Anti-money laundering changes: possible increase in red tape

Client confidentiality could be undermined by proposed changes to the European money laundering directive, the Law Society has warned.

The removal of simplified due diligence provisions for client accounts is among a number of proposals included in the commission’s fourth directive on money laundering to which the society objects.

The society noted that although simplified due diligence provisions were no longer specifically contained in the proposed fourth directive, individual countries could allow simplification within their jurisdictions, which might result in differing regimes across Europe.

Removing specific simplification provisions for client accounts “could… undermine client confidentiality and result in disproportionate data processing by financial institutions”, warned the society, adding: “The Law Society will be looking carefully at these provisions and making representations to ensure that the simplification measures do not actually result in an increase in red tape and compliance activity.”

Another key concern is a new requirement for all companies and others to hold up-to-date information on their beneficial owners and to make it available to anyone doing anti-money laundering and counter-terrorist financing (AML/CTF) due diligence and to law enforcement agencies.

The society said: “[We have] previously cautioned that this approach will be likely to impose significant administrative burdens on legitimate companies, with subsidiaries having to be kept updated on share ownership changes across entire company groups, possibly on a daily basis. It is not clear how this will make a significant difference to the fight against financial crime.”

In its summary of responses to its own consultation looking ahead to the fourth directive last June, the society said: “Regulated entities often find obtaining information about beneficial ownership a challenging and resource intensive aspect of their AML/CTF compliance…

“Such measures should carefully weigh the competing legitimate privacy concerns of beneficial owners and the proportionality of expectations placed on corporate bodies in providing extra information during these challenging economic times. “

Another issue the Law Society said it would raise with the European Commission was the proposal that all supporting documents for a transaction must not be retained for more than 10 years after the business relationship ends. This could cause problems for lawyers, said the society, because “[it] does not fully take into account the types of documents held by legal professionals (such as wills) or the consequences of limitation periods”.

Lastly, the society expressed concern about a proposal that every law firm will have to have written AML/CTF assessments, policies and procedures, and some means to test their effectiveness. It cautioned: “This requirement should be implemented in a manner which is proportionate to the size of the law firm.”