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The supervision of anti-money laundering controls at lawyers, accountants and other professional services organisations is often toothless, including new AI risk assessment systems, the UK financial watchdog has warned.
The Financial Conduct Authority said on Tuesday it could take more action against the 25 bodies supervising anti-money laundering (AML) controls in professional services if they do not fix the problems, after a body overseeing book-keepers was censured by the watchdog last year.
Bodies ranging from the Solicitors Regulation Authority to the Faculty Office of the Archbishop of Canterbury are responsible for AML compliance at the 41,400 organisations they oversee, most of which are law firms and accountants.
Some of these bodies “continue to perform poorly in their enforcement approach relative to other areas, and supervision could also be improved”, the FCA unit said. It added that “their dual role as both a membership organisation and a supervisor can hinder effective action”.
In one case highlighted by the watchdog, a legal sector body introduced an AI model to identify AML risks at the firms it supervises. However, because the model lacks sufficient data on new law firms, it automatically assigns them a “medium” risk rating, making it unlikely they would be reviewed during that time, the FCA found.
The watchdog’s report said this AI system raised “concerns about potentially unidentified or unmanaged risks” and it had encouraged the legal sector body to “explore ways to proportionately sample new firms to validate risk ratings and mitigate potential harm”.
Some professional services bodies “still take an overly member-centric approach”, said the report by the FCA’s Office for Professional Body Anti-Money Laundering Supervision. “This hinders robust AML supervision and might be linked to an ‘assisted compliance’ culture.”
The office carried out a review of six professional services bodies over the past year that found “a combination of broadly maintained or moderate improvements”. But it remained “concerned that their enforcement lacks the teeth to deter firms from falling short of minimum standards”.
The watchdog’s critical report comes after the Treasury announced last October that it planned to transfer AML supervision of professional services to the FCA after identifying this as a vulnerability in the UK’s fight against dirty money.
But the move has provoked uproar from industry bodies that currently earn fees for supervising law firms and accountants.
“Fighting financial crime is a priority for the FCA,” said Mark Francis, director of specialists at the watchdog, adding that it had “driven progress in the way money laundering is tackled in the legal and accountancy sectors, but improvements are still required”.
Last year the FCA censured the Institute of Certified Bookkeepers for deficiencies in its AML supervision of its 3,000 members — the first time the regulator has exercised its enforcement powers in this area.