Serious Compliance Failings Found Across the Legal Sector

Currently, the Solicitors Regulation Authority supervises law firms for compliance with anti-money laundering (AML) regulations, which involves:

• making sure that firms have appropriate controls in place to prevent money laundering
• assessing risk management practices
• encouraging the reporting of potential breaches.

As part of their obligations, law firms are required to conduct source of funds checks where necessary and, in certain cases, source of wealth checks to help prevent the facilitation of financial crime. 

Thematic Review Uncovers Serious Regulatory Failings

In response to concerns regarding continued levels of non-compliance in relation to source of funds and source of wealth checks, the SRA has recently published a comprehensive thematic review detailing its findings. The findings, based on three years of proactive supervision data and engagement with a further number of selected law firms, reveal a concerning pattern of inadequate checks that leave firms vulnerable to money laundering risks and potential regulatory action.

Key Findings from the Review

Although general awareness is good, the analysis uncovered persistent failings across the legal profession and non-compliance with source of funds source of wealth checks, including:

• Inadequate scrutiny of documents as firms often collect, but do not assess, evidence.
• Record-keeping issues, missing audit trails and lack of rationale for decisions.
• Out of more than 5,800 files reviewed in 2024–2025; 11% lacked source of funds checks and 18% showed inadequate scrutiny.
• In 8% of cases, the source of funds recorded in the ledger was not supported by the evidence collected.

Why Are Law Firms Getting It Wrong?

The SRA has acknowledged the challenges raised by firms in carrying out these checks, highlighting that, “There is a clear need for greater clarity on when and how source of funds and source of wealth checks should be carried out. While the regulations require firms to adopt a risk-based approach, many firms we engage with continue to express uncertainty about what constitutes a ‘necessary’ check under the MLR 2017.” Engagement with firms during the review identified other common challenges affecting the industry, including:

• Time and resource pressures that make thorough checks difficult, especially for smaller firms.
• Client reluctance to share financial information due to cultural or privacy concerns.
• Fee earner hesitation about offending long-standing clients.

Regulatory Expectations

The thematic review sets out clear expectations for how firms should comply with source for funds and source of wealth requirements, reiterating that:

“Conducting effective source of funds checks supports the understanding of the overall risk in a transaction. It helps to spot red flags, determine the appropriate actions including any evidence that should be collated, and which risk factors require monitoring.”

The regulator says it expects firms to:

• have a clear audit trail
• comply with ongoing monitoring obligations
• scrutinise transactions
• apply enhanced checks for transactions that are high risk for money laundering

Guidance and further information can be accessed by reading the full thematic review and findings here: ‘Thematic review of source of funds and wealth compliance’.

Preparing Your Firm for the Move to FCA Supervision

The publication of this thematic review takes on added significance in light of government announcements that AML supervision responsibilities will be transferred to the Financial Conduct Authority (FCA). As we previously highlighted in our recent article ‘Preparing Your Law Firm for the FCA’s AML Supervision’, this transition will likely bring fundamentally different supervisory approach to the legal sector.

The FCA’s data-driven, risk-based supervision relies heavily on proactive disclosure, operational transparency, and demonstrable outcomes. The FCA will not be satisfied with just seeing that polices, controls, and procedures (PCPs) are in place. Firms will be expected to demonstrate those controls are working in practice.

Firms that are still relying on tick-box policies and gaps in their AML frameworks, like those identified in this thematic review, will find themselves under significant scrutiny when the FCA assumes AML supervision. Although no date has been given on when this transition will occur, the time to address these failings is now, before that takes place.

Regulatory Understanding – Meeting the Expectations

At the Regulation and Compliance Office (RACO), our compliance teams regularly see firms struggle to implement source of funds checks effectively. It is often the case that firms are relying on fee earners and support staff to complete client and matter due diligence checks, as well as risk assessments alongside their day-to-day work and caseloads. When this becomes an additional burden without proper understanding or support, crucial red flag indicators get missed.

Enhanced due diligence triggers are overlooked, source of funds or source of wealth checks are applied incorrectly or not at all, and risk assessments become formulaic rather than meaningful.

We also see cases where fee earners obtain documents but fail to scrutinise them properly, or they may assumptions based on longstanding client relationships rather than conducting the checks the regulations require.

These are precisely the oversights that the regulators are targeting. Read our previous article for further guidance: The Hidden Costs and Risks of In-House Client Due Diligence.

How RACO Can Support Your Firm

All firms must demonstrate and uphold high standards in their AML systems and processes, as well as in their management and supervision. This also involves outlining how the firm operates, including the conduct of staff in accordance with established policies, controls, and procedures.

At the Regulation & Compliance Office, we can offer a number of outsourced support solutions, including:

• Regulation & Compliance Service – Our Regulation and Compliance Service, including Risk Management Assessment and AML Risk, provides a cost-effective but essential solution for law firms to ensure they achieve a compliant environment. We work with firms of all types, from sole practitioners through to partnerships, Limited Companies and ABSs. We recognise that it is essential to recognise how a firm implements compliance to tailor the solution to each firm’s working practices. This is why our service is completely bespoke to each firm we work with.
• Regulation & Compliance Outsource Guidance and Support Service – This service provides law firms with a cost-effective outsourced solution which sees the compliance managers of RACO take on the day-to-day guidance and support expected to be provided by COLPs, COFAs, Data Compliance Officers, MLROs and MLCOs. This addition to the Regulation and Compliance Service, including Risk Management and AML Risk, relieves the Compliance Officers from most of the day-to-day burden of keeping up with regulatory requirements and ensures staff have access to compliance and risk advice when they need it.
• Due Diligence & Risk Assessment Service – At the Regulation and Compliance Office (RACO), we provide law firms with a seamless, outsourced solution for Client Due Diligence (CDD) and Risk Assessments. Our Due Diligence and Risk Assessment Service has been designed to enable law firms to focus on the provision of the legal services while we collate the necessary documentation for Due Diligence, Enhanced Due Diligence (where needed), and completion of the Client and Matter Risk Assessment, which must be completed on all matters in scope of the Money Laundering Regulations 2017.
• MLR 2017 Regulation 21 Independent Audit – As a body that is independent of the Firm, RACO would qualify as being truly independent and be able to meet the requirements of Regulation 21 of the MLR 2017. The regulation 21 independent audit extension will further include a review of the approach adopted by the firm for compliance with AML regulations.
• AML Training Courses – Our Typical AML Training Includes:
  • AML Training for ALL staff to meet the firm’s obligation to provide annual training.
  • One-to-one training for the MLRO and MLCO on their obligations and requirements.

Contact Us

To ask any questions about the Regulation and Compliance Office and how we can support your law firm, please call us on 0203 985 8550, complete the online enquiry form, or email us at info@regulationandcomplianceoffice.co.uk