Money laundering is one of the nine priority risks for the legal profession in the Solicitors Regulation Authority [SRA] Annual Risk Outlook and an SRA review in October 2019 showed that a fifth of law firms fail on money laundering compliance.
The SRA subsequently increased compliance checks on some 7,000 law firms and warned of strong enforcement action against those who continue to fall short because poor processes open the door to money launderers.
Set against this backdrop, the 5th Money Laundering Directive (5MLD) came into being in January 2020 and is now known as The Money Laundering and Terrorist Financing (Amendment) Regulations 2019. 5MLD has increased compliance requirements which impact the legal sector.
Since the UK officially left the European Union on 31st January 2020, it’s no longer obliged to comply with EU money laundering directives, so the British government has opted out of 6MLD.
To understand the changes and their associated impact it is helpful to recap the requirements of the 4th Money Laundering Directive (4MLD).
In summary, 4MLD key requirements impacting law firms included, but were not limited to:
- The need to assess the potential risks related to a customer, both at inception and ongoing during the relationship through appropriate and evidenced Customer Due Diligence (CDD) checks;
- Where a transaction is being undertaken for an absent 3rd party, a need to verify the beneficial owners of corporate entities, trusts and individuals. Each country was to create a central registry of beneficial owner information and in the UK this is the Persons of Significant Control Register set up in 2016;
- There is a need to screen for politically exposed persons (PEPs) to include persons who hold prominent positions in their home country. The directive stated that PEPs must be monitored for a minimum period of 12 months after leaving office.
Additional 4MLD-mandated changes were connected to record-keeping and reducing transactional value limits requiring CDD checks.
What are the key additional requirements of 5MLD affecting the legal sector?
Cryptoasset Exchange Providers, Custodian Wallet Providers, Letting Agents and Art Dealers are all now considered obliged entities. Law firms will need to carry out a risk assessment to establish if they are transacting with these sectors and to ensure they are carrying out applicable CDD checks.
When conducting due diligence, if a law firm finds discrepancies relating to beneficial owner information it is now obligated to report this. Companies House provides guidance on reportable discrepancies and means of reporting.
Member states are required to keep an up-to-date list of the exact functions that qualify as prominent public functions. In tandem, law firms will need to be confident that they are using correct PEP definitions and that they are referring to the latest PEP data.
The use of electronic identity verification (EIV) can now be conducted with a trusted service. Law firms using outsourced EIV solutions must ensure they are from a trusted service that is secure from fraud and misuse.
Enhanced Due Diligence (EDD) is now required when transactions appear illogical or are complex, uncommonly large or transaction patterns are unusual. The type of additional information that must be gathered is detailed and specified.
Other 5MLD-mandated changes relate to reducing thresholds for CDD checks on pre-paid cards and remote payment transactions and ensuring the right governance and systems are in place to safely store customer account data and make it swiftly available to Financial Intelligence Units if requested.
Law firms found to have breached the 5MLD provisions face the possibility of sanctions and penalties together with the associated impact on their reputation and future earnings.
AML Check. Easy, intuitive and real-time.
CRIF can support the legal sector in fulfilling obligations related to 5MLD with its proprietary tool AML Check.
AML Check offers:
- Real-time screening of personal details against content-rich sources including positive, negative, domestic and international databases (such as PEP and Sanctions data).
- The possibility to perform the check against the Full Electoral Roll.
- Faster customer validation processes.
- Cost optimisation during the whole identity check process and reduction in administrative overheads.
- Access via web or A2A, enabling end-to-end integration into existing systems.
- Identify potential risks and customers who need further investigation to protect your business and reputation.
- Assessment of creditworthiness and financial standing by highlighting insolvent individuals.
- Instant verification of the validity of paper proof-of-identity documents such as driving license, passport, and bank statements.
