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News

Law firms at risk of sanctions breach

Datanomic : 04 August, 2009  (Technical Article)
Datanomic believes that legal companies are at risk of sanction screening failure due to lack of knowledge
Lack of understanding of mandatory financial crime requirements, and failure to comprehensively screen clients are placing law firms at risk of sanctions breach

The legal sector is falling behind in sanctions screening, placing many law firms at risk of a serious sanctions breach, according to Compliance Screening and Data Management specialists Datanomic, and Legal RM, experts in Risk Management and compliance. Lack of understanding of mandatory financial crime requirements, failure to comprehensively screen ongoing clients, and complacency amongst law firms are placing individual solicitors, compliance managers, and law firms at risk of heavy financial penalties, both personally and corporately.

Although law firms understand the law itself, they are failing to apply it operationally in their own business practice. The UK Proceeds of Crime Act, The Prevision of Terrorism Act 2008, the Weapons of Mass Destruction Act, and the US Treasury Department's Office of Foreign Assets Control (OFAC) Sanctions List make it illegal to do business with sanctioned individuals or entities linked with the proceeds of crime or the funding of terrorism. For law firms, this means that unless they are in a position of privilege with a client, they are liable and accountable to the letter of the law, especially in their client screening obligations. Likewise, law firms must also comply with the regulatory obligations around anti-money laundering, including the EU 3rd Money Laundering Directive, the Money Laundering Regulations 2007, as well as the Solicitors Regulation Authority and the Law Society. They must also carefully consider the business risk of new clients in the context of these legal and regulatory obligations.

"The penny still hasn't dropped with many firms in the legal sector," said Christopher Giles, Managing Director of Legal RM. "We've recently conducted risk audits with two of the Top 100 commercial law practices. We found two terrorists within their client database, several suspected cases of laundering proceeds of crime, numerous instances of banned company directors as named company contacts, as well as drug traffickers - none of which they were aware of despite implementing what they considered to be adequate 'ongoing client monitoring'. Law firms need to be systematically and comprehensively screening clients against global sanctions lists or be prepared to face the growing financial penalties associated with a breach."

Even charities now represent increased business risk with many acting as the UK front for terrorist organisations. Through lack of systems, policies and processes, many law firms are unwittingly falling foul of national and international legislation.

Simon Pearson, Director of Compliance Screening for Datanomic, added, "There are huge parallels between the legal sector and the financial services industry. The difference is financial institutions have embraced systematic, ongoing client screening. Legislation meant hey simply had no choice. Law firms should be learning from the harsh lessons that hit the financial services sector. In fact, many law firms have major banks as their clients. Can they really afford to embarrass any of their banking clients and damage their own reputations by having a money launderer or terrorist on their books? We're now seeing the same strict enforcement in other sector sectors, such as insurance and gambling, and expect the same stringent approach to be enforced in the legal sector within the next eighteen months. Law firms need to wake up to their obligations and amend their business practices accordingly."

Datanomic's dn:Director Sanctions & PEP (Politically Exposed Persons) Screening software enables organisations to rigorously and systematically screen their customers against Sanctions, PEP, money laundering, terrorist financing and other risk data sources. Industry-leading accuracy and Datanomic's unique 'Decision Intelligence' drive down compliance costs by reducing the burden of false positives. End-to-end data preparation, case management, workflow, auditability and reporting tools ensure that businesses are protected from compliance risk.

Datanomic and Legal RM are offering a free Data Assessment Workshop for law firms which provide an in-depth analysis of your client data to identify potential weaknesses in meeting and fulfilling compliance requirements.
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