Legal Village

Government must clean up money laundering rules

Posted 27/03/2007 by Fiona Woolf

It’s difficult for me not to shudder a little on hearing a mention of the Government’s dreaded draft money laundering regulations. They could not only impose significant extra costs on solicitors for compliance but also reduce the competitiveness of UK firms by gold-plating the implementation of the EU directive. They could put even conscientious solicitors at risk of conviction and imprisonment.

One of the many issues we are trying to get the Government to look at is around the requirement for solicitors to conduct enhanced customer due diligence (CDD) if your customer is a politically exposed person (PEP).

For the uninitiated in such matters, this enhanced CDD involves:

• having appropriate risk-based procedures to determine whether the customer is a PEP and the approval of senior management for establishing a business relationship with such a person;
• taking adequate measures to establish the source of wealth and source of funds which are involved in the business relationship or transaction; and
• conducting enhanced monitoring of the business relationship.

No small undertaking, I’m sure you’ll agree.

But a PEP isn’t just anyone though. Interestingly, a PEP cannot be a person who is resident in the UK so, while the Government is keen to fight corruption abroad, it has no interest in having solicitors looking into what its own officials may be up to.

A PEP may have been entrusted with a prominent function in another nation state, the EU or an international body.

For the record, a prominent function includes:

• head of state, head of government, ministers and deputy or assistant ministers;
• members of parliament;
• members of supreme courts, of constitutional courts or other high-level judicial bodies;
• members of courts of auditors or the boards of central banks;
• ambassadors, charges d’affaires and high ranking-officers in the armed forces; and
• members of administrative management or supervisory bodies of state-owned enterprises.

A PEP will also be the immediate family (spouse, partner, child and parent) and close business associates of the person who holds the prominent function. Quite a list!

I think it’s fair to say that as solicitors we recognise there is a greater risk of corruption – and therefore money laundering – with respect to PEPs. And we also recognise that they may be some of the first people in the UK to be aware of the intention of a PEP to move corruptly obtained funds into ‘safe havens’ because they are given instructions to set up the vehicles or transactions to facilitate this.

So we’ve told the Government that while solicitors would like to assist in stopping such activities from happening, in reality they have limited resources and ability to actually know who is a PEP, particularly given the extended definition in the regulations.

Some 84.7% of law firms consist of fewer than four partners and only 1.6% of firms have over 26 partners. Many of those firms will rarely, if ever, deal with potential PEPs, as such the cost of mitigating this slight risk must be proportionate.

In deciding whether a person is a known close associate, a solicitor will have to have regard to any information which is in his possession or is publicly known. But just because information is publicly known, it does not mean it is universally known. For example – it was widely publicised and publicly known that Peter Foster had convictions for fraud in a number of countries including the UK, yet both the Prime Minister and his wife claimed to be completely taken by surprise by this information after entering into business deals with him.

And then there’s the issue of the accuracy of commercial databases – don’t get me started on the difficulties there! In their consultation on the new regulations, the Government has stated that it will not be providing lists or databases for solicitors or other person covered by the regulations to help them ascertain whether their client is a PEP (although they are better placed that most to get hold of this information).

By refusing to assist in this way the Government is requesting that, as solicitors, we are to form a line of defence against PEP money laundering – with one hand tied behind our backs.

So what is our take on all this? The Law Society is advocating for production of lists of everyone who qualifies as a PEP by the UK/EU and for these to be provided free of charge to persons covered by the regulations. In reality, this is the only way to ensure this is effective, if they are really serious about the risks posed by corrupt government officials.

Our objective is to persuade the Government to guarantee proportionate and workable regulations. Currently we have a situation where the Government is passing the responsibility of interpreting the incomprehensible language of this directive to solicitors, who face possible imprisonment if they get it wrong.

This is wholly unacceptable.