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The Importance of Source of Funds Enquiries: Understanding Your Obligations
July 13, 2023

The Importance of Source of Funds Enquiries: Understanding Your Obligations

Introduction

Although precise figures are not available, the United Kingdom’s National Crime Agency (NCA) maintains that there is a significant likelihood that the annual impact of money laundering on the UK reaches hundreds of billions of pounds. Moreover, it is widely acknowledged that accounting, legal, and estate agency professionals typically face a higher risk of criminal exploitation. Furthermore, the property market, especially in London, is one of the most prominent avenues that criminals exploit. Consequently, it is imperative for law firms, particularly those who deal with property transactions, to prioritise Anti-Money Laundering (AML) compliance and improve upon their policies, controls, and procedures.

A cornerstone of AML due diligence and meeting regulatory obligations is gaining a thorough understanding of both the source of funds and source of wealth associated with a client’s transactions. Governing bodies such as the NCA and the Solicitors Regulation Authority (SRA) have been explicitly clear on their expectations in this regard and have a stringent approach to penalising those who fail to meet their obligations.

As a result, we have observed a trend of individual solicitors and legal professionals facing financial penalties and suspensions for falling short of their duties  – for a recent example, please refer to our previous article: SRA Fines Firm Employee for Breaching Internal AML Policies, Controls and Procedures. – The SRA is sending out a strong message that accountability does not merely rest with the firm but also extends to individual employees across all levels. Subsequently, gaining a comprehensive understanding of regulatory expectations and meeting these standards is not just imperative but decidedly non-negotiable.

In this article, our compliance team explores the significance of source of funds enquiries and source of wealth investigations, shedding light on their role in meeting regulatory requirements. Additionally, we will introduce how The Strategic Partner, a leading compliance support firm, can assist law firms in navigating these complex requirements.

Understanding Source of Funds and Source of Wealth

Source of funds refers to the origin of the money involved in a transaction, while source of wealth refers to the underlying activities or assets that generate the funds. Legal practices, especially those dealing with property or high-value transactions, must conduct comprehensive enquiries to establish the legitimacy and legality of these financial resources. By understanding the source of funds and source of wealth, legal professionals can identify and mitigate the risk of money laundering, terrorist financing, or other illicit activities. Directives also include specific guidelines on suspicious activity and reporting, demonstrating the critical role law firms are expected to play in combating money laundering activities.

A comprehensive understanding of AML regulations and procedures is vital to ensure that potential risks are effectively identified and mitigated.

Effective Customer Due Diligence Procedures and Identifying Suspicious Activity

Most case handlers understand the standard process of custom “Source of Income” questionnaires, requesting bank statements and information on a client’s financial transactions. However, when a transaction or client is identified as high risk, conducting a thorough investigation into the source of funds should involve a far more comprehensive investigation than solely relying on traditional risk processes and merely amassing related financial documents.

Determining the origins of the money used in legal transactions requires an extensive examination of a much bigger picture, such as prior business activities, investment records, employment earnings, or possible inheritance, among other potential sources. This rigorous investigative process provides valuable insights into the legitimacy and legality of the funds in question.

Therefore, firms, their employees and those responsible for maintaining the AML function within the firm must understand how to identify high risk transactions and suspicious activity. They must also be familiar with the procedures to report these activities, which includes understanding how to complete and submit a Suspicious Activity Report. Unusual transaction patterns, inconsistent explanations, incomplete documentation, high-risk jurisdictions, and involvement of politically exposed persons (PEPs) are just some of the common indicators that warrant further investigation.

In essence, ascertaining the source and application of funds is not merely about gathering documents—it is about piecing together a comprehensive financial narrative on behalf of your client and ensuring all investigations are accurately recorded and stored.

Understanding and adopting your requirements

Effective due diligence and risk management procedures relies on a law firm’s understanding of the regulatory objectives and additionally creating a compliant environment where all staff conform to and respect what is required of them.

Below we have provided a brief overview of the steps you should be taking to ensure you and your staff maintain the regulatory requirements expected of you and compliance solutions to help your law firm remain compliant.

  • Develop a thorough understanding of codes of conduct, solicitors’ account rules, and other legislation impacting the management of a law firm, such as Money Laundering regulations and the Bribery Act. Firms often stumble on non-obvious requirements; therefore, it is crucial to possess a comprehensive knowledge of your obligations.
  • Ensure training plans are in place regarding enhanced client due diligence, which incorporates guidance on relevant processes and procedures that clearly define the types of cases where enhanced client due diligence is required.
  • Have specific guidance and policies in place regarding source of funds checks, including clear procedures for obtaining and assessing information regarding a client’s source of wealth which directs staff on the information to obtain.
  • Record through a checklist the outcome of your source of funds and wealth enquiries to show the review has been performed and the funds approved.
  • Have policies, controls and procedures that meet the regulatory standards and are proportionate, so they work for your firm.
  • Ensure your staff are trained on your law firm’s policies and procedures. Once training has been provided, ensure the evidence of completion is recorded accurately. Training should be provided annually and to all new starters.
  • Conduct regular audits and reviews of the application of your policies and procedures at both the staff and case levels. It is vital to ensure their implementation and usage to mitigate potential risks.
  • Implement a straightforward and efficient system for staff to interact with compliance officers, ensuring all communications are recorded.
  • Refrain from shrouding your firm in complex procedures and bureaucracy that will not work in practice. It will lead to poor implementation and disengagement.
  • Maintain registers to record your activity on an ongoing basis.
  • Conduct an annual risk assessment of your firm to guarantee comprehensive identification of potential risk areas.
  • Review your risk registers and look for trends. Engage with your staff and modify your procedures as needed to ensure optimal efficiency.

 

Compliance Solutions, including AML, Risk Assessments, and Independent Audits

We recognise that understanding and meeting regulatory requirements is essential but time consuming. Our services are designed to provide firms, employees and their COLP, COFA and MLRO with the comfort of knowing that even in the busiest of times, you remain compliant and can evidence that you are. We can offer expert guidance and support, including:

  1. AML Compliance Audits: We conduct thorough audits of your existing compliance practices to identify any gaps or areas for improvement. Our experts work closely with you to develop robust AML policies and procedures tailored to your specific needs.
  2. Regulation 21 AML 2017 Independent Audit– A review of the firm’s approach to regulation and compliance to include AML procedures with the audit meeting the requirements of Regulation 21 of the AML 2017. The output of which provides the firm with a written gap analysis and solutions to remedy any issues that arise and ensure the firm is compliant.
  3. Training and Education: We offer customised training programs to educate your staff on AML regulations, source of funds and source of wealth enquiries, risk assessment, and suspicious activity detection. Our training ensures that your team is equipped with the knowledge and skills to fulfil their compliance responsibilities.
  4. Ongoing Compliance Support: Our experts provide ongoing support and guidance, keeping you up-to-date with the latest AML regulations and best practices. We offer regular compliance reviews, advice on complex cases, and assistance with regulatory reporting requirements.

 

Our Packaged Compliance Solutions

Implementation of robust solutions to ensure the firm achieves compliance and then maintains compliance through the provision of ongoing support and assistance: –

  1. Risk Regulation & Compliance Service, including AML  – Our Risk, Regulation and Compliance Service (including AML) has been designed to provide law firms of all sizes with a compliant environment. We provide bespoke policies and procedures for how your firm works, whilst drawing your attention to any gaps in your risk and compliance activities, whilst drawing your attention to any gaps in your risk and compliance activities. We work with firms of all sizes and types, from partnerships to ABSs, high street firms, and multinational firms. Each firm is different, and whilst there is a commonality of regulation and expected standards, it is essential to recognise how a firm implements compliance to tailor the solution to each firm’s working practices.
  2. Risk, Compliance, AML Guidance and Register Administration Service– Running a compliant law firm is not just about implementing a set of policies and procedures; the obligations of the Compliance Officers stretch way beyond this, as there is an ongoing responsibility to manage, maintain and monitor the application of the firm’s compliance strategy. The Strategic Partner’s Risk, Compliance, AML Guidance and Register Administration Service is an outsource solution providing all staff with access to an experienced and knowledgeable Compliance Manager for guidance and ensuring the regulatory requirement active management of the firm’s registers is met.

Get In Touch with Our Compliance Team

We would be pleased to discuss your current approach to regulation and compliance and how our services will assist you in ensuring your firm is protected.

Often expert advice and guidance is essential to ensure your firm achieves a compliant status and maintains it.

For more information about our Regulation and Compliance Services (including Anti Money Laundering), you can call us on 0203 911 9710 or please email us at info@thestrategicpartner.co.uk.

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