Mishcon de Reya, one of the UK’s most prestigious law firms (known for representing the rich, famous and powerful), has agreed to pay £232,500 ($314,500)– presumably one of the biggest fines ever imposed by the UK regulator – over “serious breaches” relating to money laundering rules.
The London-based firm will additionally pay a further £50,000 towards the costs of the two years investigation carried out by the Solicitors Regulation Authority (SRA).
In its decision, published on Wednesday, the SRA said the firm engaged in misconduct that had the “potential to cause significant harm by facilitating transactions that gave rise to a risk of facilitating money laundering”.
Between September 2015 and April 2017, the firm carried out work for two individual clients, and two companies connected with the same two individual clients.
The work was related to a non-SRA regulatory investigation, asset planning for one of the individuals, and the initial stages of the proposed acquisition of two separate entities (and the onward sale of one of them).
The proposed acquisition of the two separate entities had “higher risk of money laundering or terrorist financing” under relevant money-laundering legislation, because they involved companies in high-risk jurisdictions (the SRA did not name the jurisdictions in question).
However, due to the companies being located in high-risk jurisdictions, this transaction required enhanced customer due diligence (EDD) and ongoing monitoring .
The regulator found Mishcon de Reya failed to carry out the required level of due diligence or ongoing monitoring. The firm believes that customer due diligence (CDD) was obtained in relation to the two individual clients, but it did not retain hard copies of such documents, (apparently misplaced), and no electronic copy of the records was retained either. A partial set of CDD documents were obtained in relation to one of the corporate vehicles involved in one of the proposed acquisitions.
Additionally the regulator found that in 2016, a payment of £965,000 was made into Mishcon de Reya’s client account and three payments – the highest of $1,099,015, equivalent to £810,000 – were made out of it, none of which related to the delivery of services by the firm, contrary to SRA rules that forbid client accounts being used “as a banking facility”. The firm failed to send a bill of costs, or other written notification of the costs incurred, to the relevant entities before two invoices were raised and paid out of monies held in client account. Mishcon admitted to improperly transferring the funds.
An external investigation commissioned by Mishcon found that the unnamed former partner responsible for this transaction had not received mandatory AML training as required by anti-money laundering regulations.
Further failures were admitted by the firm in relation to three property transactions between September 2017 and October 2018. For each transaction, the firm’s client was a separate special purpose vehicle with the same ultimate beneficial owner.
The SRA explained: “The firm secured CDD in relation to the ultimate beneficial owner but, because it opened each matter file in the name of a different entity in the corporate structure, the firm did not secure full CDD for each special purpose vehicle before each relevant transaction took place.
“The firm also did not retain copies of some of the CDD information obtained in relation to the ultimate beneficial owner, and in relation to another individual who instructed the firm on a fourth, related, matter.”
In September 2018, the SRA requested a copy of Mishcon’s firm-wide risk assessment – as required by the relevant Money Laundering regulations (in place since 2017) – the firm admitted that it did not have one.
It isn’t until May 2019, that a risk assessment prepared by an external provider was supplied to the SRA.
Law firm or Banking Facility?
This isn’t the first time the firm was found to be using client accounts as a banking facility. In October 2021, Mishcon was fined £25,000 by the SRA and ordered to pay £32,500 towards the SRA’s costs, for a separate matter in which it allowed its client account to be used as a banking facility. Liz Ellen, a former sports partner at the firm was accused by the SRA of paying third parties out of Mishcon’s client account “in circumstances amounting to the provision of a banking facility”. The payments are understood to have comprised part of a £1.9m fee paid by Newcastle United to a football agent.
Tiny fine, huge money laundering problem?
Although this is the highest fine ever imposed by the SRA, one cannot help but wonder why the fine was based on a mere 0.25% of turnover, whilst Mishcon’s served the rich and famous with an average £155m turnover during the relevant periods ( the firm’s misconduct was found to be middle of the band indicating a basic penalty of up to 0.5% of annual domestic turnover).
Not only that, the fine which would have been equivalent to £387,500 was further reduced by the maximum allowable 40% discount to reflect mitigating circumstances (final fine: £232,500)
According to the SRA “the breaches were serious but the risks did not crystallize into causing harm to clients or the wider public interest”.
The SRA found that the firm assisted with its investigation (further to a report being made to the SRA by a whistleblower? ) including by providing outputs of the external investigation commissioned by the firm, early admissions, corrective action taken including improvements to systems and training and commitment to reduce the risk of repetition of similar issues.
This sanction certainly leaves one questioning whether the SRA is imposing a level of punishment that may be viewed as an effective deterrent, to other law firms in the UK.
The UK legal industry, as a whole has been recently heavily criticized for its role in money laundering in a Chatham House report.
In a scathing assessment of the role played by some UK law firms, the report argued that “capable and expensive lawyers” were able to “help the client purchase property, prevent critical press coverage via ‘cease and desist letters’ to journalists and NGOs, and suggest ‘family office’ wealth managers who can place the client’s funds in safe, profitable projects.”
The Chatham House report also argued that such wealth transfers have provided extensive business for British professional services firms, and that existing regulation was too weak to tackle the problem in any meaningful way.