Keeping proper books key to good compliance

AML compliance now accounts for more than 30% of Law Society inspection activity, the LSPT webinar Top Ten Tips for Compliance with Solicitors’ Accounts (30 June) has been told.

In their presentations, Law Society investigative accountants Stephanie Furey and Michael O’Connor focused on recurring issues identified during inspections under the Solicitors Accounts Regulations 2023 and highlighted the practical steps firms can take to ensure compliance in day-to-day practice.

The event was moderated by Éamonn Maguire, the Law Society’s regulatory communications manager.

Furey emphasised that maintaining proper books of account was “probably the most important tip for compliance”, stressing that client monies must be correctly recorded and always safeguarded.

She said firms should ensure accounting records were maintained contemporaneously, supported by regular reconciliations, and overseen by a competent bookkeeper working closely with solicitors.

Weaknesses in basic record-keeping, she noted, remained a recurring issue on inspection and could quickly lead to misstatements in client balances and deficits.

Recorded separately

Each client matter, she added, must be recorded separately to ensure funds were clearly identifiable and properly tracked.

Furey highlighted the need for complete supporting documentation on client files in line with Regulation 25 of the Solicitors Accounts Regulations 2023. This should include:

• Bank statements and reconciliations,
• Payment and lodgement confirmations,
• Cheque and electronic transfer records, and
• Matter file documentation evidencing each transaction.

Michael O’Connor noted that inspection file reviews focused on whether transactions could be traced from receipt to payment and whether ledger entries aligned with supporting records.

In conveyancing transactions, firms are expected to retain contracts, loan-discharge evidence, stamp-duty documentation, and title-registration records.

O’Connor also advised practitioners to look at the practice note (25 March) issued by the Conveyancing Committee and the Regulation of Practice Committee on stamping and registration.

In probate matters, wills, grants of probate, beneficiary receipts, and bank confirmations are expected to be retained on file.

Missing documentation

Both speakers stressed that missing documentation remained a frequent inspection issue.

Furey outlined key operational requirements under the Solicitors Accounts Regulations 2023, including:

• Prompt lodgement of client funds (generally within three working days),
• Proper authorisation of withdrawals, and
• Approval of payments by a partner or principal.

She also drew attention regulatory timeframes introduced to address dormant balances:

• Fees and outlays to office account within three months,
• Residual balances returned within six months.

O’Connor noted the importance of maintaining a register of undertakings, including date given, parties, and date of compliance. Entries should not be deleted once discharged but updated to reflect completion.

He noted recurring issues in conveyancing, particularly  mortgage-related undertakings, stamping, and registration.

He suggested that while not a requirement, having a register of deeds in place, also even a register of deeds to be stamped, and a register of deeds stamped, “is a good way of keeping track of things”.

Prohibitions on personal useNoting the prohibitions on personal use of client accounts, borrowing between solicitor and client, and loans between clients via the client account, O’Connor pointed out that such arrangements could create conflicts and, in serious cases, lead to regulatory or disciplinary action.

Where client-to-client lending occurs, it must be structured outside the client account with appropriate advice and documentation.

Under Regulation 8, Furey said firms should maintain a clear written policy on interest and communicate it to clients from the outset of the retainer.

Firms may be required to account to clients for interest depending on how funds are held and over what period. O’Connor advised firms to review policies considering current interest-rate conditions and Law Society guidance.

Obligations under Regulation 26, he said, required filing within five months of the accounting date. Late filing or deficiencies can trigger inspection. He flagged enhanced reporting requirements, including:

• Approval of balancing statements,
• Review of ledger balances,
• Confirmation of inactive balance management, and
• System back-up verification.

He also stressed the need for year-round record readiness.

Noting that AML compliance made up over 30% of inspection work, Stephanie Furey said that AML compliance began with a robust, documented business-risk assessment under Regulation 6 of the Solicitors Money Laundering and Terrorist Financing Regulations 2020. Solicitors Money Laundering and Terrorist Financing Regulations 2020.

Firms must assess client types, services, geographic exposure, and delivery channels, and have regard to the national risk assessment, which now identifies conveyancing as a significant risk area.Firms must assess client types, services, geographic exposure and delivery channels, and have regard to the national risk assessment, which now identifies conveyancing as a significant risk area.

She emphasised that firms must assign and regularly review an appropriate overall risk rating (low, medium, or high) and retain documentary evidence of annual reviews for inspection purposes.

Firms must also implement internal AML policies, controls and procedures (Regulation 5), covering:

• Client risk-assessment processes for each new matter,
• Due-diligence measures (simplified, standard and enhanced),
• Reporting procedures (internal escalation to MLRO and external reporting of suspicious activity),
• Record-keeping arrangements for both firm-wide and client-level AML documentation, and
• Staff AML training and maintenance of training records.

Simplified due diligence

Furey clarified that simplified due diligence applied only in limited low-risk scenarios, such as certain State bodies, while enhanced due diligence was required for high-risk jurisdictions, politically exposed persons, complex structures, or unusual transactions.

All other cases require standard due diligence, including verification of source of funds and source of wealth.

Client risk assessments under Regulation 7 must be completed for each transaction, taking account of risk factors including client profile, transaction size, and structure. Firms should also apply Schedule 2 risk indicators and document the assigned risk level, ensuring appropriate CDD measures follow.

Thought process

Finally, she stressed the importance of ongoing transaction monitoring, requiring solicitors to remain alert to changes in risk and to document their “thought process” even where no issues arise.

The webinar closed with a reminder that many inspection issues arose not from deliberate misconduct, but from weak systems, incomplete records, or failure to document decisions.

Firms were encouraged to ensure that compliance processes were embedded in daily practice and regularly reviewed to reflect regulatory requirements.