Enhanced customer due diligence on a politically exposed person

Welcome to The Brief. This month, we share how we undertook enhanced customer due diligence (CDD) on a politically exposed person pre-offer as part of our advice on a residential property purchase.

The Brief

We were introduced to a new client who was proposing to make an offer on a substantial property in London. The prospective client was serving in the government of his home country and having struggled to have offers accepted or taken forward by selling agents in the past, he wanted us to onboard him before he submitted his offer on the property.

Executing the Brief

All solicitors are under an obligation imposed by Money Laundering Regulations 2017 (as amended) to carry out CDD when commencing a business relationship. The obligation requires us to take a risk-based approach and carry out ongoing monitoring throughout the engagement.

We identified a clear risk factor with our new client as he is a politically exposed person with access to public funds. This meant we had to undertake enhanced CDD before we could start to act on the property purchase.

We were able to meet the normal threshold for onboarding quite painlessly: the new client provided government issued photo identification (their passport) and proof of address document (utility bill). The prospective client explained that his source of wealth was inheritance and investment proceeds, and that funds for the purchase would come from a UK bank account set up for the acquisition and ongoing maintenance of the property.

Because we were undertaking enhanced CDD we also sought additional information, asking the client for further particulars on the investment proceeds and required third-party verification from the client’s private banker. On receipt of this additional information, we identified further risk factors, namely that the client’s wealth was generated from a high-risk industry prone to corruption, and had been generated in a high-risk jurisdiction.

We therefore asked further questions of the client and their private banker, designed to provide comfort to us that the client’s wealth had been made through legitimate means. Ultimately, we were satisfied with the information provided, having taken a proportionate and risk-based approach.

As lawyers, our primary regulatory concern is understanding a prospective client’s source of wealth and funds. In this example, we were also aware that the agent needed to see proof of funds and in anticipation of this we also requested a bank statement showing the full amount required to complete the transaction, and obtained the client's authority to share CDD information, with relevant third parties (in this instance the sales agent) in order to help the agent discharge their anti-money laundering duties.

Our client is now onboarded and the delighted owner of the property. 

The debrief

Here are some key points to bear in mind for transactions and scenarios such as the one outlined in this case study:

• CDD protocols are well established and serve as an important check against money-laundering and terrorist financing.
  
  
• For routine, low-risk clients we can usually clear compliance on the day we are instructed. While it always helps to meet a client in person, certifying documents over video call is now also routine. 
  
  
• We always need to be alive to risk factors however, and when a client is not used to providing personal financial information, especially in the context of a new relationship where trust needs to be established on both sides, it can take some time to satisfy our requirements.
  
  
• We must also be mindful of the requirement to carry out ongoing monitoring: sometimes new risk factors come to light during the course of a transaction and further diligence is required.
  
  

We have produced a summary of what we generally require for our CDD checks which can be read here. We are always happy to discuss onboarding clients at an early stage so you will be ready to proceed as soon as terms are agreed.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, January 2024