Ten of the City’s leading law firms have joined forces to warn that the Government risks driving away highly-lucrative private equity business if new money laundering regulations are not relaxed.

Representatives from firms including Linklaters, Herbert Smith and Allen & Overy said the draft regulations, designed to bring the UK into line with the Third European Money Laundering Directive, would hit the private equity industry particularly hard because of the way its investment funds are structured.

Under the regulations, lawyers setting up a private equity vehicle for use in an acquisition would need to conduct due diligence on some individual investors in the fund doing the deal as well as the actual private equity firm itself.

In a joint statement, the ten firms warned that this would be “difficult, time consuming and could act as a deterrent to [private] equity funds investing in the UK.”

David Frank, practice partner at Slaughter and May, another of the firms behind the warning, said the regulations would “place the UK at a competitive disadvantage” to the US and other European jurisdictions with less stringent rules.

“If it’s easier to go elsewhere, then private equity funds will definitely think twice before doing deals in the UK,” Mr Frank said.

Law firms are keen for the UK to maintain its position as the private equity capital of Europe because the industry supplies a steady stream of corporate, tax, employment and other work.

Over a quarter of all mergers and acquisitions announced in the UK last year involved private equity firms, according to Dealogic, netting lawyers hundreds of millions of pounds in fees.

The ten law firms have agreed to introduce the Law Society, which is spearheading a wider campaign against the regulations, to representatives from other areas of financial services such as investment banking and accountancy to coordinate their opposition.

Mr Frank said the draft regulations, that are due to come into effect in December, are an example of the UK “goldplating” European legislation by imposing stricter rules than are necessary to comply with the EU Directive.

Fiona Woolf, president of the Law Society, said: “The Government could drive private equity funds away from the UK if it continues to ignore the advice of the Society and City firms.

“Private equity firms are quite mobile in their ability to operate out of different jurisdictions, and these regulations will be an incentive for them to relocate their business elsewhere.”

However, the British Private Equity and Venture Capital Association (BVCA) insisted the situation was under control.

Margaret Chamberlain, a partner at Travers Smith who is chairman of the BVCA's Regulatory Committee, said that the BVCA was in the process of completing guidelines setting out how law firms could comply with the regulations. These would then be approved by HM Treasury and offer law firms a "safe harbour" for following the new rules.

She added that although the Treasury has not yet approved the guidelines, there was "no reason to think they would be unhelpful" on the issue.

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