Posted by Allison Wooddisse, head of practice compliance at Legal Futures Associate LexisNexis
Money laundering: Fourth European directive likely to herald more substantial changes
We’ve certainly waited a long time for the Money Laundering (Amendment) Regulations 2012, but was it worth the wait?
We’ve heard rumblings about major changes to the Money Laundering Regulations (MLR) 2007 since 2009; a formal government review in 2009/10 was followed by a Treasury consultation in 2011/12. The Money Laundering (Amendment) Regulations 2012 finally surfaced on 10 September 2012 and came into force on 1 October 2012.
Do you need to make any changes to your money laundering procedures?
According to the Law Society’s Emma Oettinger, the regulations will require very few changes to anti-money laundering procedures, if any, for law firms. Firms who make use of the client due diligence (CDD) reliance provisions should look at expanding their list of who they can rely upon. There are unlikely to be any other major changes required by law firms.
So, how come this is such a damp squib and why were we expecting such fireworks? The table below shows what could have happened, what has happened and whether you’ll have to do anything.
To make life easier for you, the entries in red are potentially relevant to law firms.
Proposed change (what could have happened) | What has happened | Do you have to do anything? |
Remove criminal sanctions for breach of the MLR 2007 | Nothing—this proposal has not been implemented | No, just be aware that breach of the MLR 2007 can still attract criminal sanctions |
Strengthen powers of money laundering supervisory bodies (FSA, Law Society, etc) to compensate for the removal of criminal sanctions | Nothing—this is no longer relevant, as criminal sanctions will not be removed | |
Remove distinction between parts 1 and 2 of schedule 3, for the purpose of reliance under MLR 2007, regulation 17 and add consumer credit financial institutions to the list of third parties on which you can rely | The distinction between parts 1 and 2 of schedule 3 was removed on 1 October 2013.This means (assuming all other relevant conditions apply) you can rely on CDD conducted by auditors, insolvency practitioners, external accountants, tax advisers or independent legal professionals who are members of the professional bodies/government agencies listed in both parts 1 and 2 of schedule 3. Previously, you could only rely on third parties who were members of part 1 bodies.At the same time consumer credit financial institutions will be added to the list of third parties you can rely on | You should consider reviewing and updating your reliance procedures as the amendments expand the range of people and businesses that you can rely on for the purpose of CDD. |
Allow a debt purchaser to be able to rely on CDD previously performed by the party from which they buy debts (the seller) if the seller is supervised by the Office of Fair Trading | Reliance has been extended as proposed from 1 October 2012 | No, assuming your firm does not buy debts |
Minimise burdens on small businesses (turnover below 15,000 Euro), by disapplying MLR 2007 | Nothing – proposal rejected | No |
Exempt non-lending credit institutions from the MLR 2007 | Proposal implemented from 1 October 2012 | No |
Extend MLR 2007 to include UK estate agents who handle the sale and purchase of overseas property | Proposal implemented from 1 October 2012 | No, unless you are a multi-disciplinary firm incorporating an estate agent that handles overseas property |
Clarify the definition of ‘safe custody services’ to exclude legal professionals storing legal documents | Proposal implemented from 1 October 2012 | No – the amendment gives clarity that solicitors will not be supervised by the Financial Services Authority for anti-money laundering when storing legal documents, as this does not constitute ‘safe custody services’ under MLR 2007 |
Extend the fit and proper test for money service businesses regarding previous criminal conduct | Proposal implemented from 1 October 2012 | No |
Introduce a right of appeal against decisions made under the above fit and proper test | Proposal implemented from 1 October 2012 | No |
Clarify powers of money laundering supervisory bodies (Law Society, FSA, etc) | Some clarification implemented from 1 October 2012 in relation to the powers of HMRC and the OFT | No – the amendments around the role of the supervisory body will apply only to HMRC and the OFT. Law firms will remain supervised for anti-money laundering compliance by the Law Society, for whom there are no changes. |
Increase ability of the different money laundering supervisory bodies to share information by creating an information gateway | Government is creating an information-sharing gateway for supervisors from 1 October 2012 | No—simply be aware that different regulatory bodies will have increased ability to share information |
Penalise regulated businesses which mislead consumers in the way that they describe their relationship with their money laundering supervisory body | No changes at present – HMRC will monitor the situation | No |
Clarify current wording of MLR 2007 around beneficial owners – including whether there is an obligation to keep evidence of identity under regulation 19(2)(a), which currently appear to relate only to clients | No changes made at present; this is deferred to the wider package of regulatory changes that will follow on from the forthcoming Fourth EU Money Laundering Directive (expected in 2013) | No, but you may wish to check whether your existing procedures require you to keep evidence of the identity of beneficial owners. If not, consider amending your procedures – regardless of the wording of regulation 19(2)(a), it is good risk management practice to keep evidence of the identity of beneficial owners. |
Remove one-year limit from the definition of politically exposed person | No changes at present – deferred to wider package of regulatory changes that will follow on from the Fourth EU Money Laundering Directive | No – at present the position is unchanged: to qualify as a politically exposed person, an individual must have held a relevant public function within the last year |
Amend wording of MLR 2007, regulation 13(4), which allows credit and financial institutions to conduct simplified due diligence on pooled client accounts of independent legal professionals provided the information is available on request; the amendment is to provide limited statutory override of duty to keep client’s information confidential | No changes at present – deferred to wider package of regulatory changes that will follow on from the Fourth EU Money Laundering Directive | No – the simplified due diligence provisions allow banks to hold client accounts for law firms without the need to find out the names of every person whose money is held in those accounts on a daily basis. In recent months there have been differing views from financial institutions about whether they need assurances that they could be told those names when they open the account for the lawyer or if they can deal with matters on a case by case basis, if concerns arise. HM Treasury is not proposing to make any changes at this point, but is waiting to see how this issue is dealt with by the European Commission as it develops the Fourth Money Laundering Directive |
So that’s it?
Afraid not. The 2012 regulations are such an anti-climax because the government has seen sense and decided to defer major changes until Europe has spoken.
A draft Fourth EU Money Laundering directive will be released by the European Commission later in the autumn. This directive will be debated through the European Parliament in 2013, and will probably not be implemented in the UK until 2014. According to Emma Oettinger, once the draft directive is released firms will be able to get a sense of longer-term changes they need to start preparing for and adding into their compliance work plans and budgets. Something to look forward to!
For now, sit back and savour the moment: something that requires COLPs to do hardly anything.
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