Revising our approach to AML inspections

The anti-money laundering landscape in the legal sector is changing and coming into ever more focus, with an increased awareness of the multitude of ways in which the legitimate services provided by legal firms can be used for illegitimate purposes.

As a Professional Body Supervisor under the Money Laundering Regulations 2017 (MLRs 2017) we are therefore evolving our approach and growing our capabilities in this important area. One way in which we are doing so is by adopting a risk-based approach to our supervisory AML inspection regime.

The regulations oblige us to develop and record risk profiles for each firm and then base the frequency and intensity of our supervision on these profiles.

Adopting a risk-based approach allows us to be robust, fair and responsible - further balancing the commercial realities and the environment in which our members operate with our overarching legal responsibility to ensure our members are complying with their AML obligations.

The recent AML Certificate exercise was the first step towards this objective. The subsequent analysis of submissions has grown our understanding of the inherent AML risks each firm faces. We will shortly be taking the next step - piloting a new approach to AML inspections based on the risk profile of each firm

What is changing?

From January 2020 the frequency and intensity of inspections will be driven by the inherent AML risk profile which we have developed for each firm.

We will prioritise allocation of our time and resources to those firms which we view as being of higher inherent risk, due to the types of clients they deal with, the products/services offered or the geographies they work across.

We will also prioritise checks according to the areas of a firm’s business we deem to be of higher inherent risk. This is beneficial to us, but also to the firm itself as we will not routinely be reviewing lower risk transactions which we anticipate will make up the bulk of a firm’s work.

How will this work in practice?

Our new AML inspection process may occur alongside a client account inspection or be undertaken on a standalone basis.

‘High-risk’ AML inspection process

For those firms we believe to be at higher inherent money laundering risk we will do a full in-depth review of AML-related policies, controls and procedures, along with sample-based reviews of client/transactional files.

For ‘high risk inspections, we will ask the firm to provide copies of relevant documentation in advance of any on-site visit. Relevant documentation includes copies of AML policies, controls and procedures, risk assessment templates, governance structure charts/materials and details of any AML-related systems or tools your firm uses.

This documentation will be reviewed prior to the onsite visit, along with other AML-related information we hold on the firm (e.g. AML Certificate information, AML Registration details) and will inform the focus of file inspections.

We will advise the firm in advance of areas for review (e.g. conveyancing, trust and company service provision), and will ask for client/transaction lists for a specified period to be submitted to us in advance of on-site visit. Specific files to be sampled will be drawn from these lists and will be requested upon arrival onsite.

Onsite file review processes will remain similar to current inspection practice.

‘Medium-risk’ inspection process

AML inspections of inherently medium AML risk firms will be based around onsite review of client/transactional files, focusing on specific files and the review of risk assessments, identification and verification etc. relating to those files.

Firms in this category should see no immediate changes to the inspection process.

‘Low-risk’ inspection process

Those firms which we deem to be of lower inherent risk according to the work they do and the types of clients they serve – may be subject to no, or reduced AML review. Reduced AML review will be limited to checking that client identification and verification is held on file, along with a basic AML policy.

N.B. Firms should note that results of the supervisory risk-profiling exercise undertaken by the Society will not necessarily be comparable to the conclusions reached in the firm’s own assessment of its AML risk (required under r.18 of the MLRs 2017).

Next steps

To ensure we are well placed to roll out this new regime, we will be piloting the new ‘high-risk’ inspection process with a small sample of firms between August and December this year.

We look forward to continuing to work with firms to help keep the proceeds of crime out of the Scottish legal sector.