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A new money laundering directive came into force during December. Does it affect
my clients?
On 15 December 2007 the Money Laundering Regulations 2007 came into force. They implemented directive 2005/60/EC. The regulations affect a range of professionals, including auditors, external accountants, tax advisers and the providers of company services.
What is the aim of the new directive and will it incur any additional costs?
The main aim of the directive is to make money-laundering checks more effective (ie. more rigorous), while moving to a risk-based approach. In theory, this will allow professional service providers to tailor the level of scrutiny to the perceived risk of money laundering that the client or the transaction in question poses. It will, however, be necessary to devise and monitor systems to ensure that the appropriate level of risk-based scrutiny is adopted in each case. The upshot of this is that money laundering procedures will, at least for some clients, become more complex and more expensive.
What are the principal differences between the old and new regimes?
Apart from the risk-based approach, there are two main innovations. The first is the introduction of customer due diligence (CDD) procedures, obliging the relevant person to identify not merely their customer, but also the beneficial owner, where the customer is not the beneficial owner. In general, CDD has to be carried out whenever a professional service provider establishes a business relationship, carries out an occasional transaction, suspects money laundering or terrorist financing or doubts the veracity or adequacy of identification evidence previously obtained.
The second is a new obligation to carry out ongoing monitoring of a business relationship, meaning a scrutiny of transactions undertaken in the course of the relationship to ensure that they are consistent with the relevant person's knowledge of the customer and their business and risk profile. All this will have to be documented and records kept. A major theme of the regulations is that CDD is not just a one-off process at the outset of the business relationship, but an ongoing responsibility.
What does customer due diligence (CDD) involve?
It involves identifying and verifying the identity of the customer and, where the customer is not the beneficial owner, identifying and taking 'adequate measures on a risk sensitive basis' to enable the service provider to be satisfied he knows who the beneficial owner is.
It also involves obtaining information on the purpose and intended nature of the business relationship. The regulations also make provision for a limited range of circumstances where 'simplified due diligence' may be undertaken and another range of circumstances where 'enhanced due diligence' is required.
How do you establish who the beneficial owner is?
There is a general definition to the effect that the beneficial owner is the individual who ultimately owns or controls the customer. But in most cases, one of a series of specific definitions will apply, depending on the identity of the customer. For example, in the case of a corporate body, the beneficial owner is any individual who directly or indirectly owns more than 25% of either the shares or the voting rights (this test does not apply to listed companies) or who 'otherwise exercises control over the management' of the corporate body. There are different definitions for partnerships (other than LLPs), trusts and other legal entities or arrangements.
How is this likely to change the way I work, if at all?
You are likely to need new money laundering procedures and new record keeping. Staff training will have to be updated. And you may, on occasion, have to take outside legal advice on the meaning some of the beneficial owner definitions Ð in particular, operation of test for the beneficial owner of a trust requires some knowledge of trust law technicalities.
What is at stake here for me and my clients?
A criminal conviction and up to two years in prison if you get it wrong. There are a lot of grey areas about how the regulations will work in practice. It is to be hoped that professional guidance will, in due course, clarify what needs to be done. Meanwhile, it is clearly advisable to start taking steps to implement the new requirements.
Michael Furness QC is a member of Wilberforce Chambers
