Compliance Bulletin. The Fourth EU Directive on Money Laundering and the "Separate Business Rule"

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1 Compliance Bulletin The Fourth EU Directive on Money Laundering and the "Separate Business Rule" Compliance Bulletin No 34 June 2015

2 THE FOURTH EU DIRECTIVE ON MONEY LAUNDERING AND THE SEPARATE BUSINESS RULE Compliance Bulletin 34 June 2015 The Fourth EU Directive on Money Laundering The much delayed Fourth EU Directive on Monday Laundering has at long last received its final approval when it was endorsed by the EU Parliament at the end of May and then endorsed by the Council on the 5th June. The changes that are made by the new provisions will not be instant as all members states are allowed two years to address them in domestic legislation. We might therefore expect a revised version of the Money Laundering Regulations to take effect in early For once, the new regime will not necessarily be more arduous for lawyers than before, mostly due to the "gold-plated" version of the regime already in effect within the UK. For the most part the other EU states will now have to match some of the standards already to be found in the UK provisions. Ownership registers The main headline change will be a new obligation for companies throughout the EU to provide details of their "ultimate owners" - here presumably through the Companies Registry - which will be open to the authorities and anyone else with a "legitimate interest" in its contents. There had been concerns that this would mean that all trusts would also have to register their ownership details, but amendments made to the earlier provisions will mean that only trusts that already have to register and file annual returns with HMRC will be subject to the planned provisions. Assuming that law firms will have access to such details this will be helpful with one of the more troublesome elements of the current regime - assessing beneficial interests and deciding who precisely is a beneficial owner needing to be checked. Copyright Infolegal Limited

3 Disciplinary decision For those who are tempted to delay any updates until the new regulations appear there is a cautionary tale from the SDT and the recent case of SRA v Andrew Donald Varley (Decision number: ). This case again illustrates one of our more familiar themes of late in this newsletter - the links between money laundering identity checking processes and mortgage fraud prevention. It was held that the Respondent had shown a reckless disregard for his money laundering obligations in paying over 1m to third parties on instructions from a party he had never met. The Respondent also accepted identity evidence from the mortgage broker without any further enquiry and ignored clear indicators of suspicious activity. Although noncompliance with the Money Laundering Regulations 2007 ("MLR") is a criminal offence the Law Society operates as one of the regulatory bodies under the regulations and the need to comply with the provisions is specifically referred to at Outcome 7(5) of the Code of Conduct. The Tribunal duly found that the Respondent had failed to comply with the MLR and therefore ordered that he be struck off the Roll and that he should pay 30,000 costs. This report serves as a timely reminder of the need for effective supervision of all transactional work, clear procedures within the firm's AML policy to prevent such incidents from occurring, and the need to maintain training as also required by the MLR. A first port of call for all Infolegal subscribers wishing to update their arrangements should be to consult factsheets 3 and 4 on these issues, view our training presentations for fee earners and support personnel, and to review current policies in the light of the template AML policy in the Solicitors Office Procedures Manual which subscribers are able to download from the Infolegal web site. Face-to-face sessions are also available inhouse on both money laundering and mortgage fraud prevention (mattmoore@infolegal.co.uk). Copyright Infolegal Limited

4 Separate business changes agreed Earlier this year we flagged up SRA proposals to remove the restrictions on solicitors owning or being connected with separate businesses that offer non-reserved legal services. On 3 June 2015 the SRA Board agreed to amend chapter 12 of the Code of Conduct and other sections of the SRA Handbook to make these changes. Assuming LSB approval, the intention is to bring them into effect on 1 November when version 15 of the Handbook will be published. What are the changes? The final version of chapter 12 and other associated changes is not yet available and the SRA s news release simply says: "We are levelling the playing field for all types of law firms, encouraging innovation and growth, while ensuring appropriate consumer protection. This follows on from changes we made last year to open up the market to different business models and 'one-stop shop' services. The news release then refers readers to the proposals for change set out in the consultation paper which was published last year. The assumption has to be that the proposals have been largely been adopted. In essence, they will allow firms to own or be connected with separate businesses which offer any non-reserved legal service. The reserved legal activities set out in the Legal Services Act 2007 (LSA) are limited to litigation and advocacy, reserved instrument activities (conveyancing but limited to preparing contract and transfer documents and submitting them to the Land Registry), probate activities (preparing probate papers but not the administration of an estate), notarial activities and the administration of oaths. Come 1 November, however, firms will be able to offer a vast range of other legal services through an unregulated business. Drafting contracts, preparing wills, giving legal advice on any subject and immigration work will all be capable of being conducted outside the SRA regulated firm. Copyright Infolegal Limited

5 What controls are required when referring clients to a separate business? The detail is not yet available but it is understood that the main client protection is to be a requirement that the clients give informed consent to being transferred from the SRA regulated firm to any other business owned by the firm, or its partners, that is not SRA regulated. This will be in addition to the requirement that firms must act in their clients best interests. What is meant by informed consent is going to be a matter of debate. The assumption must be that the SRA would expect to see evidence that the client was told that the separate business was not SRA regulated and some sort of list of the pros and cons of being referred. It may be that the SRA will issue guidance on this on or before 1 November. There was also debate in the consultation about how solicitors could describe themselves in relation to their separate businesses. Obviously, a separate business must not suggest that it is SRA regulated but could a solicitor owner describe himself or herself as a non-practising solicitor in relation to the publicity of that business? Again, we do not yet know what line the SRA has taken on this so will need to await sight of the amended Handbook. Other changes in the pipeline Given that the LSA is drafted around the notion that only the reserved legal activities need to be regulated, the LSB has been pushing for some time to get the SRA to accept that it does not need to regulate solicitors providing other legal services. The difficulties created by the separate business provisions first came into focus when the SRA started to license ABSs. As many applicants operated a company group structure, it was often the case that they were already offering legal advice or conducting non-reserved legal activities through unregulated companies. To prevent costly and unnecessary re-structuring the SRA had to issue waivers to deal with the problem. Copyright Infolegal Limited

6 Having, in effect, relaxed the separate business prohibitions for ABSs, the SRA had created an unlevel playing field for recognised bodies. The current relaxations deal with this problem and give recognised bodies the same opportunities to offer non-reserved legal activities through separate businesses. However, the SRA is now moving on to look at the restrictions on solicitors employed in-house. These currently prevent them offering legal services to the public as part of their in-house practice. Applying the LSA principle that only reserved legal activities offered to the public need to be provided through an SRA regulated firm, we can expect a consultation later this year proposing that in-house solicitors be permitted to provide nonreserved legal services to the public through their employers. If agreed, this will add another strand of competition to the legal services market. Planning time All firms should be using the time between now and November to decide whether they want to take advantage of the separate business relaxations. Would it offer real cost savings to set up and run a separate business which offered, for example, will writing? How would the separate business be staffed and managed? What would clients think? Would they prefer the legal services they buy to be from a regulated firm or would they want to buy them from an associated business if it was cheaper? Whatever decision firms make, it seems certain that the legal services market faces another shake up come November and, following that, when changes to the regulation of in-house solicitors come on stream. Standing still is not an option! Copyright Infolegal Limited