Glossary of AML Terms & Why It Matters?

Client Due Diligence (CDD) for legal firms is a multifaceted and continuous process designed to mitigate money laundering and terrorist financing risks. While client identification and verification are fundamental components, effective CDD goes much further, demanding a thorough understanding of:

• The Nature and Purpose of the Business Relationship: What is the client's objective, and how does the engagement align with their known profile?

• Geographic Risk: Are there connections to High-Risk Third Countries (HRTCs) or jurisdictions with elevated corruption levels?

• Client Risk Factors: Is the client, or anyone associated with them, a Politically Exposed Person (PEP), or do they present other specific risk indicators?

• Sanctions Compliance: Rigorous screening against all relevant sanctions lists.

• Reputational Risk: Scrutiny of adverse media and other public information to identify potential illicit activity or reputational concerns.

• Ongoing Monitoring: Regularly reviewing and updating client information and transaction behaviour to ensure consistency with initial assessment

Counter Terrorism Financing (CTF) refers to the efforts, laws, regulations, and procedures designed to prevent, detect, and disrupt the flow of funds and financial support to individuals, groups, and entities involved in terrorist activities.

In the legal sector, CTF involves:

• Identifying and assessing risks related to terrorist financing.

• Implementing robust controls to prevent legal services from being used to raise, move, or conceal funds intended for terrorism.

• Conducting thorough due diligence on clients, beneficial owners, and transactions to identify potential links to terrorist financing.

• Screening against sanctions lists to identify individuals or entities designated as terrorists or terrorist financiers.

• Reporting suspicious activity (Suspicious Activity Reports - SARs) to the National Crime Agency (NCA) or relevant authorities when there are grounds to suspect terrorist financing.

CTF is often intertwined with Anti-Money Laundering (AML) efforts, as both aim to combat illicit financial flows, even though the source of funds in terrorist financing can sometimes be legitimate. The goal of CTF is to deprive terrorists of the financial resources necessary to plan, train for, and execute their acts.

In the legal sector, Enhanced Due Diligence (EDD) is a more rigorous level of client scrutiny applied when a client, transaction, or relationship presents a higher risk of money laundering or terrorist financing. It goes beyond standard checks to involve:

• Deeper understanding of the transaction's purpose and client's background.

• Enhanced verification, especially for source of funds/wealth.

• Increased, ongoing monitoring.

• More extensive sanctions and adverse media screening.

• Often requires senior management approval.

EDD is crucial for situations like dealing with High-Risk Third Countries (HRTCs), Politically Exposed Persons (PEPs), or complex, non-face-to-face transactions. It ensures robust defence against financial crime.

The Firm-Wide Risk Assessment (FWRA) is foundational for AML compliance in the legal sector. It's a legal requirement (Regulation 18, MLRs 2017) that helps firms:

• Identify and understand their unique AML risks (clients, services, geographies, transactions and delivery channels).

• Tailor their Policies, Controls, and Procedures (PCPs) accordingly.

• Guide individual client/matter risk assessments.

• Demonstrate compliance to regulators 

Without it, a firm's AML defence is incomplete and non-compliant. It's a living document requiring regular updates.

• Collecting basic identifying information (name, address, date of birth for individuals; registration details, directors for companies).

• Verifying this information using reliable, independent sources (e.g., passports, driving licenses, company house records).

• Often includes an initial screening against sanctions lists and basic PEP checks.

• Think of it as getting to know your client/ customer

The Money Laundering Reporting Officer (MLRO) is a senior individual within a legal firm (or other regulated entity) responsible for overseeing the firm's compliance with anti-money laundering (AML) and counter-terrorist financing (CTF) regulations.

Their primary duties include:

• Receiving and assessing internal reports of suspicious activity from staff.

• Determining whether a Suspicious Activity Report (SAR) should be made to the National Crime Agency (NCA).

• Acting as the main point of contact for the NCA regarding AML/CTF matters.

• Ensuring the firm's AML policies, controls, and procedures are effective and kept up to date.

References in MLR 2017 and LSAG 2025:

• Money Laundering Regulations 2017 (MLRs): The requirement for a firm to appoint an MLRO (or an equivalent role, depending on the firm's structure and size) is primarily found in Regulation 21(1)(a), which mandates firms to establish policies, controls, and procedures, including "an individual nominated by the relevant person to be responsible for the relevant person's compliance with these Regulations." While not always explicitly named "MLRO" in the Regulation itself, this is the role's statutory basis.

• Legal Sector Affinity Group (LSAG) Guidance 2025: The LSAG Guidance provides extensive detail on the MLRO's role and responsibilities. It elaborates on their independence, authority, reporting lines, training needs, and the specific duties related to internal and external suspicious activity reporting. The guidance consistently refers to the MLRO (Money Laundering Reporting Officer) as the key figure for AML compliance within a firm.

In essence, the MLRO is the designated "gatekeeper" and ultimate internal authority for a firm's AML/CTF compliance and reporting obligations.

The National Crime Agency (NCA) is the UK's lead law enforcement agency for tackling serious and organised crime.

Think of it as the UK's equivalent to the FBI, focusing on high-level criminal threats that cross regional, national, and international borders.

Key responsibilities of the NCA include:

• Investigating serious organised crime: This covers a wide range of activities such as human trafficking, drug trafficking, cybercrime, and economic crime.
• Leading the fight against economic crime: A significant part of their work involves disrupting money laundering, bribery, and corruption, as these underpin much of organised crime.
• Receiving and analysing Suspicious Activity Reports (SARs): The NCA houses the UK Financial Intelligence Unit (UKFIU), which is the central point for businesses (including legal firms) to report suspicious financial activity related to money laundering or terrorist financing. These SARs are vital intelligence for their investigations.
• Working with international partners: Given the cross-border nature of serious crime, the NCA collaborates extensively with law enforcement agencies globally.
• Providing intelligence and capabilities: They gather, store, process, and disseminate criminal intelligence, and offer specialist capabilities to support other police forces and agencies across the UK. 

In essence, the NCA plays a crucial role in safeguarding the UK from the most serious criminal threats, with a particular focus on disrupting the financial flows that enable these illicit activities.

Policies, Controls, and Procedures (PCPs) are vital for AML in the legal sector because they are legally required (MLR 2017, Regulation 19) and translate a firm's identified money laundering risks into clear, actionable steps.

PCPs ensure consistent AML practices, guide staff on their duties (e.g., CDD, reporting suspicious activity), and demonstrate to regulators (like the SRA) that the firm has a robust, practical system to prevent financial crime. They are the operational blueprint for AML compliance.

A Suspicious Activity Report (SAR) is a confidential disclosure made to the National Crime Agency (NCA) when a regulated professional knows, suspects, or has reasonable grounds to suspect money laundering or terrorist financing.

There are three main types of SARs:

1. Information SAR: This is a standard report made to alert the NCA to known or suspected money laundering or terrorist financing. It doesn't seek a defence for a future action.

2. Defence Against Money Laundering (DAML) SAR: Submitted when a firm suspects they might be dealing with criminal property and need the NCA's "appropriate consent" to proceed with a transaction or activity without committing a money laundering offence.

3. Defence Against Terrorist Financing (DATF) SAR: Similar to a DAML, but specifically for situations where there's a suspicion of terrorist property or financing, and consent is sought to avoid committing a terrorist financing offence.

An Independent AML Audit under Regulation 21(1)(c) of the Money Laundering Regulations 2017 (MLR 2017) is a mandatory function (for most firms, dependent on size and nature of business) designed to objectively assess and evaluate the adequacy and effectiveness of a legal firm's entire Anti-Money Laundering (AML) policies, controls, and procedures.

Crucially, "independent" means the audit cannot be carried out by those responsible for the day-to-day AML function, such as the Money Laundering Reporting Officer (MLRO) or Money Laundering Compliance Officer (MLCO), to ensure impartiality and avoid "marking their own homework."

Its purpose is to identify weaknesses, make recommendations for improvement, and monitor compliance with those recommendations.