PRINT THIS PAGE Anti-money laundering rules: impact on private equity18/04/2007. Source: SJ Berwin. Simon Witney 
European rules on money laundering are designed to prevent and detect terrorist and other serious criminal activity, says SJ Berwin. No one disputes the paramount importance of that. But they also add a layer of bureaucracy to financial services activity, which - unless the rules are sensible and proportionate - could load unnecessary costs on to business and damage Europe’s competitiveness. No doubt, that is a difficult balance to strike. But as an important consultation on the implementation of a new round of rule changes closes next week, warnings issued by the UK’s Law Society suggested that the right balance has not been struck.
The Third Money Laundering Directive applies across the European Union, and has an impact on a range of financial activities. Earlier this year, the UK government published its proposals to implement the directive in Britain, and the Law Society expressed a number of concerns. Some of those focussed on private equity, and the burdens that the new rules could place upon UK based funds. These were widely reported in the press last week.
At the heart of the perceived problem is a requirement to identify the “beneficial owner” in a transaction, and “taking risk-based and adequate measures to verify his identity”. In the case of a corporate body, the draft regulations define a beneficial owner as any individual who “ultimately owns or controls … more than 25% of the shares or voting rights in the body” or “otherwise exercises control over the management of the body”. There are similar provisions for trust situations, so that a beneficiary or other individual who controls at least 25% of the property or arrangement concerned is deemed to be a “beneficial owner”.
However, despite the warnings, there are two reasons why it seems unlikely that this will be a significant additional burden for UK firms. First, it is not that often that one individual will control 25% of a fund or target company - although clearly that does happen, especially on deals.
But, secondly, although “beneficial owners” are not explicitly mentioned in the existing rules, there is already a requirement that, where a person “acts or appears to act for another person, reasonable measures must be taken for the purpose of establishing the identity of that person”.
In interpreting that rule, industry guidance issued by the Joint Money Laundering Steering Group ("JMLSG") states that “as part of the standard evidence, the firm will know the names of all individual beneficial owners of private companies holding 25% or more, even where these interests are held indirectly”. Similar suggestions are made about trusts.
The UK Treasury did acknowledge that its initial consultation had drawn responses about the need to take “risk-based and adequate measures” to verify the identity of a beneficial owner. Some respondents had suggested that the rules set out explicit measures, and indicate when they ought to be applied.
But (not surprisingly) the Treasury has refused to do this; instead, supervisors and industry are expected “to develop guidance on what measures can and should be undertaken to meet the requirements imposed to ascertain the beneficial owner”, and they promise to “work closely with these bodies to ensure that the requirements and any subsequent guidance are as helpful as possible”.
So, although a more helpful response from the Government is still hoped for, the most likely way forward is for amended industry guidance to clarify the operation of the rules. Although it is not satisfactory for the burden of interpreting unclear rules to be shifted to industry bodies, it may not be a wholly bad thing - the current JMLSG Guidance relating to private equity is carefully tailored to the nature of the industry, and it can reasonably be hoped that the new guidance will be equally sensible and proportionate.
The result is that - in practice - there is unlikely to be much significant change for UK private equity houses when that guidance eventually emerges.
Simon Witney
SJ Berwin is a pan-European law firm with a particular focus on private equity. It has offices in London, Frankfurt, Munich, Berlin, Madrid, Paris and Brussels. If you would like further information on our services to the private equity industry please contact Simon Witney in our London office 020 7533 2222 or visit our website at www.sjberwin.com.
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