Money Laundering Regulations: What is a ‘transaction’?

The SRA interprets this Regulation in its Guidance of December 2021. It’s the nearest thing we have to an official definition of ‘transaction’. It reads as follows (disclaimer: it’s quite lengthy):

Interpretation

“This is the most common activity that firms we supervise provide. It is effectively a description of transactional legal work, so any matter with a transaction will likely fall into scope via this definition. It is also the most complicated definition, so we have tried to explain the requirements below.

For this to apply, the scenario needs to meet several tests:

• The service needs to be provided by way of business to other persons
• The services provided must be legal or notarial
• The matter must involve a financial transaction or a real property (ie land or buildings) transaction – note that a property transaction does not need for there to be a transfer of funds, only of ownership or rights
• You need to be assisting in the planning or execution of the transaction or otherwise acting for or on behalf of a client in the transaction

The matter must also involve any one of the following:

a. Property conveyancing (residential or commercial) or the purchase of companies, limited liability partnerships, partnerships or other kinds of business entity

b. Managing client money, securities or other assets – we would regard “managing” to include arranging or making transactions on behalf of a client, but it would not include just holding on to assets on behalf of the client

c. Opening or management of bank, savings or security accounts – again management implies activity beyond simply holding the assets

d. Preparing or managing funds or other contributions which are intended to be used by companies for their foundation, operation or management

e. Creating, operating or managing trusts, companies or similar structures.

If you meet the criteria of regulation 12(1)(e) you will also likely need to have regard to the section on Trust or Company Service Providers as this definition overlaps with regulation 12(2):

Trust or company services provider

Definition

12(2) In these regulations, trust or company service provider means a firm or sole practitioner who, by way of business, provides any of the following services to other persons, when that firm or practitioner is providing such services:

a. forming companies or other legal persons
b. acting, or arranging for another person to act:
i. as a director or secretary of a company
ii. as a partner of a partnership
iii. in a similar capacity in relation to other legal persons
c. providing a registered office, business address, correspondence or administrative address or other related services for a company, partnership or any other legal person or legal arrangement
d. acting, or arranging for another person to act, as:
i. a trustee of an express trust or similar legal arrangement
ii. a nominee shareholder for a person other than a company whose securities are listed on a regulated market

Interpretation

While this definition is quite clear, often firms risk drifting into scope of this area by doing another area of work that is out of scope. For example, a firm could be providing advice about an employment law matter which might be out of scope. Then, as a part of that matter, they might establish a trust for the client, bringing the firm into scope.

It is very important to understand that you cannot undertake any of the work in scope of regulation 12(2) before telling us via an FA10 or FA10b in mySRA. If you are providing TCSP services, you must be included on the official register held by HMRC before you can legally provide these services. We will arrange the addition of your firm to the official register of TCSPs on your behalf once you have notified us that you are providing these services. You should review our guidance on this area of work for more information.

Tax advisers

Definition

11. In these regulations, ‘tax adviser’ means a firm or sole practitioner who by way of business provides material aid, or assistance or advice, in connection with the tax affairs of other persons, whether provided directly or through a third party, when providing such services.

Interpretation

This definition is extremely broad, and whenever there is a tax consequence in a matter, there is a risk you might be drawn into scope as a tax adviser. You should monitor the work done on a matter to make sure you either steer clear of work in scope of the definition of tax adviser, or that if you do provide these services, your firm is complying with the regulations. We have published guidance on this area of work and what you might need to consider when deciding whether you are in scope or not.”

The SRA’s lengthy analysis shows that it is not straightforward. Anything but, in fact. There are few examples of excluded work. 

Regulation 33(3) specifically excludes litigation

“Requirement to cease transactions etc
31.—(1) Where, in relation to any customer, a relevant person is unable to apply customer due diligence measures as required by regulation 28, that person—
(a) must not carry out any transaction through a bank account with the customer or on behalf of the customer;
(b) must not establish a business relationship or carry out a transaction with the customer otherwise than through a bank account;
(c) must terminate any existing business relationship with the customer;
(d) must consider whether the relevant person is required to make a disclosure (or to make further disclosure) by—
(i) Part 3 of the Terrorism Act 2000; or
(ii) Part 7 of the Proceeds of Crime Act 2002
(3) Paragraph (1) does not apply where an independent legal professional… is in the course of ascertaining the legal position for a client or… defending or representing that client in, or concerning, legal proceedings, including giving advice on the institution or avoidance of proceedings.”

Rather, the SRA identifies what is included, and then leaves it to firms to decide for themselves whether a matter is excluded or not. With both TCSP and tax work, I think that many would be surprised at the very wide scope – the moment that any advice becomes personalised to the situation, then it falls within scope, with the requirement for a firm to observe the rules, including the requirement to have a practice-wide risk assessment.  Firms that do any TCSP work must register with HMRC – the SRA will do this for you on receipt of a suitable notification that the firm is within scope. For tax matters, you don’t even have to give advice: ‘assistance’ and ‘material aid’ such as filling forms are specifically included. Indeed, one of our clients dealing with commercial work were surprised to become subject to the Regulations solely on account of this aspect. The included list is as follows:

• Conveyancing
• Commercial and corporate work
• Transactional work – including commodities, and business entities
• Trust and company work
• Tax work (other than litigation involving HMRC or the simple paying of Stamp Duty and Land Tax)
• Probate matters where you are managing the assets of the estate under instruction from the executors or as the executor or creating a trust as a part of the surrounding arrangements.

It’s important to ensure that excluded work – e.g. employment litigation – does not subsequently change to included work, e.g. through giving tax advice (in accordance with the above definition and the link to the SRA’s relevant guidance) in a settlement agreement, perhaps about specific circumstances concerning tax exemptions of such instruments, or by filing relevant forms. The SRA’s examples are also self-contradictory. For example, the guidance for tax advice includes ‘material assistance’ which includes ‘filing papers with HMRC on behalf of a client.’ But the penultimate bullet point in the scope of included work (above) excludes the filing of SDLT 1s and paying the tax. It would be extremely unlikely that a Solicitor would agree to file anything unless they had conduct of the entire transaction producing the requirement to file, and therefore be within scope anyway.

In the employment example, advising on the settlement agreement is clearly excluded by Regulation 33 but the giving of tax advice or receiving settlement money into your client account is within scope. Registering a land transfer, private mortgage or a company charge that a client might have completed themselves is also clearly within scope. So, whether you are dealing with a transaction or not, it’s better to apply the same due diligence to every client – ‘transaction’ is very wide, and the boundary between transaction or no transaction is so unclear that it’s easy to fall foul of the rules.