Clean up or fall foul of money laundering bill

ACT now on new directive, writes Richard Farquhar

Picture: John Devlin

The 4th Anti-Money Laundering (AML) Directive came into effect on 26 June and EU member states have two years to include the new rules within domestic legislation. Furthermore, within the next few years the United Kingdom is to be subject to mutual evaluation by the Financial Action Task Force (FATF), the global organisation responsible for setting the standards concerning combating money laundering and terrorist financing. To contextualise the significance of this the UK’s last mutual evaluation took place in 2006 before the Money Laundering Regulations 2007 had come into force.

The introduction of more robust legislation and the timing of FATF scrutiny will undoubtedly mean there will be the need for changes in many industries especially those within the regulated sector – including the legal profession.

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It’s worth bearing in mind that while the contents of the directive give us a good indication of what must be included, HM Treasury added more to the text of the UK legislation than was required by the 3rd Directive and may choose to do so again.

Customers of those businesses affected by the change may notice a different approach taken by the service provider as those subject to the regulations try to ensure they are collecting enough information to ensure compliance.

Customers involved in financial transactions will be used to the application of customer due diligence measures although they might not be familiar with the term. At standard level these measures will usually involve an identity check. However, the application of enhanced due diligence measures can take many forms and often involve scrutiny of funding and further verification of identity. The new legislation will, amongst other things, increase the volume of transactions that are to be subject to the rules and will also increase the volume of transactions that must be automatically subject to the higher standard of due diligence.

At present the legislation prescribes very few areas where the highest level of due diligence must be carried out. The 4th AML prescribes more higher risk areas for consideration and service providers will have to be more diligent in more transactions, with examples such as businesses that are cash intensive, transaction that involve third parties, funders or clients with unusual or complex ownership structures all being mentioned. This will inevitably require businesses to better understand their clients and the transactions they are involved in.

It is quite likely that the changes will be viewed by many as an extra layer of bureaucracy and as a further inconvenience for both service provider and consumer but I suggest to those affected that, in many ways this change brings with it an opportunity.

The re-emphasis on the risk based approach and the need to be able to demonstrate how decisions were reached on risk will be key and this I believe is where the opportunity exists for professional advisers and customers alike.

In order to determine the appropriate due diligence measures for a specific client or for a transaction a professional must know about the client or transaction in question and this information will have to be documented. Understanding a customer, however, is nothing new to the professions and the idea of “know your client” existed prior to money laundering regulations .

Many questions common place for a professional to ask are now viewed as intrusive. However, if professionals and others subject to the regulations take the changes to legislation as a catalyst for reviewing client engagement this should enhance the service. Another key benefit to this is that it also makes it easier to identify any other service offered by the business that would be of benefit to the customer. Obviously if the customer is buying more services there is a benefit to the business but even where they do not, having learned what is available, the customer is better informed and this is generally a positive.

Certainly at Harper Macleod we try to see the customer and their wider needs rather than focusing only on the circumstances of the current transaction. By building a relationship and understanding who they are the business is able to provide a better service and at the same time will make many compliance considerations easier to manage.

• Richard Farquhar is the Risk, Compliance and Training Manager at Harper Macleod