EU anti-money laundering directive costing UK law firms nearly £1m each
New research shows most compliance professionals in the legal sector are unconvinced of the directive's value in detecting financial crime
Implementation of the Fifth Anti-Money Laundering Directive (5MLD) is costing the UK legal sector on average 12% more than for other regulated industries with a majority of compliance professionals unconvinced on the directive’s value in detecting and preventing financial crime, according to new research.
The research by LexisNexis Risk Solutions revealed the implementation of 5MLD costs £940,200 per law firm, compared to an average of just over £836,000 across other sectors.
Nina Kerkez, director of consulting for the UK and Ireland at LexisNexis, suggested the high costs may result from the high-risk nature of the work law firms handle on behalf of their clients.
“It is possible that the legal sector, by its nature, deals with clients of higher risk, which in turn require more due diligence performed on them, bringing the costs of onboarding up,” she explained.
The directive was implemented by EU member states in January 2020 to address significant weaknesses that came to light since the introduction of its predecessor 4MLD in 2017, with the intention of staying ahead of money laundering techniques adopted by criminal actors since the implementation of 4MLD.
Kerkez added the results foreshadow a “difficult future” for law firms trying to keep up with changing compliance requirements should they not adopt the right technology to streamline compliance checks and create a more flexible, risk-based approach to compliance matters.
In addition to higher implementation costs, the research revealed that less than half (42%) of surveyed compliance professionals in the legal sector believe that 5MLD will have a net positive impact on their ability to detect and prevent financial crime from occuring. The figure was nearly 20% lower than the overall average of 60% across other regulated industries in the UK, including real estate, banks, lenders, wealth management, accounting and gambling.
The survey, carried out in March with more than 875 compliance professionals, was conducted with an equal split across the real estate, banking, accountancy, lending, wealth management and legal sectors.
Kerkez said the results point to a “perennial conflict” within firms between fee earners who want to onboard clients quickly and compliance teams who try to minimise the firm’s exposure to risk.
“This is an area that 5MLD and the requirement to demonstrate a risk-based approach to compliance are putting additional pressure on,” she said.
“The reality is, firms can have the best of both worlds; fast, frictionless and safe onboarding, alongside robust and ongoing assessment of client risk that protects the firm from exposure to financial crime, and therefore the reputational and financial damage that could come from dealing with the wrong client.”