LSAG guidance July '22 update: The key takeaways for your firm

Published

Harriet Holmes

AML Services Manager

LSAG has updated its guidance for July 2022, and this has been approved by HM Treasury.

What has changed?: The expected level of CDD for Beneficial Owners (BOs) has been confirmed.

What do I need to do?

  • Review the LSAG new wording vs the old version
  • Consider your process 
  • Inform your teams and provide additional training if appropriate 
  • Update your PCPs

The Legal Services Affinity Group (LSAG) is made up of both regulatory and representative bodies for legal services in the UK. Back in January 2021, the group published guidance on anti-money laundering (AML) regulations. Many firms reacted to this guidance and updated their PCP’s around it even though  it had not received HM Treasury approval at the time. However, that all changed on 7th July 2022. 

This guidance now constitutes official guidance for supervised firms. It has full standing, including regulation 86(2)(b)(ii) and under regulation 76

What does regulation 86(2)(b)(ii) mean for you?

This regulation sets out that when judging whether a legal practitioner and/or law firm has committed an offence by not following the regulations, the court must decide whether the guidance has been followed. It is similarly relevant where the imposition of civil penalties is being considered (under regulation 76).

As a result, if you do not follow the guidance at any point is it critical that you document clearly and coherently why you felt it was appropriate to deviate from it. Defending the decisions you made at the time is far easier if you have all your ducks in a row.  

One of the most important changes for legal practitioners and law firms to consider carefully within the updated guidance is verification of the identities of beneficial owners (6.14.10). 

The original guidance has seen a near total rewrite. Whilst it always referred to the word ‘verify’ it was left to the reader's interpretation. The rewrite provides a clear and coherent expectation as to the level of CDD expected when verifying a BO. Both versions are included within this document so you can judge this for yourselves, please don't take my word for it. 

Section 6.14.10 now clearly outlines the expectations of supervisors and HM Treasury for beneficial owners to be verified. This is what they will expect to see on file review. You should verify the identity of the beneficial owner to the same standard that you apply to clients who are natural persons, as prescribed in sections 6.14 and 6.14.4.  

Direct reference is made to both 6.14 Methods of verification and 6.14.4 Natural persons. Legal practitioners and law firms alike should re-familiarise themselves with these two sections of the guidance. 

It is crucial to remember that you are seeking to verify the beneficial owner’s identity, not simply that the identity in question is a beneficial owner. Identifying the beneficial owner is asking them for information about who they are and verifying that this information is accurate.  

Key questions and considerations for identifying BOs

Who are the beneficial owners? How do we know that they are definitely real people? How do we know that the names we have, or are given, are real people? This is why we need to take steps to verify beneficial owners. The theory behind identifying and verifying someone's identity is ultimately twofold: 

  1. You are making sure you can find where the person lives, and what they look like, so you ideally have a photograph to circulate. That's why we all opt to obtain photo ID as standard good practice.  
  2. To ensure that it is not fraudulent. To make sure that the person instructing us or behind the company has the capacity and authority to do so, and is essentially ‘the real deal’. 

We are trying to know where to find the potential criminal and stop fraud.  

Verification should be completed on the basis of documents or information from a reliable source, independent of the client.

What steps can you take to verify a BO?

  • Obtaining or viewing original documents from a trusted and independent source (public or private)
  • On a risk sensitive basis, viewing copies of documents 
  • Obtaining or viewing certified documents
  • Conducting electronic verification, through a platform that is a reliable source or
  • Obtaining information from other regulated persons

In limited circumstances and low risk situations you should take reasonable measures to verify the beneficial owner. In instances where identification and verification is not via personal documentation (such as a passport) it is crucial that you document your file with your overarching understanding of the individual’s background, circumstances and nature of the transaction. 

For completeness, a definition of beneficial ownership can be found in R5(1) defines a beneficial owner of a body corporate or partnership and Regulation 6(1) defines a beneficial owner of trusts, similar arrangements and others.

Updated LSAG Guidance (July 2022) - 6.14.10 Non-natural persons

R28(3A) states that where the customer is a legal person, trust, company, foundation or similar legal arrangement the relevant person must identify the customer and take reasonable measures to understand the ownership and control structure of that legal person, trust, company, foundation or similar legal arrangement.

This requirement means tracing ownership back to any ultimate beneficial ownership of the entity by a natural person(s). You must then take reasonable measures to verify the identity of the beneficial owner.

“Reasonable measures” means risk-based, proportionate and effective in mitigation of the identified money laundering and terrorism financing risks inherent in the client or matter being undertaken. When considering this test of reasonableness, you should consider whether you are comfortable that you would be able to demonstrate and evidence the extent to which you have sought such information and verification, to your supervisor upon request. It should not be misinterpreted as an allowance to not fulfil your duty to understand the full ownership and control structure of the client.

Where applicable, having regard to the circumstances, you should verify the identity of the beneficial owner to the same standard as that applied to clients who are natural persons, as described in 6.14 and 6.14.4. In other, lower risk situations and in limited circumstances (such as when the relevant person already knows and has previously verified the identity of the beneficial owner) taking reasonable measures to verify the beneficial owner may mean, for example, taking verification information from non-independent sources (e.g. non certified documents or information from reputable websites). To evidence why identification of beneficial owners through personal identity documents is not undertaken, it is important to document your overarching understanding of the individual’s background, circumstances and nature of the transaction.

It is important to note that you are seeking to verify the beneficial owner’s identity, not simply that the identity in question is a beneficial owner.

Where you have been unable to verify the identity of the beneficial owners of a non-natural person, you should consider the reasons for this and whether this should lead to a disclosure to the NCA. Further consideration should be given to whether to act or continue to act for the client, particularly where the complexity of the structures is out of your normal scope of business or make completing CDD difficult.

You should record all of your considerations as a part of the client or matter risk assessment, for more information see Section 5.

Original LSAG guidance (January 2021) - 6.14.10 

R28(3A) states that where the customer is a legal person, trust, company, foundation or similar legal arrangement the relevant person must identify the customer and take reasonable measures to understand the ownership and control structure of that legal person, trust, company, foundation or similar legal arrangement.

This requires tracing ownership back to any ultimate beneficial ownership of the entity by a natural person(s). You must then take reasonable measures to verify the identity of the beneficial owner so that you are satisfied you know who the beneficial owner is. This may be more challenging in cases where there are complex ownership and control structures.

When considering this test of reasonableness, you should consider whether you are comfortable that you would be able to demonstrate and evidence the extent to which you have sought such information and verification, to your supervisor upon request. It should not be misinterpreted as an allowance to not fulfil your duty to understand the full ownership and control structure of the client.

Where you have been unable to verify the identity of the beneficial owners of a non-natural person, you should consider the reasons for this and whether this should lead to a disclosure to the NCA. Further consideration should be given to whether to act or continue to act for the client, particularly where the complexity of the structures is out of your normal scope of business or make completing CDD difficult.

You should record all of your considerations as a part of the client or matter risk assessment, for more information see Section 5.

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