Extensions to the Anti-Money Laundering Compliance Regime

MLR 2017

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.

To date the areas of work that will trigger the need to comply with the regulations, and so be part of the regulated sector, have remained broadly the same. The regulations focus on  transactional work, the management of client money or assets, trust and company service provision and tax advice. This has also meant that earlier Law Society AML practice notes, and now the official guidance found for the profession in the Legal Sector Affinity Group AML Guidance (LSAG), have confidently asserted that both litigation, along with “mere” legal advice work as it was once referred to, are exempt from the all-important definition of who precisely will be the sort of “independent legal professionals” that are referred to in the regulations. That definition will now be found at r.12 of the Money Laundering Regulations 2017 (MLR 2017) and the relevant guidance note at 1.4.5 of LSAG. The more general definition of  who will be a “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 here has been for the firm to overlook the distinction and apply much the same regime throughout the whole firm, and with the same degree of client identity checking across the board in matter opening processes in particular. There has always been the option, however, to exclude certain parts of the firm from the full regime where its profile of work has merited the exception, and many firms have done so.

Other specialist litigation firms, however, such as specialist family or employment law only firms, that now exist are likely to see themselves as being exempt from the full impact of the regulations. There might therefore be a client identity checking process, as now required by paragraph 8.1 of the SRA Code of Conduct for Solicitors RELs and RFLs in any event, but this is likely to fall well 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 by 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 the changes to the MLR 2017 in the light of the The Money Laundering and Terrorist Financing (Amendment) Regulations 2019 that were introduced earlier this year to give effect to the 5th AML Directive. Whereas being a “tax adviser” 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 regulations with those firms that it authorises, has now provided an explanation of how it interprets this revised definition. They suggest that if you become involved in a taxation issue in any way that means that you will “tailor” what you say on the issue the definition will be likely then to apply. They make, therefore, the distinction between simply referring a client to a part of the HMRC website which may be of general interest to them and doing so with a comment as to why this might be relevant in the context of a current live matter. The revised definition will also mean that so much as suggesting that a client approaches their accountant to obtain a forensic report or to regularise their tax dealings will now trigger the need to comply with the MLR 2017.  Employment lawyers who sign off on settlement agreements will also now clearly become covered, as the tax implications will be one of the main aspects that will need to be explained.

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 (Infolegal members are referred to Infolegal Factsheet 7 on template retainer terms). 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 litigation firms that have regarded themselves as being outside the regulated sector, 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. Infolegal members can consult our recently updated Infolegal Factsheet 3 – “Getting to grips with Anti-Money Laundering Compliance”. In brief, however, if currently unregulated and now needing to change this 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 10th 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 merits 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. Where, in employment law, the client is a company or other entity, or a trust, the wider ownership issues and who therefore count as “beneficial owners” will also need to be dealt with. The requirements relating to the need for “enhanced due diligence” will be another consideration, and so the need to check whether any client is a “politically exposed person” or one of their immediate family or “known close associate”,  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.  Infolegal members have access to one or other of our AML training presentations.

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 and so there will be a defence to non-reporting. Although there should therefore be no practical difference in relation to this statutory obligation, this is likely to be a further unwelcome complication for the MLRO.

Fortunately, the change of status from having been an unregulated firm to now becoming regulated will not make any difference to the more common reason to make “suspicious activity reports” to the NCA, namely to obtain consent to continue with a matter for fear of otherwise becoming liable for the offence of “entering an arrangement” which facilitates money laundering. For more details on this aspect of the AML compliance arrangements, especially if you will now become your firm’s MLRO, please see our MLRO Guidance Note.

You will find a considerable amount of further guidance on this subject on the Infolegal website. For more on:

  • Your obligations as an MLRO and when the duty to make disclosures to the National Crime Agency will arise, see Infolegal Guidance Note 3 – “Duties of the MLRO and MLCO”.
  • What you need to do to ensure that you are compliant with the obligations imposed by the MLR 2017, see Infolegal Factsheet 3 – “Getting to grips with Anti-Money Laundering Compliance”.
  • The fuller requirements on CDD and the checking required on clients, see Infolegal Factsheet 4 – “Money Laundering Regulations 2017 – Identity Checking”.

We also have a range of training videos for both fee earners and secretarial/administrative staff that all staff at all member firms can access.

Finally, all three of our draft Solicitors Office Procedures Manuals (for sole practitioners, sole principals and firms) also have precedent AML policies that will enable you to ensure that you are MLR 2017 compliant.

If you would like supplemental consultancy support to help you to address this issue please contact Infolegal director and AML expert Matt Moore– mattmoore@infolegal.co.uk.

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