Private equity funds could take their multi-billion pound business overseas if the government approves draft money laundering regulations in their present format, City lawyers and the Law Society have warned.


Under draft Treasury regulations implementing the third money laundering directive, client due diligence will have to be carried out not only on the customer setting up a legal arrangement, but also on any 'beneficial owner' of the relevant property. The regulations define a 'beneficial owner' as someone with at least a 25% interest in or control of the property.



Lawyers have argued that private equity funds are often a mix of other funds with cross-holdings in each, making it difficult to determine who has a 25% interest. The rules could potentially deter investment in the UK, it has been claimed.



Robin Booth, chairman of the Law Society's money laundering task force and a partner at BCL Burton Copeland, said that despite government claims that it no longer gold-plates EU legislation, 'the UK law in this instance is disproportionate compared with its application elsewhere in Europe'.



Warning of the risk that private equity businesses might move elsewhere, he added: 'Why put yourself through the hassle of our anti-money laundering regime when it's easier to do business in other jurisdictions?'



He was backed by Donald Williams, consultant and money laundering reporting officer at City firm Linklaters, who called for the government to be 'sensible and pragmatic, not dogmatic'. He added: 'Why should the rest of the world come to a halt because of our one-size-fits-all, unreasonable and unnecessary rules?'



Law Society President Fiona Woolf said private equity firms could easily operate out of different jurisdictions and that the regulations could be an incentive for them to relocate their businesses.



She added: 'Private equity firms are not a natural vehicle for money laundering, given the length of time funds are held in investments and the high level of risk.'



The Treasury consultation on the draft regulations closes on 2 April 2007.



Jonathan Rayner