Know your client checks – A lesson from BHS

Posted by Paul Bennett, partner in professional practices and employment law at Legal Futures Associate Aaron & Partners

Bennett: compliance is no longer enough

Bennett: compliance is no longer enough

As you will be aware, it is a legal requirement for advisory firms to carry out ‘know your client’ checks. The purpose of doing so is to confirm your client’s identity and to seek to provide protection in respect of anti-money laundering (AML) and terrorist financing laws.

The BHS experience before the House of Commons’ work and pensions committee and business, innovation and skills committee shows that firms need to think beyond AML obligations.

A lesson can be learnt from the actions of the advisers involved in the various stages of the sale of BHS. The firms are accused in the media of relying on each other’s presence throughout the deal and therefore, failing to carry out proper due diligence.

The firms have acted lawfully but the reputational effects means in the future, professional advisers (accountants, solicitors, bank and corporate financers) may wish to go a step further to protect their own reputations in the media and before parliamentary committees. Compliance with AML and wider professional obligations, it appears, is no longer enough.

The parliamentary enquiry outline suggests that many of the advisers closely involved, claim to have drawn comfort from the presence of others. Namely, River Rock initially took comfort from the presence of Linklaters and Goldman Sachs. Linklaters seemingly took comfort from the presence of Olswang and Taveta, and Sir Philip Green argued that the presence of Olswang and Grant Thorton helped give Dominic Chappell (the purchaser) credibility. In reality, Dominic Chappell had a record of bankruptcy, no retail experience and no experience of running a similar sized company.

AML is a hot topic for the Solicitors Regulation Authority (SRA) and has been for some years. In May 2016 it released a report following a thematic review of AML compliance by solicitors to ascertain how well firms were managing the risks in this area and to ensure solicitors and firms were up to date with the statutory and regulatory obligations in this area.

On 8 December 2014 the SRA issued a money laundering and terrorist financing warning notice, advising and training firms on these obligations. Many solicitors seem to know the wider principles but are unaware of the warning note.

There are a number of upcoming changes due to the Fourth EU Directive on Money Laundering and firms – for reputational, professional and legal reasons – will want to review what we would argue is an unfortunate and unjustified slur on professional practices’ working methods which were appropriate but have still posed a reputational risk.

The reaction of sophisticated commercial clients to what we would assert are misconceived and unrealistic expectations raised by politicians and the media will inform how professional practices should deal in the future. However, those we advise and train will be asked to consider and record:

  • The standing of any known purchasers of large entities;
  • What due diligence they have done on any key individuals;
  • How have they gone beyond their AML minimum requirements?; and
  • What reputational issues arise and how are they managing those risks?

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