This is the fourth blog in a series to help law firms grapple with the latest Legal Sector Affinity Group (LSAG) guidance on the Money Laundering Regulations. 

When do I need to undertake EDD? 

In the previous blog in this series, we introduced and defined client due diligence (CDD). We explained how CDD differs, depending on the type of client entity, focusing on the requirements for individuals and companies. We also mentioned that there are three different levels of CDD that can be applied when identifying your clients: standard due diligence, simplified due diligence (SDD), and enhanced due diligence (EDD).

In this, the fourth in our LSAG blog series, we will be looking more closely at EDD, and the situations which require you to examine a client’s background more thoroughly than the standard CDD process allows.

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This is the third blog in a series to help law firms grapple with the latest Legal Sector Affinity Group (LSAG) guidance on the Money Laundering Regulations. 

What is CDD?

Client due diligence, or CDD, is the process of identifying your clients and checking that they are who they say they are. In practice, this is often viewed as a tick-box process, with CDD simply consisting of taking photocopies of passports and utility bills when new clients are onboarded. However, whilst that is often an element of what is required, CDD is far broader than that, with the exact information to be gathered (as well as the timing of when CDD should be revisited) depending on the circumstances. 

The LSAG Guidance explains: 

CDD is the collective term for the checks you must do on your clients, which may differ depending on the circumstances. It is holistic in nature and is wider than simply undertaking identification and verification of clients.

Some examples of what CDD processes can include are: 

• Identifying clients (and beneficial owners) and verifying their identities
• Assessing clients’ source of wealth
• When acting for an entity (rather than an individual) making sure you understand the client’s ownership and control structure

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This blog is the second in a series of blogs set out to help firms grapple with the latest Legal Sector Affinity Group (LSAG) guidance.

A major part of a firm’s AML process is undertaking risk assessments. There are three levels at which a firm should assess the potential risk of exposure to money laundering and terrorist financing. As mentioned in our previous LSAG blog, these are practice-wide risks, client-related risks, and matter-level risks. The LSAG Guidance says that one should consider five “risk factors [which] should be addressed at any level of your practice’s risk assessments”. These are: 

1. Client risk factors
2. Geographic risks 
3. Product or service risks 
4. Delivery channel risks 
5. Transaction risks

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What is the LSAG Guidance? 

In our last AML blog, we provided an overview of the main UK money laundering offences. We also addressed some of the obligations imposed on individuals and organisations governed by The Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 (the ‘Regulations’), as amended.

As mentioned in our previous blog, the Regulations apply to certain individuals and organisations, known as ‘relevant persons’. Law firms can be categorised as relevant persons if they are: 

• ‘Independent legal professionals’: this is anyone, ‘who by way of business provides legal or notarial services to other persons, when participating in [certain] financial or real property transactions’. A full list of those transactions is set out in the Regulations, and includes buying and selling property and managing client money. 
• ‘Tax advisers’ 
• ‘Trust or company service providers’ 

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What does the term anti-money laundering mean?

‘Anti-Money Laundering’ or ‘AML’ could refer to any law, regulation or procedure designed to respond to the threat of money laundering. 

A typical money laundering scheme involves placing ‘dirty’ money into the financial system (placement), moving it around the system to hide its source (layering), and returning the ‘cleaned’ money to the criminal’s pockets (integration).  

Criminals launder money in order to mask the proceeds of crime, so that they appear to have originated from a legitimate source.

The AML laws and processes which are relevant to you will depend on the jurisdiction in which you are based, the organisation you work for, and the industries in which you or your clients operate.

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6th money laundering directive UK

The Sixth Anti-Money Laundering Directive (6AMLD) is an EU directive that aims to enhance the existing anti-money laundering (AML) and counter-terrorism financing (CTF) regulations within the European Union. The United Kingdom has implemented the provisions of 6AMLD into its domestic legislation. Some key points the UK was able to implement were: an expanded scope, stricter penalties, beneficial ownership registers, enhanced due diligence measures, information exchange, and criminalisation of aiders and abettors.

Does 6AMLD apply to the UK?

Yes. The 6AMLD is a European Union directive that aims to combat money laundering, terrorist financing, and other related financial crimes. Although the UK officially left the EU on January 31, 2020, it adopted the 6AMLD into its national legislation before that date. Therefore, the 6AMLD is still applicable in the UK, and its provisions have been incorporated into the country’s legal framework to ensure the prevention and detection of money laundering activities.

Understanding the new anti-money laundering regulations

The Sixth Money Laundering Directive was required to be implemented into national law across the EU by 3 December 2020. In some countries, such as Germany who implemented the Sixth Directive last month, this required a paradigm shift in how money laundering offences are prosecuted in Germany. The German law abandoned the concept of a catalogue of predicate offenses in favour of an ability to capture profits derived from any criminal activity. 

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FCA investigators have clearly not been furloughed

In 2019, the FCA registered nearly £400 million in fines for compliance breaches, and despite the pandemic, investigators are striking out high and fast against non-compliance. In the first half of 2020, only four cases have resulted in a fine, but collectively those fines have already reached £100 million.

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The Sixth Money Laundering Directive is already on its way

The Fourth Directive and Fifth Directive are soon to be joined by new EU wide anti-money rules.

The Sixth Directive is due to be implemented into national law by 3 December 2020. While the UK anti-money laundering regime already complies with a great deal of it, the Sixth Directive calls for the introduction of a new corporate offence for failing to prevent money laundering, which is not included in the UK regime.

The UK already has a few corporate ‘failure to prevent’ laws on the books in the form of failure to prevent bribery and tax evasion. Whether the UK is required to implement this new failure to prevent money laundering rule will depend on the status of the transition period at the time. The Sixth Directive focuses on harmonising money laundering offences across the EU, such as extending criminal liability to legal persons and aiding and attempting to commit money laundering should be an offence. 

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While much of the world has been in lockdown and most staff have been working from home, financial crime has not disappeared. In fact, fraud has become more sophisticated than ever with many criminals using the pandemic as an opportunity to exploit vulnerabilities. It is crucial to adapt financial crime controls such as anti-money laundering (AML) procedures to the specific needs of the crisis. Financial crime procedures should be kept under frequent review as the pandemic progresses.

Here are some tips on how to protect your firm from financial crime during the pandemic and beyond.

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When it comes to compliance training, the antidote to boredom is relevance.

Training that isn’t relevant is boring, unengaging and of limited effect. Training that resonates with the user, that feels like it was written with his or her particular industry, practice area or job role in mind, works.

Content that isn’t engaging isn’t going to stick and will ultimately waste the learner’s time. Boring content, along with a lack of interaction, severely harms the effectiveness of training. With regulators increasingly taking a deeper look at the content of training, not just completion records, training that merely ‘ticks the box’ with a one-size-fits-all approach will ultimately fail.

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