4 reasons why audit trails are essential for demonstrating anti-money laundering compliance for law firms
As a result of the 4th Anti-Money Laundering Directive (4MLD), which came into force in June 2017, the legal sector has seen stark changes in their approach to the client intake process to achieve regulatory compliance.
Following the directive’s enactment, we anticipated wholesale changes to the way that clients were onboarded to ensure the process met the new compliance requirements facing law firms. As well as ensuring that they stay within the parameters of the law when bringing onboard new clients, a large part of the task will be in proving that they are following their own processes.
Know Your Client, or KYC, processes are handled differently within different firms. Where some firms prefer to perform this within a central team, others prefer to let each individual lawyer undertake the task.
What is particularly important, however, for demonstrating AML compliance for law firms is not who carries out KYC, but being able to prove to regulators that the process has been adequately carried out – and carried out to the same specification on every single occasion. This is where the role of the audit trail becomes so important.
meet law firm compliance requirements with a clear audit trail
By having clear and verifiable evidence in place, law firms can ensure that they stay within the confines of the law, standardise best practice, offer transparency for the client and satisfy regulators. Here are four reasons why audit trails are a critical in demonstrating a law firm’s compliance.
adhering to money laundering regulations
How then can law firms ensure that they adhere to their own client intake and KYC processes 100% of the time? The most effective way of ensuring that the process has been carried out, is to be able to demonstrate it through an audit trail that can be checked and scrutinised.
Audit trails offer all who examine them, including internal staff such as Compliance Officers for Legal Practices (COLPs) or external regulators, confidence that the KYC policy has been executed in full accordance with the institution’s own guidelines.
Of ultimate importance, however, is the peace of mind offered that a firm will be able to demonstrate what checks were carried out during the KYC process, thereby demonstrating a law firm’s compliance with the requirements of money laundering regulations.
the role of regulators
As well as offering comfort that onboarding has been carried out effectively and in full, audit trails are being examined closely by regulators to ensure that law firms are adhering to KYC processes. It is the only piece of evidence that can be provided to regulators proving that KYC processes have been carried out, and those that cannot provide one are leaving themselves wide open to disciplinary measures from the regulators.
standardising best practice
Audit trails also provide a means of standardising best practice throughout a law firm for best-in-class compliance.
By examining the reports of onboarded clients it is possible to extrapolate what practices are working well and what is not. From here, successful practices can be rolled out across the law firm, while those that are causing issues can be modified or scaled back. Scrutinising the trail has the added bonus in that it can be used to enhance the onboarding process from the client’s perspective.
audit trail through RegTech
So what is the most effective way of producing a robust audit trail?
The simplest way for law firms to demonstrate adherence to their own KYC policies and ensure they are transparent, is through the automation of their KYC processes, and the dynamic generation of an audit trail.
With the rise of new RegTech companies and software, the availability of disruptive technologies is growing. RegTech or “regulatory technology” companies work to support regulated firms streamline their compliance procedures using technologies such as automation, AI or blockchain.
An audit trail means that every step taken on the client onboarding journey will be logged and referenced, available for anyone to come back to and examine to demonstrate that a law firm’s compliance requirements have been met.
As well as producing the audit trail, process automation allows law firms to be be secure in the knowledge that there is no risk from human error or manual oversight. An automated process results in the same process being carried out in the same manner in every instance, and addresses the risk of humans missing steps, or compiling information incorrectly. Moreover, individuals currently employed to carry out these processes can then be repositioned to service the needs of clients, rather than the needs of regulators.
In ensuring that law firms adhere to ever more stringent anti-money laundering regulations, being able to provide evidence of a robust audit trail is now an imperative. The benefits of ensuring KYC processes are carried out in a rigorous manner for every customer, can only be gained through their creation.
For law firms, automating such a vital part of the process protects against manual human error and establishes a trail that can be audited, referenced and dissected by internal staff and regulators.
about Joe Carton
BUSINESS DEVELOPMENT CONSULTANT
Joe is a business consultant specialist at encompass, working with firms to identify process improvements and solutions within their KYC and AML compliance functions. Bringing over a decade of experience working within the technology sector, his broad experience has enabled him to focus on working with businesses across professional services including legal, accountancy, property and consultancies globally.
Connect with Joe on LinkedIn.
Founded in 2011 by entrepreneurs Roger Carson and Wayne Johnson, and operating from the UK, encompass is the creator of unique, innovative Know Your Customer (KYC) software for banking, finance, legal and accountancy that enable better, faster commercial decisions. The company is driven by the belief that the best decisions are made when people understand the full picture.
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