Key Takeaways
- The UK government is cracking down on money laundering in the legal sector, with the Financial Conduct Authority (FCA) taking over as the new anti-money laundering watchdog.
- The move is part of the government’s efforts to improve the City’s reputation ahead of a fresh financial crime review by the Financial Action Task Force (FATF) in August 2027.
- The FCA’s takeover is expected to result in "sharper" penalties for law firms that fail to comply with anti-money laundering regulations.
- The National Crime Agency estimates that £100bn is being laundered through or within the UK every year, with law firms being enabling entities.
- The FCA’s new role will involve taking over the responsibilities of nine supervisors, including the Solicitors Regulation Authority (SRA).
Introduction to the Money Laundering Crackdown
The UK law firms are bracing themselves for a money-laundering crackdown as ministers race to improve the City’s reputation ahead of a fresh financial crime review. The Financial Conduct Authority (FCA) has been designated as the new anti-money laundering watchdog for the legal sector, in a move that experts warn could result in "sharper" penalties and ultimately reshape the industry. The decision to consolidate regulation, which at present is spread across nine separate supervisors, is part of the government’s wider efforts to combat the UK’s reputation as a hub for "dirty money".
The Current State of Money Laundering in the UK
The National Crime Agency estimates that £100bn is being laundered through or within the UK every single year, with the help of enabling entities such as law firms. The City’s poor reputation for money laundering came into focus in 2018, following an assessment by the Financial Action Task Force (FATF), the Paris-based global crime watchdog. Its report highlighted significant weaknesses in the UK’s anti-money laundering supervisions and called on the government to "strengthen" oversight, particularly across the accounting and legal sectors. The UK’s national risk assessment on money laundering and terrorist financing has also classed the UK legal sector as "high risk" for every one of its assessments since 2017.
The Implications of the FCA’s Takeover
The FCA’s pending role as money-laundering supervisor for the professional services sector – which also includes accounting firms and trusts – follows a two-year government review that found inconsistent oversight, duplication across more than 20 regulators, and gaps in information shared with police. For the legal sector alone, the FCA will be taking over the responsibilities of nine supervisors, most notably the Solicitors Regulation Authority (SRA). Priya Giuliani, a financial crime investigator and partner at the consultancy HKA, said that while the SRA has historically taken a more "collaborative, guidance-led approach", the FCA will have "sharper swords" to punish wrongdoing.
The Expected Outcomes of the FCA’s Takeover
The FCA’s takeover could also lead to law firms facing large hurdles to start operating in the UK, HKA said. Figures it has gathered show the FCA rejected 44% of the 275 applications it received in the 2023-24 financial year, while the SRA accepted all 218 firms that applied. "The FCA brings sharper scrutiny, broader powers, and a data-driven lens," Giuliani said. "Legal firms must be ready." Steve Smart, the executive director of enforcement and market oversight at the FCA, said: "Fighting financial crime is a priority for the FCA and we have experience in anti-money laundering supervision which we will bring to bear. We intend to take a data-led and proportionate approach – with a focus on partnering with firms to identify and disrupt crime."
The Timing of the FCA’s Takeover
The timing of this shift is no coincidence, according to Giuliani. With a fresh FATF review looming in August 2027, government reforms are being pushed into a high gear. "The urgency is there for the UK to present a credible, consistent, and effective supervisory system to FATF by August 2027," Giuliani said. While there is currently no deadline for the changing of the guard, the pressure is on for the UK to improve its anti-money laundering regulations and oversight. The FCA’s takeover is a significant step in this direction, and law firms must be prepared to adapt to the new regulatory environment.
The Impact on Law Firms
The FCA’s takeover is expected to have a significant impact on law firms, particularly those that have historically taken a lax approach to anti-money laundering regulations. The FCA’s "sharper swords" will mean that law firms that fail to comply with regulations will face stricter penalties, including larger fines. In the year to April, the SRA issued 86 fines worth £1.5m under its anti-money laundering powers, with penalties ranging from £1,520 to £300,000. In contrast, the FCA issued six anti-money laundering fines last year, ranging from £289,000 to £39.3m and totalling £82m. Law firms must therefore be prepared to invest in their anti-money laundering systems and processes to avoid falling foul of the FCA’s new regulations.