Updated: Apr 27
Before starting work with a client, law firms are required to ensure they complete adequate and thorough due diligence. As part of our #ReallyKnowYourClient series, we explain what KYC is, why it’s important and how your firm can stay on top of ever-evolving KYC requirements.
Before starting work with a client, law firms are required to ensure they complete adequate and thorough due diligence. The 5th Anti-Money Laundering Directive, introduced in January 2020 (and soon to be replaced by the 6th Anti-Money Laundering Directive which was brought into discussion in July 2021) is clear in its position; it requires regulated businesses to have watertight compliance processes and to be able to deliver audit trails that can comprehensively showcase how KYC decisions have been reached. These directives are also built into the SRA’s handbook, meaning the SRA both monitor and enforce its adherence by law firms in the UK.
What is KYC? KYC stands for ‘Know Your Client’, or ‘Know Your Customer’. It is a common acronym used when client onboarding and relates to the process of verifying the identity of the individual or entity your firm is acting on behalf of, using independent and reliable sources of documents, data or information.
KYC checks should be completed when onboarding but also periodically refreshed to ensure the risk of working with that particular client hasn’t changed.
Why is it important? Since 2017, compliance requirements for law firms have increased significantly. The SRA even stated in its Business Plan for 2020/21 it had made an additional budget allowance, purposefully for the monitoring of all 7,000 firms under its regulation regarding AML and compliance processes. We have already started to see the impact of these audits, with various firms having been penalised by the SRA for various AML and KYC failings since 2020. These firms are now at a financial loss and run the risk of higher levels of scrutiny moving forward. There is also reputational damage amongst clients and peers to be considered.
The directives are in place to protect both the individual and the firm, and helps prevent identity theft, financial fraud and money laundering, so it is imperative that firms adhere to the rules.
How to ensure you meet KYC requirements
As compliance requirements regularly evolve, some firms run the risk of falling foul of the regulator if they become complacent with their processes. It is also important to note that AML and KYC checks, whilst working hand in hand, are separate in their purpose, so having robust AML processes doesn’t necessarily mean that the KYC checks being completed are sufficient. Here are 3 tips to ensure your KYC processes remains compliant.
Keep up to date with the latest developments - Every firm will have a MLRO and COLP to manage AML and compliance across the firm however it is vital that anyone undertaking client work or client management, should have a good understanding of what compliance entails, including updates and new processes. Encourage your teams to be signed up to relevant compliance alerts, such as those provided by The Law Society’s Risk and Compliance Service.
Make sure you are regularly auditing & re-kyc’ing - Smaller or more niche law firms don’t tend to have a centralised department for compliance requirements. As a result fee-earners manage client due diligence and KYC checks directly, which could lead to inconsistency in approach and a potential pitfall. Be sure to make sure your firm’s policies, controls and procedures are up to date, with thorough documentation and training available to anyone who processes clients, and you are regularly dip auditing a select number of case files.
Invest in technology - Whilst taking on new technology is in an investment of budget and time, there are plenty of dedicated KYC tools that can help your firm remain security conscious, KYC compliant and reduce waste of billable time. They are known as electronic identification and verification (EIDV) tools. These products elevate fraud barriers by offering a much more sophisticated verification, and can be used quickly and easily, and offers a much more pleasant onboarding process for clients.
Mirror is an EIDV tool and AML solution that allows firms to KYC clients in as little as 15 minutes via one centralised, online dashboard. If you’d like to learn more how Mirror can help your team focus on matters, not admin, you can watch our demo video, or get in touch with our team.