Implications for Law Firms under the new Money Laundering and Terrorist Financing (Amendment) Regulations 2019 (copy)

Implications for Law Firms under the new Money Laundering and Terrorist Financing (Amendment) Regulations 2019Professional Indemnity InsuranceThis article looks at the operational impact of The Money Laundering, Terrorist Financing and Transfer of Funds for law firms.Contents

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Introduction

The Money Laundering and Terrorist Financing (Amendment) Regulations 2019¹ (MLR 2019) was transposed into UK law on 10 January 2020. Whilst it seems that many firms are still coming to terms with the operational impact of The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017² (MLR 2017), MLR 2019 is an amending directive brought in to incorporate the Financial Action Task Force’s recommendations.³ Recommendations that were introduced to try and address some of the gaps in the previous legislation. These gaps were further highlighted by the funding terrorists used in the November 2015 Paris attacks⁴, and the opaque ownership structures evidenced in the 2016 Panama Papers⁵, 2017 Paradise Papers⁶ and the Danske Bank money laundering scandal.⁷The Panama Papers, Paradise Papers and the Danske Bank scandals evidenced how sophisticated money launderers set up multiple companies to move illegally gained monies around the world, masking both the real sources of those funds, and the true ownership of the companies involved. Criminals utilise jurisdictions where they can set up companies quickly and cheaply. In the UK you can establish a company from just £12 in less than 24 hours, and as quoted on the Companies House website ‘Companies House does not verify the accuracy of the information filed.’⁸Transparency International has widely investigated the roles played by UK companies in the laundering of corrupt funds⁹, arguing that the UK’s ‘laissez-faire approach to company incorporation’ has allowed ‘corrupt individuals and their agents to abuse UK companies for criminal purposes’.¹⁰It is for these reasons that the UK Government recognises the importance of enforcing the money laundering regulations within the UK, and furthermore, the Solicitors Regulation Authority (SRA) has increased its regulatory monitoring and actions by recently requesting that all impacted firms confirm that they have a compliant firm wide risk assessment in place and that action will be taken against those failing to do so.¹¹____________________^{1. http://www.legislation.gov.uk- Data

2. http://www.legislation.gov.uk/uksi/2017/692/made

3. http://www.fatf-afi.org/publications/fatfrecommendations/documents/fatf- recommendations.html

4. https://www.un.org/sc/ctc/news/document/paris-attacks-showed-role-of-small- transactions-in-terror-finance%CD%BE-un-meeting-hears/

5. https://www.icij.org/investigations/panama-papers/

6. https://www.icij.org/investigations/paradise-papers/

7. https://www.theguardian.com/business/2018/sep/21/is-money-laundering-scandal-at-danske-bank-the-largest-in-history

8. https://beta.companieshouse.gov.uk/?_ga=2.109748674.634137198.1576490702-1924585199.1565165584

9. https://www.transparency.org.uk/our-work/corrupt-money-in-the-uk/

10. https://www.transparency.org.uk/publications/at-your-service/

11. https://www.sra.org.uk/solicitors/resources/money-laundering/money-laundering/}

"the Solicitors Regulation Authority (SRA) has increased its regulatory monitoring and actions by recently requesting that all impacted firms confirm that they have a compliant firm wide risk assessment"

Implications for Law Firms

The changes for law firms under MLR 2019 are not as far reaching as the MLR 2017. Some of the more straightforward changes in MLR 2019 include: -Update policies and procedures: ensure that all relevant policies and procedures are updated to refer to the MLR 2019. It is further suggested that version control is documented to help ensure that all staff are using the correct policies and procedures and that you can evidence to your regulator that you have reviewed your policies and procedures in light of the transposition of MLR 2019.Regulation 19(4): when introducing new products, new business practices (including new delivery mechanisms) and new technology (new technology was part of MLR 2017) there is a need to review policies, controls and procedures to mitigate money laundering or terrorist financing risks.Regulation 24(1): previously the requirement was to ensure that your own employees were appropriately trained. MLR 2019 provides that you must ensure that any agents used for identification, mitigation, prevention or detection of money laundering and terrorist financing are aware of the law (including data protection legislation), are regularly trained and a written record of this training is maintained.It is suggested that confirmation is sought from any third parties that they have appropriate training in place. This might include cashiering services, anyone who meets clients, introduces clients or verifies ID in anyway, or could assist in the prevention or detection of money laundering or terrorist financing.

This also serves as a good opportunity to review your own training and ensure that all staff have received regular training. The Legal Sector Affinity Group Guidance¹² for the MLR 2017 recommends that training should be at ‘regular and appropriate intervals’ and that ‘some type of training every two years is preferable.’

Regulation 28(19): Electronic identification can be accepted as being provided by a reliable source, if that source is ‘secure from fraud and misuse.
It would seem appropriate to seek written assurances from any companies that you use for electronic identification purposes. It should be noted though that the responsibility for undertaking client due diligence rests with the law firm and liability for any discrepancies or failures will remain with the law firm.

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12. Anti Money Laundering Guidance

Regulation 38: the threshold on electronic money is lowered so that it now falls within scope. From €250 to €150 on the general exemption from CDD, and from €100 to €50 or €50 per transaction in relation to cash redemptions.

Regulation 30A and Regulation 33: these regulations have more of a significant impact for law firms and therefore more consideration will be required as explained below.

Regulation 30A: Requirement to report discrepancies in registers.

This is perhaps the area of weakness that the Panama and Paradise Papers most closely exposed.The requirement is to report ‘any discrepancy’ relating to the beneficial owner of the client, and to collect ‘’proof of registration’ or ‘an excerpt from the register.’¹³

It is well known and accepted that there are significant issues with the quality of the data stored on the UK’s register at Companies House. Indeed, Companies House is currently consulting on its role as guardian of this data¹⁴ with a view to enhancing that role. It is of concern that criminals can and are creating shell companies in the UK and use these companies to launder money.

"It is of concern that criminals can and are creating shell companies in the UK and use these companies to launder money."

Strict compliance with the MLR 2019 may involve taking a screen print of the information stored at Companies House for your file. If the information that you hold on the beneficial owner differs then you will need to report this to Companies House. This is quite straightforward; the complication arises as to whether you can then continue with the transaction and whether you need to make a Suspicious Activity Report (SAR) to the National Crime Agency (NCA).It is suggested that when a discrepancy is identified that the matter is discussed with the Money Laundering Reporting Officer (MLRO) and a documented decision is made, complete with rationale, on what steps to take, this might include making a Subject Access Request (SAR) or Defence Against Money Laundering (DAML) SAR to the NCA.You may consider an approach of not completing, exchanging, sending funds etc until such time as the discrepancy has been resolved and the record updated.

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13. Legislation.gov.uk - data
14. Assets.Publishing

Details on reporting a discrepancy are here https://www.gov.uk/guidance/report-a-discrepancy-about-a-beneficial-owner-on-the-psc-register-by-an-obliged-entityRegulation 33: MLR 2017 stipulates that Enhanced Due Diligence (EDD) is to be undertaken in certain circumstances including: -

Where it is identified that there is a high risk of money laundering or terrorist financing.

In a business relationship or transaction with a person in a high-risk third country

Correspondent relationships with a credit institute or a financial institution.

When the client is, or is closely associated with or a family member of a PEP.

When the client has provided false or stolen identification documentation.

When a transaction is complex, unusually large or there is an unusual pattern of transactions and the transaction(s) have no apparent economic or legal purpose.

Any other case that can present a higher risk of money laundering or terrorist financing.

MLR 2019 introduces some amendments in these areas, as well as explaining what EDD should be undertaken.As well as the requirements under MLR 2017, EDD should be triggered when ‘either of the parties to the transaction is established in a high-risk third country.’ Helpfully the European Commission identifies and details those high-risk third countries in a published list.¹⁵

The definition of ‘established in’ includes: -

Being incorporated in/having the principal place of business in that country, or if a financial /credit institution having their principal regulatory authority in that country, and

For an individual, being resident in that country, not merely having been born in that country

Regulation 33(d): helpfully explains what EDD is required: -

Obtaining additional information on client and the client’s beneficial owner

Obtaining additional information on intended nature of the business relationship

Obtaining information on the source of funds and source of wealth

Obtaining information on the reasons for the transaction

Obtaining approval of senior management which must be documented

Conducting enhanced monitoring of the business relationship by increasing the number and timing of controls and selecting patterns of transactions that need further examination

It is suggested that firms:

Regularly review the EU list of high-risk third countries¹⁶

Identify any current matters where a high-risk third country is involved

Develop means of identifying any transactions where high-risk third countries are involved with a view to auditing those matters

Amend policies and procedures to ensure that EDD is undertaken on any matters

Review current approach to EDD to ensure it meets the requirements, in particular, ensuring that the difference between source of funds and source of wealth is clear

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15. https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2016.254.01.0001.01.ENG&toc=OJ:L:2016:254:TOC\\}
^{16. https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.L_.2016.254.01.0001.01.ENG&toc=OJ:L:2016:254:TOC}

Conclusion

The introduction of MLR 2019 is not the end of the legislative requirements in the UK and a further money laundering directive, namely the 6th Money Laundering Directive is expected to be transposed into UK law by the end of 2020. The SRA will continue to monitor and where necessary enforce the requirements of the money laundering regulations and criminals will continue to seek new tactics and strategies to launder their illicit proceeds.

The legal profession needs to continue adapting its approach and identifying how legal services are being used to assist in laundering funds. Willis Towers Watson Risk Management Team will continue to provide advice and guidance on these areas, including further commentary on shell companies, PEPS, and applying EDD.

John Hosie
Lead Associate
FINEX Global

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