A number of changes have been made to the LSAG Guidance Note of which all firms subject to the Money Laundering Regulations 2017 will need to be aware. Summarised in Schedule 23 are several key changes that law firms need to understand and, more importantly, put into practice.
Beneficial Ownership
The definition of who counts as a beneficial owner has been the subject of a good deal of confusion in recent years and so a change of wording has been introduced to clarify the issue. This is important as the MLR 2017 require CDD to be conducted on all who count as such in companies under r.28(5) which requires that “reasonable measures” must be taken to do so. The definition of who counts as a beneficial owner is set out in the MLR 2017 at r.5 as any individual who holds “more than 25% of the shares or voting rights in the body corporate”. This has often been seen to include those holding merely a 25% interest but the change of wording is intended to make it clear that this is not the case.
It should however also be stressed that the shareholding threshold is not the only factor as it is also possible to qualify as such through the assessment of “ownership and control”. Someone who holds a mere 25% or lesser interest might still have significant influence or control over a company in which case they too should count as such. The revised guidance therefore makes it important when acting for a company to check who is really pulling the strings.
This has also become a greater challenge of late in the light of the complex corporate structures that are now increasingly being used. These might involve such devices as nominee shareholders or layered corporate entities which can be used to obscure the true controls that are in place. In response firms should therefore enhance onboarding procedures to collect full information on ownership and control. This might include requesting company charts, shareholder registers or even offshore trust documents.
The Economic Crime Levy
There is also a reminder that all larger firms that have an annual turnover above £10.2 million must now register so as to pay the Economic Crime Levy (ECL) through HMRC. This is, in effect, a payment that will be required to fund the regulation that all such firms are subject to and is seen as being one of the ways in which the government will fight economic crime.
The levy applies annually and firms need to register with HMRC online. Firms that are regulated by the FCA or a professional body supervisor such as the SRA will need to register and could otherwise face penalties or other unwelcome attention from the regulator. If, therefore, your firm might cross the financial threshold you will need to ensure that your finance and compliance teams are collaborating so as to ensure that compliance is achieved.
Watch Your Supply Chain
The LSAG Guidance Note has introduced a new concept that will probably be unfamiliar to most lawyers which is that of supply chain risk on which see now 5.1.1. This requires firms to understand the whole chain of services or transactions that lie behind your client and so your enquiries should not be limited to your immediate involvement in it. This will most obviously be relevant when multiple parties are involved such as funders or any other professional advisers.
The risks here could involve someone in the chain behind the client operating under a false pretext or masking the true purpose of the transaction. More emphasis is therefore placed on the need to know who else is involved and why. This will require the need for a bigger picture to be seen at the outset of matters and then for ongoing monitoring as well as to who else might become involved as more complex matters progress. If issues or suspicions then arise the adviser must be prepared to raise questions and seek satisfactory answers.
High-Risk Third Countries: FATF Now Leads the Way
Regulation 33 requires enhanced due diligence, and so in effect more checking than usual, if the client is “established” in a high risk territory. The way in which the LSAG Guidance Note identifies high-risk third countries has changed and it is now based on the Financial Action Task Force (FATF) lists rather than, as before, schedule 3ZA of the regulations.
This change requires firms to regularly monitor the FATF lists to ensure they are aware of any updates to high-risk jurisdictions. Engaging with clients or transactions involving these jurisdictions requires enhanced due diligence to be undertaken such as seeking additional information and verifying the legitimacy of the funds involved.
Most firms, however, are highly unlikely ever to encounter any such clients and so for the great majority the most practical way to address these requirements is to consult the Law Society’s list of all such territories if unusual instructions are received from abroad or from someone in the UK who has close links elsewhere. The Infolegal template anti-money laundering policy suggests this and the link is to https://www.lawsociety.org.uk/topics/anti-money-laundering/high-risk-third-countries-for-aml-purposes which was last updated as of the 1st April 2025.
Verifying Clients: CDD Just Got Clearer
Changes have also been made to what counts as being acceptable ID evidence as part of the regulatory requirements for Customer Due Diligence (CDD). The LSAG Guidance Note now sets out which documents are acceptable for verifying name, address, and date of birth whether from government-issued documents or other reliable sources.
In practice, firms should review and update their CDD procedures to reflect these clarifications and we will shortly do the same with the template AML policies that are contained in our Office Procedures Manual templates for firms and sole principals. It is also advisable to review your record-keeping systems so as to be sure that the firm is not only compiling the right documentary evidence but is also storing such data securely.
When a Third Party Pays the Bill
Another area that the LSAG Guidance Note now tackles is the issue of third-party funding. If someone other than your client is paying for or contributing to a transaction more checking will be required. More often than not this will simply be a case of parents or other relatives making financial contributions to property purchases, but it could arise in other circumstances such as that they might be paying the divorce costs for their son or daughter. Another possible issue could be business partners settling invoices on each other’s behalf.
This issue is in fact already addressed in our template Office Procedures Manual at section 3.10, so if you have adopted our manual format the necessary procedures should be in place. As always, however, it will be just as important to know that those concerned within the firm appreciate what is contained in the manual and not just that the right things are stated in the manual.
Politically Exposed Persons: Domestic and Foreign
Under the earlier Money Laundering Regulations 2007 enhanced due diligence was required of any foreign based PEPs but not those who were based in the UK. That distinction was removed, however, by r.35 of the 2017 regulations. That in turn was modified by the Money Laundering Amendment Regulations 2023 which provided that although domestically based PEPs would still require EDD the level of checking could be less for them than would be required for those who are based internationally.
Quite how firms should address the “lower level of risk” that domestic PEPs could be expected to present was, however, unclear. This would seem still to the case with the now amended LSAG Guidance at 6.19.3 which merely confirms that the “starting point” would be that domestic PEPs present a lower level of risk than those who are based internationally, and that the checking applied to them can therefore be undertaken on this basis.
Unfortunately it is difficult to see what practical changes have actually been achieved by this changed wording. All still depends on the individual, the matter type, and any foreign links as was already the case,
Amendments made by The Economic Crime and Corporate Transparency Act 2023
The Economic Crime and Corporate Transparency Act 2023 (ECCTA) made various changes to the way that companies report to Companies House and are registered by them. The revised guidance confirms that this does not however change the requirements for ongoing monitoring at r.28(9) of the MLR 2017.
Foreign Currency Controls: The China Example
Finally is the often vexed issue of funding for transactions where the some or all of the funds will be remitted from China. The problem here is that this will not satisfy the definition of what constitutes the main offences of money laundering which require “criminal conduct” that results in “criminal property”. Criminal conduct is anything that amounts to an offence in the UK or would be so if committed here, and since there have been no exchange control regulations in the UK since 1979 what could amount to such an offence in China will not be so here. This has long since been a problem area, however, as warnings have often been provided as to the means that such transfers will therefore be made by way of “daigou”. These payments will often be linked to such offences as drug trafficking and prostitution.
An amended para 16.7.4 provides a reminder that such funds might involve criminal activity and also attempts to obscure the ultimate ownership of the funds. The problem in facing a client from China is therefore easy to state but what to do about the situation is much more difficult to say. Genuine and lawful clients should not be denied access to legal services but if any given firm cannot realistically assess the legality of the funds that it will be handling then they must not proceed, as is clear from the requirements for valid CDD to be in place before a matter can proceed as stated at r.28(2).
Where such situations might arise there is no reason why the adviser should not explain to the client the difficulties that the firm will be under and nor will this amount to the offence of tipping off as that is limited to situations where a suspicious activity report has already been made to the National Crime Agency. The firm should therefore place the onus on the client to produce the evidence it needs to be able to act safely and without the risk of thereby handling suspect funds. It might also fairly state that additional fees will be charged to undertake the time and effort that will be required to undertake the extra checking that will be required.
Final Thoughts
These latest LSAG updates remind us that the regulators expect firms to take a proactive and intelligent approach to anti-money laundering controls. The guidance is made clearer on many of the key points but, as ever, it is the implementation that counts.
At Infolegal we will be reviewing our template AML policies for firms and sole principals this month along with our on-line training presentations. The challenge for member firms will be to develop and maintain a culture of compliance that protects not only their firm but also the wider legal and financial systems.