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Money Laundering and Terrorist Financing (Amendment) (High-Risk Countries) Regulations 2021

Volume 811: debated on Tuesday 27 April 2021

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Money Laundering and Terrorist Financing (Amendment) (High-Risk Countries) Regulations 2021.

Relevant document: 51st Report from the Secondary Legislation Scrutiny Committee

My Lords, the Government are committed to combating money laundering and terrorist financing and recognise the threat that economic crime poses to our financial system. Illicit finance not only damages our reputation as a global financial centre but can impact on our national security by undermining the integrity and stability of our markets and institutions. Furthermore, illicit finance can impact opportunities for legitimate business in the UK and cause serious social and economic costs through its links to serious and organised crime.

That is why the Government are focused on making the UK a hostile environment for illicit finance. As part of this work, we have taken significant action to tackle money laundering and to strengthen the whole system response to economic crime. Underpinning these efforts are the money laundering regulations, the legislative framework which sets out a number of requirements that businesses falling within its scope must take to combat money laundering and terrorist financing. These requirements include the need for firms to implement measures to identify and verify the people and organisations with whom they have a business relationship or for whom they facilitate transactions.

Additionally, the regulations require financial institutions and other regulated sector businesses to carry out greater scrutiny or “enhanced due diligence” in respect of business relationships and transactions involving so-called “high-risk third countries”. These are countries that have been identified as having strategic deficiencies in their anti-money laundering and counter- terrorism financing regimes and that pose a significant threat to the UK’s financial system. The statutory instrument under discussion today amends the definition of a high-risk third country in the money laundering regulations.

Let me explain the background to this instrument, which I note was reported by the Secondary Legislation Scrutiny Committee as an “instrument of interest”. At present, the definition of a high-risk third country in the money laundering regulations is linked to retained EU law and references the list of countries identified by the European Commission as high risk. This list was previously updated via EU law, which now no longer has an effect in the UK. If our legislation is not amended, the list will become outdated and could leave the UK at risk from those with poor money laundering and terrorist financing controls. Furthermore, the UK will risk falling behind international standards set by the Financial Action Task Force, the global standard setter for anti-money laundering and counter- terrorist financing measures.

This instrument will therefore amend the money laundering regulations to remove references to the EU’s high-risk third countries list and instead insert a new list of countries identified in Schedule 3ZA. This will be the UK’s new autonomous high-risk third countries list. It will mirror exactly the list of countries identified by the Financial Action Task Force as having strategic deficiencies in their anti-money laundering and counterterrorist financing regimes, and it will keep the UK in line with international standards.

The change which I have just outlined will allow us to continue to protect businesses and the financial system from those who pose a significant threat, while ensuring that the UK remains at the forefront of global standards in combatting money laundering and terrorist financing.

I thank all noble Lords for their examination of this important legislation. In summary, this instrument will create a new autonomous list of high-risk third countries. Businesses that fall under the scope of the money laundering regulations and that deal with these countries must take extra scrutiny measures. In addition, this instrument will ensure that the money laundering regulations remain up to date and ready to respond to the threat posed by nations with poor money laundering and terrorist financing controls.

This instrument will enable the money laundering regulations to continue working as effectively as possible to protect the UK financial system. It will allow the UK to continue playing a full part in the fight against economic crime. I hope that noble Lords will join me in supporting this legislation. I beg to move.

My Lords, I thank the Minister for introducing this statutory instrument in his usual straightforward manner. I support it and, for once, I cannot quibble with its need for a hasty introduction within the 21-day limit. In the fight against money laundering and the financing of terrorism no time should be wasted. The need to add new countries to the list surely takes precedence over the need for a 21-day period before the legislation can come into force.

The Government have decided that they no longer want to be bound by the European Commission’s list of states which require extra money laundering precautions. They have opted instead to adhere to the Financial Action Task Force list although, in practice, this amounts to a very little change.

The need for vigilance is clear. The threat of terrorism is omnipresent. The Islamic State in Iraq and the Levant—ISIS—continues to pose a threat, as it has access to resources which enable it to carry out or inspire terrorist attacks. Al-Qaeda and its various affiliates still pose a threat, and there are countless hostile forces, both organised and rogue, which can do harm to civilised nations. The proceeds of money laundering are their cash in hand. Money laundering is certainly not a victimless crime. It needs to be hounded out and this legislation is part of the process.

The Financial Action Task Force has set itself up as the global money laundering and terrorist financing watchdog. More than 200 countries and jurisdictions are signed up to its policies. However, I wonder whether its methods are any longer entirely reliable in giving us the list we require. For instance, Russia does not feature on the list of countries which should be subject to increased vigilance. I wonder why. We are told by FATF that Russia has an in-depth understanding of its money laundering and terrorist financing risks and that it has policies and laws to address these risks. That might be enough for the FATF, but can the Minister tell us whether it is enough for the British Government? Do they feel comfortable with the FATF list about where particular vulnerabilities lie? It seems to me—and to others—that Russia has a framework aimed at preserving what it wants to preserve and not at protecting the rest of the world from money laundering.

Richard Gordon, the director of the Financial Integrity Institute at Case Western Reserve University, points out that what the FATF endeavours to measure is not results but the processes that are in place to detect and deal with money laundering. None of the measures takes account of political concentration or a lack of independence of the judiciary. They would not serve to protect external countries from a threat posed by money laundering to fund terrorism.

Terrorism comes in many shapes. Russia is known to like to interfere with electoral processes, both in the US—where sanctions are now being imposed on it because of that—and in the UK, where its interference in our elections and our referendums is now clear. That interference is funded by money laundering. Does the Minister think that the FATF list should be the one on which we place such reliance, or should we go further with our new-found independence and construct our own list?

My Lords, I am delighted to follow my noble friend Lady Wheatcroft, and to agree with her, as I turn to the same subject of Russia. In broad terms I certainly support the order before us today, but Russia is an astounding omission, if I may put it that way. I declare an interest in that I am banned from going to Russia, as of about six years ago, I think because of something somewhat disobliging that I said while I was still a Member of the House of Commons. I am not quite sure what it was, but I may have been a little bit rude about Mr Putin. Anyway, I was surprised to be banned because I thought I was so unimportant; I still think this, but they obviously feel I am a good person to ban. I would have liked to go to Leningrad—that is, St Petersburg—since I have never been there.

The Times reports today that the Foreign Secretary has announced sanctions against 14 Russians involved in massive tax fraud, as was exposed by Sergei Magnitsky who, of course, was tortured to death in prison. If any noble Lord listening has not read Red Alert by Bill Browder, I commend it. It is very readable but also extremely concerning about the behaviour of Putin’s regime. What about money laundering? Well, you do not have to be an aficionado of “McMafia” to know about Russian oligarchs in this country, some of whom I am sure—perhaps all—have made their money legitimately, although that is not what we are told. They have come here and bought up high-end property and much else: football clubs, newspapers, all sorts of things. We need to look at how this money came to be here; frankly, it is extremely concerning.

In the latest edition of the New Statesman, which is not a publication that I often quote, an article about Alexei Navalny says:

“Imagine if Western governments were to show a shred of Navalny’s bravery; by closing loopholes facilitating money laundering… Imagine if Britain dammed the flow of hot money through London’s financial and property markets; if Germany halted the … Nord Stream 2 gas pipeline”.

Of course, that is a journalist writing, but I regret to tell my noble friend the Minister that the UK’s reputation, to which he referred, has been damaged. It is known throughout the world that a huge amount of hot money has been laundered through the UK. This measure is intended to prevent a certain amount of that, but a lot of that hot money has come from Russia.

Putin’s regime is known as—and is—a kleptocracy. He and his cronies have enriched themselves enormously in the last 20 years, and we should be looking at that. This is about money laundering and terrorism. What was the attempted murder of Skripal, and the actual murder of the woman in Salisbury, if not state-sponsored terrorism with money that should not have been available to use? Can the Minister tell us what measures Russia has in place to prevent money laundering? He said that this is the criteria for being on the list. It seems to me that few, if any, such measures are in place. I regret to say that we have allowed a huge amount of Russian money—stolen money—to be laundered in this country.

My Lords, I also thank the Minister for his introduction to this debate. It was very precise and to the point. I declare an interest as a member of the advisory board of Transparency International UK.

The Explanatory Memorandum to the SI makes clear that it is intended to update the provisions of the fourth money laundering directive and the Money Laundering Regulations 2007. A principal policy objective is to update and enhance European legislation in line with international standards on combatting money laundering and terrorist financing. Billions of pounds of suspected proceeds of corruption are laundered through the United Kingdom each year. Money laundering is a key enabler of serious and organised crime. Over 100,000 businesses covered under the regulations are required to know their customers and manage their risks.

The UK Anti-Corruption Coalition believes that in terms of perceived gaps in the Government’s approach, they should bring forward economic crime legislation at the earliest opportunity to implement the reforms, together with the foreign property register. I understand that the legislation for this is now waiting to be put through Parliament, having originally been committed to be completed and in operation by 2021. Perhaps the Minister could provide us with an update in his reply. There is also a call for legislative reform to the Criminal Finances Act to ensure that loopholes in it exposed by the latest unexplained wealth order judgment are addressed urgently.

There is a sense that too many professional body supervisors have no appetite to enforce the regulations and are riven with conflicts of interest. There is also the concern that the money laundering supervisors do not meet the specific criteria for effective supervision laid out by the Committee on Standards in Public Life in 2016. Overall enforcement of the money laundering regulations appears, at best, to be patchy.

Transparency International points out that the United Kingdom banking sector acts as an entry point into the UK economy, with leaked banking data showing the movement of billions of pounds in criminal and suspicious funds. Analysis revealed that clients at 72 UK banks and branches sent or received over £750 million in suspicious funds, mostly between 2005 and 2015. Clients at just 10 banks were responsible for sending or receiving more than 90% of these funds. These transactions involved more than 3,100 British bank accounts. However, more than £575 million was paid into just five bank accounts. Surely, this is a clear, transparent case of money laundering on a grand scale. When questioned, all these banks insisted they had strict anti-money laundering measures in place.

The United Kingdom’s anti-money laundering supervision system is disjointed, with real issues regarding conflicts of interest, the quality of supervision, and insufficient and inadequate civil sanctions. Will the Government take note and act on Transparency International’s recommendations for reforming the anti-money laundering supervisory regime? I asked that question in an earlier debate. In particular, will they strengthen the ability of supervisors to provide a credible deterrent, protect the independence of anti-money laundering oversight and remove conflicts of interest, remove weaknesses in the supervisory regime, and ensure that police and supervisors pursue breaches of money laundering regulations through prosecution?

Finally, an overhaul of the United Kingdom’s anti-money laundering regime is vital for preventing money laundering and protecting the United Kingdom’s international reputation. Revelations in the latest FinCEN files leaks, including that the US Treasury considers the UK a high-risk jurisdiction, should serve as a wake-up call.

My Lords, I am grateful to the Minister for introducing this measure and to other noble Lords who contributed to the debate. The statutory instrument, although a formality in many senses, returns us to an area that your Lordships’ House has taken a great interest in over a number of years. This instrument has been laid under the “made affirmative” procedure. While we are never huge supporters of that way of doing business, I am grateful to officials for providing a justification in the Explanatory Memorandum. It is useful to know that the relevant firms were forewarned of the change. It is also reassuring that the Government have acted swiftly to align with the list agreed by the Financial Action Task Force.

This is another of the areas affected by the UK’s withdrawal from the European Union. We have always tried to play a constructive role as the Government seek to replicate or redesign the structures that came through EU membership. Given the extent of cross-border transactions in the modern age, tackling money laundering necessitates international co-operation such as that provided by the FATF. Despite the use of “made affirmative” procedures, it seems that this mechanism for specifying high-risk countries works. Whether other aspects of the Government’s new regime will function as intended remains to be seen; we will keep a watchful eye on this in the months ahead. Of course, this list will need to be updated periodically to reflect any changes made by the international task force, as is acknowledged in paragraph 6.3 of the Explanatory Memorandum. Can the Minister confirm the anticipated procedure for future change?

If I may, I want to ask about money laundering matters separate to the designation of high-risk countries. While other commitments limited his involvement in the Financial Services Bill, he will know that the topic was explored in Committee. In response to amendments from my noble friend Lord Eatwell, the Government outlined several steps that are being taken to strengthen the UK’s hand in this fight. Can the Minister provide a progress report on these initiatives either in his response or in writing? He will be aware that, in recent years, the FATF has made a number of recommendations to the UK Government. We would not expect all these changes to occur overnight but I am sure that noble Lords on all sides would be comforted if signs of progress were able to be seen.

We must leave no stone unturned in our fight to combat money laundering and terrorist financing. Designation of these countries under the new UK regime is a welcome first step, and I look forward to the Minister’s response on the Government’s wider efforts.

My Lords, I begin by thanking all noble Lords who have taken part in the debate for their thorough consideration of the statutory instrument. It is an important subject and some excellent points have been made.

My noble friends Lady Wheatcroft and Lord Robathan asked about the challenge of ensuring that the UK’s new autonomous list mirrors those countries that have been identified by the Financial Action Task Force in its public documents as having deficiencies in their anti-money laundering and counterterrorism financing controls. By aligning its approach with that of the Financial Action Task Force, the UK is in line with international standards, and the identification of countries is underpinned by the FATF’s methodology and assessment processes. It remains open to the UK to review the list and amend it according to our own assessment of risks if necessary.

On the FATF’s assessment of Russia, the judiciary’s lack of independence and corruption were both highlighted in its report. For example, the FATF noted that levels of corruption are especially high in Russia. The money laundering regulations require enhanced due diligence in a range of situations that present a high risk of money laundering or terrorist financing, not just where a transaction or business relationship involves a country that is listed as high-risk.

When assessing if there is a high risk of money laundering or terrorist financing, a number of factors are taken into consideration, including geographical risk, when countries have been identified by credible sources as having high levels of corruption, such as terrorism. The high-risk third countries list should not be viewed in isolation. Enhanced due diligence, which comes through the money laundering provisions, is applied regardless of geographic risk in certain situations, such as when a customer or potential customer is a politically exposed person, family member or known close associate of a politically exposed person. Under the money laundering regulations, the regulated sector is also required to apply enhanced due diligence in any other case which by its nature could present a higher risk of money laundering and terrorist financing, including where there are geographic factors.

The noble Lord, Lord Chidgey, is also concerned and asks about transparency and beneficial ownership. The Government are committed to ensuring that our anti-money laundering regulations support the identification of criminal and terrorist financing activity, without placing disproportionate burdens on the regulated sector. In answer to the challenge from the noble Lord, I want to be clear on the Government’s intention to introduce a package of reforms to limit the risk of misuse of companies, including by verifying the identity of people managing or controlling companies, providing the registrar with new powers to query and remove information and investing in investigation and enforcement capabilities. This was set out in September last year in our response to a consultation on Companies House reform. We will legislate on that reform programme when parliamentary time allows.

On AML supervision, we remain committed to ensuring that our AML/CTF regime is robust and responsive. The Treasury already works closely with the Office for Professional Body Anti-Money Laundering Supervision, known as OPBAS, to ensure high standards of effectiveness and consistency among supervisors.

I turn to the noble Lord, Lord Tunnicliffe, and how the list will be updated. The Government intend, before updating the list, to use the affirmative procedure to ensure alignment between the UK’s high-risk third countries lists and the Financial Action Task Force lists, which are updated three times a year and, therefore, we have the flexibility to do the same.

On implementing the FATF’s recommendations in the UK following the report of July 2019, the Government and private sector have jointly published a landmark economic crime plan, which provides a collective articulation of the 52 actions that the UK is taking to tackle economic crime and, in particular, prioritises risk areas by filling in the gaps identified by the Financial Action Task Force’s mutual evaluation report. Key actions include the reform of the suspicious activity reporting regime and improving supervision of anti-money laundering compliance in the regulated sector.

On progress, the Government are bolstering the UK Financial Intelligence Unit with an addition of more than 70 new staff, enabling more feedback of reports and better analysis of suspicious activity reports. As outlined earlier, these regulations introduce a new, autonomous high-risk third countries list, which will ensure that the UK legislation remains up to date and continues to protect the financial system from money laundering and terrorist financing. This legislation represents the UK’s new approach to high-risk third countries; it will allow the UK to take its own view on which countries are high risk without referencing EU legislation and remain in line with international standards in the fight against money laundering and terrorist financing.

Motion agreed.

That completes the business before the Grand Committee this afternoon. I remind Members to sanitise their desks and chairs before leaving the Room.

Committee adjourned at 6.24 pm.