What does it mean when the SRA refers your firm to AML InvestigationTeam

The Solicitors Regulation Authority plays a crucial role in ensuring that legal professionals uphold the highest standards of conduct, particularly in relation to anti-money laundering (AML) compliance. I am seeing an increasing amount of outcomes letters after a SRA AML Audit advising firms that they are appointing the Investigations team to take over.

The dreaded wording reads something like this:

"For this reason, I have referred the matter to our AML Investigation team for formal investigation. I would urge you to address these concerns immediately."

If a law firm is referred to the SRA AML Investigation Team, it signifies that potential breaches of AML regulations have been identified, and the firm is now subject to a thorough examination. But what does this actually mean, and what are the implications for the firm?

Why Might a Firm Be Referred?

A firm may be referred to the SRA AML Investigation Team for several reasons, including:

• Failure to Implement Adequate AML Policies: Law firms must have risk assessments, policies, and procedures in place to prevent money laundering and terrorist financing. If these are found to be inadequate or non-existent, a referral may occur.
• Failure to Carry Out Due Diligence: Firms are required to conduct proper client due diligence (CDD) and ongoing monitoring. Ignoring this duty can trigger an investigation.
• Suspicious Activity Reports (SARs) Concerns: If a firm is not submitting SARs when required, or if there is evidence of suspicious financial transactions, the SRA may intervene.
• Random Checks and Thematic Reviews: The SRA proactively conducts spot checks and broader reviews, sometimes leading to referrals when deficiencies are found.
• External Complaints or Whistleblower Reports: Complaints from clients, employees, or third parties regarding AML compliance failures can prompt regulatory scrutiny.
• False/inaccurate information: A situation where you have indicated in previous communications with the SRA that you were compliant in a particular area (e.g. you had a FWRA on before certain date and it transpires that you were subsequently unable to provide it).

What Happens During an SRA AML Investigation?

Once a firm is referred to the SRA AML Investigation Team, the following steps typically unfold:

1. Initial Review: The SRA will review documents, policies, and records to assess the firm's compliance with AML regulations.
2. Request for Additional Information: The firm may be asked to provide evidence of its AML policies, staff training records, risk assessments, and details of client due diligence procedures.
3. Further on-Site or Remote Inspection: An on-site visit or request remote access to the firm's files and procedures to verify compliance.
4. Findings and Potential Enforcement Actions: Depending on the severity of any issues found, the SRA may:
   • Issue warnings or require remedial actions.
   • Impose financial penalties.
   • Refer the case for disciplinary proceedings (which could lead to suspensions or striking-off, though rare).
   • Report findings to law enforcement agencies if criminal activity is suspected.

Implications for the Firm

Being investigated by the SRA AML Investigation Team can have serious consequences:

• Reputational Damage: Even if no significant sanctions are imposed, the firm's reputation may suffer if clients or competitors become aware of the investigation.
• Operational Disruptions: Compliance reviews and investigations can divert resources away from normal business activities.
• Financial Penalties: The SRA has the authority to impose significant fines for non-compliance.
• Regulatory Scrutiny: Even after the investigation is concluded, the firm may face increased oversight in the future.

How Firms Can Mitigate Risk

To avoid being referred to the SRA AML Investigation Team, firms should:

• Regularly Update AML Policies and Firmwide Risk Assessment: Ensure policies align with the latest legal and regulatory requirements.
• Have Independent AML Audits: You are obliged to have these by virtue of the Regulations in any event.
• Conduct Thorough Due Diligence: Implement strict CDD procedures, including verifying client identities and monitoring transactions.
• Train Staff Adequately: Provide ongoing AML training to all employees to ensure they understand their responsibilities.
• Keep Records in Order: Maintain well-documented risk assessments and compliance records.
• Act on Red Flags: Report suspicious activities and take immediate action when risks are identified.

Conclusion

Being referred to the SRA AML Investigation Team is a serious matter that can have lasting consequences for a law firm. However, by implementing robust AML procedures and fostering a culture of compliance, firms can significantly reduce their risk of regulatory scrutiny.

Proactive compliance is not only a legal obligation but also a key factor in maintaining trust and integrity within the legal profession.

It is important to note that if you have compliant AML arrangements in place by the time the AML Investigation Team contacts you, this may be considered as a mitigating factor if, as it is likely, the SRA issues a sanction.