What is meant by ‘Know Your Client (KYC)?’
For any employee of a Law Firm ‘Knowing Your Client’ is the top priority for all matters.
‘Knowing Your Client’ falls at the heart of Anti-Money Laundering (AML) Regulations. This entails obtaining sufficient information about a client’s situation, personal, financial, and professional, before providing advice.
You must make sure your client is who they say they are.
However, ‘Knowing Your Client’ goes beyond obtaining basic evidence of identity. Identity information alone does not reduce the risk of money laundering, and greater scrutiny is needed to fully ‘Know’ your client.
Why is it important?
KYC and AML obligations are not a new development, but a number of recent events and cases have re-highlighted its importance and the very serious consequences of a failure of compliance.
For example, in 2021 a man returned home to find his property and belongings had been sold by someone who had stolen his identity (https://www.bbc.co.uk/news/uk-england-essex-59069662). This was a major breach of AML Regulations resulting in a police investigation of the transaction and the firm in question; all because the basic checks were not properly undertaken.
Law firms are at particularly high risk of becoming victims of money laundering as confirmed by the National Crime Agency’s latest Risk Assessment. There were 5.1 million fraud offences alone in the year ending September 2021 according to the Office of National Statistics.
Thus, the legal sector has fallen under increasing pressure to ensure KYC and AML processes are watertight, placing these requirements at the top of its list of priorities.
It is not just qualified individuals who must ensure that compliance is met, anyone working within a law firm must ensure AML and KYC checks are undertaken and ensure compliance.
Consequences of not ‘Knowing Your Client’
The consequences for breaching the standards in regard to KYC and AML are severe.
A recent example of the consequences of such a breach is Mishcon de Reya LLP who were find £232,500 after the SRA found a serious breach of AML rules. The SRA found the firm had failed to carry out the required level of due diligence, resulting in the record fine.
Failure to comply with AML laws and regulations, and breaches of financial sanctions, have serious consequences: punitive fines, criminal proceedings, damaged reputations and sanctioning amongst the penalties– all crystal-clear motivations to justify efforts of compliance.
The SRA have begun to issue more and more fines for smaller breaches of AML, and ‘knocking on doors’ is becoming increasingly commonplace. In early 2021 13 firms were fined for a late submission of their declarations of AML compliance. This shows that compliance has moved up the agenda and it is vital that everyone preforms the correct checks on all their clients.
As recently as last week a firm in Telford faced fines for multiple failures; these such failures result in a permanent record on a firms SRA Regulatory Record and individuals can be struck off in these circumstances.
How to ‘Know Your Client’
With the above discussion of fines and penalties, it is important to ascertain just what is required to meet the Regulations.
The extent to which checks must be undertaken depend on the client, such as if they are a Politically Exposed Person (PEP), and the nature of the transaction, such as complex company transactions. However, for all basic transactions, there are three key factors:
1 – Obtaining Identification, both photo and proof of address
2 – Identify if there is a beneficial owner who is not the client and take reasonable measures to understand the relationship, ownership or control structure or a legal person, trust, company etc.
The importance of this step has recently been highlighted in Rushbrooke UK Ltd v 4 Designs Concept Ltd, where a Bristol firm has been ordered to pay costs as the Director had no authority on his own to give instructions. https://www.lawgazette.co.uk/news/firm-to-pay-wasted-costs-after-negligence-in-bringing-case/5113006.article
3 – Assess, and obtain any further information, on the purpose of the relationship/transaction
As stated above, the way that you comply may differ from case to case, but if you cannot complete the above Due Diligence, then you cannot proceed with a matter. This Due Diligence must be completed for ALL parties to a transaction or matter, not just the point of contact.
It must also be pointed out that you must continue to monitor clients throughout transactions and on occasions of repeat business.
Conclusion
It would normally be at this point where an article provides reassurance on the above subject, but the importance of thorough AML and KYC checks, and the consequences when this is not carried out, cannot be stressed enough. In 2021, 273 reports of potential AML breaches were made to the SRA, with 29 enforcement actions undertaken.
Whether you are assisting with or undertaking a Will, Probate, Property Transaction, Divorce or Complex Company Transaction, it is vital that you all ‘Know Your Client.’