Money laundering and anti-money laundering regulations - Client due diligence vs. enhanced due diligence

Learning Outcomes

After studying this article, you will be able to distinguish between standard client due diligence (CDD) and enhanced due diligence (EDD) under UK anti-money laundering law. You will understand when each is required, the practical steps involved, and the legal and ethical duties of solicitors under the Money Laundering Regulations 2017 and Proceeds of Crime Act 2002. You will also be able to identify and apply these principles to SQE1-style scenarios.

SQE1 Syllabus

For SQE1, you are required to understand the anti-money laundering (AML) regime as it applies to legal practice. Focus your revision on:

• the purpose and scope of anti-money laundering legislation, including the Money Laundering Regulations 2017 and Proceeds of Crime Act 2002
• the requirements for client due diligence (CDD) and enhanced due diligence (EDD)
• when and how to identify beneficial owners
• the circumstances triggering EDD (e.g. high-risk countries, politically exposed persons)
• the reporting obligations of solicitors and the interface with professional conduct duties
• the consequences of failing to comply with AML requirements

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. What is the main difference between standard client due diligence (CDD) and enhanced due diligence (EDD)?
2. Name two situations where enhanced due diligence is mandatory under the Money Laundering Regulations 2017.
3. What steps must a solicitor take if they suspect a client is engaged in money laundering?
4. True or false? A solicitor may inform a client that a suspicious activity report (SAR) has been made about them.

Introduction

Money laundering is the process of disguising the origins of criminal property to make it appear legitimate. Solicitors are at risk of being used to facilitate money laundering, especially when handling client funds or complex transactions. The UK anti-money laundering regime imposes strict requirements on legal professionals to prevent and detect such activity. Central to this regime are the concepts of client due diligence (CDD) and enhanced due diligence (EDD), which are essential for SQE1.

The Anti-Money Laundering Framework

Solicitors must comply with the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the "Money Laundering Regulations") and the Proceeds of Crime Act 2002 (POCA). These laws require a risk-based approach to identifying and verifying clients, monitoring transactions, and reporting suspicions.

Key Term: money laundering
Money laundering is the process of concealing, disguising, or converting criminal property to make it appear to come from a legitimate source.

Client Due Diligence (CDD)

CDD is the baseline process for verifying the identity of clients and understanding the nature of the business relationship. It must be performed before establishing a business relationship or carrying out an occasional transaction above €15,000 (or equivalent).

Key Term: client due diligence (CDD)
CDD means identifying and verifying the client’s identity using reliable, independent sources, and understanding the purpose and intended nature of the business relationship.

CDD involves:

• Identifying the client and verifying their identity (e.g. passport, driving licence, company documents)
• Identifying any beneficial owner if the client is not a natural person
• Understanding the purpose and intended nature of the business relationship or transaction
• Conducting ongoing monitoring to ensure transactions are consistent with the solicitor’s knowledge of the client

Key Term: beneficial owner
A beneficial owner is the individual who ultimately owns or controls a client, such as someone with more than 25% of shares or voting rights in a company, or the settlor, trustee, or beneficiary of a trust.

Enhanced Due Diligence (EDD)

EDD is a more rigorous process required in higher-risk situations. The Money Laundering Regulations specify when EDD must be applied, including:

• When the client or transaction is linked to a high-risk third country
• When the client is a politically exposed person (PEP), or a family member or close associate of a PEP
• When the client provides false or stolen identification documents
• When the transaction is unusually large, complex, or has no apparent economic or legal purpose
• When the business relationship is conducted without face-to-face contact

Key Term: enhanced due diligence (EDD)
EDD is a set of additional checks and measures applied to higher-risk clients or transactions, including obtaining extra information, verifying the source of funds, and enhanced ongoing monitoring.

EDD measures may include:

• Obtaining further independent documentation to verify identity
• Establishing the source of funds and source of wealth
• Obtaining senior management approval to proceed
• Conducting enhanced ongoing monitoring of the relationship

When to Apply CDD vs. EDD

Solicitors must assess the risk of money laundering for each client and transaction. Standard CDD is sufficient for most clients, but EDD is mandatory where higher risks are identified by law or in the firm’s risk assessment.

Worked Example 1.1

A solicitor is instructed by a new client to purchase a property for £2 million. The client is a company registered in a high-risk jurisdiction, and the funds are coming from multiple overseas accounts.

Question: What due diligence steps must the solicitor take?

Answer: The solicitor must apply EDD. This includes verifying the company’s identity, identifying and verifying the beneficial owners, establishing the source of funds, obtaining senior management approval, and conducting ongoing enhanced monitoring.

Worked Example 1.2

A client is a UK national and long-standing customer. They now wish to transfer £100,000 to a new business partner in another country. The client provides all requested identification documents.

Question: Is standard CDD sufficient?

Answer: If there are no other risk factors, standard CDD is sufficient. However, if the destination country is high-risk or the transaction is unusual for the client, EDD may be required.

Ongoing Monitoring and Record Keeping

CDD and EDD are not one-off checks. Solicitors must monitor client activity throughout the relationship and update due diligence if circumstances change. Records of identification and verification must be kept for at least five years after the end of the relationship.

Reporting Suspicious Activity

If a solicitor knows or suspects that a client is engaged in money laundering, they must make a disclosure to their firm’s nominated officer (often called the Money Laundering Reporting Officer, MLRO). The nominated officer must then consider whether to submit a suspicious activity report (SAR) to the National Crime Agency (NCA).

Key Term: suspicious activity report (SAR)
A SAR is a report made to the NCA when there is knowledge or suspicion of money laundering or terrorist financing.

Solicitors must not inform the client that a SAR has been made, as this constitutes the offence of "tipping off" under POCA.

Key Term: tipping off
Tipping off is the prohibited act of informing a client or third party that a SAR or money laundering investigation is underway, which may prejudice the investigation.

Ethical and Professional Conduct Considerations

Solicitors must balance their duty of confidentiality to clients with their legal obligations to report suspicions of money laundering. Disclosure to the MLRO or NCA is permitted by law and does not breach client confidentiality.

Exam Warning

If a solicitor informs a client that a SAR has been made, this is a criminal offence (tipping off), even if the solicitor believes they are acting in the client’s best interests.

Revision Tip

Always check whether the client or transaction involves high-risk countries, PEPs, or unusual features. If in doubt, apply EDD and seek guidance from your firm’s MLRO.

Summary

Key Point Checklist

This article has covered the following key knowledge points:

• Money laundering is the process of disguising criminal property as legitimate funds.
• Solicitors must comply with the Money Laundering Regulations 2017 and POCA 2002.
• Client due diligence (CDD) is required for all clients; enhanced due diligence (EDD) is mandatory in higher-risk situations.
• EDD is triggered by factors such as high-risk countries, PEPs, complex transactions, or non-face-to-face relationships.
• Solicitors must identify and verify clients and beneficial owners, and monitor transactions.
• Suspicions of money laundering must be reported to the MLRO and may require a SAR to the NCA.
• Tipping off a client about a SAR is a criminal offence.
• The duty of confidentiality does not prevent solicitors from making required disclosures under AML law.

Key Terms and Concepts

• money laundering
• client due diligence (CDD)
• beneficial owner
• enhanced due diligence (EDD)
• suspicious activity report (SAR)
• tipping off