Simplifying anti-money laundering obligations for corporate M&A lawyers

Corporate mergers and acquisitions (M&A) lawyers must understand and verify who they are working with to meet compliance requirements.

But, for many M&A lawyers, this can be a challenge because of complex ownership structures and interlinked businesses and people. However, new tools and methods can simplify this process enabling lawyers to know their clients and reduce their fraud and money laundering risk.

What’s the issue?

Any transaction or deal increases the risk of fraud and money laundering. When money is changing hands, such risks become significant.

Given this, lawyers advising firms on acquisitions, sales or mergers are exposed to increased risks and potential fines or penalties.

To reduce this risk, lawyers must understand and verify their clients. They must take ‘reasonable measures’ to discover the ultimate beneficial owner (UBO) of any deal or transaction to help prevent fraud and money laundering.

The closer lawyers are to the UBO, the more they can trust the information they receive and the less likely they are to fall foul of the regulations.

However, for M&A lawyers, this can be challenging. Some companies may have complex ownership structures involving multiple businesses and people - all requiring verification.

Such complexity takes time to resolve, adding a significant burden for already busy lawyers and their firms, and may leave the lawyer or firm open to significant fines or penalties if they fail to verify the identities of the directors and the UBO.

Indeed, many corporate lawyers deal with businesses with several layers of ownership across multiple jurisdictions. For example, Thirdfort worked with a corporate law firm to untangle the structure of a seemingly straightforward small food business, which had ten layers of ownership across four countries and in several tax havens.

What’s the impact?

Unravelling such ownership structures and verifying the identities of all involved is time-consuming.

To do so, corporate lawyers will need to understand and identify the directors and owners of each business within the ownership structure.

To gain this understanding, lawyers must investigate relevant business registers such as Companies House and overseas equivalents.

For those businesses in foreign jurisdictions, even researching such registers can be difficult. For instance, some registers may not be kept up to date, forcing lawyers to double-check all information with those involved, adding further time and complexity to the due diligence process.

After the business ownership has been examined and verified, lawyers must verify the individuals involved. This process requires checking all individuals’ identity documents, such as passports, proof of address and other essential information.

It is easy to see how complex ownership structures add a significant time burden for corporate M&A lawyers working on multiple transactions. It prevents lawyers from doing what they do best, advising clients on complex areas of law and steering transactions forward.

Moreover, such complexity increases the risk of unknowingly facilitating fraud or money laundering, exposing lawyers and firms to fines, penalties and reputational damage.

What’s the solution?

The answer is to combine know-your-business with know-your-client verification, where lawyers

can ascertain the business ownership and verify the identity of everyone involved.

This combination helps keep the process together, removing complexity and ensuring lawyers meet their AML compliance requirements.

So, how can corporate M&A lawyers ensure they get the information they need on the business and its directors and owners?

There are three criteria any information must satisfy. Information on the businesses and the people involved must be accurate, comprehensive, and global.

With corporate entities, commercial registers can become out of date quite quickly. Given this, lawyers should connect various sources to build a complete picture of their client’s organisation and activities.

Next, corporate M&A lawyers should seek comprehensive information. When conducting client due diligence, lawyers will have a list of questions they need to answer to satisfy regulatory requirements.

Such requirements may include whether the corporate entity has been subject to sanctions or adverse media. Questions might also focus on the nature of the client’s business, its main activities, and UBO discovery.

Lawyers then need to find the information to answer these questions. The greater the depth of information, the fewer delays lawyers will face when onboarding corporate clients.

Last, in today’s more international business environment, corporate M&A lawyers need information with a global reach.

While a corporate entity may be UK- or EU-registered, other entities in the ownership structure may be based in less accessible jurisdictions.

So, law firms may need access to information on corporate entities wherever based, without switching between commercial registers.

Without such global information and access, lawyers must visit multiple commercial registers in several jurisdictions, increasing the time and complexity involved in the verification process.

Overall, by identifying and verifying complex company structures and getting closer to the ultimate beneficial owners, corporate M&A lawyers can satisfy their compliance requirements and reduce the risk of fraud and money laundering.

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