Solicitors Regulatory Authority: 62 Percent of Law Firms Only Partially Compliant or Non-Compliant with Money Laundering Regulations

The United Kingdom Money Laundering Regulations, enacted in 2017, established a wide range of specific legal obligations on United Kingdom businesses of all types to guard against those businesses being used as conduits for money laundering and terrorist financing (MLTF).  Those obligations include:

• Customer due diligence (CDD) measures (ie, ‘taking steps to identify your customers and checking they are who they say they are’), including CDD in establishing a new business relationship (eg, obtaining information on the source and origin of funds that the customer will be using in the relationship).
• Updating risk assessments on customers if their circumstances change.
• Establishing and maintaining adequate internal controls and monitoring systems, policies and procedures, and record-keeping.
• Conducting ongoing monitoring and measures to take money-laundering risk into account in day-to-day operations.

While it is commonplace to think of such obligations as applying to the United Kingdom financial sector, the Regulations also apply to other sectors seen as ‘gatekeepers’ to the United Kingdom financial system. Those sectors include independent legal professionals such as legal advisers. 

From 2018 to the present, the Legal Sector Affinity Group—the United Kingdom legal sector’s regulatory and representative bodies—has provided continuing guidance to legal professionals and firms on compliance with the Regulations.  Yet despite the unambiguous language of the Regulations and the readily available legal guidance, it has lately become clear that there remains a substantial degree of noncompliance by legal professionals and firms.

On October 30, the Solicitors Regulation Authority (SRA), which regulates solicitors in England and Wales, issued its 2024-2025 Annual Report.  That report included a number of significant concerns with the legal sector’s compliance with the Regulations:

• The SRA received 426 reports of potential breaches of the Regulations and money laundering activity—an 88 percent increase over 2023/2024.
• The SBA found that in its review of 823 firms’ PPCs, only 311 firms (38 percent) were compliant, while 382 firms (46 percent) were only partially complaint and the remaining 130 firms (16 percent) were noncompliant.  As a point of comparison, in its recently issued 2024-2025 Annual Report, HM Treasury found that 19 percent of businesses were assessed as compliant, 41 percent as generally compliant, and 60 percent as noncompliant.
• Eighty-six fines (whether issued through SRA adjudicators, Regulatory Settlement Agreements, or independent Solicitors Disciplinary Tribunal actions) imposed for Regulations violations totaled £1,498,983.  In contrast, the Financial Conduct Authority (FCA), Annual Report stated that the FCA imposed a total of £59.5 million, 88 percent of which pertained to high-risk businesses.
• Recurring issues that the SRA identified included failure to (a) apply enhanced customer due diligence and enhanced ongoing monitoring, (b) recognize work that brings the firm into scope of the Regulations, and (c) have sufficient regard for the SRA’s issued warning notices, red flag indicators in transactions, and legal sector-wide guidance.

The SRA also identified three key themes that it believed contributed to those breaches:

• ‘Inadequate importance, at senior levels within firms, placed on having robust and compliant AML controls in place. For example, adequately risk assessing the firm's exposure to money laundering and terrorist financing or putting adequate PCPs in place.’
• ‘Inadequate supervision or training of fee earners’ on the Regulations and firm PCPs.
• ‘Having systems and processes that allow events to happen unchecked, such as receipt of funds or moving to the next stage in the transaction (rather than an automated 'stop' being put to a transaction when an element of customer due diligence has not been performed).’

Although the United Kingdom Government has decided to transfer responsibility for monitoring the legal sector’s compliance with the Regulations to the FCA, law firms should assume, in light of the SRA Report’s findings, that the FCA will be at least as vigilant in supervising their compliance.  They also should be mindful that the FCA, in enforcing the Regulations in the financial sector, has frequently imposed financial penalties on individual banks that are substantially higher than the £1.5 million total imposed under the current SRA regime.

In one respect, the United Kingdom legal profession can take some comfort in the fact that the percentage of noncompliance by English and Welsh legal professionals is nearly 75 percent lower than the percentage of noncompliance by other United Kingdom businesses. Nonetheless, there is no reasonable excuse, eight years after the issuance of the Regulations, for United Kingdom legal professionals and law firms to be unaware of or inattentive to the Regulations or to fail to comply with them in all relevant respects.

Jonathan Rusch is an Adjunct Professor of Law at the American University Washington College of Law.