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Anti-money laundering requirements for law firms have been growing steadily over the past few years

In this new landscape, regulatory technology – or RegTech – can play a key role in helping legal firm undertake client due diligence and meet their compliance obligations in a very cost-effective and efficient way.

There is one general rule that perfectly applies to anti-money laundering regulations: together with greater awareness comes closer scrutiny. In fact, as regulators’ understanding of criminals’ practices expand, so does the range of sectors and professional categories covered by financial regulations. 

At the centre of this new AML ecosystem extending far beyond banking, we find law practitioners. 

In the UK, the Solicitors Regulation Authority has recently launched enforcement action against firms that are not meeting their AML obligations. On 23 June 2021, the regulator published details of fines issued to six firms which took more than a year to comply with new risk assessment requirements introduced in 2020. Each firm was fined £800 and ordered to pay £600 costs. Despite the relatively small amount of the fines issued, they represent a warning signal from the regulator to the overall sector.

Another example of this international trend is the updated Practice Direction on the prevention of money laundering, published by the Law Society of Singapore in January 2019. These rules introduced client due diligence (CDD) procedures to lawyers similar to existing requirements in the banking sector. 

Even earlier in Hong Kong, the customer due diligence requirements stated by Schedule 2 of the Anti-Money Laundering and Counter Terrorist Financing Ordinance (“AMLO”) were extended to legal professionals in March 2018. 

In this new landscape, if a legal firm does not have a department dedicated to compliance, lawyers or partners must undertake client due diligence, which can be a significant undertaking for small teams. The risk is clear: the firm might onboard and accept instructions from someone who would have otherwise failed AML specific checks.

To counteract this risk and ensure that a firm’s compliance process is sufficiently thorough, it is advisable to appoint a specialised team or compliance officer to institute guidelines. In Europe, this is a legal requirement (law firms are obliged to appoint at least one Money Laundering Reporting Officer, or MLRO). This person or team not only must have knowledge of the applicable AML laws and regulations, but also needs to understand how to implement policies and procedures for lawyers and other employees to follow. 

But anyone who has ever tried to implement an internal procedure will be familiar with the challenges that come with it. Simply writing a step-by-step process into a company policy doesn’t ensure it will be followed. 

To address this challenge, more and more law practitioners are starting to turn to regulatory technology or RegTech. By applying key learnings from the financial sector, law firms are getting a head start on introducing RegTech solutions able to bring risk policies to life through step-by-step processes.

In particular, digital RegTech solutions with in-built workflows and automated audit trails have the power of streamlining the onboarding and recertification process to a high degree. By centralising client due diligence operations within one digital environment, these platforms help compliance officers gain a 360-degree view of their customers. Such solutions can be set up to perform AML screening both at the point of creation of a new “client case” as well as periodically, while all due diligence documents are collected through digital outreach tools with end-to-end encryption and stored securely within the system.

Another essential RegTech application is the use of digital tools to verify clients’ identities or company structures remotely. 

Remote ID verification of individuals has seen incredible growth in the past two years, in part driven by the COVID-19 pandemic’s new distance requirements but also by regulators’ own changing attitudes. For instance, the Financial Action Task Force (FATF) – the international rule-setter for anti-money laundering regulations – released Digital ID Guidance in March 2020, stating that “non-face-to-face onboarding and transactions conducted using trustworthy digital ID are not necessarily high-risk and can be standard or even lower-risk”.

For corporate clients, law firms can rely on specialised solutions that provide real-time connections to official registries to source company documents, map ownership structures through Optical Character Recognition and Artificial Intelligence, and easily identify ultimate beneficial owners across jurisdictions. Intelligent use of automation in this area through automated recertification requests, for example, also minimises the risk of specific tasks being deferred or forgotten, as it may happen with purely manual processes.

These are just a few examples of how strategic RegTech implementations accomplish a double objective: limit the probability of lawyers being exploited by money launderers and improve internal efficiencies and accountability ahead of potential audits by regulators.

So, as AML-related regulations continue to intensify, we expect the breadth and depth of RegTech applications to develop further, resulting in large-scale adoption in the legal sector around the world.