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Beware the pitfalls of over reliance on third parties

Due Diligence | Pro-Tem Executive Connect - Blog

Would you be happy to rely on someone else for your client due diligence?

In an attempt to reduce inconvenience, and the time and cost of carrying out anti-money laundering due diligence on clients, some law firms are looking to rely on others to help them reduce the burden, but is this a good move?

Under Part 4 (s39) of the Money Laundering Regulations firms can rely on other entities that fall under these regulations to apply any of the required customer due diligence measures (excludes source of funds/wealth checks), however, there must be a written agreement in place between the parties before such reliance can start to operate. 

So, which entities might a law firm want to rely on for all or some of their client due diligence checks?

Law firms looking to rely on third parties are likely to want to do so using one or more of the following in legal transactions, including residential and commercial conveyancing, and the creation of trusts and companies:

  • Financial institutions (banks, building societies, etc)
  • Accountants
  • Estate agents
  • Letting agents
  • Other law firms

One important thing that firms need to remember when considering reliance is that they will remain liable for any errors made by the third party(s) involved.

So, the big question is, would you be happy to rely on any of the above to carry out client due diligence on your behalf?

Sanctions issued by regulators over the last 12-18 months would seem to indicate that firms would be better keeping client due diligence inhouse, for example:

  • NatWest Bank – fined £265 million for failing to prevent the laundering of nearly £400 million
  • HSBC – fined £63.9m for “unacceptable failings” of its anti-money laundering systems
  • Estate agents
    • Agency A – fined £6,300 for failing to register as a regulated entity with the Financial Conduct Authority
    • Agency B – fined £5,250 for client due diligence breaches
    • Agency C – fined £6,591 for various breaches, including failures to have the correct policies, controls and procedures, internal controls, conducting due diligence and timing of verification.
  • Law firms
    • Law firm A – fined £14,000 for failing to carry out appropriate client due diligence
    • Law firm B – fined £10,000 for failing to carry out appropriate client due diligence, failing to properly prepare a firm wide risk assessment, and failing to provide appropriate training to staff
    • 13 law firms fined £800 each in relation to failures around firm wide risk assessments

One of the concerns that has come to light in recent months is the pressure being put on law firms, who act for clients referred to them by estate agents and property developers, to take shortcuts when carrying out client due diligence checks; such pressure is apparently being applied with the aim of hastening property completions to keep clients happy and/or to allow agents and/or developers to receive funds (purchase fees, referral fees, commissions, etc.) sooner rather than later.

Law firms must ensure they comply with their AML obligations, and if they are going to rely on third parties to carry out client due diligence checks on their behalf, must assess the potential risks of doing so, especially when they will remain liable for any errors of third parties 

Brian Rogers is the Regulatory Director at the Access Group: