Following the government’s admission that anti-money laundering regulations are ‘a major burden’ on professional business services firms, HM Treasury has released a response to the 2024 consultation examining the effectiveness of Money Laundering Regulations.
In the foreword to the response, economic secretary to the Treasury Emma Reynolds said the government is ‘confident that these changes represent a balanced approach to mitigating illicit finance risks and supporting businesses to invest and grow’.
The consultation covered four main themes: making customer due diligence more proportionate and effective; strengthening system coordination on economic crime; providing clarity on the scope of the MLRs; reforming registration requirements for the Trust Registration Service.
The response, which has resulted in changes to several key areas including clarity on source of fund checks, has been welcomed by the Solicitors Regulation Authority. Director of AML Alexandra Jones said the SRA will work with HM Treasury to put the changes into action and will update solicitors ‘as soon as possible’.
The key changes are summarised below; the full consultation can be seen here.
Key changes
Customer due diligence (CDD)
The consultation focused on three areas where there was a potential lack of clarity with respect to CDD: the trigger points for CDD for non-financial firms, the requirements in cases where a third party is acting on behalf of a customer, and source of funds checks as part of ongoing monitoring.
Fundamental changes have been ruled out in relation to trigger points, with the majority of respondents saying they were content with how customer due diligence triggers are set out. Some respondents requested clarity abot when a business relationship with a customer is established. Sector-specific guidance will be reviewed by supervisors and industry bodies to consider whether additional detail or case studies will help firms to apply the regulations consistently.
Source of funds checks as part of ongoing monitoring
Responses were split evenly between respondents who said additional guidance was necessary and those who believe current infomration is sufficient. Many responses did, however, request mosre guidance related to the phrase ‘where necessary’ in relation to the obligation to review transactions and the source of a customer’s funds.
Legal and property sectors requested sector-specific examples of when and how sources of funds checks should be carried out: estate agents highlighted the complex nature of property transactions and the legal sector highlighted a lack of clarity regarding what source of funds checks might materially constitute in the case of legal transactions and lawyer-client relationships.
The current wording of the MLRs will be retained, but the government will work with supervisors and industry bodies to improve sector-specific guidance.
“This should clarify that the effect of regulation 28(11)(a) is that source of funds checks are necessary when a transaction appears to be inconsistent with the firm’s knowledge of the customer, the customer’s business and risk profile.”
The potential for guidance to provide illustrative examples that clarify the phrase ‘where necessary’ will also be explored, along with the feasibility of creating dedicated educational tools.
Verifying whether someone is acting on behalf of a customer
The main issue raised by respondents was whether HM Treasury should clarify whether employees counted as ‘acting on behalf of’ the companies which employ them and therefore subject to CDD.
The consultation response clarifies that:
“HM Treasury considers that the ‘acting on behalf of’ provision was intended to apply to entities acting on behalf of individuals (for example when the individual has granted power of attorney to another individual or organisation) or to third parties acting on behalf of an organisation (for example when an agent or intermediary acts for a company).
“Employees or staff of an organisation acting on its own behalf (for example a member of staff transacting using a company credit card) should be considered to be acting as the organisation, and are not subject to the obligations in Regulation 28(10).”
A risk-based approach should be taken, the government advises, with anti-fraud controls implemented within policies, controls and procedures for employees who transact for employer organisations.
However, the response acknowledges that sector guidance on the issues is inconsistent, with AML/CTF guidance or the legal sector stating: ‘in the absence of factors that give rise to a concern, an employee of a company would not be considered to be ‘purporting to instruct’.
Supervisors and guidance authors will be asked to review their guidance to address the risk of over-compliance, but no other changes will be made.
Digital identity verification
The government says it is ‘committed to making it easier to comply with identify verification requirements in the MLRs, including by encouraging the uptake of digital identify technologies’.
To do so, the consultation recognises a need for clarity on how digital identities can be used to meet MLR requirements.
Consultation responses indicated strong support for government guidance, particularly in relation to how digital identity is defined for MLR checks and how verification processes should work.
“Respondents indicated that there is currently limited use of digital identities across sectors, due to firms’ cultural habits, and concerns about the legitimacy of digital identity providers.”
Most respondents said they wanted some form of government accreditation of digital identity providers, and/or a minimum set of digital identity standards.
HM Treasury and the Department for Science, Innovation and Technology (DSIT) will jointly produce guidance on using digital identities for MLRs identity verification checks. The guidance will provide clarity on the definition of a digital identity, and give further detail on how digital identities can be used in line with the MLRs’ risk-based approach.
Onboarding of customers in bank insolvency scenarios
MLRs will be amended to provide for relevant carve-outs from CDD requirements to assist the customers of an insolvent bank to access new accounts rapidly and transact from them.
Enhanced due diligence (EDD)
The list of risk factors for EDD will be maintained, but HM Treasury will work with supervisors and industry bodies to provide clarity in relation to when there is a mandatory requirement to carry out EDD, such as when a customer or transaction is linked to a high risk third country.
Complex or unusually large transactions
Respondents said that a lack of definition of ‘complex’ resulted in over-application of EDD, with 71% saying additional guidance would support understanding around the types of transactions the provision applies to.
HM Treasury will amend the MLRs to clarify that EDD is required on ‘unusually complex’ transactions, instead of all complex transactions. The requirement for EDD on unusually large transactions will remain unchanged. Firms must still consider wider geographic, product and customer risk factors when carrying out customer and transaction risk assessments.
High Risk Third Countries (HRTC)
The MLR definition of HRTC refers to two lists: the FATF’s ‘Increased Monitoring’ List (IML) of countries whose AML/CTF regimes have been found to be deficient after FATF assessment; and the list of countries subject to a ‘Call for Action’ (those with the most serious strategic deficiencies).
Many respondents expressed concern that the mandatory EDD requirements for customers and transactions linked to countries listed by the FATF often did not reflect illicit finance risk to the UK specifically. A quarter agreed that being linked to a jurisdiction listed by the FATF did not automatically make a customer high risk, and advocated for a more targeted approach based on knowledge of the specific customers or businesses and focused on the countries presenting the biggest illicit finance risks to the UK.
MLRs will be amended to mandate EDD only where the relevant transactions or customer relationships involve a person established in a Call for Action country, not an IML country. Broader requirements around assessing geographic risk will remain, including provisions which state that regulated firms must consider both FATF lists when carrying out customer risk assessments.
“This represents a more risk-based approach which enables firms to focus on the ML/TF threats faced specifically by the UK… For specific guidance, businesses can consult the UK government’s National Risk Assessment of Money Laundering and Terrorist Financing (NRA) which lists countries which present particular risks to the UK, as well as guidance provided by their supervisor, and relevant law enforcement alerts.”
Simplified due diligence: pooled client accounts (PCAs)
The link between SDD and PCAs will be removed, with new requirements for PCAs to be included in the MLRs.
“The new provisions will allow financial institutions to offer PCAs under a wider set of circumstances than currently permitted under the SDD rules.”
Financial institutions will be required to take additional measures to establish the purpose of the PCA and assess the level of associated ML/TF risk. Financial institutions will not be required to conduct CDD on the persons on whose behalf monies are held in the PCA, but information on the identity of these underlying customers will be required to be available on request.
“The intention of this change is to allow financial institutions to take a risk-based approach when offering PCAs… This supports the government’s Growth Mission by removing regulation seen to be disproportionate to the level of economic crime risk.”
Strengthening information sharing
Although respondents suggested that local authorities and other government departments and regulatory bodies including the Land Registry, the Competition and Markets Authority, and non-public bodies such as the fraud prevention service Cifas should be included in Regulation 52, only the Financial Regulators Complaints Commissioner will be added to the list of relevant authorities.
Two minor changes will be made to Regulations 52A and 52B, which cover the disclosure by the FCA of confidential information relating to MLRs supervision, to improve the operation of these provisions.
Cooperation with Companies House
Regulation 50 will be amended to include the Registrar for Companies House and the Secretary of State responsible for Companies House.
Regard for the National Risk Assessment
The majority of respondents (66%) thought that the MLRs were sufficiently clear on how MLR-regulated firms should complete and apply risk assessments and the sources of information these should be drawn from. Those who disagreed pointed to the need for sector-specific guidance, risk assessment templates, or concrete examples of risk assessment best practice.
No amendments will be made to the MLRs, but HM Treasury wll work with relevant stakeholders to ensure guidance is sufficiently clear on how to carry out risk assessments.
System prioritisation and the NRA
Respondents expressed a preference for further guidance on how to incorporate NRA findings and system priorities into AML/CTF programmes. The government will publish details on how system priorities and NRA interect along with each new set of priorities.
Currency thresholds
References to euros in the MLRs will be changed to pound sterling, supported by 81% of respondents.
“It was commonly stated that the use of EUR causes confusion and administrative burden for firms that transact solely in GBP.”
Regulation of sale of off-the-shelf companies by TCSPs
A large majority of respondents (95%) supported adding the sale of off-the-shelf companies to scope of regulated TCSP activity: MLRs will be amended accordingly.
“The measure is not expected to significantly increase administrative burdens on TCSPs.”
Crypto asset service providers
There was ‘a near consensus’ in favour of aligning MLRs with FMSA regulations: ‘Very few firms were concerned the changes would be overly burdensome and disproportionately affect non-financial firms.’
Almost all respondents supported aligning MLR registration and FSMA authorisation processes for crypto asset providers to reduce duplication provide clarity for firms.
Both will be addressed through upcoming legislatory reforms.
Registration of non-UK express trusts that hold UK land
The majority (75%) of respondents agreed with the proposal to extend registration to non-UK express trusts with no UK trustees that acquired UK land and property before 6 October 2020. The government will expand the scope of registration on the TRS accordingly. The requirement will only apply to trusts that retain an interest in UK property at the date the amendment of the MLRs come into force.
Trust required to register following a death
The majority of respondents (86%) supported the proposal to align the administrative deadlines for trusts arising from death.
The government will amend Schedule 3A (the list of exemptions) of the MLRs to include an exemption from registration, for two years following the death of the settlor, for co-ownership property trusts and trusts created under s34 Trustee Act 1925 that require registration as a result of the death of a trustee, and trusts created by deed of variation during the administration of a deceased persons’ estate.
The government will bring all non-UK express trusts holding UK land within the TRS data sharing rules and make them available to the public on request, subject to a legitimate interest test being satisfied.
Scottish survivorsip destination trusts
The government will amend Schedule 3A (the list of exemptions) of the MLRs to exclude Scottish survivorship destination trusts from registration on TRS.
De minimis exemption for registration
A majority of respondents (73%) supported the proposal to introduce a de minimis level to exempt low value non-taxable trusts, saying the proposal would reduce the administrative and financial burden on small family trusts which pose a low risk for money laundering and terrorist financing.
Many said that the de minimis level was too low and a level between £10,000-25,000 would be more realistic.
The government will introduce into Schedule 3A (the list of exemptions) of the MLRs a de minimis based higher thresholds than those proposed in the consultation. The exemption will apply to trusts that are not liable for relevant UK taxes, do not own or have an interest, (whole or in part), in UK land or property, do not exceed £10,000 in the value of accumulated assets held, do not have more than £5,000 in income per annum, and do not have more than £2,000 of ‘appreciable’ non-financial assets (art, jewellery, antiques etc).
The changes are not retrospective and apply to trusts created on or after the exemption comes into force.
Proposed further MLR revisions:
- Alignment of the MLRs with Financial Services and Markets Act 2000 (Exemption) Order 2001 in respect of overseas sovereign wealth funds operated by a central bank or public body.
- Amend the MLRs to clarify that thedefinition of ‘insurance undertaking’ does not include reinsurance contracts which reinsure the primary long-term insurance contract.
- Counterparty due diligence for cryptoasset firms: changes to ensure that the UK remains in alignment with requirements for cryptoasset businesses to conduct counterparty due diligence (CPDD) when making transactions.
- Registration of trusts liable for Stamp Duty Reserve Tax: removal of SDRT from the list of ‘relevant taxes’ for which a liability would result in a trust becoming registrable.
