As gatekeepers of the legal system, solicitors play a crucial role in safeguarding financial transactions and upholding the rule of law, however, as the regulatory landscape continues to evolve, solicitors are often presented with new challenges, obligations and guidance to follow.
In advice issued to more than 1,000 firms earlier this year, the Solicitors Regulation Authority (SRA) emphasised the importance of staying on top of sanctions advice and ensuring that their practices align with the latest regulatory requirements and guidance.
🔗 What are sanctions and what do they mean for compliance?
This article will provide a detailed overview of the SRA’s stance on complying with sanctions, sharing guidance on adhering to regulatory requirements, and helpful information about how to conduct client identification and screening.
Why has the SRA issued guidance on complying with sanctions?
As part of the SRA’s work in financial sanctions, the regulator requested firms’ responses to a survey designed to help them understand their exposure to sanctions risk and the controls that had been put in place to mitigate those risks.
With over 3,000 firms completing the survey, the findings were somewhat worrying with nearly 1,700 firms unsure if they identified and verified their clients, checked source of funds, or checked if clients were subject to sanctions.
What’s more, 26 firms shared that they had dealt with a sanctioned individual, and more than 1,000 were deemed to have a greater risk of dealing with sanctioned clients due to their areas of work.
As a result, the SRA wrote to more than 1,000 firms with guidance and support on complying with the sanctions regime in the UK and have committed to conducting targeted inspections and desk-based reviews on the processes, controls, and mitigations that firms have in place when dealing with sanctioned individuals.
Meanwhile, the SRA expects firms to have already taken steps to mitigate any gaps in their sanctions procedures based on existing guidance.
What are the SRA’s recommendations when it comes to sanctions?
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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
✅ To download this as a handy, printable PDF checklist, click here.
What are the potential consequences for law firms that fail to adhere to financial sanctions regulations?
As part of the SRA’s Standards and Regulations, the regulator may “impose a disciplinary sanction against a firm or individual, where we are satisfied that they have committed a serious breach of our Standards and Regulations,” (SRA, 2022).
Failing to adhere to financial sanctions regulations can have severe consequences and can lead to disciplinary action being pursued by the SRA. Such disciplinary action can include financial penalties, rebuke, and reprimand depending on the severity of the breach of standards. For traditional law firms, solicitors and the people that work within them, the maximum financial penalty currently sits at £25,000, with details of the fine and associated breach being published publicly if the SRA deems it appropriate.
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.
