HMT launches consultation on money laundering regulations
On 11 March, HM Treasury published a consultation entitled “Improving the Effectiveness of the Money Laundering Regulations”. The consultation follows the 2022 government review of the anti-money laundering/ counter-terrorist financing (AML/CTF) regulatory and supervisory regime and its Economic Crime Plan set for 2023-26. The overarching aim is to improve the effectiveness of the current Money Laundering Regulations 2017 (MLRs).
Reducing money laundering is one of the core goals of the Economic Crime Plan, and this consultation and any amendments to the MLRs that may flow are perhaps a small step towards achieving that. For regulated firms seeking to ensure compliance with the MLRs on a day to day basis, however, any improvements, clarifications and simplifications will be welcome.
The consultation focuses on areas of the MLRs where additional clarity might support compliance or where there might be opportunities for stakeholders to work together in a better way, with an emphasis on proportionality. With the UK government increasingly placing the burden on the private sector as the first line of defence against financial crime – as seen most recently in the new corporate criminal offence of failure to prevent fraud – the need for proportionality, in particular, is stark.
With any legislation or regulation, the key is in both the implementation and the enforcement. The consultation includes questions relating to improvements to intelligence and information sharing gateways to aid those enforcement efforts, which speaks to similar collaboration efforts at an EU level with the new EU AML authority, AMLA, being instituted in Frankfurt, to begin operations in mid-2025.
Money laundering is an inevitable corollary of any economic crime and having robust, effective regulations is a core element of the fight against it. It is to be hoped that the outcome of this consultation will support the UK’s regulated sector in contributing effectively to that fight.
Summary of key elements of the Consultation
The consultation proposals and questions are set out in four chapters, each with a different theme, which are described in more detail below, together with the key questions raised in the consultation. The four chapters are:
- Making customer due diligence more proportionate and effective
- Strengthening system coordination
- Providing clarity on scope of the MLRs
- Reforming registration requirements for the Trust Registration Service.
1. Making customer due diligence more proportionate and effective
There are concerns about the proportionality of the checks required under the MLRs and whether a better balance can be achieved. The 2022 government review found that the customer due diligence (DD) requirements in the MLRs continue to be the right ones but the government is keen to reduce any ambiguities which could result in over-compliance or inconsistent application. In particular, there are three issues identified as having a risk of ambiguity: (1) the trigger points for when DD is required; (2) the requirement for source of funds checks on customers; and (3) the checks required where a person purports to act on behalf of a customer.
Looking at these three issues in more detail, the consultation sets out the following.
- Trigger points for DD: are the primary triggers when regulated firms must undertake customer DD set out at regulation 27(1) and (2) sufficiently clear and easy to apply? Some examples of areas where there is lack of clarity include the rules around when a firm establishes a ‘business relationship’; when money laundering/ terrorist financing is suspected; and when the veracity of identity documents is doubted.
Q: Are the customer due diligence triggers in regulation 27 sufficiently clear?
- Source of funds checks: these can be used to obtain assurance that the ongoing transactions are consistent with knowledge of the customer, but the current legislation doesn’t set out specifically where a source of funds check is required. The consultation notes that listing examples is unlikely to be helpful.
Q: is additional guidance or detail needed to help firms understand when to carry out ‘source of funds’ checks?
- Verifying whether someone is acting on behalf of a customer. Regulation 28(10) stipulates that where a person purports to act on behalf of the customer, regulated firms must verify that the person is authorised to act. The consultation asks whether this requirement is clear, for example, what does ‘acting on behalf of’ mean, when a corporate entity is involved?
Q: Do you think the wording in regulation 28(10) on necessary due diligence on persons acting on behalf of a customer is sufficiently clear?
Digital IDs
The government says it is committed to considering ways to minimise the burden of identity verification for firms and customers. It wants to actively encourage digital identity technologies and is putting in place the necessary framework and tools. Regulation 28(19) clarifies that an electric identification process may be used where such a process is “secure from fraud and misuse”.
Q: What information would you like to see included in published digital identity guidance?
Enhanced DD (EDD)
The government wants to make sure that the triggers for EDD are still appropriate and that they support regulated persons to usefully identify higher risk customers or transactions.
Q: Are the risk factors listed useful; should there be other factors?
The requirement to apply EDD to ‘complex’ transactions is recognised as challenging. What constitutes a complex transaction differs between industries and across customer bases.
Q: Should there be additional guidance?
Simplified DD
There may be scope to expand the list of customer risk factors specified in regulation 37(3)(a), for the purposes of considering whether a particular situation represents a low risk of money laundering and would therefore be appropriate to consider applying SDD. For example, if the business is regulated under MLRs overseas or whether the business is regulated in other ways.
Q: Do you agree that the government should expand the list of customer-related low-risk factors?
2. Strengthening system co-ordination
This part of the consultation looks at how to support the commitment in the Economic Crime Plan 2023-26 to better coordinate the collective response to economic crime, noting that improving information and intelligence flows across the economic crime system is a key milestone in the plan.
In 2022, the government made significant amendments to regulation 52 of the MLRs to expand the gateways for intelligence and information-sharing, particularly between public bodies and the Professional Body Supervisors. The amendments aimed to provide more opportunities for a whole system approach towards removing bad actors and those seeking to exploit the UK for criminal purposes.
However, neither of the information sharing gateways at regulation 52 and 52A currently permit the sharing of information with the Financial Regulators Complaints Commissioner.
Q: should the MLRs permit the FCA to share relevant information with the Financial Regulators Complaints Commissioner?
Regulation 52(1A) of the MLRs provides for a reciprocal information-sharing gateway so that certain other public bodies may share AML/CTF-related information. However, the public bodies listed as relevant authorities under this provision are limited to the law enforcement agencies, HM Treasury and specific agencies under the oversight of the Department for Business and Trade.
Q: Should any other public bodies be added to this list and which ones?
Q: Are there any other changes to support co-operation? Should the Registrar of Companies share information?
3. Clarity on the scope of MLRs
The government reports that it remains committed to easing the administrative burdens for firms to comply with the regulations. Suggestions are therefore made to ease the burden, such as by moving all monetary references to GBP.
Crypto: The authorisation/ registration and change in control assessments under the Financial Services and Markets Act (FSMA) and the MLRs differ in how they identify and assess the risks associated with controllers of crypto firms as they use different definitions.
The government is interested in views as to whether it is appropriate to have two different concepts of control for crypto firms under MLR supervision depending on whether they are FSMA authorised or not. The government proposes to align the current MLR regime for crypto firms more closely with the FSMA model. Firms under each regime in the same industry should have commensurate risk of money laundering and terrorist financing and consequently be treated the same in regulation. There are a number of questions on aligning the concepts of control.
4. Reforming registration requirements for the Trust Registration Service (TRS)
The TRS was introduced by the MLR 2017 to increase transparency in trust ownership by creating a central register of the beneficial ownership of taxable trusts.
The government is reviewing the operation and scope of the TRS, including: the role of TRS in the investigation of money laundering and terrorist financing; the registration responsibility on trustees; and the changing international and national objectives to increase transparency of trusts. The purpose of the review is to identify areas where the TRS could be improved to continue meeting key policy objectives and to provide consistency and simplicity. The government proposes changes to ensure a targeted approach to trust registration requirements and to focus on highest risk trusts. An improvement in the transparency of UK land ownership by non-UK trusts is desired.
Various changes are proposed in this area – and will be of a particular interest to Real Estate and trusts lawyers. Most notable, is the proposal to introduce a de minimis exemption for trusts required to register on the TRS.
The consultation closes on 9 June 2024, do get in touch with your usual contact if you wish to discuss the questions raised, or any other aspect of the consultation.
