Jessica Clay
Kingsley Napley, London
JClay@kingsleynapley.co.uk

2022 was an eventful year for law firm regulation and as we have moved through 2023, it is clear that there will still be many key issues for firms to have on their radar.

AML and economic crime

Anti-money laundering (AML) was and remains a key theme arising from the enforcement work of the Solicitors Regulation Authority (SRA). According to the SRA’s most recent annual AML report, failure to have a firm-wide risk assessment, or having one that is inadequate, is cited as one of the most significant concerns attached to the AML reports the SRA received in the period 2021–2022. The SRA also confirms in the report that this is a key theme for its enforcement action taken over the same time period.

Other common issues include failures to:

• carry out or complete initial customer due diligence (CDD);
• apply enhanced customer due diligence (EDD), where required;
• carry out a source of funds check;
• identify a client;
• have in place proper AML policies, controls and procedures;
• notify the SRA of Money Laundering Reporting Officer (MLRO) and Money Laundering Compliance Officer (MLCO) appointments or seek approval as managers (as part of a firm’s ongoing obligation to identify who its beneficial owners, officers and managers are (BOOMs - see this SRA resource for an explanation of these roles and also note the definitions within the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017^[1]); and
• have sufficient regard for issued warning notices and red flag indicators (as highlighted by the Financial Action Task Force (FATF)) in transactions.

Linked to AML, there are the UK government’s new proposals set out in the Economic Crime and Corporate Transparency Bill. The Bill is currently in its final stages with House of Lords amendments due to be considered shortly. Within this Bill is a provision giving the SRA the power to issue unlimited fines on individuals and law firms for misconduct relating to economic crime. If implemented, it will have a significant impact on firms for a number of reasons. First, for the SRA, having the power to impose unlimited fines, is a significant shift from the upper limit the SRA can currently impose without referral to the Solicitors Disciplinary Tribunal. Second, the definition of economic crime has been drafted very widely so many types of misconduct of that nature are likely to be captured. Economic crime is defined in s 180 and Sch 9 to the Bill, and covers a broad range of crimes from theft, false accounting and bribery to offences under the Proceeds of Crime Act 2002, the Fraud Act 2006 and the Terrorism Act 2000.

Additionally, in January 2023, the government also extended the provisions under the draft Bill to include greater powers for the SRA to request information in relation to economic crime. It will be necessary to keep a close eye on how this Bill develops and progresses in the immediate months to follow.

Sanctions

In November of last year, the SRA published guidance explaining its expectations on individual lawyers and firms in respect of the UK’s sanctions regime. This guidance applies to all firms as they are subject to the sanctions regime, regardless of the types of services they offer. The guidance is primarily focused on the UK financial sanctions regime, which aims to prevent the flow of money to and from designated persons and is rooted in several pieces of legislation made under the Sanctions and Anti-Money Laundering Act 2018. The impacts of Russia sanctions also feature as a 'hot topic' for the SRA.

The guidance explains that the relevant risk for law firms in relation to the UK sanctions regime is threefold: unwittingly providing services or funds to a designated person; breaching the legislation in any other way; and ensuring that firms fulfil their associated reporting obligations.

The SRA’s guidance is detailed and comprehensive and if a firm does not follow this guidance, the SRA may consider it an aggravating factor in any enforcement action it takes if the firm breaches the sanctions regime.

By way of brief background, HM Treasury implements and enforces financial sanctions in the UK through its Office of Financial Sanctions Implementation (OFSI). In addition to monitoring compliance and assessing suspected breaches of the financial sanctions regime, OFSI helps firms comply with their obligations by producing guidance. It can also issue licences to allow for an activity that would otherwise be prohibited by financial sanctions regulations, under certain circumstances. What this means in practice is that law firms and their employees must not undertake paid work for a designated person unless they have been granted a licence to do so by OFSI, or are doing so under the terms of a general licence.

OFSI’s general licence regime was first introduced on 28 October 2022, and this makes it easier for firms working with clients from Russia and Belarus subject to the financial sanctions regime to receive fees for legal advice. This legal advice must be provided to designated persons within certain limits and under certain conditions. The general licence is limited in scope to providing legal advice, although there are specific carve-outs in relation to professional legal fees and expenses for cases involving defamation or malicious falsehood.

A new general licence took effect from 29 April 2023 and has a term of six months, thus it is due to expire on 28 October 2023, at which point it may, or may not, be renewed. Firms need to report to OFSI within seven days once they have finished using the licence and/or once the licence has expired. If a firm was already acting for a client when they became a designated person, the general licence allows a firm to receive payment owed in accordance with an obligation that was entered into by the designated person prior to their designation. If a firm proposes to act for a client who is already designated, the legal fees general licence sets out specific maximum hourly rates for fee earners and counsel.

In terms of the controls firms are expected to have in place, firms should understand who their clients are, who they are owned/controlled by and be able to identify who the counterparties are and any third parties providing funding. If counterparties and third parties are designated persons or are owned or controlled by designated persons, the funds they introduce into a transaction may need to be frozen.

AML and sanctions regimes—points of difference

Sanctions compliance and complying with AML regulations are often mentioned alongside each other, and the same individuals in a firm may have responsibility for ensuring compliance with both regimes. However, there are differences between the sanctions and AML regimes.

The SRA guidance sets out a helpful comparison table between the two regimes. Some key differences included are as follows:

• If a firm fulfils the mandatory legislative requirements under the AML regulations and follows the SRA guidance, and its approach to AML is appropriately risk-based, a firm may be able to avoid legal liability even if money laundering has occurred. In contrast, there is strict liability on behalf of a firm for complying with the UK sanctions regime.

• In defined instances, a firm may outsource customer due diligence (CDD) measures for AML purposes to a third party, as long as certain conditions are met and the firm remains liable for any failures to apply such measures. In contrast, firms are strictly prohibited from outsourcing their liability for complying with the sanctions requirement to a third party and cannot rely on a report by, for example, an e-verification provider.

• Whereas AML beneficial ownership is triggered where an individual owns (directly or indirectly) 25 per cent or more of the shares of a body corporate under the money laundering regulations, the shareholding trigger in the UK sanctions regime is set at 50 per cent share ownership, though an individual may have or exert control independently of their shareholding and firms are required to establish control as part of their due diligence.

Strategic Lawsuits against Public Participation (SLAPPs)

Driven largely by government policy and heightened media interest, at the end of November 2022, the SRA issued a warning notice on SLAPPs. They also feature as a 'hot topic' for the SRA. SLAPPs are a type of 'abusive litigation', which the SRA also published guidance on more generally in March 2022. Under the warning notice, claimant lawyers must be able to identify proposed courses of action that could be defined as a SLAPP (or that are otherwise abusive) and must decline to act in that way. The warning notice sets out examples of when the SRA will likely take enforcement action, which includes where litigation is pursued that is meritless or where unduly aggressive threats are made.

The warning notice does not set out a clear definition of what a SLAPP is; rather, it references the government definition as set out in the Model Anti-SLAPP law (being a case that might therefore merit early dismissal). The test to consider is whether the case:

1. relates to the public interest;

2. has some features of an abuse of process; or

3. has insufficient evidence to warrant further judicial consideration.

The SRA states that it will not require all three of these features to be present for it to step in and act against abusive litigation. While this test might be a useful starting point, it is arguably over-simplistic and, inevitably, means that identifying a SLAPP will not always be a straightforward issue.

The warning notice no doubt sends a strong message, but it is likely that there will be uncertainty in how it is applied in practice. For example, what exactly will amount to a meritless claim, or conversely, what will be deemed to be a properly arguable claim? In the same vein, what actually amounts to 'unduly aggressive threats' will largely depend upon how this is interpreted by law firms and the SRA. In February 2022, the SRA published a thematic review on conduct in disputes and stated that it is currently investigating more than 40 cases where firms might be involved in SLAPPs; however, it has not yet published any decisions on these. The SRA’s approach, and how strictly it will apply the SLAPPs definition to conduct in litigation, is yet to be fully understood. However, what is clear is that there will be more key developments in 2023.

Ethical behaviour and law firm culture

There continues to be a flurry of activity from the SRA in respect of scrutinising ethical behaviours at work and law firm culture more generally, including workplace bullying and harassment and the effects of the workplace environment on solicitors’ wellbeing.

In February 2022, the SRA published its Workplace Culture Thematic Review along with new guidance on the work environment and wellbeing. A month later, the SRA consulted on rule changes relating to health and wellbeing at work, specifically proposing new drafting in both Codes of Conduct to treat colleagues fairly and with respect and to not bully or harass or discriminate unfairly against them. In terms of the proposed changes relating to fair treatment at work, the rationale for these changes stems from the increased reports that the SRA has received in respect of sexual misconduct and unfair treatment in law firms, specifically in relation to discrimination, bullying and harassment. In its application to the Legal Services Board (LSB), the SRA states that between 2015 and 2021, it received ‘on average 462 reports each year about bullying and harassment, and on average 144 of these met [its] assessment threshold test and were investigated’.

The SRA also states it is concerned about the impact of such behaviours on the wellbeing and mental health of those involved, as well as the significant regulatory risks to clients in terms of poor service and outcomes, and reduced public confidence in the profession.

At the start of April 2023, the SRA was given the green light by the LSB, as an oversight regulator of legal services in England and Wales, to amend the SRA Codes of Conduct. The changes came in with immediate effect, introducing into the Codes explicit requirements for individuals to treat colleagues fairly and with respect, for managers to challenge behaviour that does not meet this standard and for firms to treat those who work for and with them fairly and with respect, and to require their employees to meet that standard.

The obligations will apply to behaviour away from the workplace or the direct delivery of legal services, where such behaviour arises in the context of relationships between people in their capacity as colleagues. It will also extend to require managers in firms to challenge unfair behaviour. These are clearly nuanced situations and there will be grey areas in relation to some matters, which will likely lead to an increased number of reports being made to the SRA.

It is clear that the SRA is intent on placing workplace culture and wellbeing at the heart of its agenda, noting that ‘Making the fair treatment of colleagues an explicit regulatory requirement will help to promote the importance of a healthy workplace culture in the profession. It will also reinforce our ability to take action against any case of unfair treatment that poses material regulatory risks.’

Implications for practice

The SRA acknowledges, in its application to the LSB, that the changes will lead to an increased number of reports it receives alleging unfair treatment. Specifically, it states: ‘We already receive reports about alleged bullying and harassment, not all of which meet the standard for investigation. However, the rule changes will clarify the types of behaviours which are likely to result in us taking action, and we are preparing to handle an increased level of reporting if needed.’ The new standards on fair treatment and treating colleagues with respect will represent a harder-edged enforcement approach to law firm culture than the SRA is able to adopt within its current regulatory framework. The SRA message is clear – it will take action where individuals and firms fall short of these new requirements, for example, where an individual intentionally undermines, bullies, harasses or victimises a colleague, or a firm does not deal with a complaint of such behaviour promptly and fairly.

However, the new standards are expected to raise several challenges for law firms and managers within them, in addition to the challenges the SRA will face in terms of dealing with an influx of reports and having the appropriate resources to deal with them in a fair, proportionate, targeted and consistent way.

For example, what does treating colleagues fairly and with respect actually mean?

The scope of the new standards on fair treatment – to treat colleagues and employees fairly and with respect and not to bully or harass them, or discriminate unfairly against them – is wide. While there will be serious and unambiguous circumstances concerning bullying, harassment and discrimination, where behaviours may easily and objectively be viewed to breach the new standards, there are likely to be more circumstances where, on an objective assessment, the outcome is not so clear-cut. This raises the question of how the SRA will assess the reports it receives concerning these behaviours and the evidence it will seek.

In May 2023, the SRA also published updated guidance on the workplace environment, which includes an explanation of what the SRA considers ‘treating colleagues fairly’ to mean in a regulatory context:

‘In a regulatory context, treating colleagues fairly and with respect is not the same as complying with employment law. Employment law – and ultimately the Employment Tribunal is the primary route to decide whether treatment is unfair in the context of an individual’s work role and to award redress accordingly. Our role as a regulator is to manage the risks that serious unfair behaviour can pose for consumers and the wider public interest. As such, we would only expect for example to get involved in employment disputes, or disagreements about role-related matters such as targets or the allocation of work, where they raise regulatory concerns.

Our expectation is that those we regulate will:

• not create or sustain a working environment which risks leading to mistakes and poor outcomes for clients, or to serious ethical concerns. For instance, when staff are placed under pressure to cover up problems.

• maintain public confidence in the integrity of the profession and in the legal workplace as a safe and inclusive environment.’

Obligation on managers to challenge behaviour that does not meet the standard – what does this mean?

The new standards impose a positive obligation on managers to ‘challenge behaviour that does not meet this standard’. It is likely that difficulties will arise in the interpretation of this obligation and how it would apply in real-life scenarios.

The SRA’s proposed updated guidance on the workplace environment defines ‘challenge behaviour’ along the following lines:

‘It is an important element of a safe and ethical workplace that a firm’s managers are ready to speak out where they see unfair treatment. This means taking action to address the behaviour which has been witnessed. We do not prescribe how this should be done and the action does not necessarily need to be formal, but it should be effective. Where it is feasible for a manager who witnesses unfair treatment to intervene immediately to stop it, we expect them to do so.’

The five case studies that accompany the updated guidance, notably case study 5, suggest that at the very least, ‘challenging behaviour’ will include supervisors and managers raising concerns through established channels as soon as they arise, and firms addressing the issues raised. The case studies are useful in illustrating the type of behaviours the SRA will consider amounts to unfair treatment, bullying, harassment and discrimination.^[2]