Hurrah, it’s finally here! Trailed for the last several months, the government has now published the draft amendments to the Money Laundering Regulations (the consultation paper can be seen here in its full glory).
The million dollar question, of course, is: are we really seeing a revolution in the Money Laundering Regs?
I can hear the echoes of bubbles bursting but… no. The amendments are, from the perspective of law firms, relatively minor, with a few exceptions.
So what should we be looking out for?
Enhanced Due Diligence
This is an area that lots of us struggle with. What actually constitutes enhanced due diligence, and when have I gathered enough?
Unfortunately, the amendments don’t answer those questions. What they do is refine two specific applications of when EDD is required.
High-Risk Third Countries
Remember updating your Financial Crime manual to remove references to Schedule 3ZA and getting everyone familiar with the FATF website?
Well, you’ll be reviewing again if this amendment is accepted. Somewhat unusually for an area of compliance which tends to add requirements rather than taking them away, it is proposed that the only countries to be considered as high risk will be those on the “call to action” (black) list maintained by FATF, and not on the grey list.
In practice, this is probably going to simplify your lives. There’s currently only three countries on the black list, and anyone can probably guess at least one or two of them: Iran, North Korea and Myanmar. By contrast, there are well over 20 on the grey list, and these tend to change at each review.
However, I do wonder whether this reduction in the high risk countries is going to let in risks by the back door.
We all know that jurisdictions bring several associated risks with them, whether its enhanced levels of bribery and corruption, poor structural controls, visibility of information for screening and specific currency or asset transfer risks, such as frequent use of underground or hawala banking systems.
Is toning down the specific countries going to move our focus away from these other jurisdictional risks?
And might it also water down our current preoccupation with the sanctions regime?
As always, the message to our teams must be that jurisdiction risk is a broad concept. It is not strictly black and white: good country/bad country. The FATF grey list will still be useful – if nothing else, it tells us when the alarm bells should be ringing.
Complex or unusually large transactions
This is more a rewording than anything more significant. The draft instrument proposes clarifying the need for EDD to be when a transaction is “unusually complex or unusually large”. Probably not much to quibble with here, as it remains the case that some transactions are just complex but this, on its own, may not really necessitate the need for EDD.
Pooled client accounts
Now this proposed amendment does deserve attention, but not from the “how will this make my life easier?” perspective. In fact, it could well be the opposite.
The proposal here is that banks will have to take reasonable measures to risk assess the client accounts they provide to law firms. This would include understanding more about the law firm’s business but also, and this is what gives me pause, the identity of the underlying owners of the funds (e.g. the law firm’s clients).
There are several problems with this proposal. The first is the theoretical one: how are law firms going to be able to provide this information without risking a breach of their client’s confidentiality and/or right to privilege?
It seems unlikely that there is going to be a way that law firms could comfortably apply this in a blanket fashion, meaning that each request would have to be carefully assessed, with the possibility that specialist advice would be needed.
Such a burden leads on the second problem: the practical one. You don’t have to be a huge law firm to have several hundreds if not thousands of clients for whom you are holding money for at any one time.
Indeed, your traditional high street firm may be holding more funds proportionate to its size than larger firms, simply by dint of the fact that they may be dealing with a lot of “money-heavy” matters – particularly conveyancing and probate matters. How is any firm, but particularly a smaller one, going to cope if they are asked to provide information about clients at any level of frequency or with short timescales?
The third is that of unintended consequences. At the moment, the proposed wording relates to the identity of the clients, but if that is agreed as appropriate, then should law firms need to provide more than that, including the source of funds?
After all, the identity of someone may not show a red flag but investigations into the source of their funds could well do, or vice versa. Will this be an inexorable move towards effectively opening the law firm’s case management system to their bank? (If so, we’ve circled back to the first and second problems again!)
Of course, the real unintended consequence is going to be the bank who is overly cautious, or at least the bank whose risk appetite doesn’t quite align with their client law firm. We’ve seen several examples in the media of individuals being “debanked”: how much more inconvenience would be caused if a bank removed a law firm’s client account, at short notice and with little time not only to source a new account but also to transfer any funds (and, of course, advising their clients appropriately)?
In the same way that firms have closed down because they have been unable to source insurance or resolve a cyber-attack, it doesn’t seem overly dramatic to suggest that this could happen here.
Other proposals
There are a few other amendments which will have relevance to law firms, including clarifying that selling “off the shelf” companies is a regulated activity and therefore requires appropriate customer due diligence.
There are also some relatively technical amendments proposed to the Trust Registration Service, which will be of specific reference to private client lawyers who do this sort of work. Otherwise, many of the amendments are more general or specific to other sectors, such as insurance brokers.
There is a consultation open on these amendments now – but not for long. You can email any comments to Anti-MoneyLaunderingBranch@hmtreasury.gov.uk by 30 September 2025 (it’s a good thing no-one’s busy with insurance or practising certificate renewal at the moment).
