HM Treasury has released the Money Laundering (Amendment) Regulations 2012, which will come into force on 1 October 2012.
The new regulations are the culmination of a consultation process which began in 2009. The amendments published this week (PDF) mainly focus on enhancing the supervisory powers of the default regulators and will not generally require law firms to make changes to their policies and procedures.
The Law Society has been working with HM Treasury throughout the review of the regulations. Many of the key issues for the legal profession have been deferred for consideration until the UK government are required to implement the 4th European Money Laundering Directive, which is currently being drafted.
In this week's announcement, HM Treasury has endorsed the Financial Services Authority (FSA) definition of what constitutes safe custody services for the purposes of conducting client due diligence. We welcome the fact that HM Treasury have accepted the Law Society's representations on this issue and have confirmed that the holding of legal documents by lawyers is specifically excluded from the definition. The benefit of this decisions is that:
- solicitors will not be supervised by the FSA for anti-money laundering (AML) compliance in this area and
- the potential anomaly of a solicitor not having to obtain client due diligence to write a will, but having to do so in order to store the will, has been avoided.
HM Treasury has noted that there is a practical challenge for law firms in providing beneficial ownership information of funds in their client accounts to banks without explicit consent from clients. They have undertaken to resolve the issue at a national level if it is not appropriately resolved during negotiations in Europe for the fourth money laundering directive.
HM Treasury has, however, decided to retain the criminal sanctions for breaches of the regulations. They have acknowledged that this continues to have consequences for the reporting obligations under the Proceeds of Crime Act (POCA).
The Law Society is dismayed that HM Treasury has not taken the opportunity to follow the UK government's own best practice advice on regulation as outlined under the Hampton and Mcrory principles and so ensure effective enforcement of the regulations.
The government response has focused on the importance of not sending mixed messages and ensuring compliance by employees. The criminal sanctions however will generally not apply individually to employees within a business, unless they are senior management. They do apply directly to a sole practitioner, an auditor or an insolvency practitioner. Therefore it is unlikely that criminal sanctions for breaches of the regulations will promote effective compliance with the AML regime for large businesses or corrupt employees within an organisation. We understand that to date there have been two prosecutions under the Money Laundering Regulations, both focused on micro businesses and neither attracting a specific sentence from the courts.
The Law Society firmly believes that effective enforcement of procedural compliance with the UK's AML regime is by disciplinary action and removing the right to stay in business for those who repeated fail to meet their obligations. In the last year the Solicitors Disciplinary Tribunal struck off six solicitors where there were significant failures to comply with AML obligations.
For full details read our 2011 AML supervision report (PDF)
Despite our disappointment in the outcome of this consultation, we will continue to work with the government to ensure the legal profession uphold the rule of law and support the public interest of deterring, detecting and disrupting money laundering activity, under both the regulations and POCA. Following confirmation of the continued criminalisation of breaches of the regulations, the Law Society would encourage firms to consider the wide discretion permitted under the risk-based approach, before concluding that another organisation has saved money by possibly breaching the regulations and so is in possession of the proceeds of crime.