How Should Lawyers Be Handling Client Money?
Prior to the increased focus and tightening of regulation round the management and handling of client money, what were the most typical ways that these needs were serviced?
More common than not, client's funds were deposited right into a law firm's main client bank account until the appropriate time for the funds to become transferred, as per the client's instruction. This was problematic for various reasons and the client funds were prone to misuse, for instance: being used for transactions which were outside of the remit that the lawyer's client account can be used for.
The general lack of knowledge of potential client money solution providers lead many to think that banks were the only real spot to turn to, but often they were slow, inflexible and expensive to use. If utilizing a bank wasn't an option, some would attempt to manage funds in-house with no knowledge or processes required to be regulatory compliant.
How big is this risk why is it so prominent?
It is unsurprising that lawyers are extremely prone to the sophisticated methods that criminal organisations employ to launder money; nowadays it's acknowledged as a global threat for the whole business world. Fulfilling ad-hoc payments on behalf of a client, which fall outside the agreed legal representation might appear to be a straight forward and value adding task and it often is, however this is really a breach from the SRA regulations.
The client account must not be used as a banking facility, as besides this produce an increased money laundering risk – particularly if functioning on behalf of the overseas client -, but when managed in-house, additionally, it requires an adherence towards the most stringent processes and operations as defined by the FCA.
The overheads in managing and monitoring each transaction to make sure its source legitimacy is critical, and this is where internal expertise is often found lacking or just under resourced. Legal firms wanting to service this extra requirement of their clients have various ways to fulfil this need whilst ensuring compliance with the regulator.
Fines and prosecutions take presctiption the rise. In the last Twelve months, over 20 solicitors and three law firms happen to be prosecuted. Are there similar repercussions for other FCA regulated firms that have fallen foul from the aforementioned risks the thing is with SRA regulated firms?
Absolutely, there have been similar fines passed out through the FCA over the years due to non-compliance which presents a heavy burden to firms who must stay abreast of the evolving regulatory position. If a legal practice isn't enforcing the required policies and procedures to ensure compliance, the repercussions might be as severe as imposing custodial sentences. Whatever the solution you decide to utilise, whether outsourcing or fulfilling in-house, it's imperative that any legal practice understands and acknowledges the regulatory requirements in handling client money.
Banks have become more risk adverse. What other options or solutions perhaps you have seen inside the legal sector. Do you need specific permissions to operate a client money account?
Some banks have experienced their fingers burnt and also have lost their appetite in managing client money accounts due to the increased risk of money laundering these types of the overall transactional nature of such accounts. This heightened regulatory awareness across many industries , has led to the arrival of a new 'breed' of client money specialists that compete with traditional banks. These new providers hold Part IV permissions granted through the FCA and they permit for greater flexibility, steps for success opening of bank accounts, streamlined and auditable processes allowing for the efficient management and handling of client money, all of which can sit alongside the existing law firms banking setup.
This is obviously not really a core a part of a law firm's business, and often, is going to be ancillary to daily business. Exist specialists within the financial services industry who are able to assist lawyers with client money accounts?
There are specialist providers who focus purely on providing client money banking services enabling firms to provide a more transactional plan to their clients. These specialists have purpose-built systems and procedures which are regulatory compliant and operate with the necessary controls to mitigate the AML risk. Unlike banks, these specialist providers offer greater flexibility and can often adapt their systems to meet the requirements of most organisations, regardless of transactional volume. Outsourcing this heavy lifting can be far more economical than building an in-house solution.
Delegating this burden to some client money provider can help to eliminate a lot of the danger, in addition to possibly lowering a firm's overheads, including insurance premiums.
What would be the common hurdles clients typically need help on?
While most legal firms understand the rules related to managing client money accounts, we see some potential issues when inadvertently conducting payments outside of the main an attorney. Getting the systems and processes in place is often the most difficult and cumbersome. Managing daily reconciliations, daily AML checks, complex transaction monitoring, daily calculations, breach reporting & staff training are the headline challenges that need specific expertise and also to be managed day to day.
From your extensive experience working in the finance sector with banks and payments, can you give our readers some key areas to pay attention to to limit this obvious AML risk that needs managing?
Regulators constantly need to update and alter their regulations, guidance and industry standards to combat the elevated money laundering threat and therefore, focus ought to be applied here regularly.
Whether using in-house solution or outsourcing to some specialist third party you have to ensure your accounting & IT systems adapt because the industry evolves. Relationships with banking providers, 24/7 access to account & customer support, extensive staff training and of course having a highly qualified team monitoring all the daily compliance requirements as mentioned above are key.