AML compliance for family businesses
Stephen Baker, senior partner at Baker & Partners, examines how family businesses and firms can achieve and maintain compliance with the most recent AML/CFT standards
It is not just financial services businesses which are vulnerable to falling foul of AML/ CFT rules and regulations. Most and probably all businesses are vulnerable to being caught up in money laundering. Not least the reputational consequences of getting it wrong can be severe. Family businesses are no exception.
The tone for AML/ CFT risk management is set by the board or equivalent senior management. If those at the helm of a business take AML/ CFT seriously and make sure vulnerabilities are assessed and weaknesses remedied, then the culture of the business is likely to mean that such risks are minimised. It is culture from the top which drives risk mitigation.
The starting point for family businesses or firms seeking to ensure compliance with best practice with the most recent standards is to make sure there is a full knowledge and appreciation of what those rules are and what compliance with them entails.
Though it may sound obvious, unless there is in-house expertise then at the outset appoint a legal representative with regulatory experience in the jurisdiction in which you wish to do business to ensure that you meet your regulatory and AML obligations. Then properly consider that advice and if necessary, identify the right corporate service provider and structure that meet your needs. Such initial costs are dwarfed by the cost of being investigated or being fined.
Depending on what type of business you intend on setting up and in which jurisdiction you may have to appoint a Trust and Company Service Provider (“TCSP”) to act on your behalf. This is most likely to be so if there is an international/ offshore aspect to the business. The TCSP is likely to be regulated and required to comply with all the forever changing AML/CFT standards.
Don’t be fooled by a glossy website or brochure. Look at the expertise of the senior team and how long they have been in situ. Check the website of the local regulator to ensure that they are regulated and more importantly if they have been sanctioned for applying poor AML/CFT systems and controls.
For those high-net-worth individuals setting up their own family office to manage their affairs, it is wise to invest in proper compliance with the AML standards. It may well prevent you from suffering significant financial loss and reputational damage.
If you use a TCSP they are under a legal obligation to comply with the AML regime and protect your assets. If they fail to do so, then they face a range of criminal/Regulatory and civil litigation remedies. Most TCSPs are required to carry insurance cover as a condition of being a regulated business and can only employ principal persons that have been screened and deemed to be fit and proper, a status they must maintain to continue in the position. Ask for confirmation that such insurance cover is in place and disclosure of any conditions that may be attached to such insurance. Ask your legal advisor for an introduction to a credible TCSP.
What structures and requirements exist to ensure that family businesses are complying with AML regimes?
The type of business operated by the client together with the most efficient tax model will largely dictate what structures are suitable for the client’s needs. Some families may be more inclined to have a greater say in the way their wealth is managed whilst others may be more content for assets to be placed into trust and managed by professional trustees. In all cases the clients will be required to provide identity documents and to explain from where the funds have been sourced. Those posing a higher risk are likely to have to jump through more hoops and explain how they have made their money.
Verbal explanations are insufficient, the institutions will want to see documentary evidence to support the explanations given. If the client is a company, any service provider will call for the identity of significant shareholders and those exerting considerable influence over the management of the company and such individuals will be required to produce identity documents and source of wealth information. As a general rule the higher the money laundering risk of the business, the more information will be requested from the TCSP to secure comfort that the assets are not linked to money laundering.
What are the key principles for a law firm that is advising a family business facing a regulatory investigation?
It should go without saying but is probably best repeated. The most important principle for a law firm advising a family business facing a regulatory investigation is to ensure you have the expertise or access to such expertise to be able to provide appropriate advice. Know your opposition. Adopting the wrong tone and approach can be disastrous for a client. The particular approach adopted can often have a major impact on the success or otherwise of the outcome. Getting the right tone can be particularly challenging where big personalities are involved in a business which is the subject of investigation and there is anger at what is perceived as unacceptable intrusion on normal day to day operations.
There are some key steps which should be taken, though every investigation needs a bespoke response.
Establish if the investigation is criminal or regulatory. Some Regulators have dual powers but the client should know from the outset if the matter is being treated as a criminal investigation or a regulatory investigation.
Establish why the client is facing a regulatory investigation. This sounds easy enough but in reality, the investigation is often a cumulative set of circumstances that drives the regulator to delve more deeply leaving the person under investigation having to second guess why the investigation has been launched at a particular moment in time. Make sure you have the full context. Is there a history behind the investigation? Usually there is. Make sure you understand it.
Carefully assess the potential impact if the client is considering declining to cooperate with the regulatory investigation. This is not an unusual starting point for many clients. While sometimes it is of course important to fight tooth and nail more often full co-operation and demonstrating that any problem has been or is being fixed turns out to be the more astute line in the long term.
Make sure you are clear what the regulatory investigation is focused on. Obtain maximum disclosure from the regulator. Ask to see all the correspondence sent to the client from the regulatory investigation team.
Once you understand the issues as the regulator identifies them explore whether the client holds information that could allay the concerns of the regulator and also whether an obligation exists to disclose such information.
On a practical level and importantly determine whether the client has insurance cover that might cover the costs of securing expert advice and legal representation and make sure that proper notification has been given.
The recent ENRC v Dechert judgment of the High Court is a wholly extraordinary example of the response to an investigation going catastrophically wrong. Best avoided. Some of the above may help as well as a focus on the best interest of the client.
