By Anita Rice


The government has agreed to rewrite proposed money laundering regulations after legal and finance professionals, led by the Law Society, condemned the wording of the rules as so vague they were effectively unworkable and potentially unlawful.



The Treasury's draft Money Laundering Regulations 2007 seek to implement the third EU money laundering directive by December this year. In their current form, the new rules would expand customer due diligence requirements forcing practitioners to identify the correct beneficial owners of trusts or risk committing a criminal offence.



However, the regulations were heavily criticised because they contained so broad a definition of the term 'beneficial owner', a concept uniquely developed under English common law, that even lawyers may not know if they were in breach of the rules.



Following a meeting this week between the Economic Secretary to the Treasury, Ed Balls, and Law Society President Fiona Woolf and chief executive Des Hudson, Mr Balls conceded the proposals were 'disproportionate' and that the term 'beneficial owner' should be more narrowly defined to provide greater clarity.



The announcement came in the wake of Charlie McCreevey, the European Commissioner for the internal market and services, backing the Society's campaign for the directive to be incorporated into English law in a more flexible and pragmatic way.



The Treasury is now suggesting that practitioners should only be required to carry out due diligence on those who have legal control over the trust, rather than those who only control 25% of the trust assets.



In addition, due diligence will be required for those who have a vested interest in 25% of the actual assets or capital of the trust, as opposed to anyone with merely a potential interest.



Mr Balls said: 'The issue of ownership is complex...and it is important any requirements that are imposed are as clear and certain as possible. Following discussion with the Law Society and others, we are persuaded that the 25% test presents real difficulties that would be impracticable and disproportionate for the regulated sector to apply.'



Ms Woolf welcomed the Treasury rethink, saying the original proposals would have placed a huge burden on solicitors and deterred investment in the UK.



She added: 'Trusts are used extensively in everyday life, from wills to charities to collective investment products. The definition of a beneficial owner was so unclear that it made it impossible for a solicitor to know who should be the subject of client due diligence.'



Alison Matthews, money laundering reporting officer at national firm Irwin Mitchell, said: 'I am delighted at the Treasury's decision to try to make the regulations as clear and certain as possible. A clear definition of beneficial ownership will mean it will be easier to comply with the new regulations and we can focus on the real risks.'



Sue Mawdsley, anti-money laundering expert and partner at law firm Legal Risk, said the government appeared to have responded to 'the vociferous campaign by the Law Society', but cautioned the industry to look closely at the new definition.



'There was much concern by City firms that the requirements would result in UK firms being unfairly prejudiced compared with US counterparts who don't have this requirement,' she said. 'However, we will have to see how far their concerns are alleviated by the removal of the 25% limit for control and limiting identification requirements to legal control only.'



The Law Society and other stakeholders have until 18 June to respond to the Treasury's new definition.



Concerns remain over other aspects of the UK 'gold plating' of the directive, such as imposing criminal sanctions for breach of the regulations, which the EU legislation does not require.