The Anti-Money Laundering and Counter-Terrorist Financing regulations in the UK appear set for change following HM Treasury’s Call for Evidence and Consultation to Review on the current UK AML and CTF publications in July this year. Each publication takes a collaborative approach to the proposed amendments, seeking feedback from the industry, law enforcement, supervisors, and the public for implementation in spring 2022.
The discourse of HMT signifies the UK government exercising its newly acquired regulatory autonomy post Brexit to tailor the AML/CTF approach to the specific risks identified in the UK, while also adhering to the international standards set by the FATF.
Although the proposed amendments to the MLRs indicate a further divergence from the EU’s approach to AML and CTF risks following Brexit, changes are expected to be implemented on the premise that the regime remains equivalent to the EU’s to minimise the burden of incompatibility on the industry. With the EU also planning legislative reform of their own AML/CTF regime, it will be important to look closely at the deviations that may come to fruition.
Call for Evidence
The Call for evidence is an appraisal of the most recent developments to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs), particularly the implementation of the EU’s Fifth Money Laundering Directive (MLD) in January 2020, to determine the effectiveness and proportionality of the current regime to tackle ML and TF risks.
Areas external to the regulatory perimeter will be assessed as to their risk levels, and whether including them within the scope of the MLR would be beneficial to advance the AML/CTF goals of the UK. HM Treasury will also consider the benefit of publishing Strategic National Priorities aimed at advancing the UK towards these objectives.
Moreover, the efficiency of aspects of the MLRs 2017 will be reviewed on their capacity to function as intended. The SAR regime, the effectiveness of which has previously received criticism from the NCA, FATF and industry actors will see particular attention under this facet of the review, with proposals to enhance the role of supervisors to ensure the filling of SARs adequately reflect the risk assessment of the firm. This includes enabling regulatory action to penalise “poor quality” SAR submissions, warning of an increase in the importance of rigorous SAR reporting in the future for firms.
However, the lack of guidance reflecting the definition of a “poor quality” SAR, and the potential the enhanced role of supervisors to complicate compliance with POCA has raised concerns by firms such as Herbert Smith Freehills. Responses questioning the details of this proposal are thus expected from stakeholders.
The efficacy of Gatekeeping functions including the Senior Management Function (SMF) and certification regime will also be reviewed and could lead to the introduction of a more stringent and demanding certification process. This proposal resonates with the latest criticism towards the scope of the current Appointed Representative regime discussed in the Greensil Report (Which is to be covered further in the next Laven article), which although is not addressed within either publication, suggests greater responsibility may be placed upon principal firms for due diligence of their ARs shortly.
The application of AML and CTF technology such as “personal digital identity technology” shall also be assessed to ensure both its appropriateness and safety to be promoted as an effective recourse to counter ML and TF risks.
Lastly, the UK’s supervisory regime, which currently consists of 25 Professional Body Supervisors (PBS) including the FCA, is under review for its role to deliver an efficient and functional AML/CTF regime, seeking to identify areas of strength and weakness where reform is needed. Specific attention is focused on the role of OPBAS in facilitating the collaboration and communication between the various supervisory bodies and whether changes are needed to improve the OPBAS in performing its occupation.
Proposed amendments to MLR 2017 in the consultation paper
The Consultation paper published by HM treasury explores relatively minor, time-sensitive changes under development especially targeting the MLRs. A key takeaway from the consultation paper is the anticipation of more demanding regulatory obligations on firms in a bid to close regulatory gaps.
For example, HM Treasury has suggested including the formation of limited partnerships (LLPs) within the services lists of Trust Company and Service Providers (TCSPs) obliged to register with Companies House, thus incorporating all forms of TCSP business arrangements under this obligation. This amendment is particularly aimed at LLPs in England and Wales currently exempt due to their non-legal person status that has created a gap within the MLRs.
Likewise, a proposal to extend the reporting of discrepancies between beneficial ownership and the Persons with Significant Control register on Companies House beyond initial onboarding, to become a requirement during CDD of an on-going businesses relationship, threatens to ramp up the compliance obligations of firms.
The suggested inclusion of Proliferation Finance (PF) within the MLRs represents HMT’s ambition to further align the UK’s AML regime with the recommendations of the FATF, in addition to fulfilling pledges within the economic crime plan. This would include a national risk assessment to determine the inherent PF risk, while also obligating authorised firms to conduct a PF risk assessment.
HM treasury also seeks responses regarding the best course of action to update the UK’s MLRs 2017 to be in line with recommendations provided by the FATF on cryptoassets, specifically the implementation of the much-debated “travel rule” – the cryptoasset equivalent of the Funds Transfer Regulation. The travel rule would oblige counterparty cryptoasset service providers to record the originator and beneficiary information to a transaction, a process complicated in the crypto-asset industry by the presence of “non-custodial” wallets and the current lack of a firmly established technological infrastructure in the industry, such as the SWIFT messaging system that enables banks to comply with the Funds Transfer Regulation. Cryptoasset service providers should expect their compliance obligations to intensify once more, and seek the technical solutions being developed internationally to deal with difficulties imposed by the travel rule.
Closing remarks
The proposed amendments illustrate the UK’s intensifying stance on financial crime, typified by the recent legal action taken against Natwest that could see the UK bank liable to pay fines of as much as £340 million.
The FCA and UK government importantly appear to recognise the detrimental effects of imposing strict requirements upon obliged firms. Mark Steward, Executive Director of Enforcement and Market Oversight has acknowledged the risk of creating a regulatory environment that is “overly complicated, bureaucratised, vulnerable to gaming by less scrupulous players, and expensive”. Nevertheless, firms should expect further obligations imposed once reforms are implemented in spring next year.
