AML: a new watchdog on patrol

Introduction by Lorna Jack

In my 10 years as chief executive of the Law Society of Scotland, I have seen many developments within the legal sector as it evolves to meet the changing needs of clients and the demands of a fast-moving marketplace. The Scottish legal profession can hold its head high as we keep pace and often lead the way in terms of inclusivity and business innovation.

Regulation has also seen significant changes, not least as anti-money laundering (AML) and counter-terrorism measures climb the UK and Scottish Governments’ list of priorities. A 2018 Home Office report estimated that serious and organised crime costs the UK £37 billion each year.

While we were already working on changes to our AML supervisory approach prior to the introduction of new regulations in 2017, as a Treasury appointed AML professional body supervisor we have upped our game to ensure that we fulfil our supervisory obligations and that the Scottish legal profession complies with the 2017 regulations. We ourselves are supervised by the Office for Professional Body Anti-Money Laundering Supervision (OPBAS), a specialist office within the Financial Conduct Authority (FCA). We have recruited a team of three AML experts, whose strategic implementation of a risk-based approach is transforming the way we regulate – for the better. Last year 100% of Scottish firms covered by the regulations completed the first ever AML certificate. This year minor changes to the process and a shift of the timings into the new year will result in a smoother experience for respondents and an improvement in the quality of data. We are carrying out individual file reviews, and thematic reviews of trust or company service provision (TCSP), one of the highest risk areas of work our members carry out.

And earlier this year we established our new Anti-Money Laundering Subcommittee, comprised of six Scottish solicitors and six non-solicitor members, bringing together expertise and perspectives from a broad range of professional backgrounds and sectors.

What is absolutely key to this increasingly important aspect of our regulatory work is that compliance is not a choice – either for ourselves or our members – and we will continue to work with the committee and our members to help keep the proceeds of crime out of the Scottish legal profession.

What drove you to get involved with the Law Society of Scotland, and the committee?

Hammond: My extensive experience in the financial services sector in the prevention of financial crime included numerous exchanges with regulatory bodies such as the Financial Conduct Authority (FCA) in the UK, Money Authority of Singapore (MAS) and the Central Bank in the United Arab Emirates. I found these exchanges interesting as well as challenging, and also rewarding in as much as I felt I was involved, in a small way, in the evolution of actual regulation and its interpretation. When I saw the opportunity to join the AML Subcommittee I felt this would be an ideal opportunity to be involved in the regulatory side of fighting financial crime and use my experience to have a real influence in setting and interpreting regulation.

MacDonald: I believe it is essential to maintaining public confidence and to protect the Scottish legal profession that the Society identifies, controls and mitigates its money laundering risks. The legal profession is vulnerable to money laundering and terrorist financing and we need to be proactive in ensuring compliance. I am interested in this area of the law and have prepared and prosecuted numerous cases involved money laundering. Financial crime has a huge negative impact on the economy and society, and I wanted to be part of the Society’s work educating and protecting the profession and closing doors to those who would seek to use us to legitimise their criminal activities.

AML was dealt with as part of client protection – why separate it?

MacDonald: AML goes beyond client protection. It’s about information gathering, assessing risk, focusing on firms and individuals at greater risk of money laundering, and approaching supervision and compliance in an efficient and regulated manner. The legal profession is at the heart of business and finance and must be alive to the problems caused by economic crime and the various ways in which the profession can be used to legitimise it. AML protects the legal profession.

Hammond: It is my contention that fighting financial crime and actually taking positive action to seize criminal funds has become an even larger priority for law enforcement. Part of the overall strategy is ensuring that the regulated sector really plays its part and is seen to be playing its part. As such, as in financial services, the financial crime teams and committees such as the AML Subcommittee should have real visibility and authority.

Was there pressure from OPBAS for a more focused approach?

MacDonald: In general OPBAS was created because of concerns about inconsistencies in the UK’s professional body supervisory regime. It will be determined to show its effectiveness by the time it requires to report in 2022. There will be pressure on the Society to demonstrate within the new regime that it is an effective AML regulator capable of correctly assessing AML risks and taking all reasonable steps to ensure compliance with the statutory regulations.

Hammond: I believe the financial services firms and the FCA have for some time had concerns at the effectiveness of AML regimes in the professional bodies sector, such as solicitors and other gatekeepers including accountants. I think these concerns have grown over time, given various case studies of money laundering, such that a natural buildup of pressure meant that these professional bodies needed, to an extent, to “up their game”.

What is the committee’s actual role and remit?

MacDonald: Our specific responsibility is to ensure the Society complies with its requirements under the Money Laundering Regulations and to protect the profession and the public interest by dealing with cases of non-compliance by the profession.

Hammond: I see the committee’s role and remit as: (a) to ensure that the regulatory framework and requirements for solicitors are robust and meet the highest standards; (b) to review professionally and fairly potential cases of non-compliance with those requirements by solicitors; (c) to provide expert advice concerning suggested amendments to the Society’s AML regulatory requirements; (d) to provide advice as necessary to the profession where appropriate; and (e) to assist the Society’s AML team in keeping abreast of the latest AML regulatory requirements for solicitors.

All the above should ensure a level playing field for the profession in Scotland that means both solicitors and the general public are clear and have confidence that the regulations are being applied consistently and that the fight against financial crime is real and meaningful.

For a non-solicitor member, how does the committee seek to protect client interests?

Hammond: I see my role as a non-solicitor in meeting clients’ interests to ensure that the Society’s money laundering requirements are viewed as fair and proportionate. This is why I am a strong advocate of the risk based approach so that AML effort is applied appropriately. By helping to shape requirements for firms to have realistic risk based approaches, particularly regarding customer due diligence (CDD), we should ensure that clients are not overburdened with unnecessary bureaucracy whilst at the same time understanding why the requirements are in place.

It was said that there will be no new requirements on solicitors. Will the existence of the committee have any practical effect for them?

Hammond: Subject to UK regulation changes, for example the Fifth and Sixth Money Laundering Directives, there should be no significant new requirements. The practical effect of the committee is really the more effective consideration of the excellent assurance work performed by the Society to ensure compliance with the requirements. This should mean an overall improvement by solicitors in meeting the requirements.

MacDonald: The existence of a committee dedicated to ensuring that members comply with AML duties and responsibilities will make those members more vigilant, thorough and effective in relation to those duties and responsibilities.

How will the committee bring about greater transparency in relation to the processes members have to follow?

Hammond: I believe that, subject to anonymity, the committee should produce regular information on its work. In particular I am keen that case study material and trends identified are provided to firms to help them consider how their own policies and procedures can be enhanced.

MacDonald: It’s a question of making the AML Regulations clear and accessible to all. Members must guard against being used to legitimise criminal activity. As gatekeepers to financial institutions we have it within our power to make Scotland an inhospitable and uninviting country for those who seek to further their criminal activities here. Through training, inspections, compliance and the wealth of invaluable information on the Society’s website the processes members have to follow should be clear. We all share a common goal to get this right for everyone’s benefit.

How would you rate the general level of compliance by members with the regulations? Is there a problem that needs closer scrutiny?

MacDonald: We do see cases in which compliance has fallen below the standard expected. Whilst cases of non-compliance require to be dealt with, it will also be appropriate to highlight and publicise good practice and levels of compliance.

In what respects will the committee ensure the Society’s own compliance with the regulations?

Hammond: The committee will regularly review the Society’s regulatory approach, and benchmarking with our supervisors will also assist in ensuring our approach is appropriate and effective. Membership of other financial crime forums by the Society’s head of AML also assists in ensuring such regulations are up to date. In addition, the review of the Society’s regulations by bodies such as OPBAS provides confidence in those regulations and I, personally, would be happy for external validation or assurance to be undertaken.

MacDonald: The strength of the committee is its breadth and depth of knowledge and experience from members with a diverse background in law and finance. It is committed to and capable of ensuring compliance at a strategic level.

The Society is changing the timing of the AML certificate return introduced in 2018, moving to a calendar year reporting period and avoiding a pre-Christmas holiday reporting deadline. The next certificate will be due between February and April 2020 and will cover the 14 months ending December 2019. Future certificates will cover each calendar year from 2020. The certificate has also been refined following participant feedback.