The 4th EU Anti-Money Laundering Directive
Published in March and coming into effect on 26th June, the 4th EU Anti-Money Laundering Directive will be implemented in the UK by the “draft Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations”.
The draft regulations will repeal and replace the Money Laundering Regulations 2007 (MLRs 2007).
Of primary interest to solicitors will be the new provisions relating to:
- Pooled Client Accounts no longer being automatically considered low risk and exempt from the requirement for Enhanced Due Diligence (EDD).
- Risk Assessments becoming part and parcel of a firm’s compliance package when it comes to AML.
- The need to have a written agreement in place when placing reliance on third parties.
Pooled Client Accounts
This is the biggest change being brought about by the Regulations so far as their impact on day to day business is concerned. The Regulations on Pooled Client Accounts (PCAs) do not directly affect solicitors, rather they prevent banks from automatically identifying PCAs as being low risk. From the end of June, banks will have to carry out a risk assessment on each PCA and award it a risk level, subject to regular review.
The knock on effect for a firm would result in the need to provide evidence of the firm’s AML/KYC regime and perhaps, confirmation that regular auditing/compliance verification systems are in place. Further, if a bank does not wish to carry the risk of handling pooled client monies, they may leave the market (reducing choice for firms), increase fees to cover the additional compliance work involved, or rate all PCAs as high risk.
In simple terms, the result of not having your PCA classed as low risk would mean having to provide source of funds and beneficial ownership details for every transaction carried out through your PCA. This is likely to place a disproportionate burden on smaller firms without the back of house infrastructure to quickly move such data around the system.
All clients (and third parties who may be paying funds into the firm) will now have to be subject to a documented risk assessment procedure. This will record the characteristics identified as being relevant when assessing risk along with the decision making process and resulting risk level. This will have to be reviewed at appropriate intervals and the risk level confirmed or updated.
The same system will need to be in place at your firm’s bank. Liaising with your bank will be vital if you are to ensure that your PCA remains classified as low risk. When responding to the original proposal to remove the automatic “low risk” classification for PCAs, the Law Society relied on the AML/KYS procedures that law firms were required to have in place as negating the need for the banks to monitor PCAs. Although this was not accepted by the Government, the argument is still relevant to the bank’s resulting risk classification. Demonstrating high quality risk assessment procedures on the part of the firm should reduce the perceived risk from the bank’s side.
Reliance on Third Parties
Although many firms already adopt this as a ‘best practice’ policy, where a Relevant Person wishes to rely on a Third Party for the purposes of due diligence, this must be backed up by a written agreement enabling the Relevant Person to obtain copies within 2 working days of any data required to prove identity. The agreement must also require the Third Party to retain copies of data collected for a 5 year period following completion of the relevant transaction/termination of instructions.
The Regulations allow for the use of an “out sourced” DD service but it should be noted that in all circumstances of reliance being placed on a Third Party, liability for the DD procedure not being applied correctly falls on the Relevant Person; this cannot be assigned!
If you have any questions about the 4th EU Anti-Money Laundering Directive, then do get in contact with one of the team here at Gregg Latchams to discuss your circumstances on 0117 906 9400 or firstname.lastname@example.org.