As a preliminary matter, it is important to understand the general approach of the regulations. The regulations adopt a risk-based, proportionate approach to CDD. This recognises that there cannot be a ‘one size fits all’ approach to anti-money laundering processes. Rather, the steps that need to be taken in any given case will vary according to factors such as the nature of the client, its location and what the firm is being asked to do. The regulations themselves provide some assistance by detailing requirements for ‘simplified’ CDD and ‘enhanced’ CDD in certain situations. They also provide for ‘ongoing monitoring’ of the business relationship from a CDD perspective.
Under the regulations, a firm will have to verify the identity of a proposed client and obtain information on the purpose and nature of the instructions. However, CDD also requires “identifying, where there is a beneficial owner who is not the customer, the beneficial owner and taking adequate measures, on a risk-sensitive basis, to verify his identity so that the relevant person is satisfied that he knows who the beneficial owner is, including, in the case of a legal person, trust or similar legal arrangement, measures to understand [its] ownership and control structure…” (regulation 5(b)). This goes beyond the equivalent provisions of the current Money Laundering Regulations 2003, which require that “where [an applicant for business] acts or appears to act for another person, reasonable measures must be taken for the purpose of establishing the identity of that person” (regulation 4(3)(d)).
Early discussions about the regulations generated a great deal of concern about the use of beneficial owner in the trust context. For example, there were fears that requiring corporate trustees of bond issues (and the lawyers advising them) to identify the ultimate beneficial owners might threaten the bond market. This is now dealt with through a specific exception in regulation 12. More generally, a number of consultees pointed out that, other than with a bare trust, the notion of a ‘beneficial owner’ (as opposed to the actual beneficiaries) of property was a very difficult concept to apply to a trust and precise rules on how to identify the beneficial owner for this purpose were therefore required. The Law Society urged amendment to the draft regulations on this point and obtained a counsel’s opinion that the drafting proposed at that time was unworkable.
This lobbying had the desired effect and the final wording used by the regulations on the identification of beneficial owners in the context of trusts provides the required clarification.
The regulations provide guidance on how to identify the beneficial owner in a variety of contexts, but practical difficulties remain. For example, in the corporate context, the beneficial owner of a non-listed company is anyone that ultimately owns or controls (including indirectly) more than 25% of the shares or voting rights of the company, or who otherwise exercises control over its management. In complex corporate structures, it can be onerous to determine who satisfies this test.
The Law Society guidance is very pragmatic. It stresses a proportionate approach stating, for example, that “[i]t would be disproportionate to conduct independent searches across multiple entities at multiple layers of a corporate chain to see if, by accumulating very small interests in different entities, a person finally achieves more than a 25% interest in the client corporate entity” (paragraph 4.7.4). This guidance will be very helpful, particularly if Treasury approval is obtained.
The regulations also require firms to carry out CDD on existing clients in certain circumstances (regulation 7(2)). Unfortunately, the regulations contain little guidance on when this is required and the more detailed language that the Law Society proposed for this obligation was rejected. However, the Law Society Guidance states that it is not necessary to apply the new CDD measures to all existing clients by 15 December (paragraph 4.10), before going on to list some situations that may trigger a CDD obligation on existing clients, such as a retainer gap of three years or more.
Finally, the regulations do not make it clear whether firms need to apply the same CDD measures to both the client and its beneficial owner. Again, the Law Society guidance provides some useful assistance. It stresses the risk-based approach and states that “[o]nly in rare cases will you need to verify a beneficial owner to the same level that you would a client” (paragraph 4.7.2).
Overall, the beneficial ownership provisions may appear daunting when the regulations are read cold for the first time. However, the Law Society has provided a practical guide which will be of great use in the day-to-day implementation of the regulations.
Richard Kelly is a senior associate in the litigation department at Shearman & Sterling in
