AML: room for improvement

Money laundering harms individuals, communities and society. It is central to much criminal activity and is linked to crimes that cause human misery and suffering, from people smuggling and child sexual exploitation to illegal drugs and gun smuggling.

The Law Society of Scotland is a professional body anti-money laundering (“AML”) supervisor and we continue to invest in this work to protect the public and ensure our members meet the highest legal and ethical standards in this area. Our focus on money laundering is part of our strategic goal to be a modern and effective regulator acting in the public interest.

Our work in AML

The sector may be aware that, in order to fulfil our responsibilities as the AML supervisor for Scottish solicitors, we deploy a number of tools and resources. For example, AML inspections, selected file audits, MLRO discussions and the requirement to submit the AML certificate.

Another such tool is sample-based thematic reviews, such as our AML thematic review of PCPs (policies, controls and procedures), which we launched in June 2022. Sample-based thematic reviews are a compulsory exercise for those chosen to participate. These help us to identify and assess specific current and emerging AML risks within the regulated population.

Why thematic reviews?

Thematic reviews, such as this one, allow us to:

• work collaboratively with our supervised population to gain a better, more detailed understanding of the products and services that may be exposed to use and abuse for illicit purposes;
• gain a greater insight into how the profession complies with obligations under the Money Laundering Regulations and Legal Sector Affinity Group (“LSAG”) guidance;
• use the data gathered to provide further information and support to members to mitigate the AML risks inherent in this type of work.
• We were keen to obtain further oversight regarding the overall standard of PCPs across the sector, and this review has allowed us to gauge this further oversight and to provide supplementary guidance and support for this critical area of AML compliance.

Our findings

The AML team was encouraged by some of the data identified through this thematic review, with examples of good and expected practice. However, a number of areas requiring improvement were also highlighted, with several consistent themes of non-compliance coming out of the review.

These included: 

• the absence of PCPs that clearly demonstrate that customer due diligence should be holistic in nature and the importance of documenting the nature, background and circumstances of the client/matter;
• inadequacy in documented and practical guidance in relation to record-keeping requirements;
• a lack of practical guidance to staff on red flags in relation to the identification of money laundering and terrorist financing;
• an absence of documented and practical guidance in relation to the ongoing monitoring of clients/matters.

Read the full report, with all our findings and supplementary guidance.

Our new PCP template

Given the nature of the findings and the subsequent identified areas to improve, the AML team has also refreshed the AML PCP template, which can be found in our AML toolkit under “Risk and policy templates”.

It is important that practices are mindful that this is a template to aid compliance and not be relied upon. While the Money Laundering Regulations provide for compulsory PCP requirements at reg 19, not all aspects of the template will be relevant or applicable.

Practices should tailor their PCPs to be proportionate to their size and nature, and in line with the requirements under the Money Laundering Regulations and LSAG guidance. This template may assist with constructing established, maintained, and written PCPs to help practices identify, manage and mitigate risks identified in their practice-wide risk assessments.

Next steps and going forward

We recommend that all practices in scope of the Money Laundering Regulations fully consider the findings of this report and that they review their AML PCPs accordingly.

It is our intention to undertake further thematic reviews, the next one most likely focusing on enhanced due diligence and/or politically exposed persons.

As we work with you to develop reviews and reports that help us to be robust in our AML work, we would appreciate your feedback on how we can best support and regulate AML in Scotland. It’s never been more important. Please get in contact with us at aml@lawscot.org.uk.

We hope that everyone can learn from the findings of this thematic review and implement changes to their own PCPs as appropriate.