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Extensions to the Anti-Money Laundering Compliance Regime

Matthew Moore, director of Infolegal, advises family lawyers of their obligations under anti-moneylaundering regulations following changes wording of what constitutes taxation advice.

Matthew Moore, director of Infolegal, a specialist law firm risk management and compliance consultancy


Ever since the anti-money laundering (AML) regime was first extended to the legal profession through the passing of the Proceeds of Crime Act 2002 (POCA), closely followed by the Money Laundering Regulations 2003, the scope of the regime has been defined by work type rather than professional status. It has never been the case, therefore, that all solicitors were covered as such by all successive versions of the regulations, but rather by the types of work that were undertaken within the practice. On this basis conveyancers were always rather obviously regulated but family lawyers, as litigators, were not.

Confirmation of this status quo will be found in the professional guidance for lawyers – the Legal Sector Affinity Group AML Guidance (LSAG). This provides that both litigation and legal aid lawyers of all types do not fall within the all-important definition of "independent legal professionals" referred to in the regulations. That definition will now be found at r. 12 of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017) and the relevant guidance note at 1.4.5 of LSAG. The more general definition of "tax adviser" will be found at r. 11(d).

Against this backdrop most firms are mixed for these purposes, with some departments quite clearly in the regulated sector but others not so. Standard practice has been for the firm to overlook the distinction and apply much the same regime throughout the whole firm, with the same degree of client identity checking across the board, in particular in relation to matter opening processes. There has always been the option, however, to exclude certain sections of the firm from the full regime where the profile of work of that section has merited the exception, and some firms have done so.

Thus, many family lawyers in mixed firms are likely to be required to fit in with the standard procedures of the practice albeit with partial relaxation from adherence to the full requirements. Other family Law only firms, however, are likely to see themselves as being exempt from the regulations altogether and so will operate on a less formal basis. Within those firms there should be a client identity checking process, especially as it now required by paragraph 8.1 of the SRA Code of Conduct for Individuals, but the process may well fall short of the full "customer due diligence" process as required by the MLR 2017.

Unfortunately, this rather settled status quo now needs a fairly urgent review for those family law firms and departments that have seen themselves as being exempt to date. This follows a subtle change in the  wording of what constitutes taxation advice through certain changes to the MLR 2017 that took effect in January this year. Whereas the "tax adviser" category was formerly limited to those who provided direct advice on taxation issues this has now been extended to include those who also provide:

"material aid, or assistance or advice, in connection with the tax affairs of other persons, whether provided directly or through a third party, when providing such services" .

The SRA, as the designated supervisory body for the enforcement of the MLR 2017 for those firms that it authorises, has now provided an explanation of how it interprets this revised definition. They suggest that referring a client to an HMRC website with an explanation of why it might be of interest to them would "more likely" be sufficient to trigger the definition. They further advise that the changes brought about by the breakdown of family units may well generate tax implications, including income tax and capital gains where the ownership of assets is being split or transferred. Likewise, as a result of the reference to third parties, the simple act of referring a client to an accountant to obtain a forensic report or to regularise their tax dealings should now be seen to be regulated work.

Many firms will no doubt point to the reasonably common provision in their terms of business document that seeks to exclude liability for tax advice by declaring it to be outside the scope of legal services provided. This will not avoid the problem, however, as the main thrust of the change will be to cover communications which fall well short of advice in addition to providing tax advice as such.


The practical implications


For specialist family law only firms that have regarded themselves as being outside the regulated sector to date, the implications are quite far-reaching. For these firms there is no "part-in and part-out" option and they will need to comply with all of the demands of the regulations and not just those that relate to involvement in taxation issues. In brief, if currently unregulated and now needing to change their status, the following measures will need to be put into place:

 

·         Apply to the SRA to be noted as a firm that is subject to the MLR 2017 through the use of their form FA10. The SRA has warned that this must be done by the 10 January 2021 – the first anniversary of the new requirements taking effect.

·         Choose who will be suggested to become the "nominated officer", commonly referred to as the "Money Laundering Reporting Officer". That nomination will also need to be noted in the relevant MySRA profile.

·         The partners or directors will have to produce clear DBS checks as part of their application process as there are "fitness to own" controls in place for all regulated practices. These are stated to apply to all "BOOMs" (beneficial owners, officers and managers).

·         The size and structure of most such firms is likely to mean that they will not have to comply with the other systems dealt with at r. 21, namely to appoint additionally a "Money Laundering Compliance Officer" and screen all new employees in particular, but it may seem sensible to do so in any event. You will also find here a reference to conduct an independent AML audit, but this again will only apply if the size and structure of the firm merit it.

·         Notify clients why checks on their personal data are required and then use that data for no other purpose. There are also certain record keeping provisions in relation  to the personal data collected and the file records.

 



All such firms will now need to check client identities to the full level required by the regulatory provisions dealing with "customer due diligence". The requirements here are not just to establish client identities but also the "purpose and intended nature" of the instructions – in other words, why the firm is being instructed at all and whether the instructions make sense. The regulatory requirements relating to the need for "enhanced due diligence" will be another consideration, and so there will be a need to check whether any client, or one of their immediate family or a "known close associate", is a "politically exposed person" in which case a fuller examination of their personal finances will be required.

Finally, there is also a continuing obligation for all regulated firms to ensure that all relevant personnel are trained in the subject as well, ideally to include an explanation of how their procedures on this topic have changed and why.
For mixed firms, where part of the practice is already regulated, the implications will not be so great as all of the necessary systems should already be in place. Here the main change may need to be a levelling up in relation to the client checking elements of the onboarding processes if they have operated more simply to date than the other parts of the firm.


Making disclosures to the NCA

As a further complication, there will now be a greater obligation to report known or suspected money laundering activity (in other words, any criminal conduct resulting in a financial gain) where a hitherto unregulated firm now finds itself within the regulated sector. This is because the "duty to disclose" offence at s. 330 POCA applies where a person learns through their work within the regulated sector of money laundering by "another person" – usually their client, but not necessarily so. This would mean that a family lawyer, for example, who is told about tax evasion within a family business will now need to comply with the duty to report, whereas previously they did not need to do so as the information would not have arisen in the course of work inside the regulated sector. Fortunately, the statutory defence of "privileged circumstances" found at s. 330(6) remains in place, and this will mean that although the duty to disclose will arise, the communication will be privileged so that there will be a defence to non-reporting. Although it follows that there should be no practical difference in relation to this statutory obligation, it is likely to be a further unwelcome complication for the MLRO.


Matthew Moore is a director of Infolegal, a specialist law firm risk management and compliance consultancy which provides compliance support services for private practice firms. He has written and lectured extensively on this and related topics. He can be contacted at
mattmoore@infolegal.co.uk. See www.infolegal.co.uk. for more.