Syed Rahman outlines proposed changes to enhance the effectiveness of the UK Money Laundering Regulations.
Sixteen months after HM Treasury published its original consultation on improving the effectiveness of the UK Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs), it has published its response.
Not all the changes contained within it are sweeping, with some being limited in terms of their scope and the sectors they will affect. The exact details are, for now, not known as draft legislation is yet to be published to implement the proposed changes.
But the aim appears to be reducing the regulatory burden, which is a contrast to the new measures the European Union is set to impose on firms in its Member States.
The Main Changes
The Treasury is putting forward a number of significant measures that will affect financial services firms.
One notable development is the clarification of what establishing a business relationship means under the MLRs. As this is a factor in the MLRs for requiring due diligence to be conducted on a customer, any change is set to be notable. The Treasury has said it will ask supervisors and industry bodies to publish further guidance on the precise meaning of "establishing a business relationship".
There is also likely to be clarification of the obligation to check source of funds under standard customer due diligence (CDD). With the MLRs stating a source of funds check should be carried out where necessary, the Treasury will ask supervisors and/or industry bodies to produce guidance clarifying that this means when a transaction is not consistent with what the firm knows about the customer and their risk profile.
Supervisors and / or industry bodies are also to be asked to issue guidance that clarifies the application of risk factors set out in the MLRs regarding when to apply enhanced due diligence (EDD) to a client; including when applying EDD is compulsory.
The Treasury will also amend the MLRs in relation to high-risk third countries – those with significant deficiencies in their anti-money laundering (AML) and counter-terrorist financing (CTF) regimes. The change will mean that EDD will only be automatically required in relation to countries on the Financial Action Task Force (FATF) High Risk Jurisdictions Call for Action list (which currently has the Democratic People's Republic of Korea, Iran and Myanmar on it).
Other Measures
The Treasury has also put forward other ways in which the MLRs can be adapted.
These include:
- Only requiring EDD for "unusually complex or unusually large transactions" - as opposed to the current "complex or unusually large" requirement – so that it is not applied in situations where there is a low risk of money laundering.
- Simplified due diligence for pooled client accounts.
- Clarification that a cryptoasset firm authorised by the Financial Conduct Authority (FCA) does not also need to register under the MLRs; with changes also made to ensure the MLR and Financial Services and Markets Act regimes have greater parity.
The Effect of the Changes
Any firm subject to the MLRs is likely to be affected to some degree by the changes. Some may welcome what are intended to be moves to reduce the weight of regulation and usher in an approach that accurately reflects the money laundering risks faced. However, there may be some who feel that the changes amount to tinkering rather than any genuinely substantial change. There may also be some who believe there was no need for any type of change.
If conclusions are to be drawn, they may be best left until the precise details become known with the arrival of the necessary draft legislation. The Treasury has stated that it aims to publish the draft legislative text amending the MLRs for comment in the coming months. It hopes to lay the formal legislation before parliament by the end of this year.
