Stick or twist? How law firms are responding to SRA investigations into suspected AML breaches

11 Mar 2024

As the SDT rules against the SRA in its prosecution of Dentons for breaching anti-money laundering regulations, Andrew Katzen has written a blog on whether law firms should ‘stick’ by settling with the regulator; or ‘twist’ by contesting its interpretation of the issues.

The recent decision, by the Solicitors Disciplinary Tribunal, to dismiss the SRA’s prosecution of Dentons for breaching its anti-money laundering regulations is a potential game changer for law firms and solicitors targeted for AML breaches by the regulator.

Until now, many law firms and solicitors who have come under suspicion of AML breaches have preferred to ‘stick’ by settling with the SRA, rather than ‘twist’ by contesting its interpretation of events.

The rationale for this has often been that accepting the SRA’s complaints of AML failure – and thus maintaining good relations with the regulator – outweighs the time, trouble and expense of fighting.

But the Dentons case could be illustrative a new approach to these matters.

While the SDT has not, at the time of writing, published its reasoning in the Dentons case, the tribunal’s decision comes in the context of legal, political and structural changes which together hold the potential to change a law firm’s decision-making calculus in AML matters.

The SRA is getting tougher on suspected AML regulation breaches

While SRA investigations into high profile firms such as Dentons will attract the media’s attention, it is small and medium sized law firms that have predominantly fallen under the SRA’s anti-AML spotlight.

And that spotlight, it is clear, has become significantly harsher over recent months.

Official figures published in the Law Society Gazette, show how, in the five months since October 2023, the regulator fined law firms a total of £290,000 for AML breaches. By contrast, the total amount the SRA fined law firms over the prior eight months was £5,250. This is a nearly sixfold increase.

This growth in AML action is likely to be a function of the regulator’s stated determination to focus harder on AML enforcement and related issues such as economic sanctions.

In March 2023 SRA chief executive Paul Philip said, ‘there is nothing we can do to stop the onslaught of [AML-related] regulatory requirements coming from direct legislation which we are forced to implement.’

Whilst this may be true, it is noticeable that other regulators, such as the FCA and FRC (both of which may be under similar political pressures) have not shown such a steep rise in AML enforcement action over the last year.

Perhaps a more pertinent factor is the SRA’s recently acquired ability to fine firms a maximum of £25,000 (up from £2,000 just two years ago) for AML breaches. The agency’s fining powers could become unlimited due to changes under the Economic Crime and Corporate Transparency Act.

Finally, there is the not insignificant fact that since May 2023, the SRA has employed a new system for calculating financial penalties based on turnover. This has tended to raise the amount the SRA says it should fine law firms.

How is the SRA’s new AML focus manifesting in inspections?

As a solicitor who specialises in representing law firms and lawyers under SRA investigation, I am aware that the regulator is conducting more AML and sanctions inspections of firms with no or limited notice.

Cases of historical suspected breaches are often interpreted by the SRA with the wisdom of hindsight. Incidents that may have been ‘borderline’ or ‘forgivable’ at the time they occurred are now being seen by the regulator as serious transgressions. The SRA sometimes applies a strict ‘gold standard’ to regulatory AML and sanctions compliance which does not necessarily recognise the realities of running a practice in current market conditions.

In adopting this approach, the SRA does not consider all the challenges small and medium-sized law firms face which may include the ever-increasing scope and complexity of regulatory AML compliance; turbulence in the property market; economic recession; and overcoming the legacy of COVID lockdowns.

What is the best response to an SRA AML probe?

Historically, most law firms and many solicitors have preferred to ‘stick’ rather than ‘twist’ when it comes to SRA investigations. This would be a logical approach in many cases, and particularly if there is accepted evidence of breaches.

In disputed matters, the attraction of challenging the SRA at the SDT may have been lessened by the cost, the delay, and the publicity, as well as an assumption that the Tribunal would be likely to find for the SRA and unlikely to decrease the level of fine.

Yet with the SRA proposing huge fines for AML matters based on its May 2023 Guidance on Financial Penalties, the standard calculation to accept the regulator’s allegations may now be changing.

The advent of the SRA’s May 2023 guidance means there is now a potential divergence between the regulator and the Tribunal on levels of fines.

This potential disparity could mean it is no longer safe to assume that the SDT will always follow the SRA’s ideas on fines. It is notable how, in its recent prosecution of Clyde & Co, the SRA tried unsuccessfully to address the Tribunal on penalties and draw attention to its own Guidance.

Is the SDT’s decision in the Dentons case a harbinger?

The Dentons case could turn on its own particular facts. It appears to concern allegations of AML breaches dating back many years regarding the 2007 Money Laundering Regulations.

Dentons seems to have decided to fight the case on the basis that the SRA applied the more rigorous standards required today to conduct which occurred more than a decade ago.

Dentons is the largest law firm (by head count) in the world and is thus unlikely to suffer the same cost pressures as the small and medium-sized law firms most commonly targeted by the SRA. It can probably afford the financial risks of taking on regulator at the SDT.

But the SDT’s decision to rule mostly in Denton’s favour – and to order the SRA to pay its own costs – nonetheless offers some hope to smaller firms and solicitors facing similar allegations, and may indicate that there are different ways to deal with these sorts of cases.



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