Like a child on Christmas morning, I was all of a flutter to see the breaking news: LSAG had published long-awaited updates to the guidance. What would be in it, I thought wildly? Surely: proper, concrete guidance on when and how to undertake source of funds checks; detailed examples of how to apply enhanced due diligence; and, of course, finally (finally!) correcting the ultimate beneficial ownership threshold from 25% or more, to more than 25%.
UBOs
Reader, again like a child on Christmas morning, I was disappointed. Ok, ok: they have corrected the ultimate beneficial ownership threshold. As we in the consultancy world been red-lining in AML manuals for years, ultimate beneficial owners are those with 25% or more of the shareholding.
The update does, however, usefully remind us that understanding the ownership and control structure of an entity is a wider concept than just identifying the beneficial owners, so don’t focus too much on the clarification of the threshold. In reality, someone who owns 25% on the nose may well be deemed an ultimate beneficial owner by reason of the level of control or influence they wield. In practice, this can be a test that is overlooked when conducting due diligence.
Supply chains
There were a few other notable changes. The new guidance provides more detail on supply chain risks, and the content will help firms in addressing this factor in their Firm-Wide Risk Assessments.
You may need to delve deeper into understanding how your client’s instructions fit within the broader supply chain context, so undertaking a comprehensive assessment of the entire transaction, even if you and your client are only involved in a specific part.
High risk countries and PEPs
Late to the party, the guidance clarifies that “High-Risk Third Countries” refers to the Financial Action Task Force (FATF) lists, and removes the reference to Schedule 3ZA.
Again, it’s something that we’ve been speaking about for considerable time now, but it’s worth ensuring that the references in your AML policies are up-to-date.
In a similar vein, the guidance also codifies the position on domestic PEPs, again something that we’ve been talking about since January 2024, with the caveat that domestic PEPs are still PEPs, so there’s not a huge amount of flexibility in dealing with them.
ID documents
There are a few tweaks to wording around ID documents. Most usefully, guidance is given on what sort of documents may be acceptable for identifying beneficial owners, noting that documents issued by an official body are considered independent, even if they are provided by the client directly.
Source of funds
There is a relatively extensive insertion about undertaking source of funds checks on third parties providing funding. Strangely though, it doesn’t really seem to say very much. It tells you helpfully that you should “consider” seeking to understand and obtain evidence on the third party’s source of funds (is this stating the obvious?)
There is also another re-statement of the fact that undertaking source of funds checks is on the risk-based approach. This might be true but it doesn’t provide any practical help to someone trying to understand in what situations they should be doing these checks.
Isn’t it time we had a clear statement that source of funds are going to be required in the vast majority of matters which are transactional or arrange for the movement of funds or assets, and that this includes getting the client to explain how the funds were generated, and providing evidence which backs this up?
Perhaps the SRA’s upcoming Thematic Review into Source of Funds will address this.
ECCTA
The guidance also provides some detail on relevant provisions of the Economic Crime and Corporate Transparency Act (ECCTA).
It adds two defences brought in by the Act, that the transaction is exempt due to the amount of criminal property being valued at less than £1,000 and the transaction taking place in the regulated sector, and that, in certain circumstances, the proceeds of crime were part of a mixed-property transaction.
It also adds information about who has to pay the economic crime levy.
Currency controls
There is also a relatively useful example of the risks associated with Chinese currency controls, highlighting that while the original money itself may not be proceeds of crime, the process it goes through to circumvent these controls may render it illicit. This provides a valuable example for understanding the broader implications of currency controls.
What I’d really like to see, though, is an understanding that it isn’t just China that has these currency controls! Morocco is one other good example.
So, what steps should you take?
Policies
If your AML policies are in decent shape, and particularly if they’ve been reviewed by someone externally relatively recently (whether that’s the SRA or your friendly neighbourhood compliance consultant), there’s probably not much for you to do.
Have a read through the updates (the Law Society provides a useful summary here) and just check that there are no out-of-date references floating around, perhaps a pesky Schedule 3ZA here or there.
FWRA
It’s worth adding these updates to your Firm Wide Risk Assessment too, noting the publication and that it has been reviewed and considered. If you need more detail on how supply chain risks might be a money laundering risk for your firm, the explanation given in the LSAG update is a good starting point.
Training
Even if you don’t need to make extensive policy changes, it’s a good opportunity to conduct some ongoing AML training (as per the heavy suggestion in the SRA Thematic Review). Jumping off from this update, you could particularly remind your staff about:
- The need to identify and verify ultimate beneficial owners, and the fact that it’s not just ownership which is relevant;
- How to consider supply chain risks;
- CDD and source of funds checks on third parties; and
- High risk jurisdictions and your firm’s risk appetite and procedure accordingly.
