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This blog covers some important developments in the AML world since our last update for legal practitioners and law firms.
Updates to Legal Sector Affinity Group (“LSAG”) AML guidance
The LSAG AML guidance for the legal sector, designed to help legal professionals and firms comply with the Money Laundering Regulations 2017 (as amended), was updated on 28 March 2023.
The update reflects changes brought about by the Money Laundering and Terrorist Financing (Amendment) (No. 2) Regulations 2022, effective from 1 April 2023, which includes:
- A requirement to carry out proliferation financing risk assessments
- Changes to the duty to report discrepancies to company registries.
Proliferation financing (“PF”)
Regulation 16A(9) of the Money Laundering Regulations 2017 defines PF as:
“the act of providing funds or financial services for use, in whole or in part, in the manufacture, acquisition, development, export, trans-shipment, brokering, transport, transfer, stockpiling of, or otherwise in connection with the possession or use of, chemical, biological, radiological or nuclear weapons, including the provision of funds or financial services in connection with the means of delivery of such weapons and other CBRN-related goods and technology, in contravention of a relevant financial sanctions obligation.”
This new provision brings with it an obligation on relevant persons to carry out PF risk assessments (either as a standalone document or as part of a firm’s existing practice-wide risk assessment).
The LSAG guidance contains the following updates to reflect this:
- Section 4.8, which sets out what must be included in a firm’s policies, controls and procedures (“PCPs”), now includes reference to PF risk. It follows that a firm’s PCPs must now identify, manage and mitigate the risks set out by the firm’s PF risk assessment, including a procedure for the identification of matters that are at high risk of PF.
- A new section 5.3.1 gives detailed guidance on how a firm ought to assess risk of PF. It notes that the definition is broad and states that, if a firm chooses to keep a PF risk assessment separate to the main practice-wide risk assessment, it is “still required to observe the same requirements as are required with the PWRA e.g. having regard to the relevant national risk assessment and ensuring [it] record[s] all steps taken to create the risk assessment”.
- Section 5.4.1 continues on how to assess such risk. It notes that the crucial factor is the “background, context and rationale of the client and the transaction the Practice is being asked to undertake”. It identifies service areas such as trade finance, commercial contracts and shipping as being at heightened risk exposure and notes that Iran and North Korea are the two most obvious jurisdictions when considering geographic risk. Jurisdictions that share physical / maritime borders with those known to have proliferation programmers and where the border is poorly guarded should also be considered a high PF risk.
- Finally, section 18.10 gives a set list of PF risk factors to consider. Some of the unique risk factors for this category include where:
- The client or counter-party or its address is similar to one of the parties found on publicly available lists of “denied persons” or has a history of export control contraventions;
- A freight forwarding firm is listed as the product’s final destination; and
- The transaction involves shipment of goods incompatible with the technical level of the country to which it is being shipped, (e.g. semiconductor manufacturing equipment being shipped to a country that has no electronics industry).
Duty to report discrepancies to company registries
Section 12.6 has been updated to set out a relevant persons obligations in relation to the duty to report discrepancies to company registries, which from 1 April 2023 only applies if:
- The business relationship being established is with:
a. a company
b. a limited liability partnership
c. a Scottish partnership
d. a trust which is required to register with HMRC’s trust registry
e. an overseas entity that needs to register due to ownership of UK real property
2. The discrepancy is “material” – not a typo or minor spelling mistake
3. The discrepancy “by its nature and having regard to all the circumstances, may reasonably be considered” to:
a. be linked to money laundering or terrorist financing, or
b. conceal details of the customer’s business
For the purposes of 3.b., “details of the customer’s business” may include identifying information related to the entity (e.g. entity name), or individuals within the entity (e.g. date of birth or name of an officer of the entity).
As before, practices that encounter such discrepancies while fulfilling their AML duties must report them, but it is not a requirement for practices to actively seek out such discrepancies.
Update to SRA’s guidance on AML firm inspections and Q&A
The SRA’s guidance on AML firm inspections has been updated as a result of the updated LSAG guidance.
The documents which will now be requested by the SRA ahead of its review of a firm now include a firm’s “risk assessment in relation to proliferation financing, required under Regulation 18A of the MLR 2017, which may be a separate document or be included within your firm wide risk assessment”.
The SRA has also updated its ‘Questions and Answers’ AML page to include reference to proliferation financing and reporting discrepancies to Companies House.
This highlights the need for firms to act now to ensure they are fulfilling their AML obligations.
Economic Crime Plan 2023 to 2026
The government’s second Economic Crime Plan (“Plan 2”) was published on 30 March 2023 and sets out what the “public and private sectors should do to continue to transform the UK’s response to economic crime”.
There is a particular focus in the three-year plan on reducing money laundering and recovering more criminal assets by way of tackling the misuse of UK corporate structures. The government plans to empower Companies House to become a “more active gatekeeper”, allowing it to verify the identities of those setting up, managing and owning companies.
Those firms who are set up as Limited Liability Partnerships (LLPs) or Alternative Business Structures (ABS) will be among those impacted.
New ‘information request power’ for the SRA
It has been noted by the government that the SRA is limited in its ability to proactively request information from firms (section 44B of the Solicitors Act 1974 allows this power only where it is necessary to do so for the purposes of an investigation). It can do so as a “Professional Body Supervisor” under the MLR 2017, but only in relation to those firms and sole practitioners who are within scope.
To ensure that the SRA can proactively request information from all of those entities and individuals it regulates, the government is introducing a new statutory power to allow them to do just that. The power has been added to the Economic Crime and Corporate Transparency Bill currently going through Parliament.
We can expect that the SRA will exercise this power frequently – a recent impact assessment published by the Ministry of Justice includes a comment that the regulator expects to use it around 750 times a year.
Financial Action Task Force (“FATF”) suspension of Russia’s membership
In recognising that Russia threatens the security, safety and integrity of the global financial system, the FATF suspended Russia’s membership on 24 February 2023.
It means that all businesses, including law firms, will need to be more vigilant in their due diligence for all transactions related to Russia. Firms will need to clearly identify, examine and mitigate the high levels of risk attached to such transactions.
LSAG Advisory Notice on Chinese underground banking and funds from China
On 8 March 2023, prior to its recent updates to the AML guidance, LSAG published an Advisory Notice exploring the risks arising from the use of Chinese informal value transfer systems (‘underground banking’) and circumvention of Chinese currency controls.
The guidance recognises that firms may be asked to undertake a transaction where the client’s money has come from abroad, which in some cases may have entered the legitimate economy through informal value transfer systems. This is a particular issue in relation to funds coming from China.
The guidance advises firms that the key issue is the need to establish that funds come from a legitimate source, including whether the client has misrepresented the reason for the transfer and, if so, why they did this and what the real purpose of the transaction is. One method to achieve this is by obtaining a copy of the Chinese Government Overseas Transfer Form, but this should be not be relied upon in isolation. Red flags arising from an examination of a client’s bank statement will include multiple payments made to high-value retailers, multiple sums received in unusually similar or rounded figures and transfer received that are just below the threshold of currency controls that apply in China. If in doubt, enhanced due diligence ought to be applied.
This update provides a brief overview of the key developments to have taken place over recent weeks in relation to the regulation of money laundering in the legal sector. We would encourage our readers to consider the publications, guidance and advisory notes that have been referenced above by following the embedded links to each of the documents.
FURTHER INFORMATION
If you have any questions regarding the blog, please contact Julie Norris or Alfie Cranmer in our Regulatory team.
ABOUT THE AUTHORs
Julie Norris is a partner in the Regulatory team. She predominantly acts in legal services sector, advising law firms, solicitors, and barristers on regulatory compliance, investigations, adjudication, enforcement, and prosecutions.
Alfie Cranmer is an associate in the firm’s Regulatory team. He specialises in advising regulated professionals who are subject to investigations and disciplinary proceedings in the legal, finance and healthcare sectors. He has a particular interest and expertise in advising students who face behavioural, sexual or academic misconduct allegations brought by their education providers.
We welcome views and opinions about the issues raised in this blog. Should you require specific advice in relation to personal circumstances, please use the form on the contact page.
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