Motion to Regret
That this House regrets that Her Majesty’s Government has introduced the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, the Information about People with Significant Control (Amendment) Regulations 2017 and the Scottish Partnerships (Register of People with Significant Control) Regulations 2017 without sufficient assessment of the effectiveness and value for money of the bureaucratic process proposed; and notes, with approval, that the Secondary Legislation Select Committee has questioned “the seriousness with which the Government view the process of scrutiny of secondary legislation” (SIs 2017/692, 2017/693 and 2017/694).
Relevant document: 2nd Report from the Secondary Legislation Scrutiny Committee
My Lords, I will speak, first, to the procedural issues to which the regret Motion directly refers and then turn to the anti-money laundering and terrorist-funding measures which these instruments have introduced.
Noble Lords will know that I take a great deal of interest in secondary legislation, particularly when it pertains to Treasury matters. I am therefore familiar with the reports that the Secondary Legislation Scrutiny Committee produces. In recent years I have rarely read such a scathing assessment from the committee about the Government’s approach to the checks and balances, such as impact assessments, public consultations and timetables, which underpin our legislative process. At the very least, I would expect the Government to learn from the errors that they have made. However, they appear not to have learned anything. In the Government’s response to the committee, Stephen Barclay MP, the new secondary legislation champion, stated:
“My officials have alerted me to a similar issue where the General Election purdah period has also had an impact on finalisation of the impact assessment for the implementation of the Payment Services Directive 2. The Government will shortly be laying the Payment Services Regulations 2017, which implement the Directive. Whilst a final impact assessment for implementation of the Directive has been submitted to the RPC, the Government will not be able to publish an impact assessment that has been through RPC scrutiny alongside the Regulations”.
I ask the noble Lord: how many more pieces of secondary legislation will be subjected to sub-standard preparation?
One of the most striking aspects of the Secondary Legislation Scrutiny Committee’s report is the number of occurrences of bad practice that it has noted. First, there is the timing. The three SIs in question were laid on 22 or 23 June and came into force on 26 June, thereby breaching the convention which expects instruments to be laid 21 days before they come into law. The Government go on to say that the general election held on 8 June made it impossible to meet the 21-day deadline, but the Treasury consultation closed in November 2016—nearly a year ago. Why did it take the Government until April of this year to publish the final regulations? It should be of concern to us all that, as the committee says, the Government’s default position is to reduce the time available for parliamentary scrutiny.
Secondly and perhaps even more significantly, despite the scale of the impact that this measure will have, the Government did not see fit to publish an impact assessment at the same time as the instrument. The net cost to businesses will be £5.2 million a year—not an insignificant impact. The absurdity of this situation can be summed up by paragraphs 11.2 and 11.3 of the Explanatory Memorandum published alongside the regulations. Paragraph 11.2 reads:
“The Impact Assessment will provide further detail on impact for small businesses”.
Paragraph 11.3 goes on to say:
“No specific action is proposed to minimise regulatory burdens on small businesses”.
Frankly, the Government had no idea whether action was required, given that the final impact assessment had yet to be published. What is the Government’s excuse this time? Will they say that the Regulatory Policy Committee was also affected by the general election? However, the committee makes the point that the RPC is an independent body. Do its role and functions change during a general election? Did all the RPC’s work cease?
We are as unconvinced as the committee was that the Government could not have published provisional or indicative figures in the memorandum. Given that the draft impact assessment was completed on 13 April 2017, that would seem to have been entirely possible. Why did the Government choose not to pursue this course of action and, given that this is clearly not going to be a one-off, will the Government commit to publishing provisional figures in future if an impact assessment is not available?
I should now like to address the substance of the three instruments. I start by making it very clear that we support efforts by the Government to tackle money laundering and terrorist financing. We agree with the Government’s objective of making the financial system as hostile as possible for illicit finance, and it is right that businesses know their customers and manage their risks. Indeed, we welcome the Government’s decision to clarify that an estate agent should consider that they enter into a business relationship with a purchaser as well as a seller. Estate agents must now apply due diligence checks to both parties and, in so doing, close an existing loophole.
It is also encouraging to see that the Government have acted on PEPs. A firm will now be required to assess the risk posed by each individual on a case-by-case basis. The FCA guidance states that UK PEPs should be treated as low risk unless the firm has identified independent high-risk factors. This is a common-sense change which we support.
However, as I am sure the Minister would expect, there are omissions from the regulations and elements of policy which we query, so I have a number of questions for him. Perhaps the most striking omission from the regulations is a reference to providers of gambling services other than casinos. The Government have explained that this decision,
“was based on evidence that indicated the gambling sector was low risk relative to other sectors”.
What evidence was produced suggesting that money laundering in the gambling sector was low? Whom did the Government consult beyond the gambling industry, and did those other stakeholders share different views about the potential for money laundering and terrorist financing?
Although I confess to being concerned by that omission, I am pleased that the Government have been explicit that this will be reviewed by 26 June 2018. This report— to be produced by the Treasury and the Home Office—must identify, assess, understand and mitigate the risks of money laundering and terrorist financing. This is a substantial piece of work and, given that one reason we are here this evening is the Government’s failure to meet a deadline, I would like the Minister to say how long they anticipate that this process will last. Whom do the Government intend to consult and, with particular reference to the gambling sector, what criteria are the Government using to determine whether the status quo should be maintained?
I turn to due diligence, which makes up a substantive part of the SI. Part 3 of the main money laundering regulations outlines the three different levels of due diligence that companies have to apply based on the specific nature of a business relationship. The Government have stated that they do not want to be prescriptive and, as such, they have made the decision not to publish guidance alongside these instruments. However, it strikes me that this is exactly the sort of area where prescription is required. I note that it will be up to the regulators—the Financial Conduct Authority, HMRC and the Gambling Commission—to produce guidance on how to carry out these checks. Have the regulators been in contact with each other to ensure that there is consistency where necessary, as well as delineation between the three due diligence categories? Businesses and the regulators will require clarity and this will be achieved only if there is integrated working.
On the matter of the regulators, this will place a further strain on their resource capacity. HMRC in particular has in recent years faced reduced budgets with increased demands. I would be interested to know whether HMRC, the FCA or the Gambling Commission have contacted the Government asking for additional resources. I am sure the Minister will highlight that the Government intend to hire an additional 5,000 HMRC staff, which is welcome news. However, how many of those staff will have anti-money laundering responsibilities?
On the specifics of enhanced due diligence—the highest category—the regulations stipulate that “additional independent, reliable sources” and increased,
“monitoring of the business relationship”,
are needed in order to fulfil the requirements of the legislation. But what practical differences would the Government expect to see under enhanced measures and what would be regarded as sufficient monitoring?
Alongside the additional screening and scrutinising measures, larger businesses will also have to make changes to their management, and in some cases perhaps their structure. This underlines that committee’s point about the significance of these regulations. Businesses will be required to appoint one individual from the board of directors or senior management team to take responsibility for compliance with these regulations. Furthermore, the company must establish an independent audit function to examine and evaluate the effectiveness of policies, controls and procedures adopted by the chosen board member, and make recommendations and monitor their compliance. How many companies will this affect, and when are they expected to have complied with this aspect of the regulations? Can the Minister say more about the independent audit function? Could it be incorporated in the company’s existing auditing arrangements, or are they expected to be separate?
My final point relates to the issue of failure to co-operate. What mechanisms are in place if businesses fail to comply with these changes? Have the Government indicated the scale and extent of the reprimand they can expect from the regulators?
The main intent behind this Motion was to get to the bottom of the procedural irregularities which took place in the preparation of the regulations. The Government are not short of problems, and I am sure that they do not want to be accused of undermining the crucial work of your Lordships’ House in scrutinising secondary legislation. We will of course support the Government in preventing money laundering and terrorist financing, but however noble and vital a policy may be, there are principles and procedures which are necessary components to our legislative process and which must be followed. I can only hope that the Government take heed of the warnings from ourselves and the Secondary Legislation Scrutiny Committee. I beg to move.
My Lords, by chance this Motion is being debated on the same day that we have had the Urgent Question on the paradise papers. I would like to make a couple of short points before I get on to the main issues of timing. Seeing the paradise papers means that we cannot avoid having many more debates on tax avoidance and money laundering. It shows yet again that more has to be done on the transparency of British overseas dependencies and territories. I would like to point to an extract I have seen from the Government in the context of money laundering, which comes from the Companies House annual report 2014-15 and says that the,
“benefit in having an open, and up to date, register means that it has ‘many eyes’ checking the information … The more open the data is, and the more it is viewed, trust and transparency will increase”.
That says it all about closed registers.
Turning to the Motion, I am not a member of the Secondary Legislation Scrutiny Committee, and am not yet an expert in the intricacies of how secondary legislation is scrutinised here, but I was quite expert at dealing with, and changing, comparable processes in the EU. I find myself asking why the Government organised themselves to make this regulation just in time for transposition so that there was then no breathing space to permit proper parliamentary scrutiny when a general election was called. Time did not have to be so tight, but I fear that it is part of a pattern of seeing scrutiny of secondary legislation as a mere fig leaf for due process.
The fourth money laundering directive was completed some time ago. All but the final trialogues were completed when still under my remit as chair of the Economic and Monetary Affairs Committee of the European Parliament. It was not a difficult directive. It closely followed the Financial Action Task Force recommendations that came out in 2012. Despite being slowed down by the election of a new European Parliament, the summer break, and the palaver of appointing a new Commission, it was done and dusted, translated and published by June 2015, setting two years for transposition.
What filled those two years? It took 15 months to get a first consultation out. The consultation was not opened until 15 September 2016 and closed eight weeks later on 10 November. There were a total of 186 responses to that consultation. I have not tracked down a breakdown, but that number covers all the responses from supervisors and other Government departments, as well as from NGOs and industry. It is not a huge number. Unfortunately, I have not managed to find publications of the actual submissions, but have seen a summary in the following consultation.
By then, the timing problem had been created, but there was a follow-up with a second consultation and draft regulation after another four months; it opened on 15 March 2017 and closed on 12 April 2017. The regulation would have got to a touchdown only just in time even if an election had not been called. That first 15-month delay is unacceptable, because it was scheduled in that Parliament would be given minimum time and scheduled in that there was no contemplation of a vote against, because there would not have been time for changes even without an election. I cannot find any excuse in the subject matter for delay. It is frequently iterated that the UK is a leader in FATF. Back in 2012, it was known what the provisions were and where flexibility lay. If the Government are so keen to say that they lead the field by example, which by all means they should as host to a centre of global financial services, why were they pushing up against the deadline?
I know that amendments by way of the so-called fifth money laundering directive, were soon under way. It might have been convenient to delay and try to do this at the same time as transposing the fourth directive. That does not seem appropriate, but if that were a reason for delay it means that convenience was given priority over parliamentary scrutiny. The European supervisory authorities managed to complete their consultation and guidance by November 2016, even though it is guidance for supervisors that they do not have to follow until June 2018. However, it helps with how to deal with risk assessment, and has already been referenced in the consultation that the FCA has launched. There is a problem in and around how you deal with assessing risk. In that regard, the Government possibly did their best by publishing the annex of factors from the directive in the regulation. However, a lot of businesses will have been left dangling, and wondering what they are going to do.
I will say a couple of things about the Financial Action Task Force and our scrutiny of it. The task force is an informal international partnership between Governments, and accountability, such as it is, comes through Ministers. It was pointed out in the House of Lords EU Committee report on money laundering in 2009 that:
“Since the Government accept that they are accountable to Parliament for United Kingdom membership of the FATF, they should find a more systematic way to report to Parliament on FATF developments”.
I would like to know how that has been followed up.
That is a very important point and one that applies to various other international standard-setting bodies, where the standards are agreed long before the opportunity for parliamentary scrutiny. If in future the UK is not involved in the various stages of consultation and scrutiny that happen through the EU process, it becomes all the more necessary for the scrutiny available to this Parliament to be taken more seriously. Unfortunately, no reassurance can be obtained from the manner in which this transposition regulation was handled, which adopted a just-in-time timetable, even if the election had not got in the way, indicating that there was no real choice in the matter.
As secondary legislation operates at the moment—we debated this last Wednesday in the Second Reading of the Sanctions and Anti-Money Laundering Bill—the Government do not tolerate rejection by this House. Instead, they escalate it to a constitutional and existential crisis. Now, in the context of Brexit, the Government have said that anti-money laundering legislation will continue to be done by regulation because FATF things have to be done fast. The evidence from 2012 until June 2017 does not bear that out. Further, in the debate on Wednesday the Minister stated that the new Bill was “power without policy”. There we have it: power without policy to be made by secondary legislation.
It is also worth pointing out that the Government did not include any questions about the extension of criminal offences in their consultation. They did consult on the administrative fines that were part of the directive but did not, unless I missed it, point out the new criminal offences. This is all the more relevant if you take into account the difficulty that businesses will have in complying, which the noble Lord who spoke before me pointed out. The answer to one of his questions—what happens if businesses do not comply with having the regulations in place—is that it can be a criminal offence. That is what it says in the new regulation.
Not consulting on the new criminal offence is all the more an omission when, in March to April of this year, at the same time as that consultation, another consultation was carried out by the Ministry of Justice calling for evidence on corporate liability for economic crime. It included a question on whether it was appropriate to introduce new criminal offences by statutory instrument.
I find this Motion well founded in its subject matter and timing. I do not think that the delay was solely the result of the general election. That merely exacerbated the repressive timetable that had already been set.
My Lords, I am a member of the Secondary Legislation Scrutiny Committee, and the Minister will be pleased to hear that I will concentrate my remarks on its work. Our task is to keep the Government up to scratch so that Parliament can properly scrutinise secondary legislation. I thank my noble friend for moving this Motion, which draws attention to this work and helps us in carrying it out.
What was wrong with these regulations? I do not want to repeat everything that has been said but, as my noble friend explained, we were unhappy with both the drafting and the process. We were unhappy with the definition of a “person with significant control”, and explained why that was unclear. We were unhappy with the fact that, although it was promised, there was no analysis of the consultation—this, of course, is standard practice. As my noble friend said, the impact assessment came two weeks after the regulations were laid. When it did come, there was no assessment of the value to be gained from the cost to business.
These regulations were laid in a rush. As the noble Baroness and my noble friend explained, instead of the normal 21 days between a regulation being laid and it coming into force, there were only two or three days. When we drew the Government’s attention to this, we were told that it was “because of the election”. However, as others have pointed out, the consultation ended in November 2016, so why the delay? If the Government want Parliament to scrutinise regulations properly, everything should be done in good time and with proper care; otherwise, Ministers will be called into account—that is what we have to do.
The committee wrote to Stephen Barclay MP, the Economic Secretary to the Treasury, about its concerns. Perhaps it was because of those concerns that, in his reply, he helpfully said that HM Treasury was instituting new proceedings and that he would become the “secondary legislation champion”. That was good news, but that was in July. Will the Minister confirm that this has actually happened, because it would greatly assist Parliament in its scrutiny and the public in their understanding of the law?
I thank noble Lords for their contributions and the noble Lord, Lord Tunnicliffe, for moving the Motion. I was in the middle of reading my notes seeking to answer the point of the noble Lord, Lord Haskel, and then realised that it was my time to speak. Perhaps he might bear with me as I quickly try to offer a response.
We can confirm that Stephen Barclay is now acting as the secondary legislation champion, as set out in his letter of 17 July to my noble friend Lord Trefgarne, chair of that committee. The new prioritisation and planning process is now operational. I will come back to some of those points, because they overlap with points made by other noble Lords, including the noble Lord, Lord Tunnicliffe, who talked about focusing more on procedure rather than on questioning the argument for the need for these money laundering regulations to be put in place.
I thank the noble Lord for bringing about this debate. I am sure noble Lords will agree that protecting the public and our economy from financial crime is vitally important and something that cannot be taken lightly. Indeed, the size of the UK’s economy, our open economy and the attractiveness of the London property market to overseas investors exposes the UK to money laundering—a point made by the noble Baroness, Lady Bowles, about the importance of London. The Home Office estimates that serious and organised crime costs the UK at least £24 billion every year, which is a significant sum. I am sure that we all agree on that.
In June 2017, the Government updated their anti-money laundering and counterterrorist financing regime. In doing so, the EU’s fourth money laundering directive was transposed into UK law. This was mainly through the 2017 money laundering regulations, but also through two linked statutory instruments produced by the Department for Business, Energy and Industrial Strategy. This brought the UK’s anti-money laundering regime in line with the latest global standards.
The Government’s overarching objective in this area is to ensure that the UK’s anti-money laundering and counterterrorist financing regime is current, effective and proportionate. The money laundering regulations have made it clear to both firms and supervisors that they must take a risk-based approach, as the noble Lord, Lord Tunnicliffe, said, taking steps to avoid putting disproportionate burdens on businesses.
In terms of processes of implementation, before the directive was transposed, the Government sought views and evidence through public consultations. The noble Baroness referred to the consultation exercise and the 186 responses that were received. The responses to the autumn 2016 consultation, which was also referenced by the noble Lord, Lord Tunnicliffe, were used to inform the Government’s decisions. Therefore, the draft regulations were published in March 2017.
The UK was legally obliged to transpose the directive by 26 June 2017 and meeting that deadline was imperative to minimise uncertainty for businesses that had prepared for implementation on this date. While I am not trying to suggest to the noble Baroness, Lady Bowles, that this is in any way an excuse, the Dissolution of Parliament came at a difficult time for the implementation of those directives because it was not possible to lay the money laundering regulations and the two separate but linked BEIS statutory instruments within the appropriate timeframe. That is something that we have acknowledged in our communications with the Secondary Legislation Scrutiny Committee. As the noble Lord, Lord Tunnicliffe, noted, we were unable to lay one of the impact assessments along with the regulations. A draft was however published in September 2016, alongside the first consultation, and eight months prior to the regulations coming in to force.
I shall now address some of the key policy questions raised by noble Lords in the debate. The noble Lord, Lord Tunnicliffe, rightly pointed out that the gambling sector, except for casinos, has been exempted from the scope of the money laundering regulations. While the Government recognise that money laundering risks exist in the gambling industry, in comparison with other regulated sectors, they are lower-risk. That was confirmed by the national risk assessments in 2015 and 2017. The Government will keep that decision to exempt gambling service providers, except casinos, under review as we move forward.
On the national risk assessment that the Treasury and Home Office must produce, I can confirm that that was published on 26 October 2017. It had the benefit of input from across government and the private sector. The noble Lord, Lord Tunnicliffe, also raised the question of the different levels of consumer due diligence that firms should apply and the need to be consistent across sectors. Businesses are required to carry out risk assessments and base their level of customer due diligence checks in line with those risks. To ensure consistency across sectors, all guidance is reviewed by the Money Laundering Advisory Committee, which includes representatives from law enforcement, the Government, industry and regulators, so there is a voice to be heard there. The Treasury is also in the process of reviewing the guidance and ensuring that messaging across sectors is consistent, which I know was a concern of the noble Baroness, Lady Bowles.
On the point made by the noble Lord, Lord Tunnicliffe, about regulators and the strain on their resources, I can confirm that anti-money laundering responsibilities in the FCA, HMRC and the Gambling Commission are paid for by relevant businesses, which they supervise. The noble Lord also notes the steps that businesses have taken to comply with the regulations include appointing a compliance officer. Around 100,000 businesses are subject to the money laundering regulations and, where appropriate, based on the size and nature of the businesses, they may be required to take steps, including appointing a compliance officer. I can also confirm, as I was asked, that the money laundering regulations specifically state what mechanisms are in place if businesses fail to comply.
The Government accept that we need to improve our performance and raise our game in managing secondary legislation as a coherent programme, as the noble Lord, Lord Haskel, and his committee rightly set out. I would like to assure noble Lords, the House and the committee that we are doing a great deal of work within government to improve the management of secondary legislation. This includes more central oversight as the Government align their approach to secondary legislation with their approach to primary. The Cabinet committee that oversees all primary legislation is now overseeing secondary legislation as well. There is also a focus on better management within departments, which I referred to in the letter from Stephen Barclay on 17 July.
Noble Lords will be aware that we debated the Second Reading of the Sanctions and Anti-Money Laundering Bill just last week, to which the noble Baroness, Lady Bowles, referred. That Bill will take the legal powers necessary for the Government to make, amend and repeal secondary legislation relating to anti-money laundering and counterterrorist financing once the UK ceases to be a member of the European Union. The Sanctions and Anti-Money Laundering Bill provides that post-Brexit secondary legislation relating to anti-money laundering and counterterrorist financing policy will be made through the draft affirmative procedure, which I know was debated and responded to by my noble friend Lord Ahmad in the debate last week. The only exception to this will be the secondary legislation designating high-risk countries. The approach through the Sanctions and Anti-Money Laundering Bill will therefore significantly enhance both the quality and the level of parliamentary scrutiny over the defences against misuse of the financial system. These are topics in which parliamentarians take a keen interest and it is therefore right that the government approach, following our withdrawal from the European Union, should make full use of noble Lords’ knowledge and engagement.
I hope noble Lords will be reassured that the Government are taking action. We recognise the specific problems relating to these regulations and have sought to respond to them. I finish by again thanking the noble Lord, Lord Tunnicliffe, for giving me the opportunity to set out the position of Her Majesty’s Government on the future performance relating to secondary legislation on these important matters.
My Lords, I thank all noble Lords who have taken part in this debate. There was a degree of loyalty and nostalgia in my moving this Motion because for one and a half hard years I was a member of what at the time was much more romantically known as the Merits Committee, although we did the same work—and it is very important work.
I thank the noble Baroness, Lady Bowles, for setting out the timetable in more detail. It is clear from her speech that the Government could have done a better job if they had planned ahead more. I also thank my noble friend Lord Haskel for bringing out the frustration felt by the committee. I hope this debate will feed back to the committee that we take its work seriously and that we will be looking more and more to its work as the role of secondary legislation emerges in much of the legislation we are anticipating.
I thank the Minister, in particular for his response on the more detailed areas. I notice that the report on gambling came out on 26 October, and I hope he was implying in his remarks that this area would be kept under review; I think he said that directly. We hope that there will be another report in the not too distant future. I note the reliance on the Money Laundering Advisory Committee, and perhaps it is unfortunate that that did not come out in the Explanatory Memorandum because this area is very important.
I end by referring back once again to the committee. We will be looking at its work and its output, and we will act where we feel that there are flaws in the SIs the committee brings up, and particularly where there are lapses in procedure. For the moment, I am content to withdraw the Motion.