Just published today an update from the LSB with this decision notice affecting COLP and COFA reporting download decision
SRA Discipline 26 Firms Following Severe Money Laundering Failings
26 Solicitors Regulatory Authority (SRA) regulated firms out of a sample size of just 59 law firms providing trust and company services (TCSP) have been placed into the SRA’s disciplinary process for inadequate money laundering procedures.
The review focused on the creation and administration of trusts and companies on behalf of clients, an area of law the government deemed to be at most significant risk of money laundering as criminals look to exploit the system and launder their ill-gotten gains.
The SRA speculate that two thirds of its regulated firms need to comply with Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 (MLR 2017).
The regulator will therefore be extremely disappointed to learn that almost 44% of firms legally required to comply with MLR 2017 are failing in their obligatory requirements to some extent.
The report found that too many risk assessments, which are considered as vitally important to MLR 2017, were viewed as inadequate. In total over a third of firms (24) had failed to create robust risk assessments with many areas of the regulatory strands missing completely. Worryingly, 4 law firms had failed to create any risk assessments at all.
Firms were accused of failing to complete the necessary customer due diligence (CDD), especially concerning Politically Exposed Persons (PEPs) and Suspicious Activity Reports (SAR).
Only a sixth of the sample (10 firms) had completed a SAR in the past two years, confirming the National Crime Agency data that the legal sector is struggling to comply with its AML regulatory obligations.
The recently published ‘Economic Crime – Anti-Money Laundering Supervision and Sanctions Implementation’ report found that legal service providers were particularly poor at completing Suspicious Activity Reports (SAR) that form part of a solicitors’ regulatory requirements when it comes to money laundering compliance. Of the 634,113 reports submitted between October 2015 and March 2017, 525,361 (82.85%) SARs were completed by credit institutions and banks.
In stark contrast, reports made by estate agents were a mere 0.12% (766) of the total, with independent legal professionals deeming it necessary to make 4,878 (0.77%) SARs reports. Overall, this means that the property sector completed less than 1% of all SARs reports.
In the past year, the 2,660 reports made by the legal sector represent only 0.57% of the total and a considerable decrease when compared to previous years.
The SRA will now write to 400 firms reminding them of their AML obligations and asking them to demonstrate their compliance with the MLR 2017.
Paul Philip, SRA Chief Executive, said: “Money laundering damages society, supporting terrorists, drug dealers and people traffickers. The stakes are too high for solicitors to be anything but fully committed to preventing money laundering and the crime its supports.
“Most solicitors take their responsibilities seriously, but too many firms are falling short. Those firms should be on notice that compliance is not optional. They need to improve swiftly. Where we have serious concerns that a firm could be enabling money laundering, we will take strong action.”
SARs and SRA disciplining firms
a great article appeared in Legal Futures summarising the recent changes
Updated CQS Core Practice Management Standards Enforced From May 2019
All accredited Conveyancing Quality Scheme (CQS) firms must adhere to the new Core Practice Management Standards (CPMS) from 1st May 2019.
All CPMS regulations are now enforceable to all legal practices that have already gained CQS accreditation, as well as those working towards achieving CQS for the first time.
Following the Solicitor’s Regulation Authority’s (SRA) recent Residential Conveyancing Thematic Review which highlighted the fact that a handful of conveyancing firms were failing to provide adequate information to their clients concerning the different types of property ownership and potential buyer implications, CPMS standard 1.5 now asserts that all accredited practices must have a policy in relation to acting in a purchase of a leasehold property.
According to the report, 23% of the firms that were targeted and formally observed, did not explain the difference between freehold and leasehold titles.
Over a fifth of leasehold owners believe that they either do not remember or were not provided with information on the length of the lease and the myriad of additional charges like ground rent or service charges.
Many felt rushed in the final completion process with 26% of respondents not being provided with an advanced draft copy of their leasehold contract before they were asked to sign on the day of completion.
Furthermore, 17% also believe that their chosen solicitor had failed to clearly explain the features of their leasehold agreement. Over a third of first-time buyers were also frustrated with the information provided by their conveyancer.
Under the new rules, all conveyancers from May 1st, must clearly explain the length remaining on a leasehold lease, highlight the costs attached to the property like ground rent and service charges and review provisions and method of calculation.
The updated requirements also emphasise the increased importance that should be attributed to cyber hygiene. According to section 6.2, ‘practices must have an information management and security policy, which should be accredited against Cyber Essentials.’
If Cyber Essentials certification is not gained, accredited firms must be able to evidence that they have considered the following in their information management and security policy:
- a register of relevant information assets of both the practice and clients
- procedures for the protection and security of the information assets
- procedures for the retention and disposal of information
- the use of firewalls
- procedures for the secure configuration of network devices
- procedures to manage user accounts
- procedures to detect and remove malicious software
- a register of all software used by the practice
- training for personnel on information security
- a plan for the updating and monitoring of software
- a procedure for the secure transmission of the practice’s bank information to clients and receipt of banking information from clients
- a procedure for verifying the banking details of other conveyancers and third parties to whom money is sent
- a procedure for communications with the practice’s bankers
Regulations 1.3 and 1.4 are also related to the prevention of money laundering and mortgage fraud. From today, all CQS practices should have a clear policy on ways to mitigate and manage money laundering and terrorist financing. This includes the appointment of a Money Laundering Reporting Officer (MLRO) who will be responsible for when to make disclosures to the authorities as well as providing clear procedures for checking the source of funds.
Friday fraudsters, property fraud and authorised push payment (APP) fraud have been increasing threats to law firms in recent years. Last year alone in the UK, £364 million was lost to APP fraud according to UK Finance, marking a significant increase on 2017’s figures.
Now, all practices must increase their due diligence on this issue by creating detailed policies which document procedures for dealing with high risk transactions as well as creating clear procedures for enhanced checking of client identity. Additionally, it is now mandatory to document and show how the practice will proceed when acting for a buyer where there is a significant risk of a fraudulent seller.
Is your firm ready for the CQS and CPMS updated standards? Do you feel confident that these new rules will create more rigorous safeguards for your law firm?
Why this risk matters
- The legal market can be an attractive target for those wishing to launder the proceeds of crime. In some cases, criminals instruct legal professionals to hold or transfer money because of the perceived legitimacy this offers
- The National Risk Assessment of Money Laundering and Terrorist Financing 2017 reports that the legal sector remains at high risk of exploitation for money laundering. The level of risk varies by type of legal transaction, with trust and company formation, conveyancing, and misuse of client accounts being assessed as the biggest risks.
- Solicitors have numerous regulatory and legal obligations to be aware of including the Criminal Finances Act and the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.
- Solicitors have a duty to uphold the rule of law and support the proper administration of justice. Failing to meet their anti-money laundering obligations puts this at risk.
- The number of Suspicious Activity Reports (SARs) submitted by the legal sector has risen for the first time in seven years, but is still disproportionately low.
- Reports to us relating to money laundering have increased over recent years, with around a third relating to residential conveyancing.
- HM Treasury have recently expanded their enforcement powers under sanctions legislation. These regulations reinforce the obligation on law firms to report to the Treasury if they act for anyone subject to financial sanctions. Significant financial penalties can be applied for serious breaches.
- The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 are now in force. The new obligations cover a range of areas including:
- client due diligence
- policies, controls and procedures
- a central register of beneficial ownership
- politically exposed persons
- registration of trust and company service providers
- criminality testing.
- We expect all law firms to comply with their legal obligations.
- The government has specifically targeted its ‘Flag it up’ campaign at helping solicitors and accountants identify potential money laundering signs.
- The Office of Financial Sanctions Implementation have updated their guidance, and released a quick guide.
- We will be updating our guidance on the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 during 2017. We are working with other regulators across the UK to provide a consistent approach.
- Any action we take in relation to breaches of the new regulations will be proportionate and in accordance with our enforcement strategy.
- We recognise the short lead-in time businesses have been given to implement the new requirements. We will take a proportionate and pragmatic approach as firms take steps to comply with the new requirements.
Watchdog to lower standard of proof in barrister misconduct hearings
Prosecutors of barristers accused of breaching professional rules will no longer have to meet the criminal standard of proof, the watchdog for the profession has announced.
The Bar Standards Board said that it would amend the standard of proof applied when barristers face disciplinary proceedings for professional misconduct.
It had held a public consultation on the proposal, which still needs to be approved by the Legal Services Board, the overarching regulator of all lawyers in England and Wales.
If the proposal is approved, the standard of proof will change from the criminal definition, beyond reasonable doubt, to the civil standard of on the balance of probabilities.
Board officials said that the move “will bring the Bar’s disciplinary arrangements in line with most other professions”.
It will also provide a boost to the Solicitors Regulation Authority, the watchdog with direct responsibility for the largest branch of the legal profession. The authority has for some time been battling with the Law Society, the body that represents 130,000 solicitors in England and Wales, over its aim to make the same change.
The Law Society has argued that because solicitor disciplinary tribunals can strike off lawyers and effectively bring an end to their careers, the highest standard of proof should remain in place.
The Bar Standards Board said that the revised approach would require “a period of preparation” at the Bar Tribunals and Adjudication Service. Therefore, it anticipated that the reform would not come into effect until the end of March 2019. “The revised standard will complement other changes that we have made recently to improve our rules and processes,” Sara Jagger, a BSB director, said.
Subject: ASA ruling on CQS
This Ruling replaces that published on 14 June 2017. The decision has been reversed, making the complaint upheld.
A web page on the Law Society website www.lawsociety.org.uk, seen in November 2016, describing the Conveyancing Quality Scheme (CQS) accreditation, stated “All Law Society Conveyancing Quality Scheme firms go through rigorous examination and testing to demonstrate that they have a high level of knowledge, skills, experience and practice”.
The complainant, a solicitor, who understood that the requirements to join the scheme did not involve any assessment of applicants’ expertise or quality of service, challenged whether the claim was misleading and could be substantiated.
The Law Society of England and Wales (The Law Society) said that the purpose of the CQS was to provide a trusted community of solicitors within the residential conveyancing market that helped to deter fraud and improve “best practice” standards across the sector. The CQS accreditation mark acted as a recognised quality standard for residential conveyancing practices.
The Law Society stated that all practices applying for CQS accreditation were assessed by their Technical Assessment Team to ensure that they met the requirements. They provided a copy of the application form and details of the information that firms were required to submit about their staff, structure and operations, as well as how the Law Society assessed that information. They said that all accredited practices were re-assessed on an annual basis to ensure that they continued to meet the requirements. Accredited practices were also subject to further checks outside of the normal assessment timetable in instances where there was reason to believe that a firm was not compliant with the scheme rules or CQS protocol. All relevant staff within the practice were also required to carry out mandatory training modules covering key issues relevant to conveyancing solicitors. Each module was accompanied by an assessment that they were required to pass. In addition, CQS accredited firms were required to conduct conveyancing work in line with the CQS Conveyancing Protocol, and manage their practice in line with the Core Practice Management Standards and Client Services Charter.
The Law Society believed that the requirements for joining and maintaining membership of the CQS ensured that all accredited firms had a high level of knowledge, skills, expertise and practice, and that the ad was therefore not misleading.
The ad stated “All Law Society Conveyancing Quality Scheme firms go through rigorous examination and testing to demonstrate that they have a high level of knowledge, skills, experience and practice”. The ASA considered that consumers would understand that to mean that The Law Society had conducted an in-depth assessment of each firm that applied for the scheme, and verified that, as a whole, the firm had a high level of knowledge, skills and experience related to residential conveyancing, and that their conduct was of a high standard. We considered that consumers would understand that any conveyancing firm should meet basic minimum requirements in terms of the qualifications and licensing of its staff, and its compliance record. Therefore, given the reference to “rigorous examination and testing” and a “high level of knowledge, skills, experience and practice”, we considered that they would understand members of the CQS had met a standard above and beyond basic requirements.
We noted that applicants were required to provide detailed information relating to a comprehensive range of aspects of their operations. Some of this information was cross-checked with data held by third parties, including the Solicitors Regulation Authority, the Chartered Institute of Legal Executives, and the Council for Licensed Conveyancers, the Land Registry, credit agencies, the Legal Ombudsman, and banks; or verified through the submission of original documents, or public domain searches. Information independently verified in this manner included the professional qualifications of the Head of Conveyancing, Senior Responsible Officer, Managers and Qualified Conveyancers; whether the same had held a fitness to practice certificate at all times; details of any training undertaken with the Law Society; the history of complaints against a firm and any action taken in light of these; purchase and sale transaction volumes; merger history; and professional indemnity cover. In addition, the Law Society carried out criminal records and identity checks on all relevant members of staff, and a credit check on the firm. We considered that these checks were sufficient to demonstrate that listed staff members held the appropriate qualifications to undertake their work, and to identify any causes for concern in relation to the conduct and ethics of the firm or its staff. We noted that qualifications were independently verified, and this would form part the consumer understanding of “knowledge”, however we considered that consumers would assume that any conveyancing solicitor held the appropriate qualifications to allow them to carry out residential conveyancing, and so a “high level of knowledge” was likely to be understood as implying a level of knowledge that went beyond this basic requirement. The assessment team also independently verified records of training courses that had been administered by The Law Society, though we noted that this would not cover all training an individual might have undertaken.
The form also included questions about the experience and management ability of the Head of Conveyancing to run a residential conveyancing department; adherence of the practice to Core Practice Management Requirements; and the supervision of conveyancing staff. We considered that consumers would likely understand that a firm with a “high level of knowledge, skills [and] experience” would have independently proven to the assessment team that it reached a high standard in these areas.
The sum total of information provided in the form was assessed by the Technical Assessment team and individual elements were assimilated onto a scorecard to determine the suitability of the practice and the individuals within it to obtain CQS accreditation. We noted that between 2014 and 2016, 291 out of 293 applications had been approved.
We also noted that relevant members of staff were required to undertake training and pass multiple-choice assessments, demonstrating their knowledge of key areas of conveyancing practice, within six months of accreditation being granted. This meant that firms could be accepted into the scheme before any relevant members of staff had been trained and assessed. We noted that the training contributed toward demonstrating that staff had knowledge of a range of subjects relevant to residential conveyancing, however we considered that readers of the ad would expect that all criteria would have been met prior to accreditation being granted.
The continuing suitability of accredited firms to retain membership was re-assessed on an annual basis using the same process described above. We understood that the Law Society had the capacity to undertake more detailed investigations into complaints it received about CQS-accredited firms, including on-site visits. These would consist of physical file reviews, interviews with staff, and observation of day to day processes and procedures. In the event they considered that a firm no longer met the required criteria, they could and did revoke membership. However, we understood that independent observation of these factors was only carried out, if considered necessary, following receipt of information calling into question a firm’s adherence to CQS rules and protocols; or where concerns were identified by the assessment team at re-accreditation stage. We understood that on-site visits were not conducted prior to initial accreditation. According to figures provided by The Law Society, no more than twelve firms had been visited, and two firms had had their membership revoked, between 2012 and 2016. In the majority of years, no on-site visits had been undertaken.
While we acknowledged that firms were granted CQS accreditation on the basis of independently-verified information attesting that they met an adequate standard in terms of their competency, conduct and ability to carry out conveyancing transactions, we considered that this amounted to the minimum level of “knowledge, skills, experience and practice” that consumers would expect from a firm that was licensed to undertake a major legal transaction on their behalf. In that context, and in the absence of any routine, independent checks to assess the relative degree of “knowledge, skills [and] experience” that the firm possessed prior to membership being granted, we considered that the ad exaggerated the level of knowledge, skills and experience possessed by a CQS-accredited firm and its staff, and the extent of the checks that a firm had to undergo to receive its accreditation. We concluded that the claim “All Law Society Conveyancing Quality Scheme firms go through rigorous examination and testing to demonstrate that they have a high level of knowledge, skills, experience and practice”, as consumers were likely to understand it, had not been substantiated and was therefore misleading.
The ad breached CAP Code (Edition 12) rules 3.1 (Misleading advertising) and 3.7 (Substantiation).
The ad must not appear again in the form complained about. We told the Law Society to ensure that their advertising did not describe CQS-accredited firms in a manner that misleadingly exaggerated the membership requirements of the CQS.
CAP Code (Edition 12)
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