In July 2012, the Government published its response to the 2011 consultation on proposed changes to the Money Laundering Regulations 2007 (“MLR07”) – see http://www.hm-treasury.gov.uk/press_61_12.htm.  I describe below the aspects of the response that in my view may affect IPs (and some that more directly impact the RPBs), although it should be noted that there are other changes to the MLR07 (and please note the end of “About” for the basis of any of my comments made on this blog).

Reliance

The MLR07 allow businesses to rely on customer due diligence (“CDD”, i.e. identity checks) carried out by certain regulated third parties, provided certain conditions are met.  The reliance conditions have always appeared to me to be almost as onerous to the newly instructed regulated business as those required simply to conduct CDD via the new client direct (see paragraph 5.33 et seq of the CCAB Anti-Money Laundering Guidance, available on www.ccab.org.uk).  However, in some insolvency circumstances, I can see that it would be useful to rely on the CDD of the client’s bankers, solicitors, accountants or a previously-instructed IP who either was involved in the pre-insolvency period or who was a previous office-holder.  Nevertheless, I get the feeling that few IPs use the reliance provisions and I doubt that the subtle distinction between which regulated businesses/persons can be relied upon is well-known either.

The MLR07 separate Supervisors into Part 1 and Part 2 – businesses/persons who are supervised by Part 1 bodies can be relied upon but those supervised by Part 2 bodies cannot.  This has resulted in a peculiar situation – and in my view an unfair distinction – that, for example, a successor IP can rely on checks made by an ICAEW-licensed IP but not by an IPA-licensed IP.  I am pleased that the Government plans to correct this position.

In its response, the Government has stated that “based on recent and continuing work with Supervisors, it is considered that they are discharging their role satisfactorily and that the proposed change [in removing the distinction between Part 1 and Part 2 Supervisors] is advisable” (paragraph 2.21).  It also acknowledges (2.23) that “while liability remains with the business placing reliance, some businesses may be reluctant to take advantage of this provision”.  Whilst this may suggest that there is some acceptance that use of the reliance provisions will not be widespread, given the Government’s emphasis on saving costs (it is noted that the Impact Assessment accompanying this response states that there is “agreement that the change will save both businesses’ and customers’ time” (page 13), something that personally I would dispute for regulated businesses given the conditions attached to the reliance provisions) and not making consumers’ lives unnecessarily burdensome, I would not be surprised if there is more emphasis put on using reliance more in the future.

The draft Money Laundering (Amendment) Regulations 2012, which are proposed to take effect on 1 October 2012, will replace the schedule of Part 1 and 2 professional Supervisor bodies with a single list.

Information Gateway between Supervisors

The draft Regulations introduce an information gateway between Supervisors “for purposes connected with the effective exercise of the functions of either supervisory authority”.

The insolvency RPBs long ago signed up to a Memorandum of Understanding with the Insolvency Service that in some respects meets a similar purpose in the regulation of IPs.  For example, it is usual practice for an RPB to provide regulatory information to another RPB where an IP seeks to move his/her licence.  Clearly, this makes good sense for effective regulation and thus it makes sense to me to extend such information-sharing to regulated businesses’/persons’ track records on MLR07 compliance.

One issue that bothers me a little is how this new MLR provision will interact with the Freedom of Information Act (“FoIA”).  Whilst this is not an issue when information is shared between RPBs as they are not public bodies under the FoIA, many of the MLR07 Supervisors are public bodies, thus there may be a possibility of regulatory information becoming more widely disseminated.  However, perhaps some might consider this a positive!

Records on Beneficial Owners’ Identity Checks

This was not a subject of the consultation, but in my view the proposed change makes perfect sense and I would not be surprised if the omission of this matter from the MLR07 has passed most people by, as it had me.

Regulation 19(2)(a) of the MLR07 requires the retention of a copy of, or references to, the evidence of customers’ identities obtained but not that for beneficial owners.  The draft 2012 Regulations, to take effect from 1 October 2012, widen this requirement to retaining records on the checks made on the identities of beneficial owners (although peculiarly the current wording of the draft Regulations is “or”, not “and”).  I suspect that many IPs’ systems incorporate the retention of such records anyway, but it might be worth checking this out.

Consultation Proposals Abandoned

I was heavily involved in drafting the IPA’s response to the consultation, so I was interested to read about the proposals that, post consultation, the Government has decided not to pursue.

The Government had contemplated removing the criminal sanctions attached to some of the MLR07 breaches.  It has decided not to do so as the consultation responses highlighted a number of risks in dropping the sanctions.  In response to the Law Society’s comments that the current threat of criminal sanctions burden legitimate businesses due to the procedural/administrative nature of the MLR07 requirements and because criminal breaches may occur through inadvertent mistakes (paragraph 2.9), the Government highlights that the Crown Prosecution Service has made it clear that “it is not in the public interest to prosecute employees of regulated businesses for minor, procedural or accidental regulatory failures” (paragraph 2.12).  However, I suspect that this is cold comfort for businesses and individuals who are nervous about falling foul of the MLR07 requirements particularly those carrying a threat of criminal action.

Another proposal was to exempt very small businesses, the suggestion being those that turn over less than Euros15,000 pa, from some of the MLR07 requirements.  Some consultation responses suggested that criminals may target small businesses – and certainly the risk would be greater if they were to be made exempt from some MLR07 requirements.  The proposal has been dropped because the Government acknowledges that there is no correlation between the size of a business and the money laundering risk it represents.  Paradoxically it seems to me, the Government response follows this with the words: “Supervisors are encouraged to ensure that the risk-based approach translates into effective, differential treatment in terms of the burden of requirements and, where possible, the fee levied”.  I understand that some non-insolvency Supervisors already operate tiered fees for members, but given that most, if not all, of the MLR monitoring carried out by the RPBs/Insolvency Service sits alongside monitoring IPs’ compliance generally, I suspect it is unlikely that small IP practices will see a drop in fees in response to the Government’s encouragement.