can yesterday’s processes meet the challenges raised by MLR 2017?
Since joining encompass this year I’ve been speaking with many legal and professional service firms and I cannot recall a piece of legislation that will change the way they work as much as the Money Laundering Regulations passed by Westminster over the summer.
A quick look at the banking sector should tell us all we need to know about the impact that this will have on the legal sector. Sanctions, fines and warnings have been the byword for banking over the last 12 months. Interestingly, and as I often discuss with encompass clients, in the vast majority of cases this has been because banks have broken their own internal policies on KYC and AML/CTF, rather than having actually committed money laundering directly – with the exception of a couple of very notable and high profile cases.
the new know your customer standard
With that in mind, I think it incredibly valuable and timely that encompass have launched our newest and most up to date whitepaper focusing on the legal sector and the new stipulations required by MLR 2017.
There is little doubt in my mind that some of the requirements in MLR 2017 will keep COLPs, compliance officers, Partners and others awake late into the night. If that’s the case, then I cannot recommend reading this whitepaper highly enough.
Focusing on the ‘what’ of MLR 2017 and ‘how’ law firms can stay within the narrow confines of the law as dictated by MLR 2017, this whitepaper gets to the crux of what is required right now for firms to stay compliant.
The starting point for this discussion will inevitably be in relation to the new regulations, which came into effect in June this year. Regarding compliance, these are the most far reaching set of regulations yet to be brought into law. With the move to a risk based approach, the need for audit trails, identifying Ultimate Beneficial Ownership and sources of wealth before a client can be onboarded will all have a dramatic impact on law firms internal processes.
In looking at law firms KYC processes, we must therefore look at them from the standpoint of the new regulations. As I mentioned above, the fines and sanctions that have been felt by the big banks in the recent past illustrate these regulations will be vigorously enforced, and must be adhered to to the letter.
At this moment in time, and outwith of a few large law firms who have the resource and wealth to be able to nullify the impact of the regulations through the employment of large quantities of compliance professionals, typical mid-size law firms face myriad challenges in their onboarding procedures.
challenge: ultimate beneficial owners
A key move from the third money laundering directive to the new regime, is that firms must identify the ultimate beneficial owner during the KYC process. At this time, from my conversations with numerous law firms, typical checks are completed manually by updating spreadsheets then drawing charts or diagrams. We have seen from the financial services sector that the cost and time implications of manually researching this work can have a significant impact on bottom line profits.
challenge: consistency in onboarding
When hundreds or even potentially thousands of clients are being onboarded it can be difficult to ensure that the same consistency is applied to each and every client. There may be discrepancies between individuals within the compliance team or within different teams. When different clients have very different requirements within the onboarding process, it can be difficult to ensure that consistency prevails. One of the requisites of MLR 2017 is that as well as being absolutely consistent, policies are recorded, and include:
- risk management practices
- internal controls
- customer due diligence
- reporting and record keeping
- the monitoring and management of compliance with, and the internal communication of, such policies, controls, and procedures
challenge: client life-cycle
Many law firms that I have conversed with have yet to grasp the scale of the challenge they face in the continual screening of high risk clients. As we identify in the paper, only 40 percent of law firms surveyed in a recent report screen high risk clients every 1-6 months and ten percent screened only every two years. Continuous remediation of clients is more challenging than the initial onboarding of customers as it requires the use of two different data sets – one from when the client was initially onboarded and one current set – to identify risk sets that may have changed within the set timescale.
challenge: audit trails
Even where COLPs or compliance managers are satisfied internally, law firms must be able to demonstrate to outside regulators that checks have been undertaken in-line with the law. This requires for internal policies to be documented and for all checks to be recorded. Physical files can be removed and not replaced, and different individuals can use differing methods for collating and filing information leading to discrepancies.
challenge: simplified due diligence
With a move to a risk based approach, it is not sufficient to automatically assess clients against simplified due diligence. Every client must be individually assessed against the threat level that they carry, including those that are known personally or have held accounts for many years. Money launderers are sophisticated in their methods and understand that gaining the trust of legal firms before laundering money can be of benefit to them.
challenge: client pressures
As my colleagues have noted, slow and cumbersome KYC processes can cause tension internally as the firm’s reputation suffers. Where administrators are responsible for onboarding, tension can mount if Partners cannot bill for work completed. For their part, Partners may not be as rigorous as others if they undertake the process. The slower this process is, the more time and money the firm has to write-off.
As soon as the outline of these new regulations was released by the FATF it was clear to me that this would lead to a sea-change in the way that law firms onboard new customers and remediate existing ones. Concerningly, several months on from the legislation being passed, and while there have been some good examples, I have not yet seen this wholesale change in attitude to client onboarding. Regulators are watching the sector in a manner never seen before, and though some smaller fines have been handed out, on the very near horizon are genuinely eye-watering sanctions.
In this piece I have attempted to summarise some of the challenges that will be faced by firms are they attempt to change their internal KYC processes to satisfy the new regime. As we can see there are myriad problems that require addressing. Within the whitepaper we undertake to look at each of these in more detail before outlining the steps that a firm can take to ensure that it is regulator ready.
Be sure to download it today, then do contact me to ask any questions you may have.
about Martin Russell
HEAD OF SALES PROFESSIONAL SERVICES
After graduating with an MA in Social Sciences from Glasgow University, Martin joined business research and risk management firm LexisNexis. In his six and a half year tenure with the company, Martin worked with Banks and Insurance firms to increase the effectiveness of their CDD and EDD screening. Joining encompass in July 2017, he leads the Professional Services team assisting law and accountancy firms to improve their KYC processes.
Connect with Martin on LinkedIn.
Founded in 2011 by entrepreneurs Roger Carson and Wayne Johnson, and operating from the UK, encompass is the creator of unique, innovative 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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