We have had a number of enquiries recently about a comment by the SRA in a recent bulletin reporting back on its review of anti-money laundering compliance in law firms that are, in particular, trust and company service providers. The SRA reported that a number of the firms surveyed had inadequate PEP checking processes and that “Only relying on clients self-declaring they are a PEP is not appropriate”. This does open up a can of worms as this is precisely the level of checking that is in place in most firms. Alternatively, this might be what is required in certain lower risk departments, whereas e-verification checks might be undertaken in conveyancing only as part of anti-property fraud measures, and this will therefore have the incidental benefit of checking for PEP status.
We believe that the SRA may well be overstepping the mark here for a number of reasons. A firm that is complying with the Legal Sector Affinity Group AML Guidance (‘LSAG’), is, by definition, complying with the guidelines that all of the legal supervisory bodies in the UK (including the SRA) have signed up to, and which has also been approved by HM Treasury. Although not directly applicable, it is worth pointing out that under r.86 of the MLR 2017 if a person is charged with a criminal offence under the regulations the court must decide whether that person was following “relevant guidance which was at the time … issued by any … supervisory authority and approved by the Treasury”. Meanwhile the SRA’s approach to the LSAG guidance is that “You are not required to follow this guidance but doing so will make it easier to account to oversight bodies for your actions”.
As to the guidance within the LSAG on how extensively a firm needs to check for PEP status this is dealt with at page 75 as follows, with the most relevant provisions as underlined:
“4.12.2 Politically exposed persons
PEPs have been a focus of the FATF as there is concern amongst OECD member states that PEPs have used their political position to corruptly enrich themselves.
You should take a risk-based and proportionate approach to identifying PEPs and then applying EDD measure and treat business with PEPs on a case by case basis. When there is a PEP relationship (which, for the purposes of compliance with the Regulations, also includes where a PEP is a beneficial owner of a client and where a client or its beneficial owner is a family member or known close associate of a PEP), the Regulations specify that you must take the following steps to deal with the heightened risk:
- have senior management approval for establishing a business relationship with a PEP or an entity beneficially owned by a PEP
- take adequate measures to establish the source of wealth and source of funds which are involved in the business relationship or occasional transaction
- conduct closer ongoing monitoring of the business relationship
You are not required to actively investigate whether beneficial owners of a client are PEPs. However, where you have a beneficial owner who you know to be a PEP, you should consider on a risk-based approach what extra measures, if any, you need to take when dealing with that client.
A useful source of further information is the FCA’s guidance on the treatment of politically exposed persons for anti-money laundering purposes. The guidance is aimed at firms supervised by the FCA, but you may take it into account in accordance with Regulation 34(4)(b)(i).”
All in all, a firm that has a relatively low risk of encountering PEPs should obviously remain alert to the issue but is not required to check routinely with every client whether they are a PEP or are closely associated with them under the definitions within r.35. This may be set to change, however, if the UK adopts the Fifth EU AML Directive when it takes effect in early 2020 (as it is almost bound to do regardless of where we then will be in the Brexit process) as e-checking will then become mandatory where it is available, as it clearly already is for the profession.
For more guidance on anti-money laundering related issues, including in-house training and support or to purchase a copy of his book “Money Laundering Compliance for Solicitors” please contact Matt Moore (email@example.com).