Client Due Diligence (CDD) is a process of checks law firms must carry out to ensure their clients are who they say they are and identify any risks associated with them regarding money laundering and other financial crimes. It is an essential part of compliance for UK law firms, mandated by the Solicitors Regulation Authority and failing to comply can result in severe consequences. Here, we will explain what client due diligence for law firms involves, why it’s important and how to carry out CDD at your law firm.
What is Client Due Diligence and why is it important?
Client due diligence is an essential step in the fight against money laundering. As outlined in our blog post, ‘Anti-Money Laundering for Law Firms,’ if your legal practice isn’t carrying out an appropriate level of client due diligence, you will be at risk from money laundering criminals who are out to exploit your weaknesses and make you an accomplice in their financial crimes.
CDD is a requirement under Regulation 27 of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. This regulation states that you must carry out client due diligence when:
- Establishing a business relationship
- Carrying out an occasional transaction amounting to 15,000 EUR or more
- Suspecting money laundering or terrorist financing
- In doubt of the accuracy or adequacy of the documents or information previously obtained for client due diligence
- It’s necessary for existing clients – such as when their circumstances change
If you can’t complete client due diligence on a client, your law firm should not establish a business relationship with them.
How to carry out Client Due Diligence at law firms
Here we have shared the steps UK law firms must take to comply with Anti-Money Laundering (AML) regulations and requirements mandated by the Solicitors Regulation Authority. Feel free to use this information to create a client due diligence checklist. We also recommend further reading around AML and CDD on The Law Society website.
Identify and verify the client
A law firm must first establish who the client is and verify that they are who they say they are. This will require you to ask clients for a government-issued document (like a passport), along with utility bills, bank statements and other official documents.
Beneficial ownership identification and verification
Additionally, law firms must identify where there’s a beneficial owner who is not their client and take reasonable measures to verify their identity. It’s important that you understand the ownership and control structure of any person, trust, company, or foundation linked to your client.
Identify and verify sources of funds
Along with verifying a client’s identity, another crucial part of CDD for law firms is determining how clients make a living and how they have accumulated their wealth.
The SRA requires UK law firms to gather information on the sources of funds or wealth as part of CDD. You must understand and document a client’s financial history, sources of income and any potential conflicts of interest. Obtain proof of funding and wealth sources in the form of bank statements, tax returns and business records.
CDD risk assessments and ongoing monitoring
The next step in client due diligence is to assess the risks of money laundering and terrorist financing associated with forming a business relationship with the client. The Solicitors Regulation Authority requires all UK law firms to create written risk assessments for clients, detailing the level of due diligence required.
The CDD risk assessment should cover the following:
- The client’s risk profile – Are they a Politically Exposed Person, linked to high-risk third countries, or have they committed previous crimes?
- The nature of the relationship
- The size of the assets or the transactions undertaken
- The source of funds or wealth
- The regularity and duration of the business relationship
CDD risk assessments should be regularly reviewed and updated based on any changes to the client or transaction. Ongoing monitoring is, therefore, essential to identify any suspicious activity. It may be necessary to re-assess a client’s risk profile and re-verify their information when monitoring for suspicious activity.
CDD record keeping for legal firms
Your legal firm must document and retain records of its client due diligence procedures, including:
- Client identification and verification
- Risk assessments
- Transaction details
- Any supporting documentation
You must keep these records for five years after the business relationship has ended. After five years, your law firm must delete any personal data held unless the client has explicitly given consent to retain their data or your legal firm is required to retain the personal data for court proceedings.
What is Enhanced Due Diligence?
If, when conducting a risk assessment, you identify your client as a Politically Exposed Person or find they have links to a high-risk third country or have previously committed a crime, you may need to apply enhanced client due diligence measures. You may also use enhanced due diligence measures for clients who pose a greater risk of being involved in money laundering for other reasons, such as no face-to-face contact with your law firm employees.
Under the MLR 2017, enhanced client due diligence measures must include a deeper examination of the background and purposes of any transactions and increased monitoring of the business relationship.
Other ways you can conduct enhanced client due diligence include:
- Seeking additional independent and reliable sources to verify information provided by the client
- Taking additional measures to understand the background, ownership and financial situation of your client and any third parties linked to the transaction
- Broader checks of your client’s associates, beneficiaries, and other relevant contacts
- Taking further steps to ensure you are satisfied that the transaction is consistent with the purposes and intended nature of the business relationship
- Checking terrorist, fraud, and litigation databases
- Greater scrutiny of transactions and additional monitoring of the client
Benefits of CDD for law firms
While law firms must carry out client due diligence to comply with regulatory requirements, it will also reflect positively on their reputation by demonstrating they have ethical business practices. Sound client due diligence procedures will help build trust with clients and employees, who will benefit from safe practices and greater protection from financial crime.
By taking the necessary steps to comply with CDD regulations, law firms will also reduce vulnerabilities in their operations so money laundering criminals will be less likely to target them.
Improve Client Due Diligence at your law firm with legal accountants
Reduce the risk of money laundering and terrorist financing at your law firm with the help of Kale Accountancy Ltd. As experienced hybrid legal accountants, we will support you in creating and implementing client due diligence procedures at your law firm, training employees on CDD and ensuring compliance with Anti-Money Laundering regulations.
To find out more, please book a consultation at your convenience. We look forward to speaking with you.
