Is your firm at risk of proliferation financing?

What’s changed?

The Legal Sector Affinity Group (LSAG) AML guidance is designed to help legal professionals and firms comply with the Money Laundering Regulations (MLRs) 2017.

From 1 April 2023, the Money Laundering and Terrorist Financing (Amendment) (No. 2) Regulations 2022 introduce changes to the MLRs 2017, including:

• a requirement to carry out proliferation financing risk assessments
• changes to the duty to report discrepancies to company registries

LSAG has reviewed and updated the AML guidance in the light of this new legislation, to help you stay compliant and mitigate your firm's money laundering risk.

What is proliferation financing?

“Proliferation financing” is broadly defined in regulation 16A(9) of the Money Laundering Regulations 2017 as:

“the act of providing funds or financial services for use, in whole or in part, in the manufacture, acquisition, development, export, trans-shipment, brokering, transport, transfer, stockpiling of, or otherwise in connection with the possession or use of, chemical, biological, radiological or nuclear weapons, including the provision of funds or financial services in connection with the means of delivery of such weapons and other CBRN-related goods and technology, in contravention of a relevant financial sanctions obligation.”

From 1 April 2023, firms must carry out proliferation financing risk assessments – either as part of the existing practice-wide risk assessment or as a standalone document.

Practice areas that have been identified as higher risk include trade finance, commercial contracts and shipping.

Sections 5.3 and 5.4 of the guidance set out how to assess your firm’s risk of proliferation financing in more detail. A list of risk factors to consider has been set out in section 18.10.

Section 4.8 of the guidance sets out the requirement to include a proliferation financing risk assessment in your firm’s policies, controls and procedures.

Clarification on high-risk third countries is set out in section 5.6.2.1.

Section 6.19.1 replaces a reference to “EEA country” with “country with controls equivalent to 5MLD”.

Duty to report discrepancies to company registries

From 1 April 2023, the duty to report discrepancies to company registries only applies if:

• the business relationship being established is with:
  • a company
  • a limited liability partnership
  • a Scottish partnership
  • a trust which is required to register with HMRC’s trust registry
  • an overseas entity that needs to register due to ownership of UK real property
• the discrepancy is “material” – not a typo or minor spelling mistake
• the discrepancy “by its nature and having regard to all the circumstances, may reasonably be considered” to:
  • be linked to money laundering or terrorist financing, or
  • conceal details of the customer’s business

Section 12.6 of the guidance sets out your obligations in more detail.