CDD webinar for solicitors and MLROs in law firms presented by Jonathon Bray, Rachael Eyre and Carly Fallon Zoom recording available on request

1. © Jonathon Bray Limited
How to conduct Client Due Diligence
(CDD)

2. Learning Outcomes
1. the LSAG guidance and some
common examples of what CDD
would look like in practice;
2. how technology can help you;
3. what to do if a search comes back
as 'refer', and
4. how CDD links with your firm-wide
risk assessment.
© Jonathon Bray Limited

3. LSAG guidance
on CDD
• LSAG guidance is your cheat
code
• Replaces the old Law Society
Practice Note
• HM Treasury sign off expected
• Limits of LSAG guidance
• LSAG key points
• The 5 pillars of CDD

4. The 5
pillars of
CDD
(LSAG)
1. Identify the client and verify their identity
2. Take reasonable measures to verify the identity so that you
are satisfied that you know who the beneficial owner is
3. Take reasonable measures to understand the ownership and
control structure
4. Assess, and where appropriate obtain information on the
purpose and intended nature of the instructions
5. Conduct ongoing monitoring, scrutinise transactions and
make sure CDD documents are up to date
© Jonathon Bray Limited

5. Common examples of CDD –
ID requirements
• Individuals
• Name, DOB, address
• Companies and LLPs
• Name, company number, registered address
• Listed vs private companies
• Trusts
• Name, date of birth and address of client
• Who is the client?
• Partnerships
• Name, registered address, nature of business
• Charities, foundations, associations etc…
All can be found in the LSAG guidance
© Jonathon Bray Limited

6. Beneficial ownership
• Take reasonable steps to identify and verify
• Beneficial owners
• Ownership structure
• What is a beneficial owner?
• Think 25% ownership or control
• Consider a senior executive e.g. CEO where no-one owns
25%
• Don’t necessarily have to see passports etc. of beneficial owners
• “Hello Mr Bezos….”
• What if you can’t identify the beneficial owners?
• High risk?
• Reportable?
• Carry on?
© Jonathon Bray Limited

7. Enhanced
and
simplified
CDD
● Aka “EDD” and “SDD”
● When EDD must take place
○ High risk countries
○ PEPs
○ Other high risk situations
● SDD
○ Likely to be rarely used
○ Not synonymous with “known client”
© Jonathon Bray Limited

8. Source of funds (SOF) and
Source of wealth (SOW)
• An essential part of CDD
• Does my knowledge of the client’s finances
match the transaction?
• SOF and SOW are different but likely to overlap
• Extremely important in:
• PEPs
• EDD
• Lower risk cases can be dealt with on a risk based
approach
Reminder: UK bank account ≠ safe source of funds!
© Jonathon Bray Limited

9. Other important aspects of CDD
(not covered here)
• PEPs
• Recording CDD
• Retention of records
• Reliance on third party CDD
All in the LSAG guidance
© Jonathon Bray Limited

10. How can technology help?
● Can largely replace paper based ID checks
● Very useful for:
○ Improving the client journey
○ Clients not met
○ Clients who have difficulties producing documents
● ‘Belt and Braces’
BUT:
○ You must understand the technology - all are different
○ Risk of computer says no - lots of false positives
○ ID verification is only a part of CDD…no matter what
the sales page says, the technology will not “make you
compliant”.
© Jonathon Bray Limited

11. What to do
if an e-
verification
comes back
as “refer”
● Don’t panic
● Do more CDD if warranted
● Take stock:
○ Has it moved into higher risk category? → EDD
○ False positive?
○ Use professional judgement
○ Ask advice
● Escalate where necessary
○ EDD and senior management sign off
○ Suspicious? → Suspicious activity report
© Jonathon Bray Limited

12. How CDD links with firm wide risk
assessment (FWRA)
● See last month’s session
● This is a fundamental link
○ Some firms do high risk work all the time
○ Others do more occasional high risk work
● FWRA should give strong clues
○ Does this client/matter fit with FWRA?
○ Does all team have access to FWRA?
● AML policy should flow from FWRA
○ Likely to be prescriptive in some
circumstances
○ If not, go directly to LSAG guidance
● Feedback loop
○ FWRA (and AML policy) should be
updated with new situations
© Jonathon Bray Limited

13. © Jonathon Bray Limited
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14. Questions and round up
● AML compliance is about building
blocks:
○ Risk assessment, policy, CDD, training,
records etc.
● The answers are usually there in the
LSAG guidance (even if couched in
risk based language) - there is never
a black and white answer
● Support is out there
● Regulation 21 audit will test CDD
systems
© Jonathon Bray Limited

15. © Jonathon Bray Limited
How to conduct Client Due Diligence
(CDD)