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Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) Regulations 2024

Volume 836: debated on Tuesday 13 February 2024

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) Regulations 2024.

Relevant document: 12th Report from the Secondary Legislation Scrutiny Committee. Special attention drawn to the instrument

My Lords, these regulations have been laid to amend the definition of high-risk third countries in the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, which I will refer to as the money laundering regulations.

The Government recognise the threat that economic crime poses to the UK and are committed to combating money laundering and terrorist financing. Illicit finance causes significant social and economic costs through its links to serious and organised crime. It also undermines the integrity and stability of our financial sector and can reduce opportunities for economic growth and legitimate business in the UK. The Government are bearing down on kleptocrats, criminals and terrorists who abuse the UK’s financial and services sectors. The Economic Crime and Corporate Transparency Act built on the earlier Economic Crime (Transparency and Enforcement) Act to ensure that the UK has robust, effective defences against illicit finance.

The money laundering regulations are at the centre of the UK’s legislative framework for tackling money laundering and terrorist financing. They set out various measures that businesses must take to protect the UK from illicit financial flows, such as conducting enhanced due diligence—EDD—in certain cases. EDD is required to manage and mitigate the risks arising from certain high-risk transactions or business relationships. Businesses must consider a wide range of multiple different factors when deciding whether there is a high risk of money laundering or terrorist financing in a particular situation. They include risk factors associated with the customer, product, service, transaction and delivery channel, as well as any geographical risk factors.

The MLRs set out that firms should consider the risk posed by customers or transactions relating to any countries which have been identified by credible sources, such as the IMF or the World Bank, as lacking effective systems; countries with significant levels of corruption or other criminal activity; or countries subject to sanctions, embargoes or similar measures. As well as these examples, EDD is required in any other case which by its nature can present a higher risk of money laundering or terrorist financing.

The measures being brought forward today relate to another of the specific situations in which regulated businesses must apply EDD, being in relation to any business relationship or transaction with persons established in a high-risk third country—that is, a country identified as such by the Financial Action Task Force, or FATF.

The Economic Crime and Corporate Transparency Act changed how high-risk third countries may be defined under the money laundering regulations, and this statutory instrument simply implements this change. It removes the separate list of countries from Schedule 3ZA and replaces it with an ambulatory reference to those countries listed by FATF, which is the global standard setter for anti-money laundering and counterterrorist financing. This means that countries listed by FATF will automatically be in scope of obligations under the regulations.

By taking this approach, we will ensure that the UK remains at the forefront of global standards on anti-money laundering and counterterrorist financing. This protects the UK financial system from illicit finance linked to the jurisdictions being listed. Where countries have made significant progress to improve their defences, it is equally important that we recognise that and promptly remove them from the scope of high-risk countries in the UK.

Ahead of this update, the UK and the FATF lists were already aligned. Indeed, since the creation of the UK list in 2021, the Government have always updated it to reflect changes to the FATF lists, and that remains our policy. This SI does not, therefore, add or remove any countries from scope, nor change the obligations on regulated businesses. It delivers on government policy in a streamlined way and ensures automatic alignment with the FATF lists without the need for frequent but fairly routine secondary legislation. It also ensures that firms will be notified in a timely manner of updates to the lists and their obligations, staying up to date as the risks change.

This statutory instrument has been reported as an instrument of interest by the Secondary Legislation Scrutiny Committee, which noted that it reduces parliamentary oversight of the process of adding or removing countries, although I note that of course it is government policy and would have continued to be government policy to introduce an SI every time the list changes. Therefore, in a sense this is automating the process. However, the Government are committed to keeping Parliament informed and will submit letters to the Libraries of both Houses at the conclusion of each FATF plenary meeting, when countries made have been added to or, indeed, removed from the FATF’s lists.

I also assure noble Lords that if at any time the Government saw fit to deviate from the FATF lists, they retain the authority and autonomy to do so. In such cases, a statutory instrument would be brought before Parliament for consideration.

I conclude by noting that the measures in respect of high-risk third countries are an important mechanism to mitigate the risks posed by illicit financial flows from overseas. We will continue to use this and, of course, many other tools available to us to respond to wider and emerging threats from other jurisdictions, including by applying financial sanctions as necessary. These amendments will enable the money laundering regulations to continue to work as effectively as possible to protect the integrity of the UK financial system. I beg to move.

My Lords, we support this very sensible SI and recognise the importance of the work FATF does in the fields of money laundering and terrorist financing. We recognise the importance of its lists of high-risk countries and the importance of the UK aligning itself with these lists, especially as they change from time to time.

Up until today, as the Minister said, we have kept ourselves aligned by using SIs to modify Schedule 3ZA to the MLRs. We have done this eight times; the last occasion was 8 January, a month ago. As the last of these SIs passed through the Commons, the Minister noted:

“I am aware that many noble Lords have expressed frustration at parliamentary time being taken up in the other place by such relatively routine matters to keep our high-risk third countries list aligned to the task force’s”.—[Official Report, Commons, First Delegated Legislation Committee, 8/1/24; col. 4.]

I do not know who those noble Lords were either. The Minister proposed a better way: the removal of the list in Schedule 3ZA and its replacement with, as our Minister said, an ambulatory reference to the FATF list itself.

This SI, which was debated last week in the Commons, does exactly that. It is true that it will undoubtedly save some parliamentary time, but it will remain important to ensure that all interested parties are aware of FATF list changes.

HMT issued updated guidance on high-risk third countries on 22 January. In passing, I should note that I could not find Russia on either list. Is that not a little odd? Coming back to the guidance issued by the Treasury, it would seem perfectly reasonable and not burdensome if HMT were to issue similar updated guidance after each of the three FATF plenary sessions that are held each year. Since Parliament will now lose an automatic mechanism for discussing changes to FATF lists, as the Minister said, I am very grateful for her confirmation of the commitments given to the SLSC to continue the practice of depositing in the Libraries of both Houses a summary of FATF meetings at which list changes are made and publishing an advisory note on the government website.

My Lords, we support this SI. It is a common-sense approach to ensuring timely updates to the UK list of high-risk countries, and it retains the flexibility needed to ensure that other countries can be added via affirmative SI if that is deemed appropriate. I note that the Minister mentioned that letters will be placed in the Libraries of both Houses, but what mechanisms will exist under this new regime if noble Lords wish to raise questions or concerns about high-risk countries, should they have them?

I note that we debated the latest update to the list only a few weeks ago and that this SI does not make any further updates to the list of countries. I therefore have no additional questions.

My Lords, I am very grateful to both noble Lords for their support for this SI, which I believe is entirely sensible. One of the things that I was unable to bring out in the opening statement as to why I think it is so sensible is that one of the key things about us being aligned to FATF, and the timing of a country being listed by FATF and immediately going on to the list here, is that we can act globally and in a co-ordinated manner so that the international community can ensure that it acts together to magnify the preventive effects.

The noble Lord, Lord Sharkey, mentioned Russia. It is true that Russia is not currently on a FATF list as, of course, a cycle of mutual evaluations needs to be gone through. However, Russia is obviously subject to extensive sanctions by the UK. I think there is sometimes a little confusion about the money laundering regime and the sanctions regime. In the money laundering regime, you are regulated under the money laundering regulations. Therefore, as a regulated person you must do certain things. However, everybody needs to be aware of sanctions, sanctioned individuals and sanctioned organisations. Obviously, for Russia, that is quite significant.

That brings me on to notification. As committed to, we will place a letter in both Houses with a summary of the plenary and whether any countries have gone on or off any list. Perhaps we will provide a reminder to noble Lords as to who is currently on the two lists.

The noble Lord, Lord Livermore, asked how he could raise questions. I suggest that, in the first instance, I would write to the Minister. Obviously, one could use Parliamentary Questions, but a letter would be better and probably elicit a fuller response. If not, there is always the opportunity to request a meeting with the Minister. It is a very important issue and I do not think that there would be any reason at all for us not to agree to do that.

That is about keeping Parliament informed, but then, of course, the regulated organisations need to be kept informed as well. If, as a regulated organisation, you do not have a process for checking who is on or not on a FATF list, I am afraid you are not a particularly well-run regulated organisation. All sorts of different organisations are regulated, but they will have to have controls and processes in place. We would put a notice up, as we always do, in a specific place. Two things would then happen: the regulated organisation itself would see the update—I know that many thousands of them do—but the supervisors, who are the overarching body of the different types of regulated organisations, would also send out reminders to those organisations about any changes. So there are two lines of attack, but, frankly, it should be beholden on the organisation as a regulated body to keep itself in the loop.

With that, I commend the regulations to the Committee.

Motion agreed.

Committee adjourned at 6.20 pm.