Proposed changes to the Money Laundering Regulations 2007 - Government response to consultation

Following a somewhat leisurely consultation process, the Government has this week published a response to its consultation on changes to the Money Laundering Regulations 2007 ("MLR") and an impact assessment of the proposed changes (http://www.hm-treasury.gov.uk/fin_review_laundering_regs.htm).  The consultation follows a review of the operation of the MLR which was undertaken in 2009-10, and a consequential consultation last year on proposed changes to the regime.  The Government has published the draft legislative amendments it intends to make, the majority of which will come into force on 1 October 2012.

The changes are said to be directed at reducing the regulatory burden imposed by the current MLR, making them more effective and proportionate, whilst strengthening the overall anti-money laundering regime. 

This process is separate from the revisions to the MLR which are expected to flow from the current EU review of the Third Money Laundering Directive ("Third Directive").  Following the Financial Action Task Force's ("FATF") publication of its revised Recommendations earlier this year, and drawing on both the new FATF Recommendations and an earlier review of the operation of the Third Directive, the European Commission in April 2012 adopted a Report which considers, amongst other matters, proposed changes to the Third Directive.  It is expected that this will lead to new EU legislation in late 2012, which is in turn likely to need to be implemented via amendments to the MLR.  The changes following from the amendments at EU level are likely to be more significant for financial institutions than the current Government amendments – although neither will fundamentally alter the current AML framework in the UK.  The proposals are summarised in full below. 

The Government's proposed amendments are in many respects directed at the 'edges' of the AML regulated sector – for example, strengthening HMRC's supervisory powers in relation to money services businesses, and clarifying the definition of safe custody services – rather than substantively amending the obligations of financial and credit institutions.  As such, whilst they are broadly sensible, they will not drive any significant changes for most firms, and the focus will remain on the developments at EU level.  On the positive side, whilst the proposals will not 'fix' many of the known problems with the MLR, they do not, at least, make the regulatory position any worse. 

One issue which was of interest to regulated firms was the proposal, discussed in last year's consultation paper, to de-criminalise breaches of many aspects of the MLR, leaving only a civil penalty regime.  De-criminalisation had been suggested for a number of reasons, including a perception that anxiety about criminal prosecution caused business to be unreasonably risk-averse (and in response, too 'box ticking' in culture) and that the criminal prosecution powers had not, in fact, been widely used, and were therefore redundant.  In the event, the Government has opted to retain the criminal offences for breach of the MLR, citing the views of supervisory authorities that they are a powerful deterrent and enforcement tool which help convey the importance the Government attaches to protecting the UK from money laundering and terrorist financing. 

Whilst criminal penalties are here to stay, there is a helpful confirmation in the paper that "the Government encourages supervisors to work with law enforcement agencies to improve awareness and understanding of where prosecution action may be taken" and "the Government reiterates the point made by the CPS that it is not in the public interest to prosecute employees of regulated businesses for minor, procedural or accidental regulatory failures".  These are words to which individuals and firms will no doubt wish to refer if, in due course, a supervisory body does seek to prosecute in such circumstances.

The changes that will be made include:

-          extending, to a limited degree, the firms that can be relied upon to carry out customer due diligence ("CDD") for the purposes of reg.17 of the MLR, by extending the scope of reliance to cover firms regulated by the professional bodies listed at Part 2 of Schedule 3, rather than just Part 1 of Schedule 3;

-          permitting reliance, for the purposes of reg.17, on consumer credit financial institutions (so as to assist debt purchasers to rely on the CDD already conducted by the initial lender);

-          exempting from the scope of the regulated sector non-lending credit institutions (e.g. organisations holding 'lending' licences because they allow time to pay, rather than because they make loans to third parties, such as sports clubs that allow payment in monthly instalments);

-          Including within the scope of the regulated sector estate agents handling overseas properties;

-          expanding the matters that can be considered as part of the 'fit and proper' test for money services businesses, and introducing a right of appeal against a finding that a person is not fit and proper;

-          Clarifying certain supervisory powers, for example in relation to the cancellation of registrations;

-          providing an additional 'gateway' for disclosure of information between UK supervisory authorities for the purpose connected with the effective exercise of their supervisory functions under the MLR;

-          formally recognising the FSA as AML/CTF supervisor of recognised investment exchanges; and

-          removing regulation 18 (a power to give Directions to the financial sector) as it is now redundant – equivalent powers are available to HMT under Schedule 7 of the Counter-Terrorism Act 2008.

 Other changes, considered, postponed or rejected include:

-          the provision of a definition of safe custody services (a category of business which is already regulated by the MLR) – this will be clarified, but via FSA 'soft guidance' (e.g. the Financial Crime newsletters) rather than via amendment to the MLR;

-          introducing a requirement to keep records of beneficial owner identity (rather than simply the customer's identity) – this will be addressed at the same time as any other changes flowing from the EU review;

-          amending the definition of Politically Exposed Persons – this will be addressed at the same time as any other changes flowing from the EU review;

-          providing for a statutory override of client confidentiality to enable compliance by law firms with requests for information in relation to pooled client accounts that are subject to simplified due diligence – this will be addressed at the same time as any other changes flowing from the EU review;

-          clarifying the supervision of e-money institutions such that the FSA will have responsibility for supervising compliance by all e-money institutions with the Wire Transfer Regulations and Schedule 7 to the Counter-Terrorism Act (removing dual supervision by the FSA and HMRC for an estimated 17 institutions) – this will be taken forward as soon as possible;

-          regulating the use of the HMRC name and logo by regulated businesses – HMRC is to monitor this issue and inform HMT if further measures are needed;

-          a suggested de minimis exclusion, from the scope of the regulated sector, of businesses with a very small turnover – this will not be taken forward; and

-          in relation to appointed representatives, the Government made clear that it considers that a firm which appoints appointed representatives is responsible for their compliance with the MLR, and that amendments to the MLR are not required in order to make this clear.  The Government will, however, consider the position of appointed representatives further in light of the EU review.

 In conclusion, most of the proposals seem sensible so far as they go, but those in the AML/CTF community will simply have to wait with bated breath for the next thrilling instalment from the EU.