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Human trafficking

Human trafficking and how to spot it

Human trafficking is one of the fastest-growing illegal enterprises in the world, after drug trafficking.

Human trafficking is the trade of humans for the purpose of forced labour, sexual slavery, or commercial sexual exploitation for the trafficker or others. This may encompass providing a spouse in the context of forced marriage, or the extraction of organs or tissues, including for surrogacy and ova removal. (Wikipedia)

 The statistics show the true extent of the problem. According to the charity Unseen, it is estimated that:

  • 3 million people worldwide are in modern slavery
  • 9 million are in forced labour
  • 4 million people are in forced marriages
  • Globally it is estimated that one in four victims of modern slavery are children
  • In the UK just under half of the referrals to the National Referral Mechanism (47%) were individuals who claimed they were exploited as children
  • around 13,000 people in the UK are in modern slavery, according to the UK Government
  • up to 136,000 people in the UK are in modern slavery, according to slavery experts (i.e., much more than official figures).

“Hidden in plain sight” is a term often used when people talk about modern slavery – with the crime often taking place right in front of us.

Some of you may have seen the “hidden in plain sight” poster campaign a few years ago inside taxis which attempted to educate the public on just this point and highlight that human slavery was often taking place under our noses.

What can you do?

If we look beyond the human costs, where there is human trafficking money changes hands, which can present money laundering exposure for law firms.  This is where firms can play their part by serving as another line of defence against these terrible crimes.

Given the huge scale and pervasiveness of human trafficking, businesses can inadvertently expose their business to risk unless they seek to identify and tackle the issue in their supply chain.

We all need to decide that we won’t let this happen on our watch and be alert to the red flags which indicate where human slavery may be taking place.

“You should ensure that your business adopts policies and procedures designed to highlight these red flags so that all staff know what to look out for.”

 Clearly some red flags are more relevant to financial services businesses (such as banks) than to law firms, but it is useful to understand how we can identify where this type of crime is taking place.

There are six types of human trafficking:

  • Trafficking for forced labour
  • Trafficking for forced criminal activities
  • Trafficking in women for sexual exploitation
  • Trafficking for the removal of organs
  • People smuggling.

Some Potential Red Flags of Human Trafficking:

High volume deposits through bank accounts and immediate withdrawals from border towns Ongoing ATM/credit card transactions in even amounts between 10 PM and 6 AM Credit card payments to online escort services for advertising.

Sudden activity changes in business accounts outside of the client’s expected profile Structured cash deposits at multiple bank branch locations.

Workers’ contracts not being readily available in a corporate transaction. If you are required to visit a client’s premises, do they employ large amounts of migrant workers or are children seen in and around the premises?

Look for behavioural signs – does, for example, someone look frightened? Avoiding eye contact, hesitant to talk to strangers.

Look for Physical signs – they appear to be isolated, they’re rarely allowed to travel on their own, they don’t have documents that would allow them to travel – passports, ID, etc.

Where a law firm holds financial data as part of its AML checks or when undertaking due diligence on a transaction, this may provide an opportunity for law firms to spot red flags and provide a picture of a criminal or launderer.

The message is simply to be alert to this horrific type of crime.

If you suspect any form of modern slavery is taking place within your supply chain or you suspect your clients may be involved, you should immediately flag it to the person responsible for dealing with it at your firm.

If Teal Compliance can be of any assistance in helping with your reporting obligations and procedures, please contact us at hello@tealcompliance.com

We had that email we all dread…

We had that email we all dread…

“Hi, I’ve had an email from one of your team and we think it’s a scam, just wanted to let you know.”

Then we had several others and as many phone messages from lovely contacts wanting us to know. I’m grateful for our community of clients and contacts for letting us know straight away so we could sort it.

We took the following steps within an hour:

  1. Stopped what we were doing and got onto our IT guy who specialises in cyberattacks to crawl over our systems to check what had happened, and we followed his instructions. We looked at things like:
  • Changing email logins/passwords
  • Isolating the data breach, so the rest of the system wasn’t affected
  • Adding 2-factor authentication.
  1. Put one of our team onto responding to all the enquires
  2. Briefed our friends at Moneypenny who handle our calls – thanks ladies for your help!
  3. Put a post on our website explaining what had happened
  4. Emailed our mailing list explaining what we know and advising them to contact their IT departments straight away if they received the emails and NOT TO CLICK ON THE LINKS.

Thankfully, we had confirmation that the issue had been contained almost immediately because of the speed at which we responded.

Obviously, it made us feel sick, but it just shows, that even with regular screenings of our systems, the baddies can attack.

The facts

Around 65,000 attempts to hack small-to-medium-sized businesses (SMBs) occur in the UK every day, around 4,500 of which are successful. That equates to around 1.6 million of the 5.7 million SMBs in the UK per year. (CSO online)

We hear about it all the time, but we always think it will never happen to us. The fact is, more people are hybrid working, hackers are getting cleverer, and it just takes one click on that harmless-looking link for it all to go wrong…

Here are the top three tips which helped us to be able to respond so quickly:

  1. Have a plan – we did – and we put it into action immediately that we were made aware of an issue. Everyone should have a Disaster Recovery Plan, before being exploited, not after. It can be as simple as just having a point of contact who can quickly go through disaster recovery protocols and, at the very least, stop any further damage being caused immediately. The aftermath can still be sorted over time, but it’s vital to have someone who knows how to resecure the systems immediately
  2. Get a good cyber person in your address book, and have their contact details ready. Scouting around for the details of someone you know and trust when you’re in the middle of an attack wastes valuable time. Happy to share the details of our guy if you want to get in touch
  3. Know what you’re going to say to people.

The approach we took was because we wanted to protect people – hence the communications with people who might be affected.

Even major institutions worth £100Billion+ have vulnerabilities and have been exploited in the past, notably by way of ransomware attacks and the like.

When anything goes wrong, the gut reaction may be to keep things quiet and not acknowledge there has been a problem. However, our firm view is that being open and honest when issues crop up is by far and away the best approach.

No one can completely avoid all risks at all times but having a way to deal with problems when they occur as soon as possible is a very vital skill in any business.

You can’t learn from something if it’s swept under the carpet.

Knowing the approach we were going to take enabled us to draft the wording quickly and get the message out.

In hindsight, we could have prepared it in advance just in case – we have now!

Fingers crossed you never have a day like we did but having a plan in advance will make sure you are better prepared.

If we can assist with anything, please don’t hesitate to get in touch.

Photo by Bermix Studio on Unsplash

The Potential Pitfalls of SARs: a cautionary tale, and 10 ways to avoid them

Filing Suspicious Activity Reports (SARs) should be a priority for all law firms when presented with circumstances that alert them to the potential for money laundering.

But the very word “suspicious” is in itself, problematic, as it lacks clear definition.

It’s essential that the basis for suspicion is expressed as clearly as possible – not just because of the potential for legal action, but also because of the potential that it may be read by a client.

So, what does “suspicion” actually mean?

Unhelpfully, “suspicion” isn’t formally defined in legislation – but it has been the subject of question by the courts on several occasions.

The judge in the case of Lonsdale v National Westminster Bank plc [2018] EWHC 1843 (QB) stated that

“The [person that suspects] must think that there is a possibility, which is more than fanciful, that the relevant facts exist. A vague feeling of unease would not suffice. But the statute does not require the suspicion to be “clear” or “firmly grounded and targeted on specific facts”, or based upon “reasonable grounds.”

This suggests that the term “suspicion” is subjective, with a relatively low threshold. Suspicion must be genuine, but there’s no robust necessity for it to be based on specific facts.

With this in mind – and in line with advice published by the NCA – here are our ten tips for avoiding the potential pitfalls when reporting suspicious activity:

  1. Use clear and concise language, keeping the content clear, concise and simple. Avoid using acronyms and legal jargon.

The “reasons for suspicion” section of the SAR limits your input to 8000 characters, equating to around 1500 words.

  1. Give full and precise reasons for your suspicion of money laundering.

It’s important for the NCA to see:

  • Who is doing what
  • Who they are/were doing it with
  • When they are/were doing it
  • Why they are/were doing it
  • Where they did it
  • How they are doing it
  1. Specify all individuals and businesses, including suspected criminal property in as much detail as possible (having regard to privilege). You may not be in possession of all of the details, so you should make this clear in your report if that’s the case. Think about:
  • Associated subjects
  • Dates of Birth, Post Codes, Occupations
  • Financial transactions.
  1. Specify all information giving rise to suspicion and explain how you discovered it.
  2. Clearly distinguish between information that you know from that which you suspect.
  3. Present a chronological sequence of events which support your suspicion. Be as specific with regards to dates as possible.
  4. Justify the basis of your suspicion – don’t simply state that it’s a cause for concern.

For example, a client’s bank account has large third-party transfers:

  • explain if the client has been contacted (and if not, why not) and any explanation offered
  • describe why the explanation given has not allayed your concerns
  • demonstrate how the pattern of transfers/withdrawals presents suspicious circumstances.
  1. Explain how the activity in question differs from normal, expected operations for that customer/business sector. If the SAR implicates a professional enabler (i.e., an accountant, insolvency practitioner, conveyancer, etc.) state whether it appears that the facilitation is witting or otherwise.
  2. Set out the case if your suspicion relates to the transactions only, or whether it extends to the professional involved. If the SAR doesn’t relate to financial transactions, explain the activity you consider to be suspicious.
  3. If you are requesting a Defence Against Money Laundering (DAML) be specific about the work you are undertaking for your customer/client which you believe you will require a defence to money laundering for e.g.:
  • “to buy/sell the property at (address) for (value amount)”
  • “to disburse the funds between the following people …”
  • “to buy/sell the (named company)”
  • “to draw up contracts between party X and party Y, transfer the ownership of the (named company) to party Y, and transfer the (value of funds) to party X which is all part of the arrangement”
  • “to release the funds in account A to person B”.

The regulated sector has been criticised by NCA regarding the quality of SARs. The amount of information provided is of vital importance for a number of reasons:

  • Improves efficiency in processing SARs
  • Poor quality SARs divert resources away from detection and investigation of crime
  • Vital source of intelligence
  • Contents can be a basis for legal action against the maker – Lonsdale v National Westminster Bank.

If Teal Compliance can be of any assistance in helping with your reporting obligations and procedures, please contact us at hello@tealcompliance.com

The ‘C’ word!

The mere mention of the word Compliance tends to fill people with dread and many firms, Partners or owners continue to bury their heads in the sand.

Many firms have changed the structure of their business support, showing that there is a significant shift from the misconception of ‘fee burners’ and ‘fee earners’.

Firms have had no choice but to become proactive to ensure that compliance is embedded into the culture of the firm, with employees knowing and understanding the beliefs and values of the firm they are working for.

It is vital to invest in business support to drive the firm in the right direction.

And Compliance is an essential element of your firm’s foundation to succeed.  It is not about how many accreditations you have – although working within the guidelines of those accreditations obviously minimises the firm’s risk exposure.

Are you asking the right questions to know what is happening day to day in your firm?

Are all departments linking up to review your risk registers and ensure that you are working on the same page?  

A smoke and mirrors approach will not help you in the long run, it will purely paper over the cracks.

Engage with employees – communication is key!

Every time I undertake performance reviews the reviewee states that there is not enough communication.

That’s not to say that every little detail needs to be communicated, it is more to do with involving employees to help you achieve the objectives set by the firm.

Without communication, there is an opportunity for things to slip through the net.

To make this work you need a joined-up approach

Ground-level knowledge is the difference between tackling any issues head-on and burying your head in the sand. We can all hear conversations but really listen to what’s going on. Ignorance is not a form of defence if you find yourself on the wrong side of the regulators!

Are you continually reviewing your processes and analysing critical data?

Will you as a firm, you as an individual and your employees stand up to scrutiny?

Conduct a full 360 review of your business

If you do not look at what you are doing objectively then nothing will change. Praise the good, review the not so good and put a system in place to change what’s not working.

Revisit KPI’s

On an individual, team, discipline, and overall basis. It’s all well and good giving your fee earners targets, but are they are achievable and are you ensuring they can do this in a safe environment?

What do your KPI’s look like?

Have they been implemented and reviewed to ensure they are the right ones?

Are you conducting independent file audits?

It may be that there are trends which give rise to training issues. There are many signs that could highlight that you have issues with employees, or equally that you have individuals excelling that have further capacity or partnership potential.

There is a fine line between micro-managing and no supervision

You are ultimately responsible for every employee within your firm.

How many times have we recently seen in the Law Society Gazette about lack of supervision?  It does not matter whether you are a year qualified, or 12 years qualified there still needs to be an element of supervision. Do you want to be responsible for everyone losing their job?

Every role within your firm needs to work within the framework and once everyone is working within that framework the benefits will speak for themselves.

If we can assist with anything, please don’t hesitate to get in touch.
Team Teal

Economic Crime (Anti-Money Laundering) Levy

With all that is going on at the moment, its quite likely that you are not aware that the Government has introduced the Economic Crime (Anti-Money Laundering) Levy. This previously mooted levy, by way of the Finance Act 2022, achieved Royal Assent on 24th February.

What is the Economic Crime (Anti-Money Laundering) Levy?

The Government has stated:

‘The Economic Crime (Anti-Money Laundering) Levy (‘the levy’) is part of the government’s wider objective, outlined in the 2019 Economic Crime Plan (ECP), to develop a long-term Sustainable Resourcing Model (SRM) to tackle economic crime’

The levy aims to raise £100 million a year from the AML regulated community to help fund new and improved AML capabilities. The NCA for example has been struggling to cope with all the reports it receives. Extra funding aims to address such problems.The first levy year is almost upon us, as it will run from April 2022 to March 2023, with relevant levy payments first being collected in April 2023 (i.e., payment in arrears). It will not be collected by all AML supervisors with only the Financial Conduct Authority, HMRC and the Gambling Commission being tasked with these duties. For the legal sector (and Accountants too) the HMRC will collect it.When you next plan your budgets, don’t forget to take into account the fact that as of April 2023, you may well be paying this levy in addition to all of your other overheads:

  • the levy is to be charged on a fixed fee system, based upon your UK revenue
  • it will be paid by medium, large, and very large AML-regulated entities
  • small entities (those with UK revenue below £10.2 million) will fortunately be exempt.

An entity is classified as:

  • medium if its UK revenue for the relevant accounting period is more than £10.2 million but not more than £36 million
  • large if its UK revenue for the relevant accounting period is more than £36 million but not more than £1 billion
  • very large if its UK revenue for the relevant accounting period is more than £1 billion.

The levy is to be charged as follows:

  • medium entities will pay £10,000
  • large entities £36,000
  • very large entities £250,000.

In addition to the levy itself, the Government estimates that it will impact an estimated 4,000 businesses, who will need to self-declare their levy status (i.e., whether they are AML regulated, and their UK revenue during the period of accounts that ended in a said financial year) to their relevant collector or be invoiced by their collector. The relevant collector (HMRC, the FCA or the Gambling Commission) for businesses will be the collector that already regulates/supervises them under AML Regulations, so the majority of firms will have an existing relationship with their collecting body.

The exception is c.450 firms who are regulated/supervised by the Professional Body Supervisors (PBSs), who will need to declare their status and make their levy payment to HMRC.The government is to issue centralised guidance on gov.uk that sets out the process for paying the levy in due course.If there are any burning questions or issues you want to discuss we are always available. In the first instance please get in touch with hello@tealcompliance.com.

Thanks

Simon Harbord

Team Leader, Teal Compliance Limited

Money being laundered in bubbly water - depicting money laundering

Anti-Money Laundering – Top 10 Tips

The legal sector is vulnerable to money laundering – and we’re here to help law firms with compliance and training, and make sure you’re fully equipped to ‘stop the baddies’.

The credibility of a law firm makes it an obvious target for money laundering criminals and having weak processes or staff that aren’t properly trained is like leaving your front door open.

So, here are my Top 10 Anti-Money Laundering (AML) Tips:

1. Evidence

All firms have to show regard to their supervisor’s risk assessment when preparing their own. (Reg 18 (2)). Make sure it is mentioned in the steps you’ve taken in preparing the risk assessment. If your assessment of risk differs with theirs, explain why.

2. Client account focus

In your Firm Risk Assessment, don’t forget to include the risk from the client account. It’s referenced in the National Risk Assessment and the Supervisors Risk Assessment, so it should be in yours. Often the focus is solely on the work types and firms don’t always identify the more generic operational risks. Detail what you do to protect the client account in the risk mitigation section. Also, don’t forget to include or cross reference your accounts procedures (for example, the timing of accepting funds and refusing to provide banking facilities and how you deal with funds from third parties) in your AML policy.

3. Source of funds and source of wealth

Tell people what you want them to do, ask them to record the steps they’ve taken, check that they’ve reviewed the information and most importantly remember their assessment of risk, having considered the information they have. I ask lawyers all the time.

“If I were to look at your files tomorrow, would I be able to see you have considered the source of funds and source of wealth?”

4. Client communication

Help your lawyers with what to say to clients about why your firm carries out Customer Due Diligence (CDD), in particular source of funds and wealth enquiries. If I had a pound for every time I heard the concern that

“Clients will think they are being accused/would be insulted if we asked.”

… Actually, clients don’t mind being asked nearly as much as we think they do – everyone asks all the time. But it does help if you give your lawyers some wording to explain the rationale for the checks. Clients understand this and are often appreciative of your efforts.

5. Timing of verification

You know the law, you must complete the ID&V part of CDD before the establishment of a business relationship or before carrying out a transaction. Some firms won’t issue a file number until it’s done. The Solicitors Regulation Authority certainly seem in favour of that approach.

However, many firms open the file first but require CDD to be completed soon thereafter, using the exception in Regulation 30(3). If you are going to do that, make sure you monitor that ID&V is in fact completed ‘as soon as practicable’. Make sure you can track the files and that CDD is obtained.

I see many policies which say the CDD must be obtained in, say, seven or 14 days, or work must stop – but it’s not always clear how that is managed. Is it a system issue – the file locks to prevent any further work – or is it manual, with compliance checking and chasing? Whatever it is, include it in your written procedure and be ready to show an auditor/the regulator the records of the monitoring.

6. CDD on existing clients

Something I hear all the time is:

“We will rely on existing client due diligence unless we become aware of a change in the client’s identity, risk profile or there is a three year gap in instructions”.

That’s because it is in the guidance. However, in theory, for an existing client that instructs once every two years, the CDD would never be refreshed if the lawyer doesn’t ‘become aware’ of a change. When considering a private individual, they are unlikely to change their identify, but a company could, and their beneficial owners could. So, where you don’t act for the beneficial owners, how would you know? I have always preferred to give the CDD a ‘shelf life’ – the longest we will rely on existing CDD is x months/years and then we will refresh. I would also capture the consideration of whether the fee earner thinks anything has changed in the matter risk assessment.

7. ‘purports to act’

The regulations require that, where a person purports to act on behalf of the customer, you verify the person’s authority to act and ID&V them. Some people have taken that to mean a director, but, if you look at the guidance for the legal sector, it refers to a ‘representative’. Most firms take the view that a director does not ‘purport’ to act, they do act for the company. Usually, I see firms apply Regulation 28(10) when they have an agent or attorney situation. That said, I’m still a fan of ID&V-ing at least one director because I like to know a ‘real’ person is attached to the corporate client.

8. Information for clients

The Money Laundering Regulations 2017 were amended by the Data Protection Act 2018. Make sure you’re giving your clients the required information.

9. Know your searches

Know how your electronic verification searches work. Many firms now have electronic verification of ID as part of their CDD processes. I was an early adopter in 2006 and I’m still a big fan but I say be careful. I find that many people can’t explain to me how they work, what they are checking and how many matches are required to pass.

Is it checking what you think it’s checking?

Sometimes, I see examples of CDD searches passing with the wrong date of birth included! Also, if the contract with the provider was agreed with the previous MLRO and you are the new one, make sure you are fully briefed.

10. Certifying copy ID

Be careful who you ask to certify copy ID. I prefer to rely on someone who is either well briefed or is familiar with the AML legislation, like lawyers or accountants. Also, you (or indeed the police) may want to speak to the certifier in the future so make sure it’s someone who can be traced.

That’s going to be difficult if you rely on post office or bank counter staff. Make sure they’ve signed and dated the certification and their name is printed in a way that you can read it.

I find giving the client an explanation of requirements that they can then hand to the certifier is the most effective way of getting it right.

If there are any burning questions or issues you want to discuss my team and I are always available. In the first instance please get in touch with hello@tealcompliance.com.

Thanks

Amy

Photo by Tim Mossholder on Unsplash

Post-Lockdown Compliance Planning

After so long in lockdown, planning for the reopening of offices is no doubt at the top of your to do list, but what else needs looking at?

Here are a few ideas we hope will assist in creating your Compliance Plan for the rest of 2021 and in looking forward to next year. 

Ongoing disruption caused by Covid has probably meant lots of things from last year were put on the backburner, so start by reviewing last year’s plan. Everyone is likely to have an ‘it will have to wait’ list, so you need to decide if these can be kept on hold and if not, put them to the top. Other things of course definitely won’t wait or may have been thrust upon us with little or no notice.  

Have you got round to reading the LSAG Guidance yet? All the relevant parts? Much has changed since the last version, and there has been an update to the National Risk Assessment too which you need to take into account. Now is the time to give your AML policies and procedures a health check if you haven’t already. Don’t forget to provide updated training and then ensure that changes you make are embedded in processes, particularly as the SRA is carrying out audits and are testing against the new Guidance. Are people appropriately documenting source of wealth and funds, are matter risk assessments completed, do they reflect the new guidance and policies, is there documented ongoing monitoring of matters? How about doing those AML file audits you have been putting off?  You may need to revise your firm wide risk assessment as well and don’t forget to keep copies of the old one, to evidence it is a living document.

Next ‘to do’ –  

There has been another SRA Equality & Diversity survey. This needs to be advertised to ensure as many people as possible complete it. If you choose to publish the results, perhaps on your website, remember to do so in a way that avoids people being identified. Reflect on your previous surveys and look for any improvements, record them and comment on them internally and in any relevant publicity. Consider any action you may need to take – when did you last provide E&D training? Have new staff members received it? 

August –

You need to consider holiday cover as people will be wanting a well-earned break. How will you adapt to people being unavailable? For those needing to get away from the same four walls, foreign travel might still be off the cards, so they could be venturing into remote parts of the country where mobile reception is poor and holiday home Wi-Fi is only available in theory.

September –

If you have spare time, you could look at improving your information security status by checking how you compare against the CyberEssentials standard, or even CyberEssentials+. However, renewal time is likely to keep you busy all month.

October –

It’s the anniversary of the SRA Transparency Rules in December and it’s something the Regulator is keeping its eye on, so now would be a good time to start your review. How has Covid affected timescales? Have staff changed? What about fee rates and other costs? Not just changes to your own firm, but think about delayed responses from third parties, busy Courts and other factors which mean things just aren’t moving as fast as they used to. Plenty of time to update your website if done now.

November –

This month another anniversary – the SRA Standards and Regulations, so this month you should carry out your annual review of your policies and procedures to ensure all is in order. Has anything changed? Take a look back at recent SRA Updates, thematic reviews, and other announcements so you know what they are looking for. Can you evidence these have been taken into account?

December –

Now is as good a time as any to carry out a review of your risk register, and if you don’t have one it’s a good time to create one. It should cover things like:

  • Complaints and claims
  • Identified trends from file audits and supervision
  • Business Continuity Plan review outcomes
  • SAR’s submitted (or not)
  • DSAR’s and information security issues
  • What’s gone wrong? What went right?
  • The year ahead – what are your audit and training plans for example? Back to that Compliance Plan!

January –

Now might be a good time to remind everyone of the importance of ensuring that file reviews and supervision are done. Don’t let this drift. Ensure any trends are identified and dealt with. Is training up to date? As well as AML and information security, what about equality & diversity? Have you only done your Bribery Act training just the once, all those years ago? Completing a Learning Needs Analysis will be required, so make sure learning is planned so people are able to make the necessary declarations. Don’t forget recent recruits who might not have had all the required training.

February –

Are your information security measures adequate? They may well be tested – we know of some firms that have been the victims of sophisticated hacking and ransomware, and its regularly in the national news too. This isn’t simply ensuring homeworkers are updating their anti-virus software, but more essentially, are they carefully checking emails and client instructions in order to spot attempts by fraudsters to intercept the movement of completion monies. Is your accounts team in the loop?

March –

I know, its year end for lots of firms, so much of this month could be used up ensuring time is recorded, bills are raised, and general housekeeping dealt with to ensure the figures look as good as possible. However, there are some things to consider if time allows –

  • If you have the CQS standard, now would be a good time to review your compliance with it. Why not also check your Lexcel compliance if it’s also a standard you have obtained? Remember the requirements for training.
  • It’s a year since the LSAG guidance was published – worth giving it a once over just to remind yourself what it says?

And one other thing – National Security Investment Act 2021. You may be unaware of the significant changes this legislation imposes upon you and in particular your clients, many of whom could be subject to strict reporting and approval requirements. Be warned!

https://www.legislation.gov.uk/ukpga/2021/25/contents/enacted

 

Photo by Tim Mossholder on Unsplash

Think you’re not a Tax Adviser? Think again!

On 23rd November 2020 the SRA released guidance which may have been missed on the radar of many of you.
The purpose of the guidance was to draw to the attention of firms the need to consider whether they fell within the new definition of a tax adviser under The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (‘the regulations’) which, on 10th January 2020, widened the scope to be:

‘a firm or sole practitioner who by way of business provides material aid, or assistance or advice, in connection with the tax affairs of other persons, whether provided directly or through a third party, when providing such services.’

The consequence of the guidance issued in November 2020 was that:

‘If the change in definition to tax advisers that came into force on 10 January 2020 brought your firm into scope of the regulations, you must tell us and apply for approval of your beneficial officers owners and managers before 10 January 2021’

For those of you who don’t ordinarily provide tax advice, the pertinent words in the new definition of a tax adviser are ‘provides material aid, or assistance…, in connection with the tax affairs of other persons, whether provided directly or through a third party, when providing such services.’

The SRA defines material aid and assistance as ‘Non-advisory services that are in scope and that will help the client to comply with their tax responsibilities eg filing papers with HMRC on behalf of a client’.

The SRA’s broad definition of through a third party includes the instruction of a tax specialist, accountant etc on behalf of your client.

In short completing and/or filing an IHT form on behalf of your client, instructing an accountant on behalf of your client to advise on the tax implications of a matrimonial or employment settlement, or drafting a trust to manage a PI settlement will all likely fall within the scope of being a tax adviser.

If you believe you fall within the scope you will need to give consideration to whether your CDD processes (particularly within your private client, matrimonial, and litigation and employment departments) satisfy the requirements of the regulations.

If you are a firm that already provides tax advice, and particularly where you are instructed by another professional on behalf of their client, you may be in scope of the regulations to the extent that you will need to consider carrying out appropriate CDD on the underlying client. According to the SRA the question of ‘who is the client’ when services are provided via a third party is clear, it is always the person whose tax affairs are the subject of the advice, assistance or material aid.

And, not forgetting your obligations to the SRA, you should also give consideration to informing the SRA and seeking the appropriate approval of your beneficial officers, owners and managers by completing the FA10 (for firms newly authorised or newly in scope of AML authorisation) or FA10b (for firms who already have AML authorisation) as soon as possible.

The full SRA guidance can be found at:

https://www.sra.org.uk/solicitors/resources/money-laundering/money-laundering/tax-adviser-guidance/

If you’re still unsure and would like further guidance or support, why not find out about our Ask Teal service which covers all things compliance:

https://www.tealcompliance.com/ask-teal

The purpose of the guidance was to draw to the attention of firms the need to consider whether they fell within the new definition of a tax adviser under The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (‘the regulations’) which, on 10th January 2020, widened the scope to be:
 
‘a firm or sole practitioner who by way of business provides material aid, or assistance or advice, in connection with the tax affairs of other persons, whether provided directly or through a third party, when providing such services.’
 
The consequence of the guidance issued in November 2020 was that:
 
‘If the change in definition to tax advisers that came into force on 10 January 2020 brought your firm into scope of the regulations, you must tell us and apply for approval of your beneficial officers owners and managers before 10 January 2021’
 
For those of you who don’t ordinarily provide tax advice, the pertinent words in the new definition of a tax adviser are ‘provides material aid, or assistance…, in connection with the tax affairs of other persons, whether provided directly or through a third party, when providing such services.’
 
The SRA defines material aid and assistance as ‘Non-advisory services that are in scope and that will help the client to comply with their tax responsibilities eg filing papers with HMRC on behalf of a client’.
 
The SRA’s broad definition of through a third party includes the instruction of a tax specialist, accountant etc on behalf of your client.
 
In short completing and/or filing an IHT form on behalf of your client, instructing an accountant on behalf of your client to advise on the tax implications of a matrimonial or employment settlement, or drafting a trust to manage a PI settlement will all likely fall within the scope of being a tax adviser.
 
If you believe you fall within the scope you will need to give consideration to whether your CDD processes (particularly within your private client, matrimonial, and litigation and employment departments) satisfy the requirements of the regulations.
 
If you are a firm that already provides tax advice, and particularly where you are instructed by another professional on behalf of their client, you may be in scope of the regulations to the extent that you will need to consider carrying out appropriate CDD on the underlying client. According to the SRA the question of ‘who is the client’ when services are provided via a third party is clear, it is always the person whose tax affairs are the subject of the advice, assistance or material aid.
 
And, not forgetting your obligations to the SRA, you should also give consideration to informing the SRA and seeking the appropriate approval of your beneficial officers, owners and managers by completing the FA10 (for firms newly authorised or newly in scope of AML authorisation) or FA10b (for firms who already have AML authorisation) as soon as possible.
 
The full SRA guidance can be found at:
 
 
If you’re still unsure and would like further guidance or support, why not find out about our Ask Teal service which covers all things compliance:

New AML Guidance needs a careful review.

On 20th January 2021 the Legal Sector Affinity Group (LSAG) finally issued their new draft AML guidance for law firms.

Since 2017 LSAG have agreed to issue one sector wide piece of guidance rather than different versions for each type of lawyer.

We were told to expect this guidance with both the Law Society of England and Wales and the Solicitors Regulation Authority talking about the project at events last year. However, it’s no surprise it’s taken a while to finalise since it does represent a comprehensive refresh of the existing guidance.

Part one (which applies generally to all legal professionals) is some 212 pages (about 50 more than the previous version) while part two contains specific guidance for Barristers and Notaries, but that is yet to be released.

Only a couple of pages in, you can detect a change in emphasis in the guidance, from focusing previously mainly on interpretation of the legislation for the sector to now setting out the Regulators expectations of good practice.

Practices must now pay attention to the parts of the guidance which LSAG think they should be doing, and if a practice decides to deviate from that, they need to be prepared to explain why. Clearly MLROs and MLCOs are going to have to consider this guidance carefully to ensure they’ve picked up all the areas of mandatory and recommended practice and that they can demonstrate they’ve thought about what is appropriate for their firm. This is not a small task!

That said, the guidance really is very good at setting out in some detail how to comply. In my experience many firms will welcome this additional detail, particularly for example the table listing out how to approach screening of staff, and a clear remit for senior management and nominated officers in the firm.

There are new chapters on the use of Technology and Internal Controls and a rewrite of the Privilege content.

With any new piece of writing which is over 81000 words long, there are some minor inconsistencies which will be resolved hopefully in the next draft. From our brief reading of the document there are some differences between early parts of the document (in the compliance principles) and the more detailed parts of the document further on. Therefore, we recommend reading the document cover to cover to ensure you pick everything up.

Conspicuous by its absence is the recent SRA Guidance on Tax Advisers, which if you’re not aware, could have some very substantial implications for the way your firm operates. It’s not that easy to find but here is the link – https://www.sra.org.uk/solicitors/resources/money-laundering/money-laundering/tax-adviser-guidance/

Do consider this at the same time as the guidance because it may be that for parts of your practice where you’d previously not considered the need to comply with the Regulations (Family Law, Employment and Litigation specifically) you may now have to.

One point we should make is that the guidance is draft, and it could be some months before it receives Treasury approval. From experience, any changes are likely to be minor but you should be aware of the possibility, particularly if you’re investing in new solutions.

We’ve put together a package of support for firms on implementing the new guidance which you can read about here –

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https://www.tealcompliance.com/guidance

[/vc_message][/vc_column][/vc_row]We’d love to hear your comments and queries about the guidance. Anything we can’t help with, we’ll gladly pass on to the Law Society to consider in any future redraft.

A look at the new Freelance Solicitor Model

In November 2019, the SRA introduced a new model of operating for so-called “freelance solicitors”. The intention was to allow solicitors greater flexibility when providing services. We were told that the changes took place as the regulator felt that the previous arrangements created an unnecessary and restrictive ‘artificial entity’ model around solicitors operating as individuals. Prior to the changes, sole practitioners were required to have their practice authorised as a ‘recognised sole practice’.

What is a Freelancer?

A good starting point is to look at what the SRA means by ‘freelance solicitor’.This term is used to describe a self-employed solicitor who:

  • is practising on their own;
  • doesn’t employ anyone else in connection with the services they provide;
  • is practising in their own name (rather than using a trading name or through a service company);
  • is engaged directly by the client with fees payable directly to the solicitor;
  • and without that practice being authorised. So, essentially, we’re talking about individuals who are genuinely self-employed.

Rules and Regulations

Freelancers are subject to various rules and regulations.The three key ones to note are as follows:

The SRA Authorisation of Individuals Regulations 2019 (the Regulations)

Regulation

  • You must have practised as a solicitor for a minimum of three years since admission or registration.
  • You are self-employed and practise in your own name, and not through a trading name or service company.
  • You must take out and maintain indemnity insurance that provides adequate and appropriate cover in respect of all of the services that you provide or have provided (this includes both reserved and unreserved legal services), and that takes into account any alternative arrangements you or your clients may make.
  • You are not permitted to employ anyone.
  • You are engaged directly by the client, and the client pays their fees directly to you.
  • You may only hold client money in limited circumstances, i.e. when it’s for payments on account of costs and disbursements that you have not yet billed where:
    1. any money held for disbursements relates to costs and expenses incurred by you on behalf of your client and for which you are liable, and
    2. you have told the client in advance where and how that money will be held.

SRA Code of Conduct for Solicitors, RELs and RFLs (the Code)

Freelance solicitors are regulated in the same way as other solicitors and are subject to the provisions of the Code.

The Transparency Rules

Those freelancers providing reserved legal services are also subject to the requirements of the Transparency Rules. This includes publishing costs information where they offer any the services listed in the rules, publishing details of their complaints’ procedure, and telling clients that they will not be covered by insurance on the SRA’s minimum terms and conditions and that alternative arrangements are in place.

As a more general rule, freelance solicitors will need to ensure that clients fully understand the implications of their “freelance” status and any additional risks to the client. This should include informing clients if they are unable to benefit from the SRA Compensation Fund.

Other key regulations to think about

Freelance solicitors will also need to consider whether they are an “’independent legal professional” (ILP) for the purposes of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017). The MLR 2017 apply to freelancers providing legal or notarial services to others as part of financial or real property transactions. If you are an ILP, you’ll need to comply with the regulations, which includes having a risk assessment, policies and controls and procedures in place. You’ll also need to separately register with the SRA to comply with the MLR 2017.

What activities can Freelancers undertake?

The Regulations differentiate between those performing reserved legal activities and those just providing non-reserved legal activities – essentially differentiating between the areas of law considered riskier and those of low-risk. As you’d expect, the restrictions are more stringent for those undertaking the former. There are six reserved activities which you’ll find listed at Section 12 and Schedule 2 of the Legal Services Act 2007. If you’re planning to work as a freelancer, it’s important that you familiarise yourself with these:

  • Exercise of a right of audience
  • Conduct of litigation
  • Reserved instrument activities (includes conveyancing and linked matters)
  • Probate activities
  • Notarial activities
  • Administration of oaths

Historically, you’ve only been able to provide these types of services as a solicitor through an entity that is authorised to do so.However, if you’re a solicitor practising on your own account, you can now provide these types of services without needing to be authorised as a recognised sole practitioner if you meet the conditions set out in Regulation 10.2(b) of the Regulations.

More on the Restrictions in Regulation 10.2(b)

Experience: Whilst solicitors solely providing non-reserved legal activities don’t need to meet the three years’ PQE requirement, newly qualified solicitors will need to be mindful of the need to satisfy the competency requirements set out in the Code, which still apply.

Employing others: Despite this restriction, the SRA Ethics guidance (“Preparing to become a sole practitioner or a freelance solicitor”) clarifies that this isn’t intended to stop freelancers from contracting with others to provide pure administrative support to help them to provide their services, so long as they don’t “employ” those people. This would, for example, enable you to work in a Chambers model where the Chambers provides administration and other business support. It would also enable freelancers to receive similar services from a serviced office type arrangement.

It’s also important to note that if you do decide to employ someone to assist you in connection with the services you provide (including a paralegal or secretary), your clients will not benefit from protection under the SRA Compensation Fund (see Regulation 5.2, SRA Compensation Fund Rules) – you must be genuinely practising on your own.

Professional Indemnity Insurance (PII): Another apparent rational for the introduction of the revised regime was the SRA viewing that the high cost of purchasing PII on minimum terms was deterring entry to the market of sole practitioners wanting to practise independently.

Now, freelancers who carry out purely non-reserved activities are not required to have any PII. However, prudent freelancers should consider whether having no cover is in their own, and indeed their clients’ best interests. Conversely, freelancers carrying out reserved legal activities must have “adequate and appropriate insurance” in place, but do not need to comply with the SRA’s minimum terms. Cover must be for all of the work done as a solicitor and not just any reserved activities. When speaking with insurers or brokers, it’s advisable to let them know if you’ll be seeing clients at home or working from home on a regular basis, to make sure you obtain appropriate cover. When arranging cover, factors to think about may include an assessment of maximum probable loss for each work type, your claims history (if any; number/type/value/frequency of client matters) and likely client profiles. You should also record how you reached your decision on the level of cover so you can produce this if asked to demonstrate that you meet the “adequate and appropriate” requirement.

Although the cost of insurance can sometimes be prohibitive, freelancers should also consider taking out run-off cover if they decide to stop practising – at least until the risk of claims has fallen away. If solicitors decide to move back into private practice, this may be something that new employers will look for.

Insurers will undoubtedly be looking closely at the risk and compliance framework that freelancers put in place to ensure that any risks are being properly managed before they offer cover; so this is likely to be a key focus for those wanting to take advantage of the new model of working. Here at Teal we work closely with insurers and can help you to ensure that you have an appropriate framework in place that will satisfy your insurers’ requirements. Please do not hesitate to contact us if we can assist.

Restrictions on holding client money: Given the limitations on holding client money, if a client needs to pay or is due to receive other types of client money (such as damages or money from an estate), a freelance solicitor will need to make alternative arrangements to safeguard these funds – for example via a third party managed account such as Shield Pay (see https://www.shieldpay.com/business/professional-services).

Structures

As a freelancer solicitor you’re strictly prohibited from adopting any kind of entity structure, such as a limited company, limited liability partnership or partnership and can only operate under your own name.This means that you’ll be personally liable for your actions in the same way as a sole trader.

Law Society guidance (see link below) envisages that individuals may consider working together with other like-minded solicitors in a Chambers-style arrangement, with practices complementing one another.Each freelancer in the arrangement remains individually regulated and may, for example, just offer non-reserved legal activities, whilst others may offer reserved activities or perhaps offer both.

The process for getting set up as a freelancer

To get started, you will need to notify the SRA that you intend to practise on your own and whether or not you will be providing reserved legal services. If so, the SRA will then check whether you meet the conditions set out in the Regulations mentioned above.

Risks for law firms

Law firms should consider training staff on freelance solicitors and the implications for firms – for example, given the restrictions on holding client money, freelancers will be limited in the undertakings that they will be able to give.

Given the requirements for freelancers to contract personally for services, and the ban on freelancers holding client money, the SRA considers that the arrangements are unlikely to appeal to a sole practitioner who is currently running a business and employing staff and instead, are more likely to appeal to those who wish to undertake ad hoc freelance work or set up in a chambers style model.

When the new model for freelancers was first discussed, it received a considerable amount of negative commentary in the press, mostly relating to lack of regulation.However, as mentioned above, the Code still applies to all freelancers.

The Gazette reported back in early March 2020 just prior to lockdown, that 71 solicitors had already registered with the SRA as freelancers.The model is likely to be attractive to solicitors with a good client following or with small practices – so clearly poses a threat to firms, although quite how extensive the threat will be, only time will tell.

 

 

Useful links:

https://www.lawsociety.org.uk/support-services/advice/practice-notes/freelance-solicitors/

https://www.sra.org.uk/solicitors/firm-based-authorisation/freelancers/

https://www.sra.org.uk/solicitors/guidance/ethics-guidance/preparing-to-become-a-sole-practitioner-or-an-sra-regulated-independent-solicitor/

https://www.sra.org.uk/solicitors/guidance/ethics-guidance/third-party-managed-accounts/

https://www.sra.org.uk/solicitors/standards-regulations/compensation-fund-rules/