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Why Is It Crucial for Lawyers to Identify and Verify Source of Funds?

Key takeaways from the webinar

  • There is a huge burden of risk and compliance on Conveyancers
  • Legal sector identified as ‘Professional Enablers’ by the National Crime Agency (NCA)
  • Conveyancers are the gatekeepers in transactions – must ensure money involved is clean
  • Pressure from Government to the Regulator to the Conveyancer which is why the SRA are focusing on Source of Funds
  • Key focus of latest SRA Report released in October is on Source of Funds as an area for many improvements
  • ID checking has improved massively over last 18 months. Source of Funds checks are still weak and need to follow suit
  • Out of 241 files reviewed by the SRA, 103 firms did not have appropriate source of funds checks
  • Nearly a quarter of the firms did not have any information on source of funds and source of wealth in their policies (Page 85 – 87 of LSAG guidance)
  • People on the front line need to understand the difference between SOF and SOW
  • Source of funds – where did the money from the transaction come from? How and where did the client get the money for this transaction
  • Source of Wealth – why and how does the individual have the amount of overall assets they do?
  • Firms are not providing enough SOF evidence and information
  • An audit trail is key – being able to explain why you have viewed something at a certain level of risk – this is what the regulator is looking for
  • Regulators recommend you take a risk based approach
  • Source of Funds checks will be available through Minerva in early 2022

The growing number of fraud, tax evasion, investment scams, and money laundering cases across the country has once again turned the spotlight on the importance of complying with anti-money laundering (AML) policies. Nonetheless, financial institutions are not the only ones subjected to anti-money laundering regulations. Law firms are also required to monitor and investigate the source of funds they accept from their clients in legal transactions.

Source of Funds: Explained

The term “source of funds” refers to the origins of particular funds or assets transferred from one owner to another as a part of the business relationship.

As a lawyer, you may already have information about the bank account your client has been using to make payments. However, investigating the source of funds goes beyond collecting financial documents. Law firms must also determine how their client came to possess that money and where it was used.

Identifying Source of Funds: What to Consider

Did you know that regulators visited an average of seven law firms each month during the past year to check up on the compliance of anti-money laundering policies?

According to the latest report by the Solicitors Regulation Authority (SRA), the officials received a total of 273 reports of potential AML violations in the past year. As a result, the authority visited 85 firms to offer guidance on tax-related issues, with more than 150 desk-based reviews taking place. Moreover, the SRA took 29 enforcement actions and issued £160,000 in fines. The officials also made more than 30 suspicious activity reports to the National Crime Agency.

It is no secret that law firms are among the biggest targets for money laundering. Lawyers who handle excessive amounts of funds confidentially are at the risk of non-compliance with the anti-money laundering regulations. It is also worth mentioning that their actions may weaken the public confidence in legal professionals.

Now, the question is, what should lawyers consider when it comes to investigating the source of funds?

While there are many complexities and challenges involved in this process, there are a few things legal professionals must be vigilant about. At the very least, they should question whether the client has provided a logical explanation about the origin of their funds?

They must also analyse the bank statements to determine if the documents clearly represent all the finances and transactions. If there is any suspicious activity, it is imperative to further investigate and bring it to the attention of the higher-ups. To put it simply, as a lawyer, you must be able to explain each legal transaction you have made with your clients. If required, you should also have sufficient evidence to prove that you took every measure to verify the source of funds.

Most Common Reasons for Non-Compliance with AML Regulations

There are several reasons law firms fail to comply with anti-money laundering policies.

The first and most common reason is the lack of due diligence. It is followed by the absence of a proper risk assessment system, poor staff training, improper supervision, and inadequate checks on all financial transactions.

 

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