AML Spotlight: Regulation 39 - Reliance

AML Risk Manager Dale Trahms examines when it's appropriate to rely on another professional’s client due diligence (CDD), the risks faced in doing so, and why a bank’s CDD is not an ideal solution.

What is ‘reliance’?

To address what reliance is, it is essential to understand Regulation 39 of the Money Laundering Regulations 2017.

The fundamental principle of this regulation is that practices should conduct their own client due diligence (CDD). However, under certain circumstances, CDD performed by another 'relevant person' can be relied upon.

A 'relevant person' is typically another regulated professional subject to the Money Laundering Regulations. Reliance on another regulated professional's CDD can bring some benefits, but it also brings substantive risk. For example, it may be appropriate when clients are referred by another practice or when regularly collaborating with another professional adviser in transactions, so potentially streamlining the onboarding process.

A relevant person may rely on a third party to apply CDD measures required by regulations 28(2), 28(6), 28(10), and 30A.

However, it should be noted that the above refers to identity verification checks, rather than wider, holistic due diligence, which would include source of funds and wealth checks.

In addition, it is essential to understand that the solicitor relying on another professional’s CDD remains liable for any non-compliance with CDD requirements.

Pre-conditions, risks and practical considerations

Reliance should not be the default method for practices to conduct CDD. The crucial point is that the party relying on the CDD is responsible for it.

If the party providing the CDD (such as the client's accountant or estate agent) fails to conduct sufficient checks, the solicitor relying on those documents would remain equally liable for their own compliance with relevant legislation.

There is an increased risk in using reliance, because circumstances may have changed since the original CDD was conducted. For instance, the client may have moved or a business may have gained new beneficial owners. It is vital that the solicitor ensures the anti-money laundering (AML) checks are fully up to date.

Given that CDD failures can carry criminal liability, there is a strong incentive for practices to conduct their own AML checks. However, if a practice chooses to rely on another party's CDD, it is a formal process and r.39 stipulates that a written agreement must be in place.

Can a bank be relied upon for CDD purposes?

While reliance can be effective for identity verification, it is not suitable for the fundamental element that is source of funds for the transaction.

It is for the solicitor to scrutinise transactions on a matter-by-matter basis, with the objective of understanding the source of funds for that transaction. While a bank may have an interest in source of wealth / source of funds, this will not be to the same level expected of the solicitor working on the transaction.

It is also for the solicitor to understand the nature, background and circumstances of their client. This includes their financial position and assessing whether the legal services provided to the client are in keeping with that understanding.

Practices can refer to Legal Sector Affinity Group Guidance Section 6.17 for more guidance on this. 

Due diligence is a snapshot in time. The legal and business landscape can change rapidly and what seemed acceptable during the bank's most recent assessment might become problematic later. Solicitors must remain vigilant throughout the transaction.

Additionally, consideration should be given to whether the bank itself holds concerns over the activity seen through their account(s) and has therefore raised a Suspicious Activity Report. The likelihood is that should this be the case this information will never be shared, and as such, it is better to err on the side of caution.

For the avoidance of doubt, any assumption that funds are not the proceeds of crime, because they have come from a UK-based bank that would have applied its own CDD, is incorrect and may be viewed as a breach of requirements by the AML supervisor.

In conclusion, while it might seem ideal to rely on the CDD conducted by a bank, in reality it is not advisable.

Practices are reminded of Section 6.23 of the Legal Sector Affinity Group Guidance, which provides comprehensive guidance in relation to r.39 Reliance.

And one final reminder: if a practice is relying on a person outside of the UK, they should satisfy themselves that the CDD conducted is to a standard comparable to the UK legislation.