UK: Risky Business – A Guide To The Money Laundering Regulations

Last Updated: 21 August 2008
Article by Neil Jamieson

Solicitors will have become accustomed to the need to ensure their compliance with anti-money laundering rules. This article highlights the key changes to the rules following the introduction of the new Money Laundering Regulations.

The new Money Laundering Regulations 2007, which came into force in December last year, have brought further changes which solicitors need to take on board. The new Regulations include new requirements when opening a matter and the development of a risk-based approach to compliance. These changes have had a very real impact on the obligations of firms and will in many cases require a change in internal procedure and/or a firm's approach to anti-money laundering compliance.

A key change is the requirement that solicitors undertake Customer Due Diligence (CDD) when opening a new matter. Regulation 7 says that CDD must be conducted when establishing a business relationship, carrying out an occasional transaction or when there is a suspicion of money laundering or terrorist financing. Also, if a solicitor doubts the veracity of documents previously provided, then he/she should conduct CDD again.

As Regulation 7 sets out, CDD must be undertaken on all new matters. However, the extent of CDD required is determined by a risk-sensitive assessment, including considering the type of client and the nature of the business relationship. There are three different types of CDD that a solicitor may undertake: standard; simplified; or enhanced.

Standard CDD requires that a solicitor must take the following steps:

  1. identify their client and verify their client's identity;

  2. in certain circumstances, identify any beneficial owner behind their client; and

  3. obtain information on the purpose and intended nature of the business relationship.

The first obligation to identify who is the client also requires that a solicitor then obtain independent verification of the client's identity. If there is a beneficial owner behind a client, then he too needs to be identified. A beneficial owner is defined in Regulation 6 to include those who own or control, directly or indirectly, more than 25 per cent of an entity or who otherwise exercise control over the management of that entity. It is anticipated that verification needed for beneficial owners will not normally be as high as that for the client itself. However, again a solicitor will need to assess the risk of a particular case.

Both the requirement to identify a beneficial owner and that to obtain information on the purpose and intended nature of the business relationship may be dispensed with if a client falls within the category of clients that allows for simplified CDD. Under Regulation 13, simplified CDD can be conducted if the client is in a certain class, which includes: credit or financial institutions subject to the money laundering directive (dated 26 October 2005); companies listed on a regulated exchange; or a UK public authority. A solicitor must still obtain evidence of the client's identity and that they qualify for simplified due diligence but no further CDD steps are required unless there exist circumstances suggesting increased risk.

Conversely, under Regulation 14, in certain situations a solicitor will be required to carry out enhanced CDD on a client. These include:

  • where the solicitor does not meet a client in person (if the client is an individual);

  • where the client is a politically exposed person (such as a member of a foreign government); and

  • any other situation where there is a high risk of money laundering or terrorist financing.

Enhanced CDD may require that a solicitor seek further verification of a client's (or beneficial owner's) identity, request further information about the purpose of the retainer or conduct an enhanced level of ongoing monitoring of the matter for any risk factors. The nature of the enhanced CDD will depend on the risks that have been identified.

It is crucial that the appropriate CDD is done in a timely manner in accordance with the Regulations. A failure to do so could, under Regulation 11, mean that a solicitor has to cease acting on a matter. Even once CDD has been completed, solicitors should be aware of the requirement for continuing monitoring under Regulation 8. This does not require an ongoing CDD process but instead that solicitors should keep an eye on transactions to ensure that they are consistent with their knowledge of the client and their risk profile. Any changes may require a further review.

The new Money Laundering Regulations plainly have a direct effect on the practice of any firm. The new risk-based approach does introduce some flexibility into the process. However, it also requires that solicitors be more aware of the circumstances of an instruction as situations of increased risk will require higher levels of compliance. Training to ensure a proper understanding by all staff is key. It is essential for solicitors to make sure that they are familiar with their own obligations under the new regulations because, as before, the consequences of non-compliance are grave

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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