by Amy Bell, adviser to encompass corporation and Chair of the Money Laundering Task Force at the Law Society
In June of this year, new government rules on anti-money laundering came into force. Described as the biggest change to the Anti-Money Laundering regime in a decade, the Money Laundering Regulations 2017 require businesses to assess considerably more information, making due diligence a much more involved process than it was previously. This presents law firms with a unique set of challenges.
As all law firms know, the importance of carrying out these checks goes way beyond doing compliance for compliance sake. It plays a crucial role in the broader fight against financial crime, helping preventing money laundering and its use in the likes of terrorist financing – the repercussions of which are familiar to us all.
The money laundering debate often centres around financial services. But many creative and sophisticated criminals target legal firms as well. Property purchases and/or the creation of Trusts or companies are all ways in which criminals hide transactions (involving a solicitor in the process) to add credibility.
Money laundering is of course nothing new. 2000 years ago, Chinese merchants in a bid to hide their wealth from rulers, would invest in businesses in different provinces. Since then the methods used by criminals has become ever more sophisticated, as have the methods used to prevent their crime; today, that’s in the form of ever more complex regulations that are being changed and updated fast.
But now those fighting crime have a new weapon in their arsenal: RegTech. A combination of technologies – blockchain, automation, artificial intelligence, machine learning – all combine to take on much of the KYC process. The fact that the Financial Conduct Authority now actively promotes developments in RegTech only underscores the importance they place on this new technology in the continued fight against financial crime.
Banks are starting to embrace latest technologies in support of due diligence. In part, this is an extension of what they are doing already – FinTech now dominates consumer banking and so it is perhaps easier to see similar digital transformations occurring elsewhere throughout the banking sector. But the legal sector has different client dynamics to the financial sector. Increasingly, financial firms have a more distant and often online relationship with their clients, but a lawyer’s relationship with a client is typically much more involved.
Crucially, there is a much higher degree of personal contact. Because of this, instigating a digital transformation is perhaps a greater challenge than for the banks. But it has its distinct advantages too as there are some things it is near impossible to ask face to face – a client, for example, is unlikely to voluntarily admit they are a ‘bad ‘un’.
More importantly, law firms are now finding themselves in a situation where regulations are evolving at such a pace that they may have to look at some sort of digital support – especially when looking at companies or checking beneficial owners – in support of their KYC compliance.
But this is far from straightforward; the requirements of a small firm are considerably different to a larger one. And the degree of risk can vary enormously between departments.
Currently many mid-market firms have no centralised due diligence process; invariably checks are done by individual lawyers. Not only does this mean that there is little standardisation in approach across a firm, but also lawyers find themselves doing their own research and may not always be aware of what exactly they are looking for. The logistics of obtaining relevant information can also eat into valuable time.
Inconsistencies between both lawyers and departments can in turn impact a firm’s ability to manage risk.
Consistency in approach is a powerful tool when it comes to managing that risk. Here automation can play a valuable role as it can ensure nothing is overlooked as well as demonstrating to the regulators that appropriate measures are in place to ensure a firm isn’t facilitating any sort of financial crime.
Automating more administrative tasks also means a lawyer can spend more time considering the information at hand, enabling them to carry out more in-depth investigations as a result.
We now live in a fast paced 24/7 world. Criminals have adapted to this, and their methods are evolving fast. To keep pace with those engaged in financial crime and the regulations in place to prevent it, we too should be looking to the very latest developments to support us with AML/KYC compliance.
Encompass corporation latest Whitepaper, the new know your customer standard, can be downloaded here: https://www.encompasscorporation.com/new-know-customer-standard/