Client due diligence – can you rely on others to complete it? Find out with Access Legal
Recent months have seen more and examples of estate agents asking, and in some cases forcing, conveyancers to accept their client due diligence (CDD) results to try and reduce delays in the conveyancing process and avoid complaints from clients who are unhappy about why they have to provide the same personal information several times.
I fully appreciate the frustrations of clients, estate agents and conveyancers, and in an ideal world it would only be necessary to provide information once, but unfortunately we don’t live in an ideal world; we live in one where those in the regulated sector have to comply with Money Laundering Regulations or risk regulatory and criminal sanctions!
Regulation 39 in effect says you may rely on another regulated person (e.g. an estate agent) to conduct CDD for you, subject to their agreement. Reliance does not necessarily mean obtaining certified copies of documentation from other regulated professionals for due diligence purposes.
The Legal Sector Affinity Group guidance states:
You may rely on another person to conduct CDD for you, subject to their agreement [written].
In order to rely on another regulated person to apply CDD measures you must as a pre-condition, obtain from them all the information (though it should be noted not the underlying documentation) needed to satisfy the requirement to apply CDD measures in accordance with R28(2) to (6) and (10).
Subsequently you must:
- enter into arrangements with the other person, which
- enable you to obtain from the other person immediately on request copies of any identification and verification data and any other relevant documentation on the identity of the client and/or its beneficial owner; and
- require the other person to retain copies of the data and documents in accordance with R40; and
- obtain evidence to establish that the person relied upon, falls into the category of persons who may be relied upon as per R39(3).
If you choose to rely on another professional, you should ask for written confirmation of the CDD measures and enquiries the other person has undertaken to ensure that they actually comply with the Regulations. You should also consider whether they have applied a consideration of risk and approach to mitigation similar to your own.
In practice, if you are relying on the confirmation of a third party you must obtain
- the identity of the customer or beneficial owner whose identity is being verified;
- the level of CDD that has been carried out; and
- confirmation of the third party’s understanding of their obligation to make available, on request, copies of the verification data, documents or other information.
If you routinely rely on CDD checks done by a particular third party, it is good practice to request sample documents to test their reliability.
Before agreeing to enter into such an arrangement, you should ensure that:
- You can make the required CDD information available immediately on request; and
- You have appropriate consent from your client to disclose the CDD information to the other party.
The key thing to remember is that you remain liable for any non-compliance with CDD requirements when you rely on another person, for example, a law firm would remain liable for any errors made by the estate agent being relied upon.
The big question is, when you look at the number of estate agents that have been sanctioned by HMRC for procedural failings in AML compliance, would you want to put your head on the block in relying on their CDD checks?
I am not saying all estate agents can’t be relied upon, but just want to highlight the risk faced by law firms; to be fair, if the process was the other way around I would be pointing out to estate agents the same risk about law firms based on the number of them that have been sanctioned by the Solicitors Regulation Authority for procedural non-compliances!
The risk is even higher where there are referral agreements in place, as it is apparent that some estate agents put pressure on their panel law firms to accept their CDD results without meeting the above requirements; the law firms don’t say ‘no’ because they are worried about upsetting the commercial relationship, which could result in them losing future work!
Please don’t shoot the messenger, as the choice around compliance is ultimately yours, but I personally wouldn’t want to risk the regulatory and criminal sanctions that could follow non-compliance!
