UK Money Laundering Regulations Threaten Private Equity, Law Society Argues

by Robin Pilgrim, LawAndTax-News.com, London

29 March 2007

The Law Society and several major City law firms last week warned that private equity funds could be driven out of the UK if draft money laundering regulations go ahead in their current form.

A group of 10 City firms and the Law Society met recently to discuss the impact of the draft money laundering regulations on their firms and areas of practice.

The regulations, which implement the Third European Money Laundering Directive, require that client due diligence is carried out not merely on the customer setting up a legal arrangement, such as a trust, but also on any beneficial owner of the relevant property.

A beneficial owner is defined as someone who either has at least a 25% interest in the property or who controls at least 25% of the property.

In the case of private equity funds, many of which are a mix of other funds with cross-holdings in each, determining who has a 25% interest would be difficult and time consuming, and could act as a deterrent to equity funds investing in the UK.

Fiona Woolf, Law Society president, commented:

"The government could drive private equity funds away from the UK if it continues to ignore the advice of the Society and City firms. Private equity firms are quite mobile in their ability to operate out of different jurisdictions, and these regulations will be an incentive for them to relocate their business elsewhere."

She concluded:

"Private equity firms are not a natural vehicle for money laundering, given the nature of the usual investors, the length of time funds are held in investments and the high level of risk attached to the investment."

The Law Society has previously argued that that the new rules are likely to harm competitiveness in other ways, and has urged the government to think again about key provisions which will impose unnecessary burdens on solicitors.

According to the Society, of particular concern is the failure to transpose Article 15 of the directive, which provides that UK firms may rely on international third parties who are subject to money laundering regulation for customer identification, even where the documents used by the third party are not exactly the same as those which would be required in the UK.

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