Written evidence submitted by the Law Society of England and Wales

1. The Law Society of England and Wales (‘the Law Society’) is the is the independent professional body that works globally to support and represent 200,000 solicitors, promoting the highest professional standards and the rule of law.

Role of the Law Society and the profession in tackling economic crime

2. The Law Society is a named supervisory body in Schedule 1 to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (‘the Regulations’) and has delegated all anti-money laundering (AML) regulatory and enforcement responsibilities to the Solicitors Regulation Authority (SRA). We fulfil this role by providing guidance and support to members, while delegating all monitoring and enforcement responsibilities to the SRA.

3. Solicitors play a key role in the UK’s AML and economic crime regime acting as gatekeepers to the financial system. Solicitors in the UK are subject to some of the strictest AML obligations of lawyers anywhere in the world and spend significant amounts of time and money on compliance. As such, the legal profession has a strong interest in an effective and proportionate AML regime.

The Law Society’s opposition to the introduction of an Economic Crime levy

4. The Law Society understands the Government’s desire to move towards a sustainable resourcing model for the response to economic crime and notably money laundering. However, a reduction in money laundering benefits society as a whole, and therefore should be funded by society a whole.

5. Levies are an understandable tool when the “polluter pays” principle applies, but this is not a proposal based on that concept. In this case, it is those who are part of the fight against economic crime that are being asked to fund parts of the system. It is more appropriate for such improvements to be funded by taxpayers and other sources such as the assets recovered from criminals and AML fines imposed on the regulated sector. Likewise, the benefits of improvements to the AML machinery go far beyond any efficiency benefits gained by the regulated sector. 

6. As such, the Law Society is strongly opposed to the imposition of the levy, which would effectively be an additional tax on the regulated sectors, in order to fund the public sector’s role in the AML system.

7. The legal services sector is one of the UK’s economic success stories. It was worth £60 billion to the UK economy in 2018 and employs 552,000 people. Further increasing the costs of doing business may have a negative impact on the competitiveness of the UK legal sector and the ability of firms to invest in the UK, as well as the UK’s position as a global legal centre. To introduce such a measure while large parts of the sector are grappling with the consequences of Covid-19 and the end of transition would serve to burden them further.  

8. Any levy based on revenue would be especially harmful. Basing the levy on revenue de-couples it from the risks against which it is intended to protect, and the potential contribution which each organisation might be expected to make to such risks.  Nor does it reflect the extent to which organisations will benefit from any efficiency gains in the system. Whilst we understand that there may be benefits to the banking sector and wider financial services from some of the initiatives being funded, these benefits do not extend to the rest of the regulated sector in the same way.

9. Basing the levy on revenue would also be damaging to the UK’s international reputation as a good place to do business. As a global legal centre, the UK is attractive to law firms, with approximately 200 non-UK firms already based here. When international firms are looking at where to expand, concerns will be raised that the UK has started further taxing solicitors merely by virtue of their lawful, and already highly regulated, role in advising clients. This damage to the UK’s reputation and impact on the sector’s international competitiveness could result in an overall loss of revenue if US or international firms are deterred from investing or continuing to operate in the UK. Our competitor jurisdictions (several English speaking courts have been announced in Europe and in Singapore over the last decade), vying for investment, could utilise this to their advantage.

10. If, against the advice of the Law Society, the levy is to go ahead, a calculation model based on the number of Suspicious Activity Reports (‘SARs’) which a firm had submitted the previous year would be simpler, cheaper to operate and fairer than an income-based levy. It would also be more closely linked to risk.

11. There should also be an exemption for small firms with a revenue of under £10.2 million a year. Given the current recession, the predicted future state of the economy and the pre-existing adverse financial pressures many firms are experiencing with cuts to legal aid and fixed fees, imposing an additional tax on firms that are already struggling for survival would be disastrous.

12. If the levy is to be based on revenue, then it is absolutely essential that the levy is based on domestic revenue generated by AML-regulated activity only. The ease of separating this form of revenue from other forms will differ from firm to firm. Consideration will need to be given as to how this would be best achieved. In our view, there are likely to be three options:

• Working out what percentage represents a fair average percentage of non-AML-regulated work within the legal sector and using that in the levy calculation as a percentage discount for all law-firms covered by the levy;
• Developing appropriate bands where, if a firm’s non-regulated revenue was between x and y %, it would get a set discount; and
• Each firm calculating its own individual percentage split between regulated and non-regulated work.

13. It is particularly inappropriate to impose a levy on the legal sector to fund a regime which is not as effective as it could be for solicitors. The anti-money laundering system has been designed to work for financial institutions but is less well-equipped to meet the needs of solicitors. Whatever happens in relation to the levy, it is imperative that the voice of the sector is given greater weight in the design of relevant policies, procedures and systems in relation to financial crime generally.

Improvements to the AML regime are required to make it more effective for solicitors

14. The Law Society welcome the ongoing initiatives aimed at better resourcing of the UK Financial Intelligence Unit (UKFIU), under the National Crime Agency (NCA), and upgrading of IT infrastructure to support better analysis of SARs which would support improved intelligence to the professional sectors. However, we believe that the SARs regime could be significantly improved through minimising the submission of large volumes of low value SARs.

15. Changes which could improve the efficiency of the SARs regime must include reducing the burden on the Defence Against Money Laundering (DAML) desk. This could be done via the support of examples of reasonable excuses through Home Office circulars until primary legislation better allows for firms to not require DAMLs for SARs of negligible value to law enforcement. This will better align the legal sectors’ reporting obligations with what we understand to be Government and law enforcement priorities.

16. It is critical that the legal sector is involved in the DAML re-design process. The DAML process is essential as a result of

• The low bar for suspicion
• The all crimes approach
• Government’s prevalence for criminalising minor/administrative offences
• The principle of fungibility

17. The Law Society continues to be strongly opposed to removing the consent regime without a comprehensive overhaul of the existing principal money laundering offences. Removing consent would result in over-criminalisation of day to day business activities as a result of the “all crimes” approach which treats minor, “technical” infractions the same way as “real” money laundering.

18. Strong consideration should be given to including other sectors within the regulated umbrella.  This should include those which contribute significant risk into the economic crime landscape.  For example, telecoms entities which may become aware of criminal conduct but are not currently under a duty to report.

19. The current consent regime cannot be removed or substantially altered without addressing the issues outlined above.

The introduction of OPBAS has brought several benefits but greater transparency would be helpful

20. The establishment of OPBAS has clearly brought several benefits, these including better coordination across and Public Body Supervisors (PBS) in understanding of AML risks and best practice towards supervision and regulation.

21. An area where we would encourage future focus is to set out in advance both their regulatory programme and the accompanying costings and budgets for the execution of the programme. This will give greater transparency to their work and also make it easier for supervisors and their supervised populations to predict the fees that will be levied against them.

22. Greater transparency would also be helpful in OPBAS’ annual reports. Generally these reports do not name specific supervisors, and this can limit the ability for the report to highlight good and bad supervisory performance (only generalised and anonymised observations are included currently). Overall, we see greater transparency in OPBAS’ execution of their duties to be an easy and quick win, and one that will increase confidence in their work and the value of their contribution to the AML space.

Reform of corporate liability for economic crime is not required

23. The Law Society originally responded to the Ministry of Justice’s Call for Evidence on Corporate liability for economic crime in 2017. We aware that the MoJ have now responded and have asked the Law Commission to look at options for reforms and we will be engaging with the Law Commission as they take the work forward.

24. When responding in 2017, we argued that the case has not been made out for the reform of the Identification Doctrine through amendment of the doctrine or the introduction of new corporate criminal offences.

25. Strong corporate governance is essential for creating and maintaining a business environment based on trust, transparency and accountability. The UK already has in place strong criminal and regulatory regimes which support its international reputation as an attractive place with which to do business. We have seen no compelling evidence that reforms in this area would would add to the UK’s standing, or outweigh the costs of compliance and the potential duplication with existing regulatory regimes and other parts of the criminal law framework.

26. There are a number of agencies such as the Financial Conduct Authority (FCA), the National Crime Agency, Her Majesty's Revenue and Customs and the Serious Fraud Office (SFO) with wide-ranging investigatory and enforcement powers which are put to good effect. Companies in the financial sector face substantial penalties for corporate governance breaches. Furthermore, we have the Bribery Act 2010 regime and the Criminal Finances Act which make it an offence to fail to prevent the facilitation of tax evasion. Furthermore, the FCA's Senior Managers and Certification Regimes (SM&CR) is specifically directed at ensuring the accountability of senior managers in the financial services sector. 

27. In such a complex landscape, additional laws would almost certainly require businesses, particularly in the financial sector, to develop new training and compliance frameworks at a time when they are already facing significant compliance-related costs.

We are supportive of the overall reform programme for Companies House but have some concerns over implementation

28. The Government has set out ambitious plans as to how Companies House will operate in the future. This is as part of their Corporate Transparency and Register Reform programme (the programme). We are supportive of the strategy that the information collected by Companies House is checked more thoroughly, though we have concerns about the implementation of the programme. The UK company registry system is currently very efficient, and this makes it attractive on an international level for companies to register in the UK. While modern technology should be utilised to better verify information provided to Companies House it would not be in the interests of the UK to adopt a system that reduces the UK’s attractiveness for investment. In implementation of the new systems and processes there needs to be a balance between the interest of transparency and good governance with this ease of use, attractiveness and accessibility.

29. Companies House already has the ability to check information on its register, but it rarely does so. The current lack of checks means that it is simple for an unidentified person with bad intentions to create a new legal entity in the UK, enter false information, and then begin trading. The new advanced technical system that will be introduced, which will use facial recognition and cross reference information with other government databases – for example, DVLA and Passport Office, should increase confidence in the quality of information held by Companies House.

30. We are firmly of the view that any new requirements should be treated as an enhanced filing requirement rather than a prerequisite, or potential challenge, to the validity of an appointment. The programme has led to a lack of clarity as to what will be the role and status of the register in the future. Companies House has a legal role in confirming when someone becomes a director. The more that the actions of Companies House gain legal consequences, the greater potential there is for Companies House to adopt a cautious approach, but the greater reliance that could be placed on the register. This could lead to increased bureaucracy and delays. The government needs to give further thought as to how the relevant system interacts with how companies operate in practice and their requirements under company law. Companies House is unlikely to be best placed to decide on what an individual company’s articles of association means when there is a dispute.

31. Companies House are seeking to control the routes thorough which document can be filed and are moving towards a situation where most of those who act as company agents will have to be registered. This is understandable as they do not want people who are not subject to AML rules to be involved in company registration for anti-fraud reasons. Companies House has yet to define who a third-party can be. Solicitors are regulated under the AML rules through the SRA, so should be able to file for transactional/day-to-day purposes without needing any further registration. The SRA should be an appropriate authority for Companies House.

Increase in cyber fraud affecting the legal sector

32. Like many other sectors, the legal sector has seen an increase in cyber fraud as result of COVID-19 but overall fraud is not a serious issue for the legal sector

33. The coronavirus (COVID-19) pandemic has changed the way that legal services are delivered. These changes have presented an opportunity for cyber-criminals and fraudsters.

34. The legal profession has been working with Government to help identify the types of fraud that have seen an increase during the pandemic, particularly in relation to scams related to the business support measures that are currently available from the government.

35. The Law Society is supporting solicitors and law firms to:

• prevent fraud and scams and help their clients to stay cyber-safe
• safely deliver legal services online
• run their organisations effectively by using legal technology.

36. We have partnered with the Fraud Advisory Panel which helps people and organisations to protect themselves against fraud. The insight from the panel show that the most common forms of COVID related fraud which are relevant to legal services are:

• Cyber dependent fraud which include payment diversion fraud (including conveyancing fraud, mandate fraud and invoicing fraud). 
• Cyber-attacks through phishing emails to obtain financial, client and/or employee details.
• Financial risks which include fraudulent use of stimulus funding such as Bounce Back Loans as deposits for mortgages and related conveyancing.
• Business impersonation risk with firms identities being highjacked though mirrored websites for fraudulent related investment or business schemes.

November 2020

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