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Anti-Money Laundering - Independent Audit Function

In our 20th of January 2020 article on Anti-Money Laundering, we laid out what some of the latest changes were following the introduction of the 5th Directive, and explained what the SRA had found in their thematic review when they visited a hundred firms in 2018.

This article deals with our anonymised findings from the reports we have generated since cpm21 rolled out its Independent Audit Function (IAF) to solicitors firms at the start of 2020…

Fee Earner interviews

We have a series of questions we ask of fee earners to determine their money laundering awareness both with the firm’s internal procedures and external requirements. In general, the only question we have not had answered satisfactorily from the all sample groups in firms is “does the fee earner seem aware of the current issues in AML?” Generally where this appears to be an issue is with awareness of the 5th Directive, but then it only became effective in January 2020, and as we write this article, it is only February, so maybe some more time is needed for fee earners to become fully aware of the newer requirements.

File compliance

This area is where we found most issues, and tends to be what the SRA would consider basic practices. Examples of unsatisfactory file compliance for AML we have noted are;

  • Not checking the PEP status of a client at file inception.
  • Allowing a client to “self-declare” as a PEP rather than carrying out independent verification
  • Not completing an initial risk assessment on the file. Risk assessments vary from firm to firm, and the ones we noted hadn’t been completed in the firms we visited although the template form was very comprehensive and made the fee earner consider the matter in some depth from an AML perspective. By not completing them, there is no evidence on the file that key AML questions had been considered, as well as making the file non-compliant with other things such as Lexcel or CQS…
  • Utility bills used as evidence of address are outside of 3 months before the file started
  • No source of funds evidence on file where a purchase transaction is not funded by a mortgage
  • No source of funds evidence for a gifted deposit towards a house purchase from a family member
  • No establishment of source of wealth on a commercial purchase file for a business that is purchasing a property
  • No check of the “People with Significant Control” register on a commercial purchase file for a business purchasing a property
  • No check for the difference between funding property which is being bought with a mortgage for a lower amount than the full price, and the difference is being funded by the client
  • Where some firms have more than one office, different practices, procedures and templates can exist, with the result that in some offices these are much closer to compliance whereas in others they are unsatisfactory

When we’ve spoken to fee earners on some of these issues, it appears there is some complacency or lack of understanding regarding them. Fee earners may say for example that they know a particular client, or that they have acted on transactions for them in the past, implying for example that they are comfortable with the source of funds despite not having any evidence thereof. While this may well be true it is utterly unsatisfactory from an AML regulatory perspective, and with the SRA continuing to audit firms, then those that take this view may find themselves on the end of some unwelcome regulatory attention….

If you haven’t set up your Independent Audit Function (IAF) yet, then get in touch with us for a no-obligation quote.

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