It used to be all about the deal, the borrower, and the property: financial metrics of the deal, assets and liabilities, profit on costs, market conditions, supply and demand, etc.
Then the AML requirements came in, and a whole new workflow was added for lenders to comply with.
The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs 2017) set out the main anti-money laundering (AML) requirements for firms. This legislation has been amended multiple times, refining requirements between 2017 and 2024.
Compliance obligations are falling onto lenders, regulated and unregulated alike, with the same obligations now imposed upon law firms too. Essentially, lenders and law firms need to satisfy themselves that they are not involved in funding a transaction where criminal proceeds might be used in the process.
Late to the game
Law firms were rather late catching up with the regulatory requirements. One of the first Solicitors Regulation Authority (“SRA”) audits, conducted in 2019-2020, revealed that out of 74 reviewed firms, more than half (38, 51%) required further action in the AML audit area. Additionally, 14 firms (19%) had never conducted an audit, 21% failed to conduct ongoing checks, 29% failed to conduct matter risk assessments, and 21% of cases showed non-compliance with source of funds checks.
Remedy and consequences
As of today, law firms are now well and truly up to speed. There are very robust CDD frameworks in place, and law firms have strengthened their AML procedures. In fact, the Legal Sector Affinity Group has released a comprehensive 220-page Anti-Money Laundering Guidance for the Legal Sector in 2023.
What we all failed to recognize is that lenders are not allowed to rely on someone else’s due diligence in their quest to satisfy themselves with source of funds and source of wealth requirements. In other words, while our solicitors have now taken on the very onerous task of compliance with AML regulations, lenders are still required to comply with the same regulations themselves. As a result, there are two sets of AML requirements coming the borrower’s way to deal with. While two professional bodies complying with regulations is better than none, some common sense and cross-reliance should be acknowledged and recognized by the regulator.
Compliance with AML regulations is undoubtedly paramount and essential, but as lenders, we should be acutely focused on the customer experience and customer journey. Having an extremely onerous AML process imposed on the client not once, but twice, is not the way forward.
Looking Ahead: Striking the Right Balance
It is clear that AML compliance cannot be compromised. However, it is equally important to balance rigorous regulatory requirements with a smooth and efficient customer experience. We need to consider ways in which cross-reliance between lenders and law firms can be acknowledged, enabling a more streamlined process for the borrower. A unified approach, perhaps guided by regulators, would not only reduce duplication of efforts but also improve the overall experience for clients navigating these complex transactions. In the end, achieving both compliance and customer satisfaction should be the ultimate goal for all.
