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New Legal Sector Affinity Group (LSAG) Guidance January 2021 - A guide to the main changes

The Money Laundering , Terrorist Financing and Transfer of Funds (Information on the Payee) Regulations 2017 (Regulations) were amended on the 10th January 2020 to reflect the requirements of the 5th EU AML Directive.

On the 20th January 2021 the LSAG published new Anti-Money Laundering Guidance for the legal sector (new LSAG Guidance). The new LSAG Guidance is currently awaiting approval from HM Treasury.

The new LSAG Guidance has been comprehensively re-structured and is now divided into 18 sections plus a glossary. The old Guidance contained 13 chapters plus a glossary. Each section of the new LSAG Guidance is prefaced by a list of the applicable compliance principles.

This article is intended to provide a summary and list of the key changes brought about by the new LSAG Guidance

Table 1 below provides a summary of the key changes and Table 2 provides a more detailed analysis of the changes with cross referencing to the relevant sections of the new LSAG Guidance.

Compliance

Posted 12/02/2021

1.      Introduction of key AML compliance principles.

 

2.      Expanded guidance on understanding and evidencing source of funds and source of wealth.

 

3.      New section on technology.

 

4.      Fully revised and expanded section on risk assessments – firmwide, client and matter.

 

5.      Revised section on legal professional privilege.

 

6.      Revised, updated and expanded sections on AML governance and internal controls.

 

7.      Clarification on:

high-risk sectors

accepting cash into client account

CDD on referrals from another practice

timing of CDD and exceptions.

 

8.      Updated training section.

 

9.      New section on discrepancy reporting to Companies House.

 

Table 2 - Analysis of the new LSAG Guidance

Section 3.2 – This is new and it sets out 36 high-level Compliance Principles which are key areas to address when trying to ensure compliance with the Regulations.

 

Section 4.3.3 – This is new and it requires an MLRO to submit an annual written report to the senior management body. The section contains a list of the matters that should be covered in the annual report.

 

Section 4.6 – This is new and it highlights the role and responsibilities of senior management.

 

Section 5 – This is a fully revised section on risk assessments. Now emphasises the need for individual risk assessments for each client and new matter. It also expands the guidance on risk assessments generally.

 

Section 5.16.12 – This is new. It covers what risk preventative measures firms should take to safeguard against misuse of their client accounts.

 

Section 6.2 – This is new and it states that there is no provision in the Regulations for waiving the CDD requirements on the basis of long standing or personal relationships.

 

Section 6.7 – This explains who you should carry out CDD on when a client is referred by another legal practice.

 

Section 6.14.8 – Where other professionals use your services in their capacity as  professionals you may consider using simplified due diligence.

 

Section 6.17 – This is a revised and expanded section providing helpful guidance on source of funds and source of wealth. It includes a paragraph which states that funds coming from another AML regulated legal practice may be assessed as low risk.

 

Section 6.18 – This section expands the guidance on enhanced due diligence and in particular in relation to high-risk third countries.

 

Section 6.21 – With regard to ongoing monitoring of business relationships and transactions this section states that CDD should be reviewed/re-evaluated at appropriate intervals. There is no mention of what period is considered to be “appropriate” and most firms take the view that a gap of 2 to 3 years between instructions is appropriate. However in higher risk cases evidence should be renewed/re-evaluated if the gap is 12 months or more.

 

Section 7 – This is a completely new section and it focuses mainly on the use of  electronic ID verification services and when it is appropriate to use such services.

 

Section 8 – This section contains far more comprehensive guidance on AML training. Gone (at last!) is the suggestion that some form of training should take place every two years. There are now specific requirements for training AML officers, staff and relevant agents and the training requirements now extent to more than just training on knowing the law and how to recognise and deal with money laundering activity.

 

Section 9.3 – This section covers internal controls and provides additional guidance on the requirements for setting up an independent audit function. It covers the use of both internal and external auditors.

 

Section 12 – This is a completely new section covering “other duties”. The section covers the obligations of corporate bodies and trustees to provide regulated organisations with CDD information and this extends to providing  information about beneficial owners. Section 12.6 specifically deals with the obligation of regulated firms to report discrepancies (in relation to beneficial owners`) found, during the client onboarding process, in the registers at Companies House.

 

Section 13 – This section covers legal professional privilege. It updates and expands the previous guidance.