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MONEY LAUNDERING - RISKS & REGULATIONS

Emma Oettinger discusses anti-money laundering and explains why the Law Society is campaigning for proportionality.

On 22 January 2007, HM Treasury released draft regulations to replace the Money Laundering Regulations 2003 and implement the Third European Directive on Money Laundering in the United Kingdom.  

The draft regulations currently contain a wide range of changes from the 2003 regulations, some of which are minor and others which will require significant changes to the anti-money laundering procedures of firms and training of staff.  

The regulations are likely to be presented to Parliament in June or July and HM Treasury are saying they will be in force by 15 December 2007. The Law Society is aiming to have updated guidance on the new regulations issued by the end of summer and is looking at offering training in the new regulations to Money Laundering Reporting Officers (MLROs) throughout the UK during the spring.     

It is vital that managing partners and MLROs start making themselves aware of the changes and consider the time and resources which will be required to permit an effective transition to the new regulations by 15 December.  

Key changes from the 2003 regulations  

There are a number of new requirements under the draft regulations which will require a change in practice for solicitors:  

1. Identifying beneficial owners  

The 2003 regulations required lawyers to consider agency principles and ensure that they conducted Client Due Diligence (CDD) checks on any person who was controlling or benefiting from the transaction from behind the scene.  

The draft regulations require practitioners to go further and where the client is acting on behalf of any corporate body or legal arrangement or entities, you must conduct due diligence on the beneficial owner of that corporate body, legal arrangement of entity. This has significant implications for practitioners dealing with companies, partnerships, trusts, foundations and funds.  

2. Identifying existing customers  

The 2003 regulations permitted lawyers to not conduct CDD on clients with whom they had a business relationship prior to 1 March 2004. The draft regulations require that all existing customers are identified at appropriate times and in a risk-sensitive manner.  

Many firms have long-standing clients and will find that the majority of their client base has yet to be identified for anti-money laundering purposes. This will require resources not only from the perspective of actually conducting the identification, but also of explaining to clients why they are now subject to these requirements despite their long-standing positive relationship with the firm.  

3. Identifying politically exposed persons  

The draft regulations introduce the new category of client, namely the Politically Exposed Person (PEP). A PEP includes a person who has been entrusted with prominent public functions, their immediate family and their close associates in a business context.  

Firms are expected to have processes in place to identify whether their client is a PEP, ensure senior management approval for acceptance of the retainer and establish the source of wealth and funds involved in the transaction to be undertaken.  

Law Society campaign  

The Law Society has been actively making representations to government on its members' behalf since the European Commission began consulting on the drafting of the Third European Money Laundering Directive, which is the basis for these draft regulations.  

In February 2007, the Law Society launched its campaign for more proportionate and workable regulations in the area of money laundering. The Law Society sought amendments to the regulations with respect to the new requirements outlined above, as well as a number of other issues. Our campaign activities included:

• raising solicitors’ awareness of concerns with the draft regulations and getting their input on how the regulations would impact their firm
• engaging with Treasury officials
• writing directly to government ministers
• briefing Opposition MPs
• working with other representative and regulatory agencies to highlight key areas of concern; and
• providing a detailed written response to the consultation on the regulations which closed on 2 April 2007.

The Law Society will continue to lobby on behalf of its members to see that money laundering regulations which are proportionate and workable. To read our response to the consultation, or add your voice to our campaign visit www.moneylaundering.lawsociety.org.uk.  

Author: Emma Oettinger is the Law Society’s anti-money laundering policy adviser

Published In: Managing for Success in April 2007

Dated: April 2007

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