AML - risk and opportunity

Anti money laundering  (AML) has become a focus for the SRA on a scale I do not think that I have seen before. It is creating dedicated roles across the organisation to up its game and tackle money laundering within a legal market recognised as a key enabler of crime. It is uncomfortable for lawyers and law firms that their profession has become such a target. But we need to be clear that it is so. The National Risk Assessment says that ‘there is still assessed to be a high risk associated with abuse of legal services in money laundering.’

What are those risks? In its guidance on risk assessment the SRA groups key risks under product/service, client, transaction, delivery channel and geography. Given the last two or three years of heavy focus on this it might be expected that the sector has stepped up and tackled a key cause of reputation damage to their sector overall and to the very existence of their firm. But the sector has not done so overall.  It might not be as bad as the accountancy sector where regulators  have seemed to me to put as much effort into denying there is a problem as tackling it, but the issue is real and the SRA is raising its game. Perhaps that is the benefit of independent regulation – certainly the European Union appears to have thought so in its 5th Money Laundering Directive.

You only have to scan the legal press to discover how seriously the SRA is taking money laundering risks. Look here and here for example. Interesting, in passing, to note that the story in the Gazette prompted just two comments -  compare that to the volume a story on SRA activity in diversity generates (49 comments) and you might get at least a sense of what some lawyers care about! Back to the main story: the SRA is going to look at 7,000 firms over the next year.

What risks a firm focuses on will depend upon the risk assessment it has undertaken after reading the national and sectoral risk assessments and SRA guidance. They will, no doubt, have looked carefully at what they offer, how they work and who their clients are in the light of that guidance and come to their own, informed view of risk. They will not, for sure, have just cut and paste a risk assessment from a trade association, compliance consultant or another firm. They wouldn’t be that naïve surely – that is as easy to spot as a degree student buying in essays from a dodgy website.

My real point is that law firms see this as a compliance issue if they see it as an issue at all. But it is not. It is an opportunity to remove some risks from your business. There are obvious risks such as those related to cyber fraud and managing your reputation. And for the smartest businesses this is also an opportunity to rethink some systems, improve customer service and experience, and reduce costs. Standardising and automating client on-boarding for example might not come free but it is probably cheaper than the lawyer, finance and compliance team handling things manually. Manual and imprecise workflows are less consistent, more expensive and vulnerable to third party intervention and corruption.

Done well, know your client (KYC) activity can be more secure and tailored to the level of risk a case represents. Good systems that do this can also speed up payment. And they can provide a platform for secure communication with your client. That reduces so many risks at the same time as improving the business. The real issue is why wouldn’t you do this?

Bizarrely, I hear firms say that they do not know if the SRA would allow them to use a third-party firm to help with KYC. I hear of firms saying that the SRA wouldn’t allow them to use just one payment processor or on-boarding system. That’s absurd. In my experience, the SRA is looking for firms to understand their business and work in ways that are consistent with their regulatory objectives. The new Standards & Regulations allow law firms and solicitors to use their professional and business judgement on how they secure good outcomes.  The whole point of firm level risk assessments is that the SRA cannot know the right answer for each firm. There are many other firms wise enough to be finding opportunities to turn AML hassle into better business delivery.

Luckily there is the emergence of a new breed of technology firms that are creating products and services that help law firms deal with these issues positively. My two favourites are Legl and Shieldpay. Legl has developed payments handling systems that go way beyond what Stripe or Worldpay offer - not just a retail payments process but a way of integrating law firm obligations of KYC and AML and anti-fraud measures into onboarding, payment processing and client management and communication. Shieldpay, for its part, is offering third party managed accounts as an alternative to a client account – removing some of the key risks that law firms handling client money face.

I know both these businesses well. Legl is looking for law firms to work with as they go beyond core functionality to deliver something that is truly innovative in helping law firms turn AML compliance into a business service that grows the bottom line and improves customer experience. If you want to be part of that drop me an e-mail crispin.passmore@passmoreconsulting.co.uk

The most imaginative firms that I work with examine every challenge positively and see if they can use it to create a new opportunity. Perhaps AML will be the thing that tips your business over the line. It may be the cost that sinks you or the opportunity that improves your business. It’s your choice.