The European Commission has released its proposals for a fourth money laundering directive (4th Directive) today.
The proposals are a response to changes made to the requirements issued by the Financial Action Taskforce (FATF) in February 2012 and a review conducted by the Commission on the implementation of the third money laundering directive (3rd Directive).
Changes to the law in the UK are likely to occur later in 2014 and the Law Society will be liaising with both the Commission and the UK government on those changes.
We are also hosting the Financial Crime Symposium on 22 March in London to enable law firms and others covered by the anti-money laundering and counter-terrorist financing (AML/CTF) regime to hear about the changes from the European Commission and to discuss the implications for their business.
What stays the same
The scope of activities undertaken by legal professionals that are within the 4th Directive and the protection of legal professional privilege has not changed.
The key components of client due diligence and the money laundering offences also stay the same.
Key proposals of interest to legal professionals are:
Every law firm will be required to have written AML/CTF risk assessments, policies and procedures, as well as a process by which they can test how effective these are.
This requirement should be implemented in a manner which is proportionate to the size of the law firm. The Law Society already provides assistance to firms in developing risk assessments, policies and procedures through our AML toolkit and in assessing the effectiveness of their systems through our Risk and Compliance Service.
Enhanced due diligence
Enhanced due diligence for politically exposed persons (PEPs) is being extended, so you will need to consider if a beneficial owner is a PEP. People with high level appointments in the UK will now be a PEP, and enhanced measures will need to apply for at least 18 months (rather than the former 12) after a PEP leaves office.
The enhanced due diligence measures to UK based PEPs will be on a risk sensitive basis. Where a PEP is a beneficial owner of a company it appears that it is the source of wealth and funds being used in the transaction that are to be assessed, which may be the company's funds rather than necessarily requiring an assessment of the PEP's wealth.
The Law Society's preferred e-verification providers can assist firms in assessing whether they are acting for PEPs.
Simplified due diligence
Entities which are regulated for AML/CTF compliance have not been included in the list of clients which should generally be considered as lower risk, despite the recommendation from FATF that they should be.
Simplified due diligence provisions are not now specifically contained in the 4th Directive, although individual countries may permit simplification following an evidence based assessment within their jurisdiction. This could result in a range of different simplification options being permitted for different types of institutions in different countries across Europe.
The removal of specific simplification provisions for lawyers' client accounts could also undermine client confidentiality and result in disproportionate data processing by financial institutions.
The Law Society will be looking carefully at these provisions and making representations to ensure that the simplification measures do not actually result in an increase in red tape and compliance activity.
Record keeping requirements
There is an attempt to provide further clarity around the record keeping requirements, to make them more consistent with the requirements under data protection legislation.
While the Law Society appreciates these clarifications, they do not provide a solution for situations where law firms are required to obtain due diligence information only for some activities for the client and not for others.
The proposal that all supporting documents for a transaction must not be retained for more than ten years after the business relationship ends does not fully take into account the types of documents held by legal professionals (such as wills) or the consequences of limitation periods. We will be raising this with the Commission.
Specific minimum sanctions for breach of AML/CTF requirements have been outlined, including public reprimands, removal from practice, financial sanctions of up to 10 per cent of total annual turnover or €5 million
The Solicitors Disciplinary Tribunal already has power to issue all of the minimum sanctions listed and publishes those decisions. The Law Society and the Solicitors Regulation Authority jointly publishes a summary of this action in its annual AML supervisors report.
The vexing issue of beneficial ownership
One final proposal, which may be of greater interest when advising clients, is the new requirement for all companies, legal entities and trustees to hold adequate, accurate and up-to-date information on their beneficial owners. They are also required to make this available to those doing AML/CTF due diligence and to law enforcement agencies.
It is not yet clear whether some countries will interpret this requirement to provide the information as a need to provide it publicly or merely on a transactional basis.
The Law Society has previously cautioned that this approach will be likely to impose significant administrative burdens on legitimate companies, with subsidiaries having to be kept updated on share ownership changes across entire company groups, possibly on a daily basis.
It is not clear how this will make a significant difference to the fight against financial crime taking into account the fairly specific approaches which criminals have been documented as employing when using corporate vehicles as a way of laundering funds.
The Law Society has previously suggested more effective and propionate ways of tackling this misuse of companies through:
- the requirement that all persons able to incorporate companies by way of business are supervised for AML/CTF compliance and required to undertake due diligence on the persons setting up the company irrespective of the value of the transaction;
- that individuals seeking to register their company directly with Companies House be subject to due diligence
- every jurisdiction have a public register of companies which includes information on directors and direct shareholders, so that law enforcement and those required to do CDD can easily establish who the beneficial owners are at the time that they actually need to know them.
You can read all of our money laundering consultation responses on our website.
Members can help to inform the Law Society's work on the 4th directive by emailing areas of concern to email@example.com