On the money

It is one of the fundamental rules of business that you need to know exactly who you are dealing with. Banks and building societies that lend money to registered social landlords must adhere rigidly to the Money Laundering Regulations 2003 to protect themselves from being caught out. If the lender’s regime is not rigorous enough, it can mean criminal action against both the firm and individuals involved under the Proceeds of Crime & Terrorism Act.

This legislation has resulted in lenders adopting Know Your Customer regimes, as the onus is upon the lender taking responsibility. They must create their own procedures for preventing money laundering and remain vigilant. This means they have to ask their customers for specific pieces of information before they can let them use their facilities.

We have found that our RSL clients are puzzled by the amount of detailed information that lenders are asking from them in finance transactions. The chief officers of the RSL or anyone who needs to sign anything to be provided to a lender have to be put through checking procedures. As a minimum this involves the production of legally certified photographic and address identification, which is less than three months old, from the individual to the lender. In practice this is rarely easy if they have recently moved house or their bills may be in their spouse’s name.

The organisations involved in the transaction must be identified as clearly as the individuals. Basic requirements include company searches and certifications. It seems to be becoming standard practice for us to procure letters setting out the ownership structure of the company taking the funds in more complex transactions, for example where a subsidiary is directly drawing funds. This can even be required for opening bank accounts.

Even for lawyers who have been key in setting up the joint venture it may be a challenge to sit down and set out how it works

Tracing ownership can be hard when you have anything more complicated than a standalone RSL of long standing with a simple ownership structure. For example, if a subsidiary forming part of a group wished to borrow money, then the requirements could well extend up to a parent or, in the case of wider group structures, even beyond.

In the territory of trusts, partnering, joint ventures, private finance initiatives or anything involving more than one company, the process becomes very complicated. Even for lawyers who have been key in setting up the transaction it may be a challenge to sit down and set out how it is meant to work. Also, as this amounts to the law firm giving the lender something to rely on, this may make lawyers jumpy because if there is an innocent mistake or oversight it may rebound on them. This could well entail an increase in legal fees.

An important final point to make is that the money laundering regime is changing. The process of implementing the Third Money Laundering Directive is under way in Brussels and will be complete by the end of 2005. In our increasingly suspicious society it is important to be able to say exactly who we are and why we are doing something. We all have to take responsibility and pay the price for security.