Data Innovation Driving Source of Funds

In January 2021 The Legal Sector Advisory Group on anti-money laundering (LSAG) updated its guidance on how law firms should be dealing with the increasing risk of money laundering.

Conveyancing continues to be a focus for criminal activity, enabling criminal organisations to filter illegal funds through the sale and purchase of property.

One of the key questions many conveyancing firms continue to grapple with is the extent to which they are required to establish the source of the funds. Not only is relevant financial information to be collected from clients, critically it must be assessed to check that the funds involved have come from legitimate sources.

“Source of Funds refers to the funds that are being used to fund the specific transaction in hand – The question you are seeking to answer should not simply be, “where did the money for the transaction come from,” but also “how and from where did the client get the money for this transaction or business relationship.” It is not enough to know the money came from a UK bank account.”

LSAG AML Guidance

According to financial report experts Armalytix conducting financial crime checks for Know Your Customer compliance can be completed in 3 steps:

  1. Data
  2. Analysis
  3. Insights

Mike Ward explains further

“When compared to banking, legal firms have historically had to deal with very poor-quality data – information can be returned in a variety of forms, typically as either paper statements, PDF’s or screen shots.”

“All these formats make the information slow and difficult to analyse, with information often incomplete and in a format that leaves the legal firm ‘eyeballing the data’. There is the additional risk that bad actors could deliberately alter this information to mislead legal firms.”

The development of Open Banking has enabled greater quality of information and better analysis. Open Banking combines changing technology and regulation to put the consumer at the centre of controlling the use of their data and, with their consent, sharing it with 3rd parties. The latest innovations put information about the client’s finances at the finger tips of practitioners; including highlighting the most relevant incoming and outgoing transactions and graphically representing the balances over the time period across multiple bank accounts. Significant incomings and outgoings are also highlighted to enable insight into the accumulation of the funds.

Adds Mike

“Open banking is simply more convenient, with better customer experience, removing the need to share sensitive information potentially insecurely via email, post or websites.”

“And because of the data organisations can now access, a more in depth understanding of the client and their source of funds can be completed. Organisations like Armalytix are working with conveyancers to not only simplify the source of funds process, but also make it more robust.”

“It now takes a client the same amount of time to return twelve months of bank information across multiple accounts as it does one month from a single account. Legal firms can also have significantly higher confidence in the accuracy of the information, thereby dramatically reducing the risk from bad actors.”

The updated version of the LSAG guidance more formally discusses the role of technology and identifies that their adoption must be included in law firm’s practice wide risk assessment, with a “risk-based approach” to use, taking into account the circumstances of each client.

Alongside choosing an appropriate solution, the guidance also advises firms to conduct relevant training with staff to ensure they understand how to use the product or service; including validating the accuracy of information entered and fully understanding the output to enable an effective evaluation of risk. (7.7 Training Considerations)

Concludes Mike

“Ultimately the quality of the data drives the ability to provide insight and give firms the necessary information to make an informed decision.”

“As data innovation increases, we’re turning a traditionally time consuming and sometimes complicated job of tracing the source of funds, into a data driven and simpler process, speeding up client onboarding and reducing risk for conveyancers.”

Today's Conveyancer