Previous anti-money laundering measures were extremely prescriptive. Solicitors were often left applying the same level of client due diligence to a loyal client selling the family home, as they would for a convicted fraudster who just walked into their office with a suitcase full of cash. Such an approach was hardly an appropriate use of resources and led to a 'tick the box' mentality developing among those in the regulated sector.
The risk-based approach is based on the following premises:
- Professionals know their clients and their business better than any government agency.
- Professionals will act in their own best interest by not engaging in or being utilised for criminal acts which could see them loose their right to practice, their business and their liberty.
- By enabling professionals to direct resources to meet money laundering risks where they are the greatest, this criminal activity will be more effectively targeted.
The Money Laundering Regulations 2007 set out the minimum requirements for client due diligence that government considers will enable those in the regulated sector to spot potential launders, or provide an effective audit trail for law enforcement should laundering occur. It is then a matter for firms to assess the risks posed by the area of practice in which they operate and the individual clients which they undertake, and then apply those requirements in a manner that will meet the risks.
Many factors will influence the risk level of an individual file, including the legal services being required, the type of client you are acting for, and the particular features of the retainer.
In cases where you are confident you know who your client is and have verified this, but the transaction or the nature of the client poses a greater risk of money laundering, it is pointless getting further identity documentation. The risk based approach would allow you to shift your attention to more detailed ongoing monitoring of the transaction, with due attention to the specific money laundering risks posed.
Read more on the factors to take into account when assessing risk of money laundering
Finally, firms need to be able demonstrate to the Solicitors Regulation Authority (SRA) that they have applied the anti-money laundering requirements in an appropriate manner. You may demonstrate your compliance to the SRA through:
- documenting your risk-analysis
- having written policies for how to apply the anti-money laundering requirements for a given risk-profile, and
- making contemporaneous notes on your decisions, particularly on cases which seem to pose a higher risk.