UK Publishes Controversial New Money Laundering Rules

by Robin Pilgrim, LawAndTax-News.com, London

23 January 2007

Economic Secretary to the UK Treasury, Ed Balls, on Monday published draft money laundering regulations for consultation, alongside his speech to the FSA financial crime conference.

The regulations are designed to implement the EU's Third Money Laundering Directive, and have already caused controversy, with solicitors and other groups warning that the regulations need clarification.

The proposed regulations include:

• Extended supervision so that all businesses in the regulated sector comply with money laundering requirements, including estate agents, trust and company service providers and unsecured lenders;
• Strict tests to ensure people running money services businesses and those who help set up trusts and companies are fit and proper;
• Extra checks on customers that firms identify as posing a high risk of money laundering;
• A requirement to establish the source of wealth for those in high risk situations, for example those involving deals with high ranking public officials overseas; and
• A strengthened and risk-based regime in casinos, in line with, but stricter than, international standards.

In addition to taking tough action where the risks require it, the measures announced on Monday are also intended to reduce regulatory burdens in low risk areas. For example:

• Firms will be able to make fewer checks in low risk situations, such as employer led pension funds and child trust fund administration;
• The number of identity checks will be reduced with firms being able to rely upon checks of other firms in certain situations; and
• Greater flexibility will be introduced to record keeping rules so that firms can keep important details rather than whole documents.

Mr Balls announced that:

'These Regulations will strengthen further the UK's defences against money laundering and terrorist finance. By taking tough and targeted new measures where the risks are greatest we will crackdown further on illegal activity and help force criminals and would-be terrorists out of the shadows. At the same time our Regulations will ensure that businesses and consumers in low risk situations face fewer burdens than previously.'

The public consultation is open until 2 April 2007, and the Government intends to implement the regulations by December 2007.

Ahead of the publication of the regulations for consultation, the Society of Trust and Estate Practitioners warned last week that the implementation of the new rules could jeopardise major growth areas of the City of London.

STEP argued that millions of family trusts and billions of pounds worth of City investment are in jeopardy, as the Government risks over-regulating trusts in implementing the Third Money Laundering Directive.

Regulations governing the implementation of the Directive may force trustees, estate agents, banks, auctioneers and stockbrokers to do multiple checks on beneficiaries of trusts upfront. Trustees currently operate on a risk-sensitive approach, and normally verify the identity of beneficiaries before they distribute assets, thus ensuring that potential criminals cannot enjoy criminal proceeds.

The Directive includes criminal penalties for advisers ranging from stockbrokers to lawyers and estate agents to bankers if they do not carry out such multiple checks.

However, STEP has established that the defintion of beneficiaries, which the Treasury intend to implement verbatim, does not make any sense in English law, leaving regulators and advisors confused and likely to prompt gold-plating by those anxious to avoid penalties.

The STEP warning came shortly after the the UK's Law Society warned that the new money laundering regulations could put solicitors at risk of inadvertently committing criminal offences because they are "impossible to interpret" in practice. It also warned that the new rules will increase the cost to clients of solicitor’s work in dealing with trusts.

According to the Law Society, a number of the terms in the new EU Directive are unclear, and unless the Government clarifies them, solicitors will have to make extensive enquiries – at clients’ expense – in order to avoid inadvertently committing a criminal offence.

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