Reynolds: Closing loopholes
The government has outlined how it will improve the anti-money laundering (AML) regime by publishing a slew of planned changes to the underlying regulations.
As part of the Industrial Strategy published last month, the government said it recognised the importance of ensuring the Money Laundering Regulations 2017 (MLRs) were “clearer and more proportionate”.
Last week, alongside the latest National Risk Assessment – which continued to describe legal services as high risk in relation to money laundering – HM Treasury published its response to last year’s consultation on technical changes to make the MLRs “more effective”, to which it received 224 submissions.
The response noted that the legal sector had highlighted “a lack of clarity regarding what source of funds checks might materially constitute in the case of legal transactions and lawyer-client relationships”.
HM Treasury has decided to retain the current wording of the MLRs in respect of source of funds checks “to preserve flexibility” but said it would work with regulators and industry bodies “to improve sector-specific guidance”.
On digital ID, the Treasury and the Department for Science, Innovation and Technology will jointly produce guidance on using digital identities for verification checks, with the aim of providing “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”.
The regulations will also be clarified so that enhanced due diligence (EDD) is required on “unusually complex” transactions, instead of all complex transactions.
Another change to mandate EDD in relation to high-risk third countries only “where the relevant transactions or customer relationships involve a person established in a Call for Action country, not an Increased Monitoring List country”.
The consultation sought views on whether changes to the simplified due diligence (SDD) rules would help businesses that have struggled to access pooled client accounts (PCAs), which it said were used by solicitors among others to hold client funds on behalf of a number of different clients.
Feedback indicated that banks were keen to offer this type of account, but the current link between PCAs and SDD meant that they were only able to do so in very narrow circumstances, so the government would remove it.
“In order to maintain a risk-based approach, the new provisions will build in protections by requiring financial institutions to take additional measures to establish the purpose of the PCA and assess the level of ML/TF [terrorist financing] risk associated with the PCA.
“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.”
The Treasury will publish the draft statutory instrument “in the coming months” for technical feedback, before laying in Parliament later this year if parliamentary time allows.
Emma Reynolds MP, economic secretary to the Treasury and City minister, stressed the importance of the UK maintaining high standard, particularly ahead of the Financial Action Task Force’s upcoming assessment of the UK’s AML regime.
“The changes we are taking forward will strengthen our regime by closing loopholes in the existing regulations, addressing new and emerging threats, and clarifying requirements so that they are more targeted and effective.
“We are confident that these changes represent a balanced approach to mitigating illicit finance risks and supporting businesses to invest and grow.”
