Sectoral Risk Assessment refers to a process that enables companies to assess the risks associated with a specific sector of their business activities. In particular, it helps companies identify and manage the risks of money laundering and terrorist financing.
Under the MLR 2017 regulations, companies that are subject to anti-money laundering laws are required to conduct a written firm-wide risk assessment. This assessment is aimed at identifying and mitigating the risks associated with money laundering and terrorist financing.
Money laundering is a significant concern for companies, as it enables criminals to hide the proceeds of their illegal activities. By implementing strong anti-money laundering measures, companies can help prevent criminals from carrying out their activities, such as drug smuggling or human trafficking. This, in turn, helps to reduce overall violence and make the world a safer place.
If your company is subject to the MLR 2017 regulations, the SRA is an essential tool for assessing and managing the risks associated with money laundering and terrorist financing. In case of any security issues, the Solicitors Regulation Authority (SRA) may request a copy of your company's risk assessment.
By carrying out a risk assessment, companies can establish anti-money laundering laws, protocols, and measures, track and deter money laundering using a risk-based approach, be aware of the level of risk that specific commercial interactions and transactions pose, and make reasonable risk-based customer and retainer decisions. Overall, the SRA is a crucial tool for companies to manage the risks associated with money laundering and terrorist financing.
Outline of Sectoral Risk Assessment
Sectoral Risk Assessment is a process that companies use to identify and manage the risks associated with money laundering and terrorist financing. The MLR 2017 regulations require companies to conduct a firm-wide risk assessment that takes into account several factors, including:
- Customers: Companies should assess the risk associated with their customer base, including factors such as their location, business activity, and transaction history.
- Countries: Companies should consider if they serve customers in countries that have a high degree of corruption or are sanctioned.
- Programs: Companies should assess the risk associated with the programs they offer, particularly those that involve carrying customer money, and whether these programs are in locations that are considered "at-risk."
- Transaction features: Companies should examine the features of their transactions, including the origins of funds and whether the transaction is outside the firm's usual scope of work.
- Distribution services: Companies should assess the risk associated with their distribution services, such as the use of distributors and facilitators, as well as internet services.
It is important to document and keep track of the risk assessment in a structured manner, such as through chapters, tables, or risk rating matrices. Companies should also keep track of the sources they consult and revise the risk assessment regularly, particularly in response to changes in their conditions or the SRA's risk assessment.
High-Risk Activities and Jurisdictions
In your risk assessment, determine what portion of your work is made up of controlled activities, particularly those defined by the NRA as "high risk."
Money launderers are most likely to misuse the following programs, according to the NRA:
- the establishment of trust and a corporation
- account management services for clients
To minimize risk while operating in these areas, you must follow the most recent AML advice for the legal sector and be aware of money laundering danger signs. You should keep track of the steps you've taken to reduce these risks and change your protocols, controls, and procedures as needed.
If you're working with clients or dealing with matters in a "high-risk" jurisdiction, the risk management should indicate that. At the minimum, you'll need to think about how you handle clients and issues, including countries on the EU's list of high-risk third countries. Stay up to date with the Financial Action Task Force (FATF) list of high-risk countries with shortcomings in their anti-money laundering and counter-terrorist funding regimes.
The Difference Between Matter and Firm Risk Assessments
It's important to note that there is a difference between matter and firm risk assessments when it comes to assessing money laundering risk. While both documents are required under money laundering regulations, they serve different purposes.
A firm-wide risk assessment is designed to determine the overall money laundering risk that a company faces. It involves an analysis of various factors, such as the company's customer base, the countries in which it operates, and the types of products or services it offers. The aim is to identify areas where the company is most vulnerable to money laundering and to implement measures to reduce those risks.
On the other hand, a matter or case risk assessment is specific to a single client file. It is designed to evaluate the money laundering risk associated with a particular client or matter. This involves an analysis of various factors, such as the client's background, the nature of the transaction, and the countries involved. The aim is to identify any potential red flags or warning signs that may indicate a higher risk of money laundering.
It's important to conduct both firm-wide and matter-specific risk assessments as they provide different but complementary perspectives on money laundering risk. While a firm-wide assessment can help identify areas of high risk across the company, a matter-specific assessment can help identify specific transactions or clients that may require further scrutiny. By conducting both types of assessments, companies can better manage their money laundering risk and meet regulatory requirements.
Updated AML Sectoral Risk Assessment
The SRA's updated sectoral risk assessment for AML and terrorism funding in the legal market is crucial to help companies identify and mitigate potential risks. The latest risk assessment comes after HM Treasury's third national risk assessment (NRA) was released in December 2020. The SRA's risk review, which was published in January 2021, identifies emerging threats that legal firms should be aware of.
One of the emerging threats identified by the SRA is the COVID-19 pandemic, which has created new vulnerabilities for companies in the legal sector. The SRA recognizes that the AML regulatory culture in the legal sector is improving, but companies without effective regulations, controls, and procedures, including accurate risk management, are still at risk of exploitation.
Another emerging threat is the use of new financial technologies, which can create new risks for companies if not properly assessed and mitigated. The SRA warned about the dangers of using emerging financial technologies, such as fund transfer mechanisms and crowdfunding sites. To address these risks, companies should conduct a thorough risk assessment of any new software they plan to use and take necessary steps to reduce the identified risks.
By staying up to date with the latest sectoral risk assessments, legal firms can protect themselves and their clients from potential money laundering and terrorist financing risks.