AML risks and company services
The new anti-money laundering regulations impose particular requirements on those who help clients form companies or other legal persons – whether or not client funds are handled in the process
It is likely that you will have already seen various articles about the new anti-money laundering regulations, the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. This is another such article, though this time to draw your attention specifically to issues related to trust or company service providers (TCSPs).
A TCSP is defined in the new regulations as a firm or sole practitioner who, among other services, provides the service of forming companies or other legal persons. This is in addition to the definition of independent legal professional, which includes a firm or sole practitioner who, among other things, provides the service of the creation, operation or management of trusts, companies, foundations or similar structures.
The regulations also require you to apply customer due diligence measures when establishing a business relationship. Such a relationship is created when you are asked to form a company for your client, whether or not the formation of the company is the only transaction carried out for that customer. Of course, you will still need to conduct customer due diligence when doing other TCSP work.
AML, with or without money
All of this adds up to the requirement for you to conduct customer due diligence in connection with a client who is instructing you in TCSP work, such as setting up a company or similar structure. In some sense, this may come as no surprise. After all, the requirement to know your client and understand the basis of their instruction is a longstanding AML requirement. However, as no money (apart from your fee) is to move through your client account (or otherwise change hands as part of this instruction), it might be wrongly thought that the requirement to apply customer due diligence is reduced. This is not the case, and is specifically provided for in the new regulations.
As ever, you will first of all need carefully to assess and record the AML risk of the instruction, and it is the outcome of that risk assessment which will determine the level of customer due diligence conducted.
That ought not to present a problem to most firms. However, what it does reinforce is that it is not just when moving money that you need to be aware of your AML obligations.
The AML risks associated with TCSP work – think Panama Papers, or the recent AML issues relating to funds purportedly from Azerbaijan – have been raised by the Financial Action Task Force and the National Risk Assessment, resulting in specific content in the 2017 Regulations.
You should consider your exposure to risks arising from TCSP work when preparing practice unit risk assessments and when developing policies, procedures and controls.
In the spotlight
The Financial Compliance team at the Law Society of Scotland are currently revising their supervisory processes for TCSP work and increased attention will be paid to this area in future.
As a final remark, and to bring this matter home, you may have seen recent press coverage relating to the laundering of money via legal structures registered in Glasgow. This is only one of a series of recent stories about this issue. Money laundering is a very real issue, often facilitated by legal structures potentially created by TCSPs or solicitors in Scotland. The requirement to properly consider and record the AML risks arising from this type of work has never been greater.
Hugh Sanders is a solicitor in the Law Society of Scotland's Financial Compliance team