Amendments to the MLRs – "time-sensitive" updates
On 21 July 2022, The Money Laundering and Terrorist Financing (Amendment)(No.2) Regulations 2022 were made. They made changes to The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the MLRs).
Most of the amendments are now in force (they came into force on 1 September 2022) except that:
- Some came into force earlier (21 days after the Regulations were made).
- Changes relating to the reporting of material discrepancies and amendments to primary legislation come into force on 1 April 2023.
- The amendments to the so-called "travel rule" for cryptoasset transfers will come into force on 1 September 2023.
The changes make some "time-sensitive" updates to the MLRs that HM Treasury had identified in June 2022, as a result of the consultation it ran in the summer of 2021.
The key changes are summarised below.
Change in scope to reflect latest risk assessments – AISPs no longer in scope
Account Information Service Providers (AISPs) have been removed from the regulated sector. However, Payment Initiation Service Providers (PISPs), Bill Payment Service Providers (BPSPs) and Telecoms, Digital and IT Services Providers (TDIPSPs) all remain in scope.
Copies of SARs
AML/CTF supervisors are now able to ask to see a copy of any Suspicious Activity Report (SAR) made to the National Crime Agency (NCA) provided it is necessary to fulfil their supervisory functions.
Proliferation Financing Risk
New Regulation 18A, MLRs implements FATF standards by requiring relevant persons to identify and assess the risks of proliferation financing, taking the following into account:
- The risk assessment that HM Treasury itself is now required to make.
- The firm's risk factors (e.g. customers, geographic, products or services, transactions and/or delivery channel).
- The size and nature of its business.
It must keep a record of that risk assessment and must also establish and maintain policies, controls and procedures to mitigate and manage effectively proliferation financing risks – remember, such policies, controls and procedures should have been in place by 1 September 2022.
"Proliferation financing" is a broad concept – it means the act of providing funds or financial services for use, in whole or in part, in the manufacture, acquisition, development, export, trans-shipment, brokering, transport, transfer, stockpiling of, or otherwise in connection with the possession or use of, chemical, biological, radiological or nuclear weapons, including the provision of funds or financial services in connection with the means of delivery of such weapons and other CBRN-related goods and technology, in contravention of a relevant financial sanctions obligation.
The definition of "Trust or Company Service Provider" and the definition of "business relationship"
This definition of "Trust or Company Service Provider" has been expanded to cover the act of "forming a firm", so that it covers the formation of all types of business arrangements, not just companies and other legal persons.
The definition of "business relationship" has also been amended so that it applies:
- when a Trust or Company Service Provider (TCSP) forms all types of business arrangement that are required to register with Companies House,
- when a TCSP provides the service of acting (or arranging for another person to act) as a director or secretary of a company, as a partner of a partnership or in a similar capacity in relation to other legal persons, and
- when a TCSP provides the service of acting (or arranging for another person to act) as a trustee of an express trust or similar arrangement or as a nominee shareholder for a person other than a company whose securities are listed on a regulated market,
whether or not, in any such case, the relationship is otherwise expected to have an element of duration.
Among other things, these amendments will cover a situation where there is a one-off appointment of a limited partner, meaning that CDD would need to be conducted by the TCSP on the limited partner if it is a "customer" of the TCSP.
Reporting of material discrepancies – comes into force 1 April 2023
Under Regulation 30A(1) of the MLRs, relevant firms were already required to collect proof of registration (e.g. on the PSC Register or trust beneficial ownership register) or an excerpt from the relevant register (e.g. of the company, unregistered company, or LLP) and, when establishing a business relationship, to report any discrepancies between (i) the information relating to the beneficial ownership of the customer from such proof of registration or register excerpt and (ii) information which otherwise becomes available to them under the MLRs.
From 1 April 2023, the discrepancy reporting requirement will be expanded to cover ongoing business relationships – i.e., it is no longer a "snapshot" requirement at the point of establishing a business relationship.
In addition, from the same date, relevant firms will also need to include entities on the new Register of Overseas Entities as introduced by the Economic Crime (Transparency and Enforcement) Act (see below).
Finally, as amended, the obligation will be to report "material discrepancies" (previously there was no concept of materiality). The amendments to the MLRs include a new Schedule 3AZA which provides that, to be caught, a discrepancy must be of a type that, by its nature, and having regard to all the circumstances, it may reasonably be considered to be linked to money laundering or terrorist financing, or to conceal details of the business of the customer. Such discrepancy must be in one (or more) of the following forms:
- a difference in name;
- an incorrect entry for nature of control;
- an incorrect entry for date of birth;
- an incorrect entry for nationality;
- an incorrect entry for correspondence address;
- a missing entry for a person of significant control or a registrable beneficial owner; or
- an incorrect entry for the date the individual became a registrable person.
Transfers of cryptoassets – the "Travel Rule" – in force 1 September 2023
The amendments give effect to the expanded application of FATF Recommendation 16 (regarding information sharing requirements for wire transfers)(the so-called "Travel Rule") to cover transfers of cryptoassets. The changes take effect on 1 September 2023 though during the "grace period" leading up to that date businesses are expected to implement solutions to enable compliance with the Travel Rule. Broadly, the changes will be as follows:
- Intermediaries in cryptoasset transfers will be brought within the scope of the MLRs – the amendments to the MLRs make clear that the Travel Rule only applies to intermediaries that are cryptoasset exchange providers or custodian wallet providers (and will not capture others, like software providers).
- There will be a partial exemption for transfers which involve only UK-based cryptoasset firms – here the full information need to be sent with the transfer, but must be provided to the beneficiary cryptoasset business on request.
- A de minimis threshold for cryptoasset transfers has been modified to €1,000 to bring it into line with the FATF recommended threshold (€1,000/$1,000).
- As regards unhosted wallets, cryptoasset businesses will only be expected to collect beneficiary and originator information for transactions identified as posing an elevated risk of illicit finance – the amending Regulations set out the minimum factors that firms should consider when making such a determination of risk.
Changes in Control of Registered Cryptoasset Businesses
A new Regulation 60B and Schedule 6B, MLRs effectively applies Part 12 of the Financial Services and Markets Act 2000 (FSMA)(control of authorised persons) to an acquisition of, or an increase in control over, a cryptoasset business, with certain modifications. Proposed acquirers of cryptoasset firms will be required to notify the FCA ahead of an acquisition, enabling the FCA to undertake a "fit and proper" assessment of that proposed acquirer. These requirements came into force on 11 August 2022 (21 days after the amending Regulations were made).
HM Treasury Review of the UK's AML/CFT regulatory and supervisory regime
The amendments to the MLRs outlined above represent what the Treasury saw as "time-critical" updates to the regime, partly to bring the UK in line with FATF recommendations. However, in parallel the Treasury was (and is) conducting a "slower burn" assessment of the MLRs with a view to amendments that may be needed, or desirable, in the medium-to-long term.
On 24 June 2022, HM Treasury published a Review of the UK’s AML/CFT regulatory and supervisory regime (the Review) – this was informed by the Call for Evidence which the government had launched in July 2021.
The Review focused on improving the effectiveness of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the MLRs) and was structured around elements to ensure systemic, regulatory and supervisory effectiveness.
The Review drew a number of conclusions though many of these were tentative rather than finalised:
- On supervision: while the Treasury was clear that reform was needed, it was not yet clear what types of reform would work. A shortlist of possible options had been drawn up and the government would consult.
- On specific regulations: the Treasury found that most of the provisions currently in the MLRs were the right ones and should be maintained, but it would be continuing to seek to ensure that UK legislation is further aligned with the FATF recommendations. Among future work streams, the government will be doing further work on domestic PEPs with a view to possibly removing the requirement for automatic EDD, looking into further enhancements to the list of high-risk third countries and consulting on removing the list of mandatory checks for customers in high-risk third countries (except where FATF requires specific EDD measures).
- On objectives: a set of clear, new objectives will be set out in the MLRs.
- On risks: the government will keep emerging money laundering and terrorist financing under review and will consider adding further sectors to the MLRs.
- On guidance: the government will not overhaul the current guidance arrangements – so the JMLSG Guidance Notes will continue to perform an important role – but it will nonetheless seek to make the existing guidance more streamlined, consistent and clear.
The Review indicated a "direction of travel" for the government, in terms of identifying where change is needed and where further work needs to be undertaken, but no specific timetable has been mentioned for when the further work and changes might take place.
Economic Crime (Transparency and Enforcement) Act 2022 – the Register of Overseas Entities
On 15 March 2022, the Economic Crime (Transparency and Enforcement) Act 2022 (ECA) received Royal Assent.
In outline, the ECA:
- Establishes a register of overseas entities and their beneficial owners, and requires overseas entities who own, or who wish to acquire, UK property to register in certain circumstances.
- Makes additional provisions about unexplained wealth orders.
- Makes additional provisions about sanctions.
The details of this Act (and its subordinate legislation) are beyond the scope of this briefing, but for background see the following briefings:
However, remember that as from 1 April 2023, relevant persons will be required to report material discrepancies under the MLRs. From that date they will also need to include, where relevant, entities on the new Register of Overseas Entities as introduced by the Economic Crime (Transparency and Enforcement) Act in order to determine whether there is a material discrepancy between the beneficial ownership information on that Register and the information that they have in relation to the customer arising out of their duties under the MLRs.
The Economic Crime and Corporate Transparency Bill 2022
The Economic Crime and Corporate Transparency Bill 2022 was published in September 2022 with proposals designed to prevent the abuse of UK corporate structures and tackle economic crime. It includes broader powers for the Registrar of Companies, including identity verification measures, and additional requirements for limited partnerships.
From a financial services perspective, it also includes the following:
- Additional money laundering exemptions for persons in the regulated sector who end a business relationship with a client and hand over property worth less than £1000 or who deal with an account involving a mixture of suspicious and non-suspicious property and retain in the account at least the amount of the property subject to suspicion.
- The granting of a power to HM Treasury under which it will be able to amend the list of high-risk countries for anti-money laundering purposes (rather than requiring a statutory instrument). This will enable the government to react more promptly to perceived risks but will also potentially result in more frequent changes to the list which will then need to be reflected by regulated persons in their own money laundering procedures.
- Additional information sharing rights between persons in the regulated sector
- Confiscation and forfeiture powers in respect of cryptoassets.