Sanctions and Anti-Money Laundering Bill [HL]
My Lords, Amendments 69H, 69J and 69L in this group are in my name and that of my noble friend Lady Bowles, but the group also encompasses Amendment 69K in the name of the noble Lord, Lord Naseby. This cluster of four amendments work extremely well together, and we are very grateful to the noble Lord for bringing in a piece which strengthens this cluster.
Even the unobservant will have noticed that, in a sense, this is about starting to close loopholes. We had a very interesting comment, I think from the noble Lord, Lord Naseby, earlier—he can tell me if I am wrong—talking about the reputation and the failures of the UK to manage money laundering that involves the overseas ownership of property in London. The noble Lord, Lord Naseby, may not have had the opportunity to be here earlier, but we did have Amendment 69 in the name of the noble Lords, Lord Faulks, Lord Rooker and Lord Collins, and the noble Baroness, Lady Bowles, which directly addressed the public register of beneficial ownership of UK property by companies and other legal entities registered outside the UK, in an attempt to speed up the whole process of getting a public register of beneficial ownership.
I sat through the whole debate on Amendment 69, which took a fair amount of time.
I do apologise, but the noble Lord will know then that that issue was addressed at that point in time. The Government gave us an update on the progress they are making towards what we hope will be such a public register. Indeed, I believe the Minister said it was not a question of whether but how there would be a public register. In a sense, that is one of the criticisms of London that hopefully will be closed within a reasonable period of time. We are still waiting on the timetable, but that is indeed what we hope.
However, the noble Lord is absolutely right that whenever issues are raised, particularly when the UK talks of issues around tax havens in other countries, or we on these various Benches talk about trying to get public registers in the overseas territories and Crown dependencies, the answer nearly always comes back, “Clean up your own house first”. Indeed, that is one of the reasons why I and so many in this House support that public register of beneficial ownership of property.
These amendments that I now address follow on that same theme. I remember the noble Lord, Lord Eatwell, in particular in the debates on the Criminal Finances Bill, being highly critical, comparing London very badly with Jersey. Although we have a public register for companies, it is not one that has any verification system, and he saw that as a very fundamental flaw in the UK system. That accusation comes again and again, whenever we look at trying to do anything with the overseas territories. Whenever we look at any kind of more global activity, the answer that always comes back is: “You say that you’re well in advance of other countries, but look at your own house—you’ve plenty there to get in order”. I would agree that we have plenty to get in order, so let us do it.
The three amendments that I have tabled with the noble Baroness, Lady Bowles, deal with various aspects of this. Amendment 69H deals with an issue that has generally been overlooked. I am very grateful to the noble Baroness, Lady Bowles, for identifying it—as noble Lords can probably tell, she is the expert hand in these amendments and has drafted all three. Amendment 69H proposes that trust or company service providers that do not carry on business in the UK and ensures that they may not incorporate UK companies without oversight from an anti-money laundering supervisor. I will not go through the details of each of its provisions, but essentially it makes sure that anti-money laundering authorities can get a grip on a series of organisations—trust or company service providers—that may have escaped notice up to this point in time. It is one loophole closed.
Amendment 69J takes another tack to close loopholes. It recognises that a company can be tracked if it has a UK bank account, but if the company does not, it is much harder to identify that particular company and make sure that the money laundering authorities can give it due and appropriate attention. In the proposed new clause, if an entity falling under the Companies Act 2006 does not have a UK bank account, it will have to provide a fee. The reason it should provide a fee is that it means that the cost of doing due diligence falls not on the UK taxpayer but on the company. That provides every incentive and every opportunity for the various authorities to pay due attention to that company. That is another loophole closed.
That fits brilliantly with the new clause proposed by the noble Lord, Lord Naseby. I will let him explain that because he will understand it far better than I, but again it highlights the importance of due diligence which flows through the first two amendments that I have described. Due diligence is vital to make sure that those entities that are active in the UK have very limited opportunity—or, preferably, no opportunity—to engage in nefarious activity.
Finally, Amendment 69L directly addresses that issue that was raised by the noble Lord, Lord Eatwell, and others. As noble Lords know, we have a public register of companies here in the UK, but the Government have never used a verification procedure. I understand why they have not. When a register is public, it is transparent. Journalists, NGOs, and members of the public have the opportunity to trawl that database, and that provides for many additional eyes to look through the material. That is exceedingly important, but perhaps it is not sufficient. At this point in time, issues of tax avoidance, tax evasion and money laundering have become far more significant—and on a far more significant scale. This is the time to turn to the supervisory authorities and give them the power and the wherewithal —the wherewithal probably being the critical element—to do verification and proper due diligence on that register.
That is the purpose of the three new clauses proposed in my name and that of the noble Baroness, Lady Bowles. They are to close the kinds of loopholes which leave the UK open to regular criticism that we talk about cleaning other people’s houses but we have not done what is necessary to clean our own. Read those together with Amendment 69 and you have a package that makes a very fundamental difference—one I am sure ought to be acceptable to the Government. I beg to move.
My Lords, I shall speak to Amendment 69K, which contains a new clause that I believe would meet a need arising from an apparent money laundering loophole to do with Companies House. Before I get onto it, I thank the Minister and particularly his staff for the consultation periods that were made available to Members of your Lordships’ House; they were extremely well run. I have also had correspondence with his office and I found it extremely helpful, so I put on record my personal thanks.
There are two ways of registering a company in this country, either directly through Companies House or via a company formation agent. Currently, 40% of all companies are incorporated through Companies House. As we probably all know, in July this year the fourth EU anti-money laundering directive came into force. It required considerable change for company formation agents in that they now had to take out enhanced due diligence checks when registering a company. Obviously this increased their workload and indeed the cost considerably, but nevertheless it was to the credit of the industry that it welcomed the changes that came with the directive.
However, under current provisions, fraudsters can still register a business direct with Companies House, either on paper or via the GOV.UK website, and, through that, avoid all the checks now required when company formation agents carry out exactly the same process. My understanding of the rationale behind this is that Companies House is not a business provider, but instead is fulfilling a statutory duty just to register businesses and issue incorporation certificates. Legally, Companies House has to accept in good faith all documents sent to it, and has no statutory power whatever to verify or validate the information contained in them. It can act only within the parameters of the Companies Act, and it has no investigatory powers under that legislation.
In reality, that means that for just £12 someone can set up a company using entirely false details without having to go through any verification checks on beneficial ownership, and with limited checks on registered directors. Individuals who have been involved in money laundering, who have convictions or who have been disbarred as owners in other jurisdictions can therefore gain access to UK companies through Companies House. This loophole cannot be justified; by incorporating at Companies House, fraudsters are able to create the illusion of their company being financially secure and sustainable. That leaves British business, consumers and taxpayers open to abuse through fraud or money laundering.
The organisation Transparency International reports that in the UK last year 251,628 UK companies were created with no checks being made on the person setting up the company or their source of wealth. A further TI report found that there were hundreds of British shell companies implicated, in its judgment, in nearly £80 billion of money laundering. The report goes on to say:
“The fact that a large proportion of firms are incorporated directly through Companies House and undergo no due diligence checks creates a significant money laundering risk to the UK framework”.
That lack of checks and balances harms Britain’s reputation as a leading place to do business, and in my judgment it is essential that that reputation is protected in the lead-up to Brexit. To protect businesses, taxpayers, and the UK’s reputation, it is essential that this loophole is closed.
I do not necessarily expect the Minister to take the precise wording in my amendment. It was written largely by myself with the help of the Public Bill Office, so in a sense it is a probing amendment, but I believe it is one with such depth of information that I would be enormously surprised if Her Majesty’s Government did not respond to it and come back with something similar on Report.
My Lords, the Opposition are sympathetic to many of the points that have been made, and I single out Amendment 69H. The capacity to carry out UK company formation from outside the UK is a real lacuna in the current money laundering regime. Monitoring within the UK is difficult enough, as is evidenced by the use of, for example, Scottish limited partnerships in Russian and former eastern-bloc bank fraud and money laundering of gigantic proportions. This vulnerability is of course magnified when the company information provider eludes the UK’s money laundering oversight.
Amendment 69J provides, we respectfully suggest, a useful additional hurdle for any prospective money launderer to negotiate. While the provision of the requisite materials for opening a bank account no doubt seems irksome to many, it none the less provides an additional external check on the background of those seeking to operate via a UK company.
The amendment of the noble Lord, Lord Naseby, offers a clear and useful mechanism for combating money laundering and I share his observation that it would be surprising if the Government did not support this measure with considerable force.
My Lords, there are two issues here. The first is to make sure that money laundering checks are carried out somewhere in the chain. There could be various mechanisms to do so, some of which are suggested in the amendments. Then there is the issue of how Companies House itself will get the money to conduct the checks. That is the point of the provision in Amendment 69L for a mechanism to levy a fee. Obviously, there could be other mechanisms. As to Amendment 69J, if there is no bank account, the fee could be levied at that point. Ways in which to tighten up and get the money are the objectives of this family of amendments.
My Lords, I thank the noble Baroness, Lady Kramer, for leading a short but interesting debate on these matters. I shall put some remarks on the record to see whether they satisfy her and my noble friend.
Amendments 69H and 69J would prohibit trust or company service providers, known as TCSPs, that do not carry on business in the UK from incorporating UK companies, unless overseen by a UK anti-money laundering supervisor. The amendments would also require UK companies to establish a UK bank account and evidence this to Companies House. The money laundering regulations 2017 require TCSPs carrying on business in the UK to be fit and proper. We will also shortly formally establish the office for professional body anti-money laundering supervision, or OPBAS, which will work to ensure consistently high standards of anti-money laundering supervision by professional bodies, including TCSPs.
If there are factors that make it unclear whether a trust or company service provider could be regarded as acting by way of business in the UK—in which case it would fall within the jurisdiction of a UK anti-money laundering supervisor—HMRC considers on a case-by-case basis whether registration for supervision is necessary in order to combat attempted evasion of supervisory requirements. I therefore agree with the intention behind the amendment. However, given the pending establishment of the office for professional body anti-money laundering supervision, it is right that we establish this body first and then take proper account of its conclusions around TCSP supervision before taking further action in this space.
Additionally, the problem that the noble Baroness, Lady Kramer, and my noble friend Lord Naseby correctly identified ultimately results from trust or company service providers exploiting the comparative weakness of anti-money laundering supervision in certain overseas jurisdictions. In order to comprehensively address this, our emphasis should not be solely on expanding the scope of our anti-money laundering regime, particularly given the practical difficulties that would arise from UK supervisors seeking to exercise effective oversight over trust or company service providers established outside the UK and with no physical presence within the UK.
Such circumstances would present significant challenges for effective supervision, which typically includes measures such as on-site visits to firms that present higher risks of money laundering. The most effective way of addressing the problem which the proposers of the amendment have highlighted is through effective international co-ordination to drive up standards of supervision in jurisdictions with weaker anti-money laundering regimes than we have here in the UK. This is the agenda which we promote with international partners through the Financial Action Task Force, and it is this agenda which will offer a durable, long-term solution to the problem of weak overseas supervision of trust or company service providers.
Amendment 69J would amend the Companies Act 2006 to require UK companies to establish a UK bank account and evidence this to Companies House on an annual basis, or otherwise pay a fee or financial penalty. The wider purpose behind this part of the Companies Act is to provide a simple mechanism for companies to confirm that corporate information registered with Companies House as required under other obligations is accurate and up to date. The amendment would significantly change the purpose of the annual confirmation statement. As drafted, it would additionally require all UK companies to demonstrate annually that they hold a UK bank account; otherwise, they would have to pay a financial penalty. This would mark a significant increase in the reporting burden on the 3.9 million entities registered with Companies House, the majority of which are small, local businesses which would have to provide evidence of a UK bank account every year.
Amendment 69K would require company formation agents—defined for these purposes as including the UK registrar of companies at Companies House—to conduct customer due diligence. I appreciate my noble friend’s remarks about the consultation which has taken place, led by my noble friend Lord Ahmad, with colleagues and officials. I understand and sympathise with my noble friend’s intention; it is quite correct that we should take steps to avoid corporate vehicles being used for money laundering. However, I hope I can convince him that his amendment is not the best way to do that—although he prefaced his remarks by saying that it was a probing amendment. He will probably want to reflect on my remarks in response to it.
The amendment would represent a fundamental change in the principles under which the UK’s company law system has long operated. The UK registrar of companies has a statutory duty to incorporate and dissolve limited companies. This is carried out by Companies House, which registers company information and makes it available to the public. Companies House is not—unlike trust or company service providers, which are already supervised for anti-money laundering purposes under the money laundering regulations—a private-sector profit-making business. The registrar has no discretion in law to refuse or decline a request to incorporate a company. Companies House therefore cannot decline to establish a business relationship in the way that firms regulated for anti-money laundering purposes must when they cannot discharge their customer due diligence obligations. Because of the registrar’s statutory obligations, Companies House is not considered to be a company formation agent. If approved, the amendment would require further substantial revision to UK company law to allow Companies House to operate in the same fashion as company formation agents.
Approximately 600,000 new companies are registered each year at Companies House. The customer due diligence measures required under the money laundering regulations are significant, and are required to be applied by regulated firms on an ongoing, risk-sensitive basis to prevent illicit actors making use of the financial system. They are not intended—either by international standards, EU law or UK law—to be applied by a public body to all companies that are incorporated within the UK. Were these measures to be adopted, they would be a significant, unfunded burden upon Companies House and would fundamentally alter its relationship with the company formation process. They would also unnecessarily delay the process of company formation. The overwhelming majority of UK companies are set up for legitimate commercial purposes. Applying this amendment as drafted would not address or identify higher risks of money laundering or terrorist financing, but would instead impose an across-the-board administrative burden on Companies House and individual companies.
My Lords, I am grateful to the Minister, but he is just repeating the problem. I understand what he is saying about the EU directive, although I am not skilled in that area and would not claim to be. However, I am quite skilled in the practicalities of life, and if a quarter of a million companies are being registered and nobody is checking them, that is a huge loophole, and Her Majesty’s Government have to find a way around that. The commercial sector is doing its proper due diligence—yes, it does it for a fee—but the Government have to say, “Right, it shall all be done by the private sector and Companies House will carry on doing the little bit of work it does for £12”, or develop a section at Companies House to do it. I accept that more work may well be need to be done, but we cannot have such a situation in this country.
I can even give the Minister a small case history of what could happen. Somebody goes to Companies House, pays their £12 and registers. It is then reported to HMRC that they have registered. They then write in four months later to say that they have ceased trading. That is a wonderful vehicle for money laundering: they are a registered company, and HMRC has forgotten about them because they have told it that they are not trading. If a quarter of a million of them are doing this—I am not saying there are quite as many as that—it is a huge loophole and Her Majesty’s Government have to figure out how to deal with that section of companies that are currently being registered fully through Companies House.
I do not accept that all we are doing is describing a problem. We are of course doing that, but we are also highlighting that we are about to formally establish the office for professional body anti-money laundering supervision, which will be responsible for supervising the very professional body of trust companies to which my noble friend was referring. We will have to keep an eye on and watch out for this issue, but we are certainly not complacent about it; we are aware of it and watching it carefully.
My Lords, perhaps I heard the same speech that the noble Lord, Lord Naseby, heard, because it seemed to me a speech in which basically all the loopholes were recognised. The argument was that we cannot do anything much about it. We have to co-operate with international regulators regarding companies based overseas with no UK presence that take advantage of Companies House; and regarding companies that go directly to Companies House, never get noticed again but, under the radar, can behave inappropriately. Some of them are entirely legitimate, I am sure, but within that pool there are bound to be some that are behaving very inappropriately.
Having recognised that there is a loophole, I am not vested in one set of answers to how we close it, but it needs to be closed. If the Minister has problems with the drafting or the way various phrases have been laid out, or if there are various other issues, surely all of those can be overcome once there is a decision in principle that this is a loophole and we ought to close it. I hope there is an opportunity for a conversation before Report, because I suspect that this House would be rather uncomfortable with walking away from a Bill like this and leaving a large and acknowledged loophole on the books and in the system. I beg leave to withdraw the amendment.
My Lords, my noble friend Lady Kramer and I gave notice that this schedule should not stand part of the Bill. I would like noble Lords to take a few moments in private to give the schedule the “read it out aloud” test. Let us try one bit of it now. Paragraph 4 says:
“Require prescribed persons to take prescribed measures in relation to their customers in prescribed circumstances”.
All the prescribing is yet to be defined. I am sorry to appear light-hearted, but I can imagine that coming out of the mouths of comedians. Truly, I do not know whether the schedule is sinister or whether it just fails to understand how the money laundering regulations 2017 work. It is sinister if you look at the scope of the powers, which gives opportunity for boundless increase in who can be covered and ignores any proportionality or safeguards that are included in the current law.
It is no use pointing to the reference to the current regulations, which appears in paragraph 20, because that is basically there only to give power for them all to be rewritten, amended or revoked—so there are no guarantees for anything. It is worth having a quick look at paragraph 20, which starts:
“Without prejudice to anything in section 41, paragraphs 1 to 19 or section 44(2), regulations under section 41 may”.
We have to remember that Schedule 2 starts:
“Without prejudice to the generality of section 41”.
So we have a paragraph that starts with three mentions of “without prejudice”, reinforcing that a whole lot of other stuff is expected to be going on. Paragraph 20 then says:
“(a) subject to any modifications the appropriate Minister making the regulations considers appropriate, make provision corresponding or similar to any provision of the Money Laundering Regulations 2017, as those Regulations have effect immediately before they are saved by section 2 of the European Union (Withdrawal) Act 2017; (b) amend or revoke the Money Laundering Regulations 2017”.
It says that you can make provisions corresponding or similar or revoke. If that, together with the three references to “without prejudice” is not giving notice that you intend to completely rewrite them, then I really do not know what is. This is, as I have said before, a big part of the problem. It is sinister when looked at that way.
There is also a failure to understand, or at least to commit to, how the money laundering regulations 2017 work. That misunderstanding or failure to acknowledge is there by virtue of the very structure of Schedule 2. It is upside down, starting with the person, moving on to supervisors and leaving out duties of government. It does not seem to appreciate the cascade of risk assessment that drives automatic updating of the nature of risks from the Treasury and Home Office, to supervisors and then on to the persons. The list of powers seems to have been composed by lifting a short part-sentence here and there from individual sub-regulations, ignoring any safeguards including, as I said, the surrounding cascade methodology. The part-sentences are then turned into a list of naked powers that have already received criticism from the Delegated Powers Committee in paragraph 36 of its report. I commend reading that paragraph to noble Lords; it highlights and criticises the unrestricted power over persons, the powers to create supervisors with investigatory powers, the powers to prohibit the carrying on of business and power to impose unlimited fines and criminal offences—all without limit save for the sentencing limits.
It would stretch your Lordships’ patience, especially at this hour, if I went through each paragraph to show its origins and what is missing—although I could do that, if noble Lords wanted. I will just illustrate the pattern with one paragraph but, as I have said, it is a repeating pattern. Paragraph 2(1) requires “prescribed persons”—the yet to be defined prescribed persons—
“to identify and assess risks relating to money laundering, terrorist financing and other threats to the integrity of the international financial system”.
That actually sounds like a pretty good definition of what the Financial Action Task Force was set up to do. The Minister can by regulation make anyone—some small accountant, lawyer or bookkeeper, you, me, the doorkeeper, a schoolteacher—do it all, not forgetting unlimited fines for getting it wrong. Am I being ridiculous? Well, no, because there is no mention of the category of person or it being about their own or a relevant business. Where does this wording come from? Let us look at Regulation 18(1) of the 2017 regulations, entitled:
“Risk assessment by relevant persons”.
“A relevant person must take appropriate steps to identify and assess the risks of money laundering and terrorist financing to which its business is subject”.
Spot the missing bits. It has to be “appropriate steps” relating to its own business. The “relevant person” is not open-ended either, because there is a list of relevant persons in Regulation 8.
My Lords, we are coming to the end—this is the last group. The noble Baroness has given a detailed exposition of the reasons behind the proposed amendments. I can say quite clearly that the Government do not agree with her position. She used phrases such as “the Government going it alone”. Throughout the Committee stage—and today with my noble friend—I have articulated the fact that with the FATF we have led the way. These are areas where Britain is ahead of the curve, not behind it. Perhaps I can answer some of her questions directly, and I will also look carefully at her contribution in Hansard.
Schedule 2 provides further detail on the scope of the anti-money laundering and counterterrorist financing regulations that can be made under Clause 41. Paragraphs 1 to 17 of this schedule confirm that regulations made under Clause 41 can cover the topics already addressed in the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.
The noble Baroness quoted a few paragraphs. I will quote a few in return. For example, paragraph 4 confirms that regulations made under Clause 41, which she referred to, can require prescribed persons to take specified actions in relation to customers in prescribed circumstances.
The money laundering regulations 2017 currently give effect to the international standards set by the Financial Action Task Force and EU law, by including provisions of this type which require regulated firms to conduct varying levels of due diligence on their customers on a risk-sensitive basis. Further, and for example, paragraph 7, which I think the noble Baroness also mentioned, confirms that regulations under Clause 41 can confer supervisory functions—and corresponding powers—on supervisory authorities, such as the FCA. Other paragraphs within the schedule similarly clarify or supplement other aspects of regulations under Clause 41. For example, paragraph 18 provides that regulations made under Clause 41 cannot provide for criminal sentences that exceed the statutory maximums already established through the money laundering regulations 2017. Section 7 of the Proceeds of Crime Act 2002 provides for longer prison sentences of up to 14 years; these provisions should be seen in that wider context.
Finally, the noble Baroness mentioned paragraph 20 on a few occasions. This paragraph confirms that regulations made under Clause 41 may make provision corresponding or similar to the money laundering regulations. Sub-paragraph (2) also confirms that regulations made under Clause 41 can be used to amend or revoke the money laundering regulations. Indeed, this is exactly what was done when the money laundering regulations came in to replace the 2007 regulations. This is not something new that has been created.
When the money laundering directive came in, there was, through the cascade mechanism, a framework within which the regulations sat. Will the Minister at least acknowledge that that framework is the missing piece here? Does he acknowledge that the cascade structure, which was a backbone to make sure that the framework and the principles were translated down through the system, is also missing here? Amendment and revocation had to be within that context, with those constraints and principles. The new amendment that he quoted has no such constraint or principle sitting around it. That is the whole point that everyone is attempting to make in this discussion. He needs to tell us why the Government have chosen that route, where those frameworks, principles and backbones are eliminated.
The noble Baroness says “everyone”. I know that she and the noble Baroness, Lady Bowles, made that point but I do not agree. She has made her point and I have listened; perhaps she should listen to the point that I am making in response.
As the noble Baroness says, Schedule 2 ignores the cascade of information. The power in Clause 41 will enable us to update and amend existing legislation that does this, as we did when the regulations were replaced this year, as I have already mentioned. This should not be viewed in isolation, which I fear is what the noble Baroness is doing. When new categories of risk manifest—the noble Baroness, Lady Bowles, talked about virtual currency exchanges—new legislation will be needed, and this power helps to fill that gap.
In sum, Schedule 2 sets out examples of the scope of the anti-money laundering and counterterrorist financing power contained in Clause 41, and it defines the limits of this power in relation to criminal penalties. The noble Baroness, Lady Bowles, ignores proportionality. However, this issue must be looked at in the wider context, not in isolation. Ministers are bound to use these powers proportionately, taking account of people’s human rights, and they are bound by Section 6 of the Human Rights Act 1998. I therefore contend that Schedule 2 should stand part of the Bill.
Perhaps I may briefly mention Amendment 71A, which I understand is related to the opposition of the noble Baronesses, Lady Kramer and Lady Bowles, to Schedule 2. To give an example, the reference in paragraph 2 of Schedule 2 to regulations, mentioned by the noble Baroness, being capable of requiring,
“prescribed persons to identify and assess risks relating to money laundering, terrorist financing and other threats to the integrity of the international financial system”,
corresponds with regulations 16 to 18 of the money laundering regulations 2017. These require the Government, supervisors and regulated firms to assess the risks of money laundering and terrorist financing at a national, sectoral and business level as appropriate so as to inform the nature and extent of any due diligence measures applied by regulated firms.
Perhaps I may give a further example. The reference to “prescribed persons” in paragraph 4 of Schedule 2, which again the noble Baroness quoted, corresponds to Part 3 of the money laundering regulations 2017. This establishes a framework giving effect to the standards of the Financial Action Task Force relating to simplified and enhanced customer due diligence, which I am sure we all welcome. Again, this is not about the UK going it alone; it is about how we are part and parcel of the FATF.
Therefore, the amendment would not remove the Government’s ability to designate categories of business as regulated for anti-money laundering purposes, or designate supervisors. These purposes are already permitted under Clause 41 and are referred to in Schedule 2.
There may also be a number of areas where we want to confer functions upon persons to assist with the implementation and enforcement of sanctions. I think that the noble Baroness, Lady Bowles, startled the doorkeepers when she quoted various examples. Captains of ships and harbour masters, for example, might need to exercise functions in order to comply with shipping sanctions. We might also need to confer functions to help enforce sanctions on border officials, agents of Her Majesty’s Customs and Revenue, or law enforcement agencies, such as the National Crime Agency.
I know the noble Baroness. She is well versed in the money laundering issue, and I respect that. That is why I said at the outset that I will listen again, or read, I should say—listening to Hansard may be stretching it a bit—her contribution very carefully and see if there are aspects that need further amplification and explanation from the Government. I hope that through my practical examples I have addressed some, if not all, of her concerns and that at this point, she will be minded to withdraw her amendment.
I thank the Minister for his reply. I fear that a large part of it merely proved my point that small extracts have been turned into powers. I maintain that without the surrounding framework to give proportionality, you do not need everything that is in there. It is difficult—
I was merely giving a few illustrative examples. Like the noble Baroness mentioned, I think she and I would be only ones here if we carried on in this respect. What I was doing was merely illustrating, but it is dealt with comprehensively.
That is the point. It is converted into a power very comprehensively but it just takes the first section. For instance the one I quoted does not even point out that they are responsible only for what goes on in their own business. That makes it very difficult. A lot of this could be dealt with by putting in those proportionality statements and a few more things.
The other source from which this list of powers has been obtained—which I think the Minister was referring to—is the FATF recommendations. However, you have to bear in mind that the FATF is an organisation meant to look at risks to the financial system, terrorist financing and those kinds of things. It is not set up with a branch to deal with civil liberties or even human rights. It leaves that to the nation states which are then going to implement. I could probably find it in the FATF but it is too late in the evening to do that. You cannot just put the list of powers or of things that the FATF wants you to do into powers without acknowledging that there has to be a framework.
Yes, there may be human rights elements that we have not abolished, nevertheless there are more things—
To clarify, I said that we need to look at this in the wider context. That is why I referred to the obligations that Ministers are bound by in the Human Rights Act. That is part of our statute, so we are obliged to follow that.
Unfortunately, it seems that that ends up in the courts from time to time, which is very difficult for the sorts of people that might find themselves entangled in this. My plea is really that we just make an effort to get this a little bit more right. In that spirit, I will not be pressing Amendment 71A, which was linked to the creation of supervisory powers, which was why it was in the same group. This issue is one that we will wish to return to in general on Report.
Committee (3rd Day) (Continued)
69H: After Clause 41, insert the following new Clause—
“Trust or company service providers
(1) A trust or company service provider that does not carry on business in the UK may not incorporate UK companies without oversight from an anti-money laundering supervisor.(2) In this section—“anti-money laundering supervisor” has the same meaning as “supervisory authority” in Schedule 2;“trust or company service provider” has the same meaning as in regulation 3 of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (S.I. 692/2017);“carry on business in the UK” has the same meaning as in regulation 9 of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (S.I. 692/2017).”
As drafted, the amendment would also require that due diligence be carried out in accordance with any of the customer due diligence measures specified in the money laundering regulations, the fourth EU money laundering directive or regulations made under Clause 41 of the Bill. This approach would unfortunately create uncertainty for firms and for Companies House as to which set of due diligence obligations they should comply with, and how they should do so.
Amendment 69L raises similar issues, so I will be brief. It seeks to amend the Companies Act 2006 to require the Secretary of State to impose a duty on Companies House to carry out customer due diligence measures in accordance with the money laundering regulations on persons wishing to register a company in the UK. The international standards set by the Financial Action Task Force, EU and UK law all envisage that customer due diligence measures should be applied by a limited number of regulated firms. These entities are the gatekeepers to the financial system and are therefore the proper entities to carry out due diligence for anti-money laundering purposes. Given the scale of Companies House’s activities, it would only be possible to require it to conduct such due diligence at disproportionate cost. This would further penalise legitimate businesses while not adding significant new obstacles to money laundering and terrorist financing.
The amendment tabled by the noble Baroness, Lady Bowles, would effectively establish an additional levy on legitimate businesses: to duplicate due diligence checks that are already being conducted by regulated firms such as banks and lawyers, which such businesses already have commercial relationships with. Were these measures to be adopted, they would unnecessarily delay the process of company formation from the same day—in its most accelerated form—to an average of weeks, not days. This would additionally result in a significant increase in the cost of incorporation at Companies House. Also, any such obligations would only duplicate those already carried out by financial institutions and other firms that are already regulated in the UK. Any entity with a UK bank account is already required to go through customer due diligence. It would be neither effective nor proportionate to compel Companies House to duplicate these requirements.
For these reasons, I therefore ask the noble Baronesses, Lady Bowles and Lady Kramer, and my noble friend Lord Naseby, to withdraw their amendments.
Amendment 69H withdrawn.
Amendments 69J to 69L not moved.
Schedule 2: Money laundering and terrorist financing etc
Amendments 70 and 71 not moved.
Debate on whether Schedule 2 should be agreed.
What else is missing? Rather a lot; that is why the 2017 regulations are 118 pages long—and yes, there are flags in my copy, because I kind of know what is in there. What else is missing? Even within that same Regulation 18, paragraph (2)(a) says:
“In carrying out the risk assessment … a relevant person must take into account … information made available to them … under regulations 17 … and 47”.
Regulation 17 is about the supervisor’s risk assessment. Regulation 47 gives supervisors an obligation to provide information to those they supervise. I think that is a pretty good thing for them to do. Going back to Regulation 18, paragraph (2)(b) gives a non-exhaustive list of risk factors to include, such as customers, countries of operation, products and services, transactions and delivery channels. Paragraph (3) states:
“In deciding what steps are appropriate … the relevant person must take into account the size and nature of its business.”
If we zoom out to other parts of the 2017 regulations, noble Lords will find that the “relevant person” in Regulation 18 does not have to work out the risk factors and proportionality all by themselves. There is guidance from their supervisors in the cascade. In fact, the cascade under the 2017 regulations starts with the Government making risk assessments, which feed in to supervisors, who refine or add their own sectoral information and then provide, under a duty, guidance to the entities they regulate. None of that is anywhere near being included in Schedule 2.
For the self-regulating sectors, the professional bodies that act as supervisors—there is a list of 22 of them in Schedule 1 to the 2017 regulations—can get the guidance they are going to give to the entities they supervise signed off by the Treasury. That is another safeguard, especially when we consider that at the end of all this lie unlimited fines and potentially criminal offences.
The cascade, the duty to inform and proportionality are all essential elements. It is simply not good enough to give them no status. Also, the cascade already gives massive scope for update because of the ongoing requirement in the 2017 regulations for the Treasury and Home Office to,
“identify, assess, understand and mitigate the risks of money laundering and terrorist financing”.
That is the start of Regulation 16, and at the end of that regulation, in paragraph (9), it says that the risk assessment is to be kept up to date. That, indeed, is also the first requirement of FATF recommendations.
To recap, under Regulation 16 there is government risk assessment, under Regulation 17 supervisors do follow-on assessments for their sector, and under Regulation 18 the relevant person does their risk assessment. So the mechanism is already there for top-down automatic updating, and it includes essential safeguards like proportionality and provision for how procedures can be approved. That is essential to try to get businesses on board and—I say it again—to make sure that they get their internal audit procedures functioning in a way that everybody agrees is right.
In contrast, instead of better referencing to this sequence and context, Schedule 2 to the Bill provides a bottom-up list of powers to make anyone responsible for anything, with the creation of supervisors, oversight and inspection disembodied from who it might be for. It leaves out provision for government duties, proportionality, and, again, the cascade.
So what does Schedule 2 intend to achieve that might be necessary and is not already achievable? It is not new risks because they are in the risk assessment cascade. The Government can put in anything they identify as well as mitigation requirements. It can only be to widen the scope to more business categories that do not already fall within the list of relevant persons in Regulation 8, and the supervisors of those businesses. Therefore, will the Minister advise what businesses those might be other than virtual currencies and wallet providers already included in the ongoing update in the fifth money laundering directive, and for which I understand the Government also have their own plans?
Can the Minister also advise whether the UK would go it alone to designate additional business categories without international agreements? What kind of businesses might those be? Is he able to advise whether change is envisaged—for example, to supervision of self-regulated professions, and, if it were, whether that is a matter to slip through in a regulation? Self-regulated professions are a very strong thread in the United Kingdom. I ask this as there is a lot of supervisor creation power going on in Schedule 2.
Why are the Government paving the way potentially to do away with the backbone of the cascade and proportionality, because, as I read out, there can be no mistaking that paragraph 20 is about the serious business of rewriting everything that is there, leading to massive uncertainty for business? That is the only reasonable interpretation to put on the continual reiteration of all those powers.
On any reasonable assessment of Schedule 2 as updating who can be included, it is a sledge-hammer to crack a nut, but with sinister consequences. Surely, all that is necessary is a modest provision to update the 2017 regulations in accordance with international recommendations, including power to add new business categories and their existing supervisors into the framework that already exists. Even if the framework were more narrowly described, it is not that difficult; I think that I could write it. I have broadly suggested this kind of approach in other amendments, but there will be other ways to achieve it. If a major rewrite is really wanted, or the nature of additional businesses that it is wished to cover are currently structured without any, or any appropriate, supervisors, and the Government are going it alone separate from international consensus, those are the kinds of things that are getting into the territory that belongs in primary legislation.
Thus, Schedule 2 is neither needed in its current scope nor appropriate and, as has been debated already, it further expands the basis to make unlimited new criminal offences without any reference to safeguards or basis. In this context, as I have said before, the criminal offences that were introduced by regulation mirror some that are already in other Acts of Parliament concerned with money laundering, such as the Proceeds of Crime Act, so they are not completely off the wall. In Schedule 2, you can now have them completely off the wall with no antecedent anywhere else in any primary legislation.
Finally, as I think the Minister has said previously, the fifth money laundering directive is expected to be finished and transposed before Brexit, and, I now understand, will be transposed by virtue of this Bill, when it becomes an Act, rather than through the European Communities Act. There are potentially more intrusive provisions within that fifth money laundering directive, which bear on individuals. Currently, they are bounded by the European Charter of Fundamental Rights. When I last looked, that was one of the conditions that the Council was writing into its version, which is in trilogue. How will this be taken into account when we have abolished the Charter of Fundamental Rights? I understand there are things in it, especially those impacting on immigration and so forth, that the Government do not like—although we on these Benches think the whole charter is a jolly good thing—but are we really saying those aspects that bear on Treasury implications and how you deal with out-and-out civil liberties will all be gone?
This is yet another reason why having such an extensive ability to rewrite, such naked powers to introduce things without safeguards, is unacceptable. A little more homework needs to be done so that this remains properly framed, whatever rewrites may or may not go on.
Finally, I ask the Minister to make sure that, when regulations on money laundering come around again, Parliament is not given only a matter of days to scrutinise them.
Schedule 2 agreed.
Clauses 42 and 43 agreed.
Clause 44: Regulations: general
Amendments 71A to 72A not moved.
Clause 44 agreed.
House adjourned at 9.39 pm.