Regulatory Update - May 2025

James Price

Welcome to this month’s compliance update. In this session, we’ll be focusing on the latest changes to the Legal Sector Affinity Group, or LS A G, Guidance.

James Price

This guidance is essential for legal professionals working in anti-money laundering, as it sets the industry standard, is supported by all legal regulators, and outlines good practice across the UK. There have been several key updates that legal professionals and compliance teams need to be aware of.

James Price

Firstly, there's a clear confirmation that firms with an annual turnover exceeding £10.2 million are now required to pay the Economic Crime Levy. Registration can be done online with HMRC. The guidance also introduces the concept of supply chain risk—highlighting the need to examine not only your direct clients but also the risks posed by the broader supply and client chains.As always, firms must stay up to date with FATF updates, particularly concerning high-risk jurisdictions. These are defined as countries subject to a call for action, or those under increased monitoring.

James Price

On the subject of client due diligence, the guidance now reinforces the need to look beyond just beneficial ownership. You should also consider who controls the organisation. That means identifying key decision-makers, understanding the governing law and constitution of the entity, and verifying directors or equivalent persons with operational responsibility.

James Price

Regulation 28.5 highlights that we must take reasonable measures to understand the ownership and control structure of client entities—especially where beneficial ownership involves a non-natural person. This is not just about percentages. It’s about identifying individuals who hold power and influence and documenting your understanding of their background and the nature of the transaction.

James Price

The update also reminds us of the Register of Overseas Entities. Any overseas business owning, buying, selling, or even transferring UK property must be registered.Another key addition is the term “underlying source of funds.” This refers to third parties who may be providing funds in a transaction. Their source of funds must now also be established.As of January 2024, the guidance also clarifies that domestic Politically Exposed Persons are considered lower risk than non-domestic PEPs, though appropriate risk assessment is still required.There's also increased emphasis on discrepancy reporting, with referrals directed to Companies House and the HMRC Trust Register.

James Price

Importantly, we now have two new exemptions under the Proceeds of Crime Act, introduced by the Economic Crime and Corporate Transparency Act—or ECCTA.The first is the “de minimis exemption”. Under certain conditions, an offence is not committed if the criminal property involved is less than 1,000 pounds, the transaction occurs in the regulated sector, and it's carried out as part of exiting a client relationship—provided the firm complies with their duty to carry out customer due diligence. The second exemption allows for mixed-fund transfers, where some but not all of the client’s assets may be criminal in origin. If it's not possible to separate the legitimate and suspect funds, and the transfer doesn't reduce the remaining balance below the value of the suspected criminal portion, then the transfer may proceed—again, within tightly defined conditions. That said, the guidance makes it clear: you should never structure a transaction to try and take advantage of these exemptions. If there’s any doubt at all, submit a Suspicious Activity Report.

James Price

To help you unpack all of these updates, Datalaw will be hosting a Spring Update webinar on 13th June 2025, where we’ll be diving into the Legal sector affinity group guidance changes in greater detail.Thanks for joining us for this May 2025 compliance update. Stay informed, stay compliant—and we’ll see you next time.