Law Firms, Loopholes and Launderers


International governments and regulators work tirelessly to combat money laundering and terrorism financing around the world.

But as anti-money laundering (AML) and counter terrorism financing (CFT) regulation in banks has tightened, criminals are always looking for other avenues to hide, clean and move money.

The rapid rise of money laundering through real estate transactions and the role law firms and lawyers play in establishing private companies and trusts has recently concentrated regulators’ attention on the legal profession.

Law firms’ client accounts are a tempting target because they have not always been subject to the same due diligence checks as banks.

In 2003 the Financial Action Task Force (FATF) proposed that designated non-financial businesses and professions (DNFBPs), including lawyers, notaries and other legal professionals, should be subject to the same AML/CTF regulations as financial institutions.

Since then, requirements for law firms and lawyers has steadily increased, driven largely by the European Union’s 4th and 5th Anti Money Laundering Directives.

European Union Leads the Charge

The 4th Directive, which was passed in 2015 and implemented across Europe in 2017, represented the most sweeping change to AML legislation for decades. Its requirements included:

  • Extra checks for politically exposed persons (PEPs), covering both domestic and international clients
  • The introduction of central register of beneficial ownership in each EU Member State, detailing the ultimate owners of legal entities, and the nature of the interest in a transaction
  • An emphasis on a risk-based approach to AML.

The 5th Directive, which is due to be implemented in Member States by January 2020, introduces even more onerous requirements on the legal profession, including:

  • An obligation to consult a beneficial ownership register when performing AML due diligence, and a requirement for law firms to report any discrepancies between the register and the information they hold
  • An extension of beneficial ownership reporting requirements to trusts.

The FATF is also currently finalising new guidance on a risk-based approach to AML/CFT for legal professionals.

Concerns remain, though, that law firms have been too slow to adopt effective AML processes, which could be attributed to the increased workload on risk and compliance teams. The latest assessment by the FATF found that none of the countries studied are fully compliant with all of its recommendations on DNFBPs[1].

It’s clear that meeting the new regulatory requirements has created some challenges for law firms. A recent Accuity survey revealed that the process-oriented nature of AML and identifying clients’ source of funds can be particularly onerous obstacles for them to overcome.

Firms risk a fine if their AML procedures are less than robust, but that is not all – inefficient due diligence and screening processes can significantly impair the client experience. They must find a way to join the battle, without it becoming prohibitive to business.

Rising to the Challenge

To ensure that law firms aren’t complicit to money laundering activities, we recommend:

  • Using financial crime screening tools to help identify clients against updated PEP lists, which can help ease the burden for law firms.
  • Ongoing training and awareness to embed a culture of AML/CFT compliance. While new processes can seem burdensome at first encouraging a culture where AML is second nature will help to ease the process considerably.

The legal profession may be a relatively new recruit in the international fight against money laundering, but it is not alone. AML solutions are increasingly sophisticated, and there is much to be learned from the experience of others.

With different players across the landscape working together to meet the same regulations using robust processes and tools, the strongest possible defence against financial crime can be achieved.

Learn how financial crime screening solutions are helping the legal profession combat illicit activity and address regulatory threats.

[1] FATF consolidated assessment ratings 2019 https://www.fatf-gafi.org/publications/mutualevaluations/documents/assessment-ratings.html