In case you missed it while grappling with new sanctions in recent weeks, at the end of June 2022, HM Treasury (HMT) published the outcome of last year's consultation on forthcoming amendments to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) (the Consultation). These include a new requirement to assess and mitigate the risk of proliferation financing, in addition to amendments to the discrepancy reporting regime, and scope of the regulated sector. Some of the changes consulted upon will come into force shortly, on 1 September 2022.
In parallel, HMT published a report following last year's Call for Evidence and strategic review of the UK's anti-money laundering (AML) and countering the financing of terrorism (CFT) regimes (the Call for Evidence). The review's findings have identified potential areas for reform and will be used to inform the second Economic Crime Plan, which is expected to be published later this year.
We published a detailed briefing on the Consultation and the Call for Evidence when they were launched last year.
In this briefing, we summarise the key conclusions arising from HMT's published findings and the forthcoming amendments to the MLRs.
Consultation outcome and forthcoming amendments to the MLRs
HMT sought views on a number of amendments to the MLRs which it said should be progressed prior to the conclusion of the Call for Evidence and strategic review of the UK's AML and CFT regimes (discussed below). Those amendments were described as time sensitive or already in the works and relatively minor. HMT said it received a total of 94 responses to the Consultation from a range of respondents, including AML supervisors, industry, civil society, academia and several government departments.
The forthcoming amendments to the MLRs which are likely to be of particular interest relate to the following areas. The majority of these amendments are expected to come into force on 1 September 2022:
- Risk assessment to cover proliferation financing
Following the Consultation, HM Government (HMG) will introduce a requirement to assess and mitigate the risk of proliferation financing. This is likely to come into force on 1 September 2022. HMT will be required to conduct a national risk assessment in relation to proliferation financing, and regulated persons will also be required to take appropriate steps to identify and assess the risks to which their business is subject, and to establish and maintain policies, controls and procedures to mitigate and manage these effectively.
The Consultation stated that this amendment would align the MLRs with standards set by the Financial Action Taskforce (FATF). In practice however this effectively 'gold-plates' the relevant FATF recommendation as all persons referred to in Reg 8 of the MLRs (i.e. credit institutions, financial institutions, estate agents etc) – including those in sectors which are likely to pose a low proliferation financing risk – will soon be required to assess this type of risk. HMT said that it would conduct outreach to relevant supervisors so they are able to support their regulated populations in understanding this type of risk.
- Changes in scope of the regulated sector
HMT consulted on the removal of certain account information service providers (AISPs), payment initiation service providers (PISPs), and bill payment service providers (BPSPs), and telecoms, digital and IT payment service providers (TDITPSPs) from the regulated sector. In addition, HMT proposed to clarify the scope of the art sector by removing 'art market participants'. This was based on the perception that such persons pose a relatively low risk of money laundering and terrorist financing.
Following the Consultation, HMT has decided to remove AISPs from the regulated sector and to clarify the scope of the art sector to remove artists who sell their works of art for EUR 10,000 or more. Respondents raised concerns about the removal of PISPs, BPSPs and TDITPSPs from the scope of the MLRs, and so they will be retained.
- Discrepancy reporting
As referred to in our earlier briefing, the Consultation sought views on various changes to the requirement for regulated persons to report discrepancies between information held about their customers' beneficial owners and that recorded on the Persons with Significant Control (PSC) register at Companies House. Respondents expressed concern about the introduction of any changes to this requirement prior to the implementation of reforms to Companies House, which include new powers for Companies House to query information provided to it and to remove information from the register. The following changes to discrepancy reporting will therefore only come into force in April 2023.
New ongoing obligation to report discrepancies after the start of a business relationship
Reg 30A of the MLRs will be amended to require the regulated sector to report discrepancies on an ongoing basis. At present, this is only required before establishing a business relationship.
The draft amending instrument does not clarify precisely when regulated persons will be expected to make any reports following the start of a business relationship. The draft wording provides that any discrepancies identified "when undertaking CDD measures and ongoing monitoring of a business relationship (including enhanced customer due diligence and enhanced ongoing monitoring) under Part 3 of these Regulations after a business relationship [...] has been established" should be reported. Given the breadth of ongoing monitoring requirements under the MLRs (in addition to ongoing CDD refreshes), we hope that HMG, or industry guidance such as the JMLSG guidance, will clarify the position further through accompanying guidance on the revised MLRs, which is yet to be published.
Nature of discrepancy reports required
Many respondents to the Consultation noted a lack of clarity as to what constitutes a "material discrepancy" for the purposes of Reg 30A of the MLRs. We expect that many firms will welcome the forthcoming amendment to the MLRs to include a definition of this, and a list of the types of discrepancy which should be reported to Companies House. The draft amendment instrument provides that a discrepancy will be "material" if:
- by its nature, and having regard to all of the circumstances, the discrepancy may reasonably be considered to be linked to money laundering or terrorist financing, or to conceal details of the business of the customer; including if
- the discrepancy is in a form specified by the MLRs (such as a difference in name or an incorrect entry for a person's date of birth/nationality/correspondence address).
Discrepancy reporting requirement in respect of new Register of Overseas Entities
Regulated persons will also be required to report any discrepancies between information held about overseas entities which are subject to registration under Part 1 of the Economic Crime Act 2022 and that recorded on the newly created Register of Overseas Entities holding UK property. Further information about the new Register, which came into effect on 1 August 2022, can be found here.
In addition, other forthcoming amendments include:
- A new change in control regime for cryptoasset businesses, which we summarised in our earlier briefing, and improvements to information sharing between supervisory authorities and other relevant authorities.
- The introduction from 1 September 2023 of the 'travel rule' for cryptoasset businesses, which will expand the application of FATF Recommendation 16, regarding information sharing requirements for wire transfers, to cryptoassets.
- An extension to Regs 74A-C of the MLRs to apply to Annex 1 firms, aligning the FCA's information-gathering powers across its supervised population.
- Amendments to permit supervisors to view the content of suspicious activity reports submitted by those they supervise and to improve information sharing between supervisory authorities and other relevant authorities.
- An expansion to Regulation 12(2)(a) of the MLRs to include, as a service provided by a Trust or Company Service Provider (TCSP), the formation of a firm and to extend the term "business relationship" to ensure that all TCSPs are obliged to conduct CDD checks if they are seeking to form any business arrangement that must be registered with Companies House.
Results of HMT's Call for Evidence and strategic review of the UK's AML and CFT regimes
HMT committed to undertaking a strategic review of the AML/CTF regime as part of the UK's first Economic Crime Plan 2019-22, and was in any event required by the MLRs to review by June 2022 the MLRs and the Oversight of Professional Body Anti-Money Laundering and Counter Terrorist Financing Supervision Regulations 2017 (the OPBAS Regulations).
The strategic review satisfied both obligations, was structured around three themes and reached the following overall conclusions:
- System effectiveness of the AML/CFT regimes and their extent
Measuring the effectiveness of the MLRs
In seeking to evaluate the effectiveness of the MLRs and the OPBAS Regulations, the review considered their existing objectives and role within the UK's wider AML regime. In light of the responses received to the Call for Evidence, HMT has decided to refine the objectives of the MLRs, which are now as follows:
- their primary objectives are for: (i) the regulated sector to identify, prevent and report suspicious activity, including through the provision of valuable intelligence to law enforcement; and (ii) supervisors to monitor and enforce compliance with the regulations using a risk-based approach, making proportionate and dissuasive use of their powers and enforcement tools; and
- their secondary objective is for the regulated sector to work in partnership with supervisors and the government to improve collective understanding of the ML/TF threat, which in turn ensures compliance activity is focused on the highest risks.
The review noted the challenges of measuring progress towards the objectives of the MLRs, which respondents to the Call for Evidence said were constraining efforts to target activity at improving areas of particular weakness in the UK's AML regime. HMT has said that wider "outcomes-focused" metrics will be set out as part of the second Economic Crime Plan and that it is committed to developing a revised set of "priority metrics" with the aim of providing clearer feedback on the effectiveness of the MLRs.
High/low impact activity
The Call for Evidence sought views on whether a significant proportion of financial crime resource is deployed on activity which makes a limited contribution towards the objectives of the MLRs, and whether there is scope to rebalance resource towards "higher impact" activity. The review noted a common critique of the current balance between mandatory and judgement-based requirements under the MLRs, and the enforcement of these by supervisors.
Based on the responses received, HMT concluded that there was insufficient evidence for a fundamental overhaul of the preventative measures required under the MLRs, although it would continue to consider whether there were further opportunities to dial down activity which less directly contributes to the objectives of the MLRs. HMT said that the review had highlighted the need for it to continue working with businesses and supervisors to build greater understanding of risk and the requirements of the MLRs. The review also highlighted areas for further improvement, such as the provision of intelligence by enforcement agencies to SAR-reporters and the clearer articulation of expectations by supervisors, law enforcement and policymakers.
Strategic National Priorities and emerging risks
HMT said that responses to the Call for Evidence demonstrated clear appetite for increased guidance and granular risk information from the public sector, although the majority of respondents felt that standalone national priorities for the UK's AML regime should not be published at this time. HMT agreed with this and said that it would instead focus on incorporating feedback into the second Economic Crime Plan and National Risk Assessment (NRA), and working with law enforcement agencies to explore how coordinated and timely communications could more clearly demonstrate how firms should flex their compliance activities.
The review also considered the approach to the inclusion of different sectors in the scope of the MLRs. It concluded that the NRA should act as the central vehicle through which emerging risks are assessed to determine whether inclusion in the MLRs is a proportionate outcome. Sectors flagged by respondents to the Call for Evidence will be considered in the next iteration of the NRA. Given that risks may arise outside the NRA timelines, HMT said it would also continue to consider how to use the current system for intelligence development and analysis to identify, review and escalate emerging risks whilst maintaining consistency with the NRA methodology.
- Application of particular elements of the MLRs
Referring to FATF's 2018 UK Mutual Evaluation Review (the 2018 FATF Review), which noted that there was a poor understanding of risk across the UK's regulated sector, the Call for Evidence had asked specific questions about the risk-based approach. Those questions covered: (i) barriers to the risk-based approach; (ii) understanding of risk; (iii) expectations of supervisors; and (iv) specific requirements and provisions of the MLRs relating to enhanced due diligence (EDD), simplified due diligence and reliance.
HMT has indicated that it will continue to look at a number of areas in light of the responses received to the Call for Evidence. In particular, in relation to EDD, HMT highlighted the following for further consideration:
- the risk profile of domestic PEPs – if the risks are found to be sufficiently low, HMT will consider changing the MLRs such that EDD and the additional requirements under Reg 35 of the MLRs would only be required in relation to domestic PEPs where other high risk factors are also present;
- the potential removal of the list of required checks for customers in high risk third countries (HRTC) (Reg 33(3A) of the MLRs) except where FATF requires the application of specific elements of EDD – HMT plans to consult on this change;
- the introduction of further benchmarks to inform the UK's HRTC listing methodology beyond those considered and the jurisdictions listed by the FATF;
- the reference to "complex or unusually large" transactions under the MLRs – HMT said it will review this wording and consider whether an alternative provision would more clearly deliver the policy intent; and
- more broadly, HMT has said it will work with the regulated sectors and supervisors to gather information about the effectiveness of EDD.
Equally, there appear to be a number of missed opportunities to support reforms which consultation responses supported, with HMT failing to take account of industry observations on the unhelpful and disproportionate impact of a number of detailed aspects of the MLRs, such as aspects of simplified due diligence, reliance, and record-keeping, and the scope of 'correspondent relationships'.
The Call for Evidence sought views on whether the MLRs could go further in enhancing the obligations of supervisors in relation to SARs, with a view to improving the quality of SARs that are submitted. Respondents agreed that the role of supervisors in assessing whether the regulated sector is providing high quality information and adequately reporting SARs to law enforcement should be clarified, subject to appropriate safeguards around information handling/sharing. They were not however convinced that the role of supervisors in relation to SARs should be enhanced through legislation. HMT noted that OPBAS already expects Professional Body Supervisors (PBSs) to assess the quality of SARs submitted by their supervised populations, and that a sourcebook update will be published this year which will further clarify how PBSs can increase their supervisory effectiveness.
HMT will keep possible legislative changes under review, in particular in light of a pilot project between the UK's Financial Intelligence Unit and the Gambling Commission relating to the proactive use of SARs for regulatory purposes. This pilot has been extended and a similar approach is planned to be expanded into HMRC and the FCA, subject to progress on IT and SARs reform.
Guidance and supervisory approach
Respondents to the Call for Evidence noted the need for more guidance and information sharing to improve the understanding of risk and the application of an effective risk-based approach. HMT will work with supervisors, OPBAS and law enforcement agencies to understand how information and intelligence is currently shared, and how the risk-based approach is incorporated into front-line supervision, and how these might be enhanced.
- Structure of the supervisory regime
Adequacy of enforcement powers under the MLRs
The Call for Evidence sought views on whether the enforcement powers under the MLRs were sufficient, whether they were used proportionately and dissuasively, and whether there is sufficient use of criminal sanctions for the worst offences.
Broadly speaking, respondents thought that the powers were sufficient, although their inconsistent application across different sectors was noted. Respondents from the financial sector noted that the level of fines brought against financial institutions has been significantly higher than other sectors, which has led to high levels of investment in AML regimes but has also made banks more risk-averse. HMT noted that the performance framework measuring the effectiveness of the MLRs would set out the expectations of the supervisory regime, and that enforcement considerations would form part of a planned consultation on the structure of the supervisory regime.
The Call for Evidence sought views on potential models for reform of the supervisory regime, such as expanding OPBAS's remit or a degree of consolidation. HMT noted the criticisms that were made of the supervisory regime as part of the 2018 FATF Review and by the Treasury Select Committee as part of their inquiry into economic crime earlier this year.
Responses did not agree on which broad category of reform should be sought, although the report noted that HMT had now developed four potential options for reform which it plans to consult on in due course:
- OPBAS+ – reforming OPBAS's remit and giving it additional powers, such as a power to issue financial penalties. HMT noted that the downside to this option is that it would effectively represent a continuation of the UK's existing approach and would therefore not address more structural concerns.
- PBS consolidation – consolidating the number of PBSs and transitioning supervised firms into between two and six remaining PBSs, to decrease inconsistency and simplify information-sharing across the legal, accountancy and TCSP sectors. This would however require regulated firms not currently supervised by one of the remaining PBSs to pay fees to two professional bodies.
- Single professional services supervisor (SPSS) – creating a single statutory supervisor for professional services to enable a greater focus on the effectiveness of "high risk enabling services" and with similar statutory powers to the FCA and HMRC. HMT said that there would be a consultation on the extent of professional services in scope of such a supervisor. HMT noted that the reform necessary to implement this model would take several years to complete and that there was a risk of a lack of focus on supervision of high-risk sectors while the new supervisor was established.
- Single AML supervisor (SAS) – creating a new dedicated AML authority with a view to ensuring a consistent approach to supervision and enforcement. HMT noted that the creation of a SAS would present similar challenges to the alternative SPSS model, and that a SAS would need to be carefully monitored to ensure it was appropriately prioritising resources and targeting risks across the whole of the regulated sector.
A significant number of changes to the UK's AML and CFT regulatory and supervisory regimes are on the horizon.
In the immediate term, firms should consider the forthcoming amendments to the MLRs, such as the new requirement to assess and mitigate the risk of proliferation financing, to ensure that compliance procedures are aligned. In relation to the forthcoming amendments to the discrepancy reporting requirement, which are not due to come into force until April 2023, firms should look out for any additional guidance from HMG and their supervisors, which we hope will clarify precisely when reports should be made following the start of a business relationship.
In the medium to long term, firms can expect further clarity on HMG's plans for reform in the second Economic Crime Plan which is due to be published later this year, and the future consultations referred to in HMT's report on its strategic review of the AML and CFT regimes. Whist HMT has said that it does not currently see the merits of a fundamental overhaul of the MLRs (e.g. to focus more on higher impact activity or to adjust the balance between mandatory and judgement-based requirements), it will continue to look at specific aspects of the MLRs, such as the provisions relating to EDD. In addition, it is clear that changes to the UK's supervisory regime, and potentially the enforcement powers under the MLRs, are also in scope of further consideration and reform.
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