The regulatory landscape for law firms in the UK is undergoing a seismic shift as the Solicitors Regulation Authority (SRA) tightens its enforcement of anti-money laundering (AML) compliance. With significant fines, increased scrutiny, and the potential for substantial operational disruptions on the horizon, firms must act swiftly to adapt. Here’s a comprehensive look at the trends shaping AML compliance and what law firms need to prioritise in 2025.
Stricter penalties: a new era of enforcement
The SRA’s recent consultation on financial penalties, which closed on 20 September 2024, marks a turning point for how law firms are regulated. The proposed changes tie penalties to firm turnover, meaning even minor breaches could result in substantial fines. For smaller and mid-sized firms, these penalties could threaten financial stability and even lead to market consolidation as smaller entities struggle to cope.
Historically, the SRA faced resource constraints in enforcing AML compliance. However, this is no longer the case. The regulator has significantly bolstered its capacity by increasing the number of relationship and quality assurance managers. In 2025, the number of law firms subject to audits will more than double, from 200 to 500, with the first round of these expanded audits starting in January.
Additionally, the SRA’s data collection exercises have grown more frequent and detailed, leveraging technology to enhance visibility into firms’ operations. This increased capacity and visibility signal the SRA’s intent to take a more rigorous and proactive approach to enforcement.
The challenges of AML compliance
AML compliance remains a cornerstone of regulatory oversight, and law firms are under pressure to meet higher standards across several critical areas:
- Customer due diligence (CDD): Ensuring robust client verification and identifying beneficial ownership.
- Enhanced due diligence (EDD): Applying stricter checks in high-risk scenarios, such as transactions involving politically exposed persons (PEPs).
- Suspicious activity reporting (SAR): Promptly reporting suspicious transactions is a recurring theme in enforcement actions.
- Ongoing risk assessments: Regularly reviewing client activities to ensure alignment with their stated purposes.
- Firmwide training: The SRA has identified a direct correlation between comprehensive training and compliance success.
The SRA’s 2024 AML report revealed alarming statistics about the cost of non-compliance:
- Only 22% of inspected firms were fully compliant.
- Over half (55%) were partially compliant, while 23% were found non-compliant.
- Common shortcomings included inadequate risk assessments, insufficient source-of-funds checks, and weak internal controls.
The SRA said that 10% of the firm-wide risk assessments it analysed were not compliant, with some only putting one in place after it asked to see it, even though they had previously declared to the SRA in January 2020 that they did have one.
The SRA issued 74 enforcement actions in 2024—nearly double the previous year—highlighting the increasing risks of failing to meet AML obligations. With the SRA’s own regulator OPBAS declaring the SRA needs to strengthen its supervision, law firms should prepare for a stricter approach in 2025.
Lessons from recent SDT decisions
Recent rulings from the Solicitors Disciplinary Tribunal (SDT) have underscored the immense stakes involved, with penalties ranging from hefty fines to suspension and even disbarment. As AML compliance demands become increasingly complex, legal professionals must adapt quickly to stay ahead of regulatory expectations.
Recent tribunal decisions have illuminated several pitfalls that firms must avoid:
Failure to act on red flags: Firms ignoring clear signs of unusual payment patterns or discrepancies in client data have faced severe repercussions.
Weak internal controls: Inadequate compliance frameworks and insufficient file reviews have repeatedly left firms exposed to enforcement action.
Misplaced delegation reliance: The SDT has made it clear that while tasks can be delegated, ultimate responsibility for AML compliance lies with the solicitor. Accountability cannot be outsourced.
Balancing client confidentiality and reporting obligations: Maintaining client confidentiality is vital, but the tribunal consistently prioritizes public interest in combating financial crime over confidentiality concerns.
AML compliance is a high-stakes endeavour. Regulatory breaches do not just lead to financial penalties; they threaten reputational damage and, in extreme cases, professional ruin. With the SRA increasing their audit frequency and scrutiny, firms must ensure their processes are bulletproof. A clear message from the SDT and regulators is that a reactive approach to AML compliance is no longer sufficient. Proactive measures, regular audits, and high-profile enforcement actions are shaping a stricter compliance environment.
Preparing for 2025: key actions for law firms
The SRA’s crackdown on AML compliance is reshaping the regulatory environment. Firms that fail to adapt risk more than just fines—they face reputational damage, operational disruption, and even closure. With the SRA’s enhanced capacity for audits and its intent to enforce stricter penalties, law firms must act now to safeguard their future.
Conduct robust risk assessments
Firms should critically evaluate their AML processes, identify compliance gaps, and implement tailored policies to address these vulnerabilities. This includes ensuring that client/matter risk assessments are effective and documented.
Strengthen policies, controls, and procedures
Automated systems can help enforce compliance, such as “stop” mechanisms for transactions where due diligence is incomplete.
Prioritise training
With the SRA’s focus on training during its next thematic review, firms must ensure that staff at all levels receive comprehensive and ongoing AML education.
Leverage technology
Adopting RegTech solutions like AI-powered monitoring and digital ID checks can streamline compliance processes. However, firms must vet providers carefully to ensure quality.
Stay informed and agile
Firms must monitor the outcomes of the SRA’s consultation and be ready to adapt swiftly to new guidelines.
