Money laundering rule to raise costs

By Matthew Richards and Michael Peel

January 22 2007 16:12

Lawyers will be overburdened by a new European Union directive on money laundering that could lead to prosecutions of family solicitors and raise the cost of establishing a trust, the Law Society has warned.

Fiona Woolf, president of the solicitors’ body, said the directive was unclear and “will leave even the most conscientious of practitioners open to severe criminal sanction”.

In a letter to Stephen Timms, chief secretary to the Treasury, she wrote: “It is not acceptable for the government to pass the responsibility of interpreting the opaque language of the directive to practitioners.”

The directive, which must enter the statute books of EU states by December, requires solicitors, accountants and others who set up trusts to perform due diligence on trustees and on beneficiaries who own at least 25 per cent of the trust. This will involve ensuring that there is no risk of money laundering and those who fail to do so will be deemed to be breaking the law.

A leading chancery barrister has warned the directive could be incompatible with English trust law. For example, in a trust that gives a widow a fixed annual income until she dies and then shares the remaining assets among her three children, it is not clear who owns at least 25 per cent of the trust.

The Treasury is expected to publish draft legislation by the end of January, after which there will be a three-month consultation period.

However, Toby Graham, a solicitor who has worked on the issue for the Society of Tax and Estate Professionals (Step), said: “There doesn’t seem to be any appetite in the Treasury to really address the problem.”

He added that the directive would place “a very significant extra burden” on solicitors and possibly on bankers, fund managers and other professions dealing with trusts, which would make trusts more expensive to administer.

Ronnie Ludwig, a partner of accountants Saffery Champness, agreed costs would rise. He said: “Solicitors and accountants are becoming the international police on money laundering as far as the government is concerned.”

Step warned the government was “in danger of over-regulating trusts” and its implementation of the directive could drive international financial and legal services, including much of the burgeoning Islamic finance business, away from the UK.

Wilson Cotton, a director of accountants Smith & Williamson and a member of Step, said: “If they get this wrong they could send City legal, accountancy and investment services elsewhere as well as threaten millions of ordinary family trusts.”

The Law Society’s call for clarity highlights differences of opinion over the move by regulators such as the Financial Services Authority towards regulations based on broad principles, as opposed to detailed rules.

While lawyers and compliance officers tend to want the certainty of strict rules, some bankers and others prefer principles that allow flexibility and the scope for individual judgment.

Copyright The Financial Times Limited 2007

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