September 20, 2018

Here are the myths of anti-money laundering rules

Anti-money laundering due diligence requirements are stringent enough – there is no need for extra hoops for HNWs and their lawyers to jump through, writes Jerry Jamieson

Much has been made of modern society’s gradual descent into a quagmire of red tape and bureaucracy. Whilst the common narrative seems to point the finger squarely at the lawmakers for devising such purportedly vexatious provisions, in many cases this represents a misallocation of blame; instead, the spotlight should be cast on the overzealous application of such regulations by practitioners themselves.

The UK Money Laundering Regulations (MLRs), governed by the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 require all businesses covered by the regulations, including all law firms, to put in place controls designed to prevent them being used for money laundering. Such measures, which include individual client risk assessments, due diligence, and identity verification, are often cited as responsible for work grinding to a halt while awaiting identification documentation from clients – no action is able to be taken until such evidence is acquired.

However, the MLRs are often not being applied accurately. Instead, alarmist rhetoric within many businesses which are primarily concerned with not falling short of their MLR duties has resulted in an overly-cautious approach, causing unnecessary slowdowns as MLR due diligence is being applied to situations which do not require it. There are two particular myths about the MLRs which exemplify this, the first in relation to beneficial owners, and the second regarding classes of beneficiaries:

Firstly, the MLRs require all beneficial owners to be properly identified – and hence there exists a misunderstanding that a beneficial owner must exist in every case. This is not true; in relation to beneficial owners of bodies corporate or partnerships, a beneficial owner is somebody that, under s.5 of the 2017 Regulations, either exercises ultimate control over the management of the body corporate/partnership, exercises control over the body corporate itself, or is entitled to or control more than 25 per cent of the capital/profits/voting rights of the body corporate or partnership.

It is entirely feasible that control over such an entity could be spread so thinly that no individual controls more than 25 per cent, and hence in such a case there would be no beneficial owner under the act – resulting in a far lower standard of individual due diligence being required. The mistaken belief that there must always be at least one beneficial owner under the act only serves to create unnecessary bureaucracy in cases where one in fact does not exist.

Secondly, in relation to classes of beneficiaries of a trust, there once again exists a misunderstanding as to the level of identification required. Should the individual beneficiaries of a class not yet have been determined, s.28(4)(c) of the 2017 Regulations only require there to be ‘reasonable measures’ taken to understand the ownership and control structure of the trust – this does not extend to the collection of certified passports and proof of address of every potential beneficiary (s.6(1)(d)). Such identity verification would in any case be an utterly infeasible and drawn out process; classes of beneficiaries can be incredibly wide, with the beneficiaries often being unaware that the trust even exists – the individual identification of each potential member would therefore constitute gargantuan levels of entirely needless paperwork, expense, and hassle.

The Money Laundering Regulations already set out lengthy and extensive due diligence requirements – the artificial creation of extra hoops to jump through due to the misapplication of the law should therefore be avoided at all costs, for the benefit of each practitioner and client’s time, money, and sanity.