From Stress to Strategy: Managing AML Audits in a Changing Regulatory Environment

TL;DR Summary:

The Compliance Collective’s recent meeting discussed the evolving landscape of AML compliance audits. Key points included the SRA‘s shift to a more rigid and less flexible approach post-2023, leading to increased stress and scrutiny for firms. Only 30% of firms were fully compliant, with common issues in risk assessments, policies, and training. Practical advice emphasised providing only requested information and engaging directly with auditors. Concerns were raised about the emotional toll on staff and the auditors’ lack of practical legal experience. Participants suggested forming a collective response and creating a repository of audit questions and responses for better preparedness.

Overview of AML Audit Trends

The conversation highlighted a significant shift in the Solicitors Regulation Authority’s (SRA) approach to audits post-2023. Previously characterised as collaborative and pragmatic, the new approach has become more rigid and less flexible. Attendees shared experiences of how the SRA’s assessment process has become more stringent, with a “computer says no” attitude, leading to immediate referrals for investigation without consideration for recent improvements firms may have made.

Changes in SRA Approach

The discussion underscored the increased fines and lack of flexibility in the SRA’s current approach. Participants expressed frustration with this uncompromising stance, noting the challenges it poses during the inspection process. It was emphasised that clear and concise communication is crucial during these processes to effectively convey information.

Practical Experiences and Advice

Several participants shared their personal experiences with SRA audits, providing valuable insights:

1. Historical vs. Current Compliance: Firms that have made significant improvements in their AML processes still face scrutiny for past non-compliance. This retrospective application of current standards was a common frustration.
2. Documentation and Evidence: It was advised to provide only the information specifically requested by auditors to avoid unnecessary complications. Over-disclosure can lead to further scrutiny and potential issues.
3. Communication with Auditors: Engaging directly with auditors and requesting preliminary meetings before formal responses can help clarify expectations and build rapport.
4. Regulatory Knowledge and Engagement: Concerns were raised about the lack of practical legal experience among SRA auditors, which sometimes leads to misinterpretations of compliance efforts. Having experienced legal professionals within the auditing teams could improve understanding and fairness in the process.

Emotional and Mental Health Impact

The emotional toll of these audits on firm staff was a key concern. It was mentioned that some solicitors reported increase in stress from the process. The profession must address these mental health impacts and find ways to support affected individuals.

Collective Action and Best Practices

1. Sharing Common Questions: Creating a central repository of common audit questions and firm responses was proposed to aid collective preparedness.
2. Representation and Feedback: Exploring opportunities for collective representation and providing feedback to regulators to improve the process was discussed.
3. Case-by-Case Approach: Advocating for a case-by-case approach in addressing individual concerns within the SRA, with escalation to the head of the team or General Counsel, was suggested as an effective strategy.

Insights on Regulation Pressure and Supervision

The conversation also touched on the regulatory compliance and risk management in the financial industry, emphasising the importance of providing only what is asked for during processes like Professional Indemnity Insurance (PII) renewals. Additionally, the potential benefits of seconding SRA investigation team members to law firms to foster cross-fertilization of knowledge were discussed.

In Conclusion

This meeting underscored the need for continued dialogue and support among legal professionals to navigate the increasingly stringent regulatory environment effectively. By sharing experiences and strategies, firms can better prepare for audits and mitigate the associated challenges.