Exploring the risks of the legal profession: Anti money laundering insights

RICK KENT: Hi, Joanne. Many thanks for inviting me. My role for the Law Society of England and Wales as the independent professional body that works globally, representing some 220,000 solicitors and around 7,000 law firms, is supporting and representing members on understanding the risks and threats to the profession, navigating legislation and applying best practice around economic crime, compliance covering money laundering, sanctions, bribery and corruption.

To help put this into context, the Law Society is named supervising body under Schedule I of the money laundering regulations. And as we've delegated our anti-money laundering regulatory and enforcement responsibilities to the Solicitors Regulation Authority.

JOANNE CRACKNELL: Thanks, Rick. Dale, like to introduce yourself?

DALE TRAHMS: Yep. Morning, everybody. And thanks for having me. I am one of four AML risk managers within the Law Society of Scotland. We are another one of the public body supervisors. Our supervised population is quite a wee bit smaller than that of the Law Society of England and Wales. We have approximately 630 firms who are in scope of the money laundering regulations.

And my role within the Law Society is varied and includes completing AML inspections, as well as the design and delivery of thematic reviews at annual AML certificate, and lots of other guidance that we pop into our website. I've got over 14 years of experience working within AML role.

JOANNE CRACKNELL: That's great. Thanks, Dale. And Brian, last but not least, over to you.

BRIAN CARSON: Thanks, Joanne. And morning, everyone. And thank you for the invitation to today's podcast. Yeah, so I'm head of AML policy at the Law Society of Northern Ireland. And the Law Society of Northern Ireland is the professional body supervisor and so designated supervisory authority under the money laundering regulations for the solicitors profession in Northern Ireland.

Our sector is smaller. Again, we would have, in total, approximately 437 firms, including sole practitioners. Of those, about 97% would provide services and scope of the money laundering regulations. And in my role as head of AML, we are-- oh, sorry. I've just paused there.

So as the Society of AML professional body supervisor for solicitors in Northern Ireland, it's committed to helping our firms meet their obligations under the said regulations and also exercising our statutory functions as a supervisory authority. In May, 2023, we created a new position in our senior management team of head of AML policy, which I was appointed to.

And I provide exclusively assistance within the society's AML, CTF policy, strategic and operational work.

JOANNE CRACKNELL: Thank you, Brian. So to set the scene, the first UK national risk assessment was published in 2015 and that national risk assessment identified the legal sector as being high risk to money laundering, and it's continued to be assessed as high risk and subsequent NRAs (National Risk Assessments), the 2017 and 2020 national risk assessment. And I think it's safe to say we've seen a lot since that last publication.

We've lived through a pandemic. We've got the war in Ukraine, which sadly continues. And we're seeing increased turbulent geopolitical and economic landscapes, which is bringing many challenges. We've also seen many changes to the money laundering regulations and the implementation of new legislation in order to respond to such threats, such as the Economic Crime Transparency and Enforcement Act, which was enforced in 2022, and the more recent Economic Crime and Corporate Transparency Act in 2023, both of which are aimed at strengthening the UK's fight against economic crime.

The national risk assessments have identified that the legal services most at risk of exploitation from criminals and corrupt elites for money laundering purposes continues to be conveyancing as well as trust and company services and obviously, the risk to client accounts. Last summer, Europol published a report entitled, "Decoding the EU's Most Threatening Criminal Networks," which suggested that 2/5 of organized crime groups launder their proceeds of crime through property.

And in that report, there was a statement that said a key threat vector is criminal networks strategy to infiltrate the legal business world as a facilitator to commit their crimes, as a front to disguise their crimes, and as a vehicle for laundering criminal profits. 86% of the most threatening criminal networks are using services offered by legal business structures.

41% of the most threatening criminal network groups in the EU use real estate as one of the main industries to launder their illicit profits. And when laundering through investments in real estate, some criminal networks are laundering their profits through the purchase of physical and financial assets often linked to private companies or by financial and legal experts such as lawyers and accountants, and who is sometimes unaware of the criminal origin of their assets.

And these statements from the Europol report are rather alarming. So with that in mind, having considered the Europol report that 2/5 of serious organized crime groups launder their illicit proceeds through property, in each of your opinions, do you consider conveyancing to be the most vulnerable area for law firms from the risk of money laundering? And Rick, may I start with you, please?

RICK KENT: Yeah, it's a really relevant and interesting question. I'm going to caveat my comments, first of all, by saying this is UK-focused. When we're talking about Europe, there's many facets to be aware of. But my comments are in relation to the UK environment and landscape. The approach by Europol.

Yeah, this is mirrored in the position set out by OPBAS and the UK's national risk assessment and the sectoral risk assessments that, by its very nature, conveyancing is considered high risk owing to the risk of abuse of systems by criminals given mainly the significant sums involved that are reported on. In the Europol report is correct.

And I will say here, I'm not sure how they actually come to their conclusions given having read through a lot of it, then clearly conveyancing presents a risk. However, I'm not sure that it is as simple as saying conveyancing equals actual risk versus perceived risk. Money used to purchase properties may already be cleaned by the time it comes to a solicitor.

As we have seen, even following AML best practices, it's no guarantee that law firms will spot money laundering. Purchasing property using the proceeds of crime is held by law enforcement and regulators as a key method of money laundering. This, on occasions, may occur, although it's unclear to what extent. The argument being conveyancing to be perceived as high risk for abuse is enabling illicit finance for several reasons.

These perceived risks, and I'll emphasize the word perceived risks, being high value deals, complex ownership structures, perception of legitimacy and international transactions. However, despite making numerous requests to government and law enforcement and regulators over the years, to date, the Law Society, actually, we don't get that much evidence to support this position.

However, this is a view that continues to be published even as recently as November 2024. If the NRA is based on statistical evidence and data, then it would be hard to justify conveyancing would be classified as high risk. And notice I'm saying this is-- I'll, again, always caveat my kind of input here about evidence-based. There's never been any evidence published as part of the NRA to justify convincing being high risk.

Instead, the classification has been based on theoretical or perceived risks that because of the day to day nature of the transactions and the large amounts of money involved in criminals must be buying property using illicit proceeds because they'd be fools if they didn't. And therefore, conveyancing is a high risk.

Conveyancing is a very broad term, though, and we as a profession should focus on being more specific as to what work within the areas constitutes a risk. The labeling of conveyancing as high risk is, as I say, quite an anomaly. Many conveyancing transactions pose low risk money laundering, and it would be prudent to focus on what is consistently and genuinely the high risk.

For example, the sale of a three bedroom property or a scenario where you've got a national house-builder selling newly constructed houses advertised on the open market. Is that high risk or is it low risk? Or an individual selling property that they do not live in, that they only require nine months earlier in a private sale for significantly more than they acquire for.

While certain types of conveyancing have increased vulnerability, this should not be conflated to being high risk. Therefore, as an inherent risk of money laundering in conveyancing that does not exist in some other work engaged within the law firms, but that it does mean that there's a high level of vulnerability.

It doesn't, however, justify conveyancing inclusion as a regulated sector activity that should be subject to scrutiny by we must not conflate regulatory sector as high risk. High risk will need to factor in the law firm's client profile, the service delivery, control environment and transaction mechanisms. I'll say that sentence again.

High risk will need to factor in law firm's client profile, service delivery control environment and transaction mechanics. So law firms that participate in conveyancing therefore increase the likelihood of the law firm interacting with those attempting to money laundering, right? Source of wealth and source of fund checks are crucial in the conveyancing transaction, but lawyers are not the sole gatekeepers.

There's estate agents, financial institutions involved in these transaction. And also, they conduct their own checks, which in theory, should create additional barriers to money laundering. So as you see, I put into focus there in the context of the UK and our regulated sector. Is it? I don't think all conveyancing is high risk. If there is high risk, it needs to be identified, and we should be focusing on those high risk elements.

JOANNE CRACKNELL: Yeah, thank you, Rick. I think a lot of it is because of the volume and the amount of money that can flow. I think that's the trigger, isn't it? So Dale, is your view sort of similar? Are you seeing anything different in Scotland?

DALE TRAHMS: No, very similar to what Rick just said. We identify conveyancing as posing the highest risk of money laundering within the Scottish legal profession. And as you said, it's due to the value and the volume of property transactions. And the potential to legitimize very large sums of money very quickly.

As Rick mentioned, this is a view that's shared by OPBAS who have explicitly identified conveyancing as a high risk area, again, due to the volume and value of funds that could be cleaned throughout the transaction. As Rick kind of touched on, it's important to understand that while something can start out as being high risk, which convayancing is intended to be, following the appropriate level of due diligence, the risk rating could decrease throughout the transaction or matter which is what we talk about when we speak about inherent risk versus residual risk.

I absolutely agree with Rick when he said that the funds could have been cleaned by the time that they reached the stage of being used to purchase the property. However, we know that it's not true in all of the cases that we see. We don't expect solicitors to be forensic accountants, but it's vital that the appropriate training is provided to ensure that red flags can be identified where appropriate.

Completing the adequate source of funds checks really is vital. And in most cases, it's not enough just to collect the standard three months worth of bank statements just to tick that compliance box.

JOANNE CRACKNELL: I do think that's a really key point there, Dale, as well. And also, I think the point you touched on earlier about having the conveyancing through solicitors, it adds that veneer of legitimacy to the transaction, doesn't it? So Brian, is conveyancing the key risk area you're seeing facing law firms in Northern Ireland, or are you seeing other practice areas that are just as vulnerable?

BRIAN CARSON: Well, from my own perspective there, Joanne, thanks, I think there'll be a lot of synergy, a lot of agreement that conveyancing is an area of great vulnerability to legal professionals in this jurisdiction. And as Rick has said, they're in a UK context. We'd be aligned there. I guess I was just keen to also flag up that an agreement with what the folks, Dale and Rick, were saying, risk can be mitigated.

There are inherent risks associated with conveyancing because of volume and value, but where legal professionals tend to attract a lot of focus, I think, it's important to remember that legal professionals for conveyancing is a reserved work in our jurisdictions. It must involve a solicitor in the process. That's why there will always be a big connection between solicitors and conveyancing.

And I know similar in Scotland and England and Wales. And also, it's the combination of services that creates a vulnerability for legal practitioners. So the client account trust and company service provision, the other services that the legal professional can offer, I think in combination create high risk in those areas for legal professionals and that adds to the vulnerability.

And just to conclude, you would also be keen to reflect that conveyancing is not the only service in scope of money laundering regulation. Sometimes with all the focus on conveyancing, it can be associated with oh, I don't do conveyancing and therefore, nothing to worry about. And that's an art we try to push back against. Thanks.

JOANNE CRACKNELL: Yeah, yeah. That's, again, a really, really valid point to remember there, Brian, so thank you. I don't know if any of you have got a view because obviously, we're eagerly awaiting the next national risk assessment. I think it was due to be published towards the end, but obviously, there was a lot going on last year.

So I presume it's going to be sort of published later this year. Do you envisage that conveyancing will continue to be identified as high risk in the next national risk assessment? I don't know who would like to answer that one, but you could all contribute if you want to. So I'll hand over to Dale first.

DALE TRAHMS: Yeah, yeah, I do. And I would agree on the main. However, we've kind of touched upon this previously that not all conveyancing transactions will end up being high risk by the time that the due diligence has been completed and any risks identified have been mitigated, if possible. The money laundering regulations themselves outline the importance of understanding the nature, background and circumstances of each transaction.

And in my opinion, having a good understanding of this is the beginning of that risk mitigation process. If you have a conveyancing transaction, which includes a sale of a large family home in order to purchase a small property onto your client's children, move into their own property, would that be something that we would consider unusual and offer a higher risk? Probably not.

Whereas if we've got an 18-year-old student purchasing a property using no regulated learning-- lending, sorry, partially funded by a family-based overseas, this is going to require a lot more due diligence and risk mitigation in order to provide that comfort that you would need in order to continue with the transaction.

JOANNE CRACKNELL: Thanks, Dale. Brian, what about--

BRIAN CARSON: I think it will be. I'd be very surprised if it wasn't identified as high risk in the next national risk assessment. As you mentioned there in your introduction, it's been high risk since 2015 and in every national risk assessment since. The folks have alluded there to the OPBAS, the Office for Professional Body Anti-Money Laundering Supervision that supervises the supervisors or supervisors of the professional body supervisors.

There in November 2020, for their work on conveyancing confirmed that they considered conveyancing as an inherently high risk activity. The supervisors, ourselves included, have assessed conveyancing as high risk in our sector risk assessments. And there hasn't been much in the public domain that I have seen that would change that assessment.

Although I take Rick's point he mentioned earlier and acknowledged by OPBAS. The supervisors, and the professional body supervisors, we look for a call for greater granularity and the risk assessment, national risk assessment is our perhaps case studies of actual examples of where it has happened by way of education and keeping the sector and our members informed.

JOANNE CRACKNELL: Yeah, I think that's a really key point and really important because again, it's sort of there's a lot being said, but it's not backed up with evidence so it makes it harder for firms to understand what exactly is expected from them sometimes in that area. And Rick, the SRA's latest sectoral risk assessment highlighted vendor fraud as an emerging threat.

So how can law firms, and in particular those that specialize in conveyancing, minimize their risk of the threat from money laundering and vendor fraud?

RICK KENT: Just check. I didn't give my comment to the last bit. Do you want me to--

JOANNE CRACKNELL: Oh, sorry, Rick. I got too excited. OK.

RICK KENT: Got too excited. Yeah.

JOANNE CRACKNELL: I got too excited. Sorry. Right.

RICK KENT: I can ramble on about vendor fraud, but you get me going on conveyancing, you know you're going to have passion here, OK?

JOANNE CRACKNELL: I know there's passion so Rick, do you--

RICK KENT: You've got my two favorite subjects. Conveyancing and national risk assessment. Now, you couldn't put two better things together, OK?

JOANNE CRACKNELL: Well, right. OK. I feel sorry--

RICK KENT: Anyway, I will be--

JOANNE CRACKNELL: --and edit this.

RICK KENT: I will be my usual brief self, as you can always expect, OK? My take on that one would be yes and no, all right? That's a nice legal answer. OK. I would like to see a change in some of the language. Brian just alluded to it in his thing of the issue of granularity and stuff. And it's been mentioned. It's been high risk since 2015. OK. I think there needs to be changes.

Unless there's evidence-based and we filter out the rhetoric and the unfounded assumptions and look at the actual evidence in reality in the context of the legal sector, we're not seeing conveyancing as being high risk. There's elements of conveyancing that would be high risk. And I would like to see the national risk assessment being more nuanced in their response about that.

Otherwise, this blanket term of conveyancing is high risk has unforeseen consequences. Risk is other-- or risk is or rather should be more nuanced, as I mentioned. And as per my previous answer, transactions, and then you've got-- unless the law firm is accepting cash, I haven't seen for many years somebody dragging a suitcase of cash up the steps of a solicitors firm, all right.

But they'd usually been someone else involved in the transaction. We've got the banks. We've got estate agents. We've got other elements as well. So how much of that high risk perception is actual high risk by the time it comes to solicitors? And the legislation fails to properly acknowledge the difference between inherent risk and residual risk. That element's already been discussed.

Conveyancing continues to be a vulnerability for money laundering that law firms should be aware of due to the high value and the volume of transactions involved. No one's questioning that. It's a vulnerability. It is also a service offered by many law firms. So making it high risk with a blanket terminology means you're capturing a lot of law firms.

And therefore, unless we start to see any classification being based on well-supported evidence and comprehensive analysis conducted by experts, hopefully the sector involved in the contribution to this next national risk assessment and treasury and home office and law enforcement to justify the risk profile for the sector, it seems quite unreasonable to continue it on. As we said, it's been the same situation since 2015. So yeah.

JOANNE CRACKNELL: Yeah, no, I agree with you. And maybe they might look at including sort of thresholds, putting setting limits that would determine the risk as well. But then again it's a risk-based approach, isn't it? And its understanding it. And if it continues, people will probably just get a bit sanitized to the risk.

And it just doesn't feel so-- I'm just trying to think of the word there. But it is, it's just a sort of complacent as well there's that risk. So Rick, staying with you, the SRA, sectoral risk assessment, highlights vendor fraud as an emerging threat. So how can law firms, and in particular those that specialize in conveyancing, minimize their risk of threat from money laundering and vendor fraud?

RICK KENT: Well, from my side, we're not seeing this in practice or hearing about it from firms or insurers. Kind of vendor fraud does happen on occasions, but it's relatively rare in our experience. I think the SRA have experienced received reports on some high profile or large vendor fraud cases, which has enticed them to highlight it as an emerging threat. It has always been there.

"Dreameva"-- I'm going to re-pronounce this because this case always gets me tongue tied, all right? "Dreamavar." OK. The leading case on vendor fraud relates to facts on the property sale over seven years ago. So this seems hardly new or emerging. When people use the word emerging threat or new threat, I think corporate memory is quite weak.

We've got to look back and see, is it really new? We would like to see the SRA data, which shows that it's an increasingly emerging threat. It's a threat. But most firms are very alive to it because of previously widely reported cases going even back to 2018, 2020. So law firms, especially those specializing in conveyances, can take several steps to minimize the risk of money laundering and vendor fraud.

So it depends whether law firms are acting as the vendor or the buyer. And the vendor side, one of the most important protections for money laundering and vendors fraud is making sure you identify your clients and where possible, meet them. Strengthen due diligence. Look for some warning signs. I don't use red flags. Sorry that I'm a late-- I one of my peeves in life.

No warning flags. No red flags. Warning signs, please like sales or undervalue of sale, sale of property with no mortgage, sale of only transactions, et cetera.

JOANNE CRACKNELL: Thanks, Rick. What about in Scotland, Dale? Has it been identified as a threat?

BRIAN CARSON: As Rick said, it's there but it's not something that we are seeing on the ground. The Law Society of Scotland have a wee blog series, which we call Spotlight On, which covers various topics, including human trafficking and terrorist financing. And it is our intention, based on the conversation today, to highlight the risks involved in vendor fraud, just to bring it to the forefront in people's minds.

But no, it's not something that we're seeing on the ground in any volume.

JOANNE CRACKNELL: Thanks, Dale. And Brian, is vendor fraud an emerging threat in Northern Ireland? Or are you actually seeing other economic crime threats facing law firms in your jurisdiction?

BRIAN CARSON: Like the others there, It's not vendor fraud per se. It's not something that we've seen on the ground or it's been reported to us by our members or had equivalent sort of high profile cases. I acknowledge, though, that there's always the possibility. And there are good firms having good policies and controls and procedures around.

Client due diligence are good steps to take in the wider context of vendor fraud. In terms of other economic crime threats facing law firms in our jurisdiction, I suppose I would signpost our members to our Reg 46A report. That's our annual supervisors report on anti-money laundering that all of the professional body supervisors will publish by 1 November each year.

And in that, we would highlight some of the emerging areas of risk and trends that we're seeing. And as in our latest report there, we highlighted just some of the implications from post Brexit. Just Northern Ireland's unique status. And there that the land border with the EU represents a particular risk for solicitors where they may be undertaking new or different work areas depending on their clients' needs and changes made relating to their clients' businesses.

And then, and I suppose this is part of the conversation that we're having there, for me, there's a distinction between the predicate crime of what criminal activity we're seeing in the jurisdiction and the impact or the risk for the particular law firm from a money laundering perspective that those criminals will move to look to the local law firms to launder those funds.

But the degree of that nexus remains to be established. But in terms of headlines, Northern Ireland is criminal activity that we might once have or not have seen as prevalent as more recent times. For example, in December, there just before Christmas, there was a press report of 35 people arrested in people smuggling crackdown. 17 of those arrests were in Northern Ireland.

And there are areas that are maybe coming closer to home than they have been previously.

JOANNE CRACKNELL: Yeah, I think, again, the world is just blurring now, isn't it? Their borders are getting smaller and smaller and so are the threats. So as mentioned earlier, we've sort of seen significant changes in the AML landscape over the last few years and with those changes has brought changes to AML compliance.

Brian, if I may ask you, first of all, to deal with this. What are the key challenges you see law firms and practitioners who you supervise face around complying with AML legislation?

BRIAN CARSON: Thanks, Joanne. So I think some of the areas that we would see as challenging for firms that we're supervising would be just the cultural shift that's required or has been required over the past few years. Embedding that compliance first culture within firms can be challenging, especially in environments where AML obligations are perceived as burdensome or secondary to business operations.

Regulatory changes. The landscape has changed massively and continues to change. And it's hard to keep abreast of all of those changes, not only as a supervisor, but for the firms themselves. Resource and expertise constraints. Law firms may struggle to allocate sufficient resources or maintain in-house expertise to manage complex AML obligations effectively.

And technology, adopting and integrating advanced AML tools for monitoring. Screening and reporting is often hindered or can be hindered, I should say, by compiler cost, compatibility issues and user training. So I suppose in summary, it can feel burdensome for the firms the amount of regulation, that regulation is constantly changing or evolving, and it's keeping up to date with that and embedding that culture of compliance across the firm.

JOANNE CRACKNELL: Yeah, I think that's a really key point there, Brian. Dale, what's your view?

BRIAN CARSON: Yeah, very similar to what Brian has just covered. The increased regulatory pressure versus the resource and cost demands that, that brings to our supervised populations. We know that most of the law firms that we supervise are trying their best. But it is that constant juggling between all of the changes that are taking place, the regulatory pressures that they face against the fact that they want to be profitable businesses.

We're seeing more and more firms moving away from the kind of typical firm structure and employing specific AML expertise. But obviously, we appreciate that this model comes with additional cost and is therefore something that is maybe only reachable by some of the larger firms in Scotland. We know all too well that AML compliance is not black and white. The regulations are complex.

And while we are continually trying to keep up to date with the regulations and changes to compliance ourselves, we are trying to put out guidance and as much information as we can to our population. But reading that guidance takes time. And if you are juggling everything else that you've got to do as a fee earner, that is challenging.

JOANNE CRACKNELL: Yeah, I think you're right. And also, in some firms, the money laundering reporting officer or the money laundering compliance officer, that might not be their only role. They may be fee earning and have a caseload as well. So it's just trying to manage that, isn't it? And Rick, from an England and Wales perspective, what do you have to say on that?

RICK KENT: There's no question law firms are facing several challenges in the changing landscape of AML compliance. I think it's already been alluded to, the complexity of the regulations and the expertise and systems that are required to comply with them, which leads to the cost, particularly in conveyancing, which has been a point of discussion today.

Firms are needing to constantly adapt, demanding significant resources and time to maintain compliance and evolving standards. Unfortunately, the legislation seems now the focus is on providing data to law enforcement rather than prevention of money laundering. The focus on identification rather than on the movement of money is indicative of that.

The emergence of scrutiny has further shifted focus from prevention of money laundering to regulators wanting to show that they are effective in using sanctions as a metric. The overzealous nature of some of the regulators means that regulating businesses are becoming protective, rather than engaging with regulators and law enforcement to prevent crime.

The reality is that overzealous regulating compliance approach is often unsuccessful in enforcement, deters constructive conversation, which the regulators-- and it destroys what we consider to be increased-- increasingly seeing the credibility in not only the AML regime, but the regulators. This is more focused on-- relevant to England and Wales.

We need a better culture, I think, where law firms are trying to comply, do not need to be fearful of sanctions. We are all keen for the bad actors and repeat offenders to be sanctioned, right? But the perception is sometimes wrong that this is the only channel for regulatory compliance, which is not. We'd like to see more education and more learning and training and understanding of risks.

JOANNE CRACKNELL: Yeah, I think that that's really important. And the profession, there is that fear factor. And I think sometimes that can be like rabbit in the headlights sort of thing, just sort of takes away the reality and just doing it and just being focused in little bit-sized chunks. And again, at the end of the day, it's a risk-based approach that needs to be taken, isn't it?

So talking about compliance, I think it's always good to provide some sort of good examples of where things go wrong, but also would be nice to touch on some of the examples of where things go right. So, Dale, what bad practices do you see from AML compliance?

BRIAN CARSON: Yeah, I think it's a really interesting that both Rick and Brian touched on culture. That tone from the top and the buy-in to the importance of the AML regime in Scotland is really important. And we are seeing firms approaching compliance with the regulations, and the legal sector affinity group guidance as a tick box exercise.

Just doing the bare minimum with no consideration to why the regulations are in place, not keeping up with the changes, as we've already covered. The AML landscape changes rapidly and if you don't keep up, you could find yourself in a bit of a sticky situation. Overuse or reliance on templates. And the Law Society of Scotland themselves releases templates.

We've got client and matter risk assessment templates, policies, tools and procedures templates. However, we do emphasize the importance of tailoring those templates. It's an aid to compliance and shouldn't be the last stop to compliance. We really have to hammer home that these templates are to aid your compliance and should be tailored to the risks and the work that you undertake within your individual practice.

Lack of training and/or a lack of buy-in to the importance of training. Training, I've got here red flags. But we'll go with warning signs. Just for your benefit. But ensuring that the relevant staff are aware of the warning signs and when they should be raising concerns to their money laundering reporting officer or the AML compliance team within a firm. And not being fearful of approaching something.

You're not expected to know everything about AML compliance. But there should be somebody that you can take your question to, to gain that comfort. And lastly, just for me as poor record keeping. We know that the firms that are under our supervision know their clients well. But we need to be seeing what they know documented enough that if I come in and visit a friend, then I'm going to know your client almost as well as you do.

JOANNE CRACKNELL: Yeah, that's really key. Brian, what about in Northern Ireland?

BRIAN CARSON: So in terms of some of the bad practice that we might see, most common types of non-compliance remain in client due diligence measures or CDD with over 60% of breaches identified by the society concerning a lack of evidence of both source of funds and client due diligence checks.

Examples of those might be checks made, but not documented or recorded on files or only divulged on further inquiry by the society. The identity checks not being unchecked and source of funds and wealth not being fully understood or carried out over familiarity with a long-standing client, resulting in a lack of or incomplete client due diligence.

Relying on bank statements as a source of funds or wealth check without further inquiry in appropriate cases. And accepting funds to complete transactions without making the requisite checks until after the event, or if at all. So you might go do an inspection and ask about a particular transaction.

And when the evidence of the client due diligence undertaken is produced, it has only been carried out after the event, once the money has already been received in the client account, which is too late if there's a problem there. And then issues with firm-wide risk assessments including, as Dale mentioned there, just the use of templates which haven't been adequately tailored or updated to reflect relevant risk areas of the firm.

And yeah, the area of firm-wide risk assessments is a particular topic of focus for the society at present, and in some of our work in this area.

JOANNE CRACKNELL: Thanks, Brian. And Rick, what bad practices are you seeing at the moment?

RICK KENT: If there's a lack of education and training, this leads to all sorts of bad practices. Sources need to be better at recognizing the difference between perceived risk indicators and actual risks. Avoiding the word red flags. Perceived risk indicators do not translate to the presence of making a mandated high risk.

Some real thought needs to go into it and again, revert back. This is because if we need to do education and training, this is where that upskilling and understanding is really important. Or as already mentioned, overreliance on templates is a major problem. Firms will fail to rigorously follow, for example, the SRA's firm-wide risk assessment, client risk assessment and matter risk assessment thinking and this will offer some kind of protection, when in fact, the SRA often criticized firms for not tailoring the templates to the firm's own requirements or understanding.

This we're conscious of, and we want to make sure that there's better communication in getting this point out to members. Taking time to complete a firm-wide risk assessment and then never looking at it again, so it becomes out of date. Not really what it's there for. The firm-wide risk assessment should be the foundation of all your other risk assessments and building on and a constant living document.

And aside from the record keeping requirements shouldn't be an issue. But to see regulators take a view that if you don't have recorded, then it never happened. So firms should get a lot better in and documenting all their decisions. Few of us who come from law enforcement backgrounds and decision logs, it's got to be your culture.

Document everything, your decisions and your actions. For example, not just those ones that where you cease to act, but the ones where they are happy to act and why. know. So that's kind of lost sometimes. Scrutinizing transactions throughout the business relationship. That's often dropped to ensure that they are consistent with your knowledge and the client, the client business and their risk profile and understanding the origin, and the funds and transactions.

So in that respect, quite a few things that firms still need to keep on top of.

JOANNE CRACKNELL: Yeah, and it's still quite a lot to do. But these are the bad practices. But it would be really nice to understand where the profession are getting it right. So could you provide, Dale, some examples of what good practices you're seeing on the profession.

DALE TRAHMS: Yeah, we see lots of good things in it. Like you said, it's really important not to focus on the bad things all the time. I don't believe that any solicitor wakes up in the morning and thinks that I'm going to go to work and launder some money today. We are seeing more and more firms buying into the AML regime and acknowledge that it's now part of their role.

We can judge that by the volume of queries we get into our mailbox asking for more information on something or our opinion on something. And while we can't comment on specific matters, I think that, that shows that people are starting to think about things that they wouldn't have perhaps considered a few years ago.

Technology is making some of the aspects of obtaining client due diligence documents much easier. I know that with the introduction of open banking, which is a relatively new development into the compliance world within the legal sector, it's making things a wee bit easier for them, hopefully giving more time for that appropriate scrutiny, as Rick said, to be completed.

While technology can make obtaining documents a wee bit easier, it's not alone going to satisfy the source of funds obligations. And you must still scrutinize the transactions to ensure that there's a clear audit trail of the funds being used in the transaction. We have seen an increase in our templates being used, but being tailored to the specific firms and not just the name of the firm put at the top and everything else is as we've put out to the world.

That real consideration to what the risks that, that particular firm are facing being added into the policies, controls and procedures. We're seeing an increase in people attending our AML conferences. And I think, again, that shows that willingness to learn and understand that compliance is not and shouldn't be a tick box exercise.

JOANNE CRACKNELL: I think that's a really key point. I think the way that sometimes, especially from law enforcement, the sort of message feels that we're sort of complicit and that's what lawyers intention is, is to go out and facilitate. I think we all want to do the right thing. Brian, what good practices are you seeing in Northern Ireland?

BRIAN CARSON: Thanks, Joanne. Yes, it's good to focus on the positives as well. In our last inspection reporting period, '23, '24, 82% of relevant firms that received a completed DBR, review or on-site inspection were found to be compliant or generally compliant. So there's a high level of compliance out there, which is great.

In terms of good practice, it's sort of the opposite of some of the bad practice, not unsurprisingly, but maintaining detailed records. The inspections were the best. Outcomes tend to come from the firms that keep good records. And as Rick had mentioned there, the significance of record keeping where client and matter risk assessments are used or where the firm has them, that those are being used.

The checklists are on the file. They're completed, and they're reviewed throughout the transaction and that's recorded. Where the assessment of a client or matter risk demonstrates an assessment of whether the client's financial circumstances mean business activities and source of wealth and source of funds align with the background and wider profile of the client.

Firm-wide risk assessments that demonstrate consideration of all risk factors as set out in the MLRs, including client's geographic product services provided, transaction and delivery channels and consider all relevant sources, including the society sector risk assessment. Some of the firm-wide risk assessment, what you must consider, is set out in the MRLs themselves and that includes your supervisor sector risk assessment.

So try and reflect that and record that in your firm-wide risk assessment. And there's lots of other things that could go into as well. But I'll pass over to Rick to give him some space.

RICK KENT: Thanks, yeah. For ourselves, client due diligence is now generally accepted and clients not pushing back on it really helps. It's not only the culture of the law firm, but the culture of the service that is being provided and the business. It's kind of accepted that this is part of the routine now, particularly in conveyancing. A greater awareness of source of funds, source of wealth as a risk.

Again, going on the point, good record-- good recording, sorry. Good recording of decisions and actions. Not documentation. Stay away from tick box stuff. But a good record of your decisions and actions. Most law firms are complying with the money laundering regs, and following the LSAC guidance is best practice with the LSAC guidance now being quite common reading for a lot of people.

Reiterate the point that law firms are more open to using technology to assist with AML compliance. Technology we're seeing is significantly enhancing AML compliance for law firms by improving efficiency and accuracy of client verification process. Through digital identity checks and automated KYC systems, firms can quickly verify clients' identities and gather the necessary information, saving time, reducing errors compared to a manual system and process.

JOANNE CRACKNELL: Yeah, I think we're going to see a lot more with technology as sort of technological advancements and trust in the system. So I think that's going to help improve services going forward. So we've touched on the importance of knowing your clients and where their money comes from, so obviously around the source of funds.

So with that in mind, what, if anything, have we learned from the Panama Paradise and Pandora Paper data breaches following the acquittal of the 28 defendants charged with money laundering in connection with the Panama Papers last June. I don't know if you all want to contribute to this one or who wants to actually take this, because it's probably a bit obscure, but I think we saw a lot of changes in compliance and regulation as a result of those data breaches. So--

RICK KENT: Yeah, I'm happy to give a comment on it.

JOANNE CRACKNELL: OK.

RICK KENT: It's interesting times, as they say from the Panama Papers, or we call-- their referencing the three P's. Just because someone is in the three P's Papers is not enough to necessarily create a suspicion. It's just part of the due diligence. So you need the full picture. What it did was it highlighted the difference between perceived risk indicators and actual risk.

I'm not sure that the three P's Papers have altered any approach to AML. The fact remains that you need to identify and verify your actual client and the true beneficial owners. What the three P Papers have done is shed light on the complexities of offshore finance and money laundering globally. The recent acquittal of the defendants from the Panama Papers case shows how tough it can be to prosecute these cases.

The complex nature of international transactions and corporate structures makes providing-- proving, sorry. The complex nature of international transactions and corporate structures makes proving wrongdoing challenging for the legal system. One key takeaway is the need for stronger due diligence. The data leaks highlighted the importance of understanding clients backgrounds and financial histories better.

This insight is crucial to identifying the risks linked to offshore accounts and the complex ownership that might be used for laundering money. The leaks also underline the importance of transparency and better disclosure of financial dealings. Finally, whilst most firms will not be dealing in residential conveyancing with oligarchs or the rich foreign nationals, these leaks have raised public awareness about the issues of financial secrecy and money laundering.

They sparked advocacy for the legal reform and more ethical business, which is no short benefit, increasing the pressure on financial institutions and governments to improve their AML strategies and prevent some breaches in the future. So there's been some good benefits, but not quite as beneficial as some would have hoped.

JOANNE CRACKNELL: I think it has highlighted the-- I think it's been a bit of a theme that's flown through our discussion today so far is around culture, and I think it did highlight culture, hasn't it? I think that's one of the key things. Dale, Brian, did you want to comment on the three P's, as Rick refers to them?

BRIAN CARSON: Only to add that I do think they highlighted the complexity involved and that-- just agreed with a lot of Rick's comments on it. The terms of reputational risk, public and regulatory perceptions, have shifted with firms expected to go beyond minimum compliance and adopt an ethical approach to client management.

So it's that development of the discussion in that area for legal practitioners. And the leaks show how a lack of scrutiny can lead to complicity whether intentional or due to negligence. Law firms, there's a lot for them to take away and reflect on in terms of their practices. And the transparency.

The leaks revealed extensive use of opaque corporate structures, shell companies and offshore jurisdictions to hide their origin of funds. And just as Rick mentioned there, just really underscores the importance of source of funds, wealth checks and understanding your client.

JOANNE CRACKNELL: Yeah, it goes back to basics. Dale?

BRIAN CARSON: No, nothing of note more than what Rick and Brian have already said.

JOANNE CRACKNELL: Yeah, I think, again, it is key. It did turn into a bit of a media frenzy. And I think it does highlight just the complexities and culture and reputational damage. Money laundering is often perceived as a victimless crime. And in the UK, the true amount of money laundered through the financial systems is actually not fully known.

But the impact in the UK annually is estimated to be in the hundreds of billions of pounds. And the World Economic Forum estimates that I think is like $2.4 trillion are laundered through the global financial systems and that money's come from proceeds from activities such as forced prostitution, terrorism and drug trafficking.

And that money then in turn is used to further sort of criminal activity. Do you think that the human cost of money laundering gets overlooked by law firms when they're carrying out their AML compliance measures? Dale, can I ask you first?

DALE TRAHMS: Mm-hmm. Yeah, potentially. Yes, compliance can be seen as a bit of a burdom-- burden, sorry, on time and resource. Money laundering is sometimes seen as a financial or a procedural issue, rather than one that directly harms people. However, we know that this perception is not correct. For example, trafficked individuals are often exploited in illegal operations funded by laundered money.

These people live in inhumane conditions with no rights or protections. It's so important to train your relevant staff, not only on the regulatory compliance, but also on the societal impacts of money laundering. This could include case studies showing how laundered funds harm individuals and communities, rather than concentrating on what the regulations say and what you have to do to comply with that individual regulation.

JOANNE CRACKNELL: Thanks, Dale. Brian, if I may turn to you, because you did mention about some of the latest threats that you're seeing come from Northern Ireland and some of that was around human trafficking. So what do you think?

BRIAN CARSON: Thanks, Joanne. It's an interesting question for me. I just I would echo what Dale said earlier and Rick as well. The overwhelming majority of legal professionals are keen to do-- desire to do their job to the best of their ability. They understand their role in the legal profession, and they value it. And they don't want to see their services being abused or misused by criminals.

So I think that's key. I don't think it's intentionally overlooked by law firms and for me, I think it's part of a wider approach in this area generally, at a macro level of helping everyone involved in the AML arena understand more and better the link between organized criminal activity and money laundering at the other end.

And there's a balance because you obviously-- from a law enforcement point of view, you don't want to disclose too much to how you're able to track down the bad actors and catch them. But it's about making-- for me, it's about making that connection of how me and my law firm undertaking my AML compliance helps in the bigger picture and that comes from the likes of case studies and understanding the nexus or the connection, if that makes sense.

JOANNE CRACKNELL: Yeah, it sounds like, again, there's a bit of an education piece needed here just to bring it to the fore a little. Rick, from your perspective, how do you see this?

RICK KENT: Yes, it is unfortunately overlooked. Focused on the day job. It is too remote to be in their mind. Law firms often focus primarily on meeting regulatory requirements, which can lead to an emphasis on process and documentation, rather than the broader impact of money laundering activities. If you make money laundering harder, you're really unlikely to stop the prerequisite fences.

That's the reality of life. The definition of insanity is doing the same thing repeatedly and expecting different results. The best strategy is to prevent rather than treat the problem caused by it. The best strategy to reduce money laundering is to prevent the prerequisite crimes. This needs to be aligned with encouraging culture that views AML compliance as part of an ethical responsibility, rather than just a legal obligation.

Can help address the human costs more effectively. This broader perspective reinforces the importance of thinking about the social impacts of financial crimes, adopting a holistic approach to risk management that considers financial, legal, social impact can help ensure human costs and money laundering are possibly factored into compliance strategies.

JOANNE CRACKNELL: Yeah, if I stay with you, then, Rick, on the next question. So if human cost of money laundering was factored into the AML processes and sort of the compliance, do you think compliance would improve around AML if there was that focus?

RICK KENT: I've got to say, we're trying to prove a negative here. How do we show what would have happened in the absence of all the controls in place, for example, where controls failed will help? Prerequisite crimes involve people smuggling slavery. Would be useful as most encounter money laundering derived from bribery, corruption, tax evasion and regulatory activity that resulted in criminal sanctions.

So I think getting those factors into the AML process, getting that understanding, as I mentioned previously, getting it as part of the culture, and asking those questions on the financial, legal and social impacts can help ensure possible-- a better understanding of the compliance issues as they relate to those other external elements.

JOANNE CRACKNELL: Yeah, and Dale and Brian, you've touched on the point that solicitors want to do the right thing. But do you think actually having a greater emphasis on-- and just bringing the human cost to the fore a little bit more, do you think that could improve compliance or just focus minds a little bit more?

BRIAN CARSON: Absolutely, I do. By recognizing and addressing the human cost of money laundering, firms can make their AML compliance programs more meaningful and impactful and aligned with their obligations.

A deeper awareness of the human cause can inspire more diligence compliance efforts and it's about making that connection that fulfilling your AML obligations, it's not about a tick box or a checklist, but it has real added value to the overall AML regime and playing your part in that. So I think undoubtedly it would help.

JOANNE CRACKNELL: Dale?

DALE TRAHMS: Yeah, no, I agree. I think back to when you're watching a program on TV, and you get the charity adverts. The hardest hitting ones are the ones where you are seeing the people that are involved in whatever disease that the charity is funding for. Bringing that human aspect back to why you're doing what you're doing, I think is really important.

Sometimes not thinking about the legal world, but you don't see that buying a counterfeit handbag when you're on holiday is all that big of a deal. But actually, who's behind the making of that handbag? Are you talking about people who have been trafficked? Are you talking about potentially child slavery? And what is your purchase funding?

Bringing that back to the forefront, I think, would certainly help firms to understand why they're being asked to do what they're being asked to do.

JOANNE CRACKNELL: Yeah, and I agree. I think we've answered the next question I was going to pose, but I just wanted to just reiterate the point. So to help the profession achieve a better understanding of human costs, do we think more case studies included in training and whether involving law enforcement with this program, do you think that would assist with the legal profession to understand the risk a lot more? Who would like to go? Dale?

DALE TRAHMS: Yeah. No, I do. I think case studies are always really welcome, bringing the message back to life and highlighting the importance of compliance. UKFIU, the SARs in Action magazine regularly contains anonymized case studies, which might be a wee bit helpful if firms are looking for training material to add in to any training that they're conducting.

It's really important that we highlight the human cost of money laundering and help the solicitors to see beyond the compliance checklists.

JOANNE CRACKNELL: Yeah, thanks, Dale. Rick, as a former law enforcement officer yourself, do you think it would help?

RICK KENT: Definitely more case studies, real-life stories from law enforcement, and understanding the real consequences of money laundering, including that in referencing the guidance. I think sometimes the guidance misses the point. It's an opportunity to emphasize that point and include it in the explanations of why things are being done, and the consequences of not doing them.

A great awareness along better training, education, highlighting the issues of real human costs case studies will be a real big factor in getting the message across.

JOANNE CRACKNELL: Yeah, I think that's right. Brian, from your perspective.

BRIAN CARSON: Yeah, I'd agree with what Dale and Rick have said. And the only additional comment, just thinking back from some of our earlier discussions, the use of case studies in conveyancing, for example, might help with that more nuanced approach to risk in conveyancing.

If there's greater information on the types of actual conveyancing transactions that are being used, that would help inform that risk-based approach, rather that overarching broad term of all conveyancing is high risk, diving into it a bit more. But it's just a thought.

JOANNE CRACKNELL: Yeah, I think when the first national risk assessment came out, and it said all solicitors were facilitating money laundering and complicity, it was like, well, some case studies for that would be really helpful. So I think it just makes it more real, doesn't it? And people can apply it easier, I think, when they've got examples to work with.

The topic of the risk for money laundering for the legal profession and AML compliance is huge. And we've only covered a very small area today. But what would be your key takeaways from today's discussion? Rick, if I can turn to you first.

RICK KENT: Yeah, there's one thing practitioners should hopefully take away is that there is a difference between perceived risk indicators and actual risks. And perceived risk indicators do not translate to the presence of making mandated high risk. Under risk-based regimes such as we operate in the legislation, notably the money laundering regs guidance on best practice and regulatory advice, such as risk assessments, are just simply tools, a means to an end of supporting, understanding and identifying risks.

The key mantra being scrutinized transactions throughout the business relationship to ensure they're consistently with your knowledge of the client and their business that they're in. Understand their risk profile. Understand the origins of the funds on the transactions. And last statement, document everything, decisions and actions.

JOANNE CRACKNELL: Yeah, document, document, document indeed. Brian.

BRIAN CARSON: I think for me, one of the key takeaways from today's discussion has been just the synergy across the three jurisdictions where from a practitioner's perspective, whether you're in Northern Ireland, Scotland or England and Wales, it's the same types of issues are being encountered. Same good practice is being seen. Same bad practice or room for improveme-- or areas for improvement.

And from a supervisor's point of view that, again, we have a lot in common and shared approach. And I think that's all helpful for the legal sector across the board. I had a note here just whatever your frustrations with AML regulation and being obliged to perform checks underneath it or under that regime. Unfortunately, just would say it's not going to go away and 2025 promises see more change.

We've mentioned earlier, there's the national risk assessment will likely be published at some point during the year. That will have an impact on us as supervisors on our sector risk assessments and then will filter down to firms and their firm-wide risk assessments. We have a couple of ongoing consultations, including one under improving the effectiveness of the money laundering regulations.

Undoubtedly, when that comes to the fore, the outcome of that will involve changes to those regulations again. So unfortunately, just need to keep watching this space.

JOANNE CRACKNELL: Yeah. Oh, crikey. And Dale, key takeaways.

DALE TRAHMS: Yeah, no, I completely agree with both Brian and Rick that scrutinizing the funds throughout the business relationship, and not just at the beginning, is really important to make sure that what you know about your client continues to ring true throughout the matter. You're more than entitled to make a risk-based decision.

However, if you've made a risk-based decision, you have to make sure that, that decision is documented or the rationale behind the decision is documented because we will be looking at it if we're coming in. But Brian's point about things getting much stricter is a good point to end on.

BRIAN CARSON: Oh, no, I don't mean that to be unduly negative. I'm not suggesting that they'll get worse. But I'm just trying to highlight that it will keep changing.

RICK KENT: It's not stricter. It's continuing to be a challenge.

BRIAN CARSON: Yeah, yeah--

JOANNE CRACKNELL: They're constantly evolving, I think, is--

RICK KENT: Constantly evolving, I think.

JOANNE CRACKNELL: I think we're going to--

BRIAN CARSON: But also, in fairness, I was trying to just have a wee reminder to them. If a new national risk assessment does come out, that will filter down, and we will-- so if I need to re-edit that bit, we can. But-- good.

JOANNE CRACKNELL: So yeah, that's great. I think really, the message that we can take from today is that we're seeing a lot of good practices. Considering the volume of changes to legislation and compliance and the changes we've seen in the world, I think in all fairness, everyone's doing the best they can. And also, it's appreciated that compliance with the AML legislation can really feel overwhelming at times.

And it's time consuming for lawyers. They want to be doing the thing that they love, which is the law and advising their clients. But there is a lot of guidance. Dale has mentioned the blogs and things. And what we will do is we will signpost the guidance and resources available by the law societies that have presented today onto the notes of the podcast.

So really, that concludes our discussion today. And may I thank you, Rick, Dale and Brian, for your insights. It's been really interesting. And thank you all for listening and goodbye.