Anti-Money Laundering (AML) compliance for legal and professional services firms

Anti-Money Laundering (AML) compliance is more than a regulatory requirement for legal and professional services firms. It’s a safeguard that protects clients, the firm, and the integrity of the financial system. From verifying client identities to monitoring high-risk transactions, firms play a key role in preventing financial crime and maintaining trust in every engagement. Staying on top of AML processes, including CDD, EDD, sanctions, and PEP checks, ensures firms can operate confidently while reducing exposure to legal, financial, and reputational risks.

This article covers why AML compliance matters for legal and professional services firms, explores how to understand client suitability and appropriateness, and looks at maintaining compliance across everyday operations. It also examines navigating sanctions and regulatory guidance, safeguarding the legal and professional services industries, and the role of AML checks.

Why AML compliance matters for legal and professional services firms

AML compliance shapes how a firm functions day to day. It protects clients by making sure their matters are handled safely and ethically. It shields the firm from financial and reputational risks, such as fines or sanctions that can result from oversight. Regulators expect firms to have systems in place to manage risk, from client onboarding and anti-money laundering checks to monitoring ongoing cases for potential red flags. By keeping compliance at the forefront, a firm creates a culture of accountability, reduces the chance of errors, and strengthens its credibility in the eyes of both clients and regulators. Essentially, compliance is about running the firm responsibly while keeping trust intact.

Understanding client suitability and appropriateness

Suitability and appropriateness checks, while related, are actually distinct. The checks that a financial institution will need to make will depend on the type of service being provided:

• Suitability checks: Suitability checks must be conducted when a business provides investment advice and/or portfolio management, to ensure that investment advice and decisions to trade (including to buy or to hold) are suitable for the investor.
• Appropriateness checks: When a financial institution provides services without advice, such as execution-only services, it must ensure that the financial instrument envisaged is appropriate for the investor.

It’s a subtle difference, but a vital one.

Suitability testing, for both professional and retail clients, assesses a client’s knowledge and experience of the types of services and instruments in which the investment advice or portfolio management is to be offered, their financial situation including the ability to bear loses and the investor’s investment objectives including the risk tolerance. This information allows financial institutions to thoroughly understand an investor’s income, assets and risk profile, in order to ensure the right recommendations are made.

Traditionally, checks are done manually. However, the method of processing client forms is not only outdated but also highly ineffective. The increased risk of human error often leads to costly and time-consuming mistakes. The process does not take into account the domicile of the client, which means that, often, clients can be categorised incorrectly in the first place.

This can lead to an impact on the overall applicability of the suitability and appropriateness assessment.

The problem is that this is very knowledge-intensive work that cannot be expected to be correctly templated by each and every respective financial institution. There are constant changes in regulation, and most business is global nowadays, so the assessments will often need to cover several jurisdictions and asset types. The potential for errors is, therefore, very, very high. Ask yourself, why would you ever want to manually have to keep track of changes in regulation in, say, 10 different countries that you take clients from in the first place?

Maintaining compliance across legal practices and professional services

We have seen demands increase in many of the professional services sectors. Particularly legal, accountancy and even telecommunications firms when it comes to managing compliance.

A recent case, reported by the Law Society, saw a small legal firm fined £20,000 by the Solicitors Regulation Authority (SRA) for anti-money laundering (AML) compliance breaches. The firm was fined after the SRA found it failed to put in place a practice-wide risk assessment compliant with regulation 18 of the Money Laundering Regulations (MLRs) 2017.

By omitting the risk from its conveyancing work – which amounted to 75% of fee income – the firm was held by the SRA to not have fully assessed its product/services risks. Accountancy firms also need to meet their extensive obligations for money laundering supervision, including customer due diligence, record keeping and reporting suspicious activity.

Many professional services firms have relied on manual processes and old-fashioned ways of researching data. Using spreadsheets, Google for searching documents and beneficial ownerships as well as shared files and documents, is inefficient and can lead to human error and mistakes. It could also mean that professional services firms are missing out on the benefits of automated compliance management systems.

Navigating sanctions and regulatory guidance

The guidance provided by the SRA emphasises the need for law firms to establish robust systems and controls to detect and prevent financial crimes effectively. Solicitors must identify clients or jurisdictions that may be subject to sanctions regimes, assessing any potential risk and conducting due diligence accordingly. They must establish ‘written and implemented’ internal controls “to identify all clients and counterparties, and to verify their identities using independent materials,” (SRA, 2022).

Integrating sanctions checks as part of routine practices is essential to preventing breaches of the UK’s sanctions regime. Firms need to be confident in their processes to ensure they avoid unwittingly providing services or funds to a sanctioned person.

What’s more, firms must record their assessment of sanctions risk for each client and/or matter which indicate any increased sanctions risk. With a stark reminder of the importance of solicitors’ reporting obligations, the SRA’s guidance also reiterates the duty of legal firms to report any suspicions or breaches of financial sanctions promptly.

What does a good sanctions compliance process look like?

As part of detailed guidance issued by the SRA, there are a number of key elements that make up, in their view, a robust, comprehensive sanctions process.

1. Assess sanctions risks: Conduct a comprehensive assessment of the sanctions risks facing your firm. This should include identifying which areas of work or clients are most susceptible to sanctions breaches, and mitigation strategies should be put in place to address these risks effectively.
2. Establish policies and procedures: Develop and implement written policies, controls, and procedures to identify all clients and counterparties. Ensure their identities are verified using independent documents such as a passport. For non-natural person clients, these requirements must be extended to include ultimate beneficial owners or individuals with significant control over the entity in question.
3. Keep record of sanctions risk assessments: It is important for solicitors to maintain a record of sanctions risks assessments carried out for each client or matter, highlighting anything that indicates a heightened risk, with appropriate mitigating controls put in place.
4. Implement ongoing monitoring: Establish a policy and procedure for the ongoing monitoring of clients to ensure their sanctions status remains unchanged by screening for any updates to applicable sanctions lists. It is also recommended that firms review a client’s sanctions status at periodic intervals, such as year since the initial screening.
5. Provide training: Training must be offered on the sanctions regime and your firm’s internal procedures to all relevant staff members. The SRA also recommends subscribing to alerts issued by the Office of Financial Sanctions Implementation (OFSI) to stay up-to-date on any changes to sanctions.
6. Report to senior management: Regularly report on sanctions risks and the performance of your compliance controls to senior management to ensure their involvement in decision-making when it comes to managing sanctions in your firm.
7. Conduct independent audits: Arrange for regular independent audits, whether internal or external, of your firm’s compliance processes that encompass reviews of your risk assessments, policies, controls, procedures, and training, and take appropriate action where necessary.
8. Implement processes for sanctioned individuals: Establish specific protocols for handling sanctioned people and ensure prompt reporting to OFSI, freezing any client assets held and stop accepting payments from them.

How can law firms stay proactive and adapt to evolving financial sanctions regimes?

Sanctions can change quickly, so it’s important for legal firms to be proactive in their compliance strategies and risk assessments to ensure that any undue risk is identified and mitigated promptly.

This begins with staying on top of the latest developments in sanctions regulations and guidance from the SRA by keeping tabs on regulatory updates, subscribing to relevant, trusted sources of information, and active participation in industry networks.

As mentioned above, the SRA recommends that firms subscribe to alerts issued by the Office of Financial Sanctions Implementation which you can do here on the gov.uk website.

When sanctions do change, the SRA recommends that law firms “should consider doing a recheck of all clients and related parties (beneficial owners and counterparties) and re-examine all money (including money for fees or disbursements) held across accounts.”

What’s more, firms should consider the implementation of sanctions screening systems that can enhance the efficiency and effectiveness of the compliance process. By automating the process of identifying potential matches against global sanctions lists, firms can conduct real-time screening of clients, counterparties, beneficial owners, and PSCs, enabling them to quickly identify and address any potential sanctions risks without the need for laborious, manual research.

Safeguarding the legal and professional services industries

AML compliance is more than a regulatory checkbox for firms in the UK. It is a vital step in ensuring the integrity of the legal profession and maintaining public trust. The underlying aim of wider AML regulations is to prevent the proceeds of unlawful activities from being laundered to legitimise their illicit origins.

Professional services and legal firms often deal with large financial transactions, property conveyancing, and trust management. These activities could be easily abused by criminals aiming to legitimise ill-gotten gains. A lack of diligence may inadvertently involve firms in serious crimes, damaging the reputation of the business in question and profession as a whole.

Ensuring AML compliance ensures that the services provided are not misused for illicit purposes, thereby upholding public trust. Financial crimes such as money laundering, terrorist financing, and tax evasion have severe societal impacts. They can destabilise economies, erode public trust, and even fund dangerous criminal activities. Non-compliance can not only lead to heavy penalties, but also legal proceedings, and serious damage to a firm’s reputation. As such, having proper AML procedures protect not only the firm but also clients who could unknowingly be associated with financial crime and fraud.

The role of AML checks

AML checks in professional services typically focus on preventing and detecting money laundering and related financial crimes. Firms are expected to carry out Customer Due Diligence (CDD) to identify and verify clients, apply Enhanced Due Diligence (EDD) in higher-risk situations, assess risk profiles, maintain accurate records, monitor for suspicious activity, and report concerns to the relevant authorities. Non-compliance can result in serious legal and reputational consequences, highlighting the importance of adhering to AML requirements in each jurisdiction.

Why AML checks matter

AML regulations are designed to stop illicit funds from entering the financial system. Professional services firms often handle high-value transactions such as property sales, corporate deals, or trust management, which makes them potential targets for criminals. Effective AML controls protect clients, safeguard the firm, and uphold the integrity of the broader financial ecosystem.

Weak processes, undertrained staff, or inconsistent checks can create vulnerabilities. Even when teams are committed to doing the right thing, gaps in procedure can leave firms exposed.

Key AML compliancemeasures

Customer Due Diligence (CDD): CDD is the foundation of AML compliance. Firms must carry out thorough client identification and verification, ensuring documents are authentic and up to date. The level of scrutiny should reflect the risk associated with the client and the type of transaction.

Enhanced Due Diligence (EDD): In higher-risk situations, EDD is necessary. This could involve clients in certain industries, regions, or with specific reputations. Additional checks, documentation, and background research help firms assess and mitigate potential financial crime risks.

Sanctions Screening: Screening for individuals or entities subject to sanctions is a critical part of AML processes. Professional services firms often handle significant financial and corporate transactions, and thorough sanctions checks help prevent inadvertent involvement in restricted activities.

PEP Screening: Screening for Politically Exposed Persons (PEPs) is important because these individuals, including government officials and high-ranking public figures, can carry higher risks of corruption or financial crime. Firms must identify these clients and apply enhanced scrutiny where needed.

AML compliance in legal and professional services FAQs