Skip to main content

Money Laundering and Transfer of Funds (Information) (Amendment) (EU Exit) Regulations 2018

Volume 795: debated on Wednesday 23 January 2019

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Money Laundering and Transfer of Funds (Information) (Amendment) (EU Exit) Regulations 2018.

My Lords, this statutory instrument, laid under the EU withdrawal Act 2018, is part of the legislative programme that the Treasury is undertaking to ensure that there continues to be a functioning legislative and regulatory regime for financial services in the EU. The statutory instrument has been debated and approved by the House of Commons. The SI will fix deficiencies in UK anti-money laundering law to ensure it continues to operate effectively post exit. The approach taken in this legislation aligns with that of other SIs being laid under the Act, providing continuity by maintaining existing legislation at the point of exit.

Turning to the substance of the SI, many noble Lords will be familiar with existing anti-money laundering legislation. The money laundering regulations set out the requirements on regulated firms to combat money laundering and terrorist financing. Further, the EU Funds Transfer Regulation specifies what information must accompany electronic transfers of funds. Finally, the Oversight of Professional Body Anti-Money Laundering and Counter Terrorist Financing Supervision Regulations established the Office of Professional Body Anti-Money Laundering Supervision within the Financial Conduct Authority in early 2018. Anti-money laundering legislation is designed to combat illicit finance, while minimising the burden on legitimate businesses.

In a no-deal scenario, the UK would be outside the EEA, and outside the EU’s legal, supervisory and financial regulatory framework. Therefore, these three pieces of anti-money laundering legislation would need to be updated to reflect the new position of the UK, and to ensure that the provisions work properly in a no-deal scenario. The changes primarily affect the financial services sector, but the impact will be minimal and we have engaged with industry extensively to ensure that affected firms are aware of the changes that we are making. These draft regulations will make the following changes to the UK’s anti-money laundering regime.

First, this SI will equalise the regulatory treatment of European Economic Area member states and “third countries” for correspondent banking relationships—that is, when one bank provides banking services on behalf of another bank. Currently, UK financial institutions apply enhanced due diligence measures to correspondent banking relationships with financial institutions outside the EEA. However, these measures are not required for intra-EEA relationships.

This SI will equalise the regulatory treatment, meaning that enhanced due diligence will be required for all correspondent banking relationships. This change better aligns with the Financial Action Task Force standards on the issue, and the existing practice of many UK institutions, which already apply enhanced due diligence because of the risks associated with correspondent banking relationships. The SI will also equalise regulatory requirements on the information about the payer and payee accompanying electronic transfers of funds. Therefore, UK payment service providers will be required to provide higher volumes of information accompanying transfers into EEA member states and other countries. These changes are being made to reflect the UK’s new position outside of the EU’s regulatory framework.

Secondly, this SI will transfer from the Commission the responsibility to make technical standards, which specify the additional measures required to be taken by credit and financial institutions with branches or subsidiaries abroad, to the Financial Conduct Authority. These standards are of a type similar to those currently made by the FCA, in an area where they have technical expertise. Therefore, the FCA is the appropriate body to take on this responsibility. The transfer of this power is necessary because the relevant standards are currently made by the European Commission.

Thirdly, this SI removes the obligation for certain UK persons to have regard to guidelines published by the European supervisory authorities. The UK will be outside the EU’s regulatory framework, so it would be inappropriate for UK persons to be legally required to have regard to these guidelines. Firms will continue to be required to have regard to guidance developed by UK supervisory authorities and industry bodies, thereby maintaining the same strong standards to counter money laundering and terrorist financing.

Finally, the current money laundering regulations require certain information to be communicated to EU institutions. These provisions will be removed, as they would no longer be appropriate once the UK is no longer a member of the EU. The House of Lords Secondary Legislation Scrutiny Committee queried the change in requirements to transmit information to EU institutions, and whether the FCA would be co-operating with its counterparts in other countries to combat illicit finance. However, the changes to information-submission requirements made by this SI relate to specific duties to provide information directly to EU institutions, such as the national risk assessment of money laundering and terrorist financing.

Legal obligations to submit this information would be inappropriate once the UK leaves the EU. It is important to emphasise that UK supervisory authorities, including the FCA, will continue to co-operate extensively and make information available to overseas anti-money laundering authorities in relation to firms which have offices within the UK. Therefore, UK authorities will continue to make use of international co-operation to detect, prevent and investigate money laundering.

The Treasury has been working very closely with the FCA in the drafting of this instrument. It has also engaged extensively with the financial services industry on this SI, including UK Finance and relevant trade associations, and will continue to do so in relation to other SIs within the onshoring programme. Last November, the Treasury published the instrument in draft, along with an explanatory policy note to maximise transparency to Parliament and industry. The Treasury considers the net impact of business to be less than £5 million, so a full impact assessment has not been carried out.

In summary, this Government believe that the proposed legislation is necessary to ensure that the UK’s anti-money laundering and counterterrorist financing regime operates effectively, and that the legislation will continue to function appropriately if the UK leaves the EU without a deal or an implementation period. I hope noble Lords will join me in supporting these regulations.

My Lords, I hope it will be all right for me to intervene in this matter. As a former Member of the European Parliament, I had something to do with the fourth anti-money laundering directive and the high standards required by it and I would like to ask my noble friend one or two questions.

First, we have been obliged to operate enhanced due diligence only to countries outside the EEA, and post-Brexit we will find ourselves required to deal with all countries equally—in other words, with enhanced due diligence in all cases. I know my noble friend has just referred to the fact that many UK institutions apply this enhanced approach already and that the Financial Action Task Force recommends those standards but I would like to inquire of him as to the position regarding others. He said “most institutions” but I believe quite a considerable number do not wish to apply enhanced due diligence in countries where we are satisfied that the standards are common in the EEA and, of course, in the EU. I am rather worried about this and the obligations that it will now put on institutions which they did not have before. I think it is quite a significant change.

Secondly, I am interested in the issue of information. When payment service providers transfer funds outside the EU, there is a need for higher levels of information. I am concerned that, once again, post-Brexit we will require of UK PSPs a much greater volume of information accompanying the transfer of funds into all the EU states as well as those outside. Again, I wonder about the extent of those obligations and the amount of information. Is my noble friend aware of how that extra information should be obtained and what it would consist of? Can he advise me now or write to me if he cannot?

Thirdly, although it is not mentioned in this measure at all, I am quite curious as to whether any of these things will affect the status of so-called politically exposed persons. Currently, as noble Lords know, the term covers quite a large number of people, particularly those who have had a connection overseas—as they put it from this country—with receipts of moneys or involvement in business affairs. I wonder whether by bringing this back into this country and no longer being obliged to apply the rules that applied before, this will then recategorise or decategorise large numbers of people currently designated as PEPs and therefore subject to a very much higher level of scrutiny by our financial institutions.

I know that this is not a policy change as such but clearly this measure is a big change to obligations and procedures. There must be some costs attached and quite a lot of organisations may not be ready to carry out these new responsibilities in terms of the due diligence or, indeed, provision of information. Is my noble friend satisfied that, in the consultations and discussions that have taken place so far, our institutions are satisfied that they will be able to cope with this in the timescale we have?

My Lords, I have a lot of common thought with the questions that the noble Lord, Lord Kirkhope, has raised, so I do not need to go into detail. I have no problem with, if you like, the way the handle has been turned on the routine adaptation but, again, the question comes of whether it was right to follow the symmetrical approach, so that immediately the EEA is in the third-country pot, or whether there could perhaps have been a transition that made it a little easier. This is not to say that in the longer term that is not the right destination, but I am not sure about a “big-bang” switchover. I, too, wonder what will happen under the Part 3 heading, “Customer Due Diligence”. Will this be another excuse for banks to extract life histories from an awful lot of people, quite a few of whom reside in this House?

Those of us who are former Members of the European Parliament ought, I suppose, to declare an interest; we tend still to have residual bank accounts and such things there. I should talk about this because the same rules apply to those bank accounts as apply to UK bank accounts. Whereas from the UK banks I get 20 pages to fill in, including, as I said, a life history and everything since the year dot, I seem to get one page from a bank in Belgium, which is under the same ruling. I would quite like to know how many of these rules are consequences of the legislation and how many are consequences of gold-plating or uncertainty among our banks. It is, in a sense, an identity thief’s charter when you have to fill in all this information, along with copies of your passport and everything else, and upload it while unsure of where it is going; or you can take it into your branch. Anything that helps with regard to that would be useful to know.

In this case, there would have been an argument for being asymmetrical for at least a little while. I regret that that opportunity was not taken, but I do not believe anything has been done that offends, as such, against what one is supposed to do under the EU withdrawal Act.

My Lords, perhaps I should say a couple of words about where we find ourselves with these SIs. As Her Majesty’s loyal Opposition, I do not want our participation in this process to be misinterpreted in any way as an endorsement of a no-deal exit from the EU; I cannot think of a worse outcome than no deal to the chaos that we find ourselves in. However, we have to accept that, given this chaos, which has to be laid at the Government’s door, there is a real possibility that we will stumble out of the EU without a deal. While the Government seek to make contingency plans for this, by bringing in front of us what one might call no-deal instruments, we will do our duty of scrutinising them as best we can.

So far, the Government seem to have played by the rules. In my view, the rules are set out first in the European Union (Withdrawal) Act 2018, but also in paragraphs 7.1 through to 7.9—which are identical in all Explanatory Memoranda that come from the Treasury. I believe they say that there will be no new policy introduced except where necessary to achieve the transition.

I diligently read through the Explanatory Memoranda. I fear that I did not read the instruments with as much care, because, frankly, I would not know how to start. A lot of them relate to other documents and getting up-to-date, amended copies of them is difficult, so I have to judge an instrument on the basis of the Explanatory Memorandum. All it basically does is say that EEA countries become third countries. It then goes on to make the consequential changes, which involve transferring various responsibilities. In relation to this instrument in particular, it also defines high-risk countries, which I can see is important.

I have only two questions. The problem with these memoranda is that the authors know what they are talking about, whereas the reader does not know what they are reading about. Having staggered through the document, when I got to paragraph 2.12, I became exhausted. I shall read what I think is the offending passage:

“The standards are to specify what additional measures are required to be taken by credit institutions and financial institutions with branches or subsidiaries abroad, when national law outside the UK does not permit group-wide policies and procedures to be implemented that are at least as strong as those that are required by the MLRs”.

I hope that the noble Lord can make some sense of that.

My only other comment is on the tone of the memorandum—this is true of other memoranda, but I shall centre on this one for the moment. The obligation to report to EU institutions is removed, and one can see why that is perfectly logical. However, money laundering is an international crime with an enormous impact on ordinary citizens, relating particularly to terrorism and to their wealth, because of the crimes committed and their impact on the economy. It is crucial that, even if we are daft enough to leave the EU without a deal, international co-operation continues. It is not just about taking the law where it is now; it is about the law needing to develop as criminals become cleverer and do different things, and we understand more about what they are doing and what action and international co-operation are necessary.

These regulations are brought before us as no-deal SIs and will be commenced on exit day. It is clear what role they will have if it is a no-deal exit, but if a deal is done and we enter a transition period and then come to the end of it, what will happen to this statutory instrument? Will it be repealed or will it be paused? The answer to that makes a big difference to its impact. If the instrument is merely paused, we are making law for the future. If it is repealed and we essentially start from scratch as part of the negotiation in the transition period, and if sanity then reigns and we complete a deal, this SI will not matter; we will be looking at longer-term ways of managing the problems to which it relates.

My Lords, I am grateful to all noble Lords who have taken part in this debate, particularly my noble friend, with his background as a Member of the European Parliament.

I agree with the noble Lord, Lord Tunnicliffe; in so far as the Government do not want no deal, we do not expect no deal, and we accept entirely that it will be much better to make progress. He also asked what would happen to this SI if, as I hope, there is a deal. The answer is that the withdrawal Act would switch it off, and it could subsequently be either reintroduced or possibly amended in the light of whatever agreement we came to during the transitional period.

Could the noble Lord define “switching off” slightly better? Is the law taken out or repealed? The term I have used is “paused”, which is rather different from “deleted”.

I will read out the exact words in my brief: “Are these SIs for a no-deal scenario only? This legislation would not come into effect in March 2019 in the event of an implementation period, which will be delivered through a separate piece of legislation”—as I think I said—“through the EU (Withdrawal) Bill. It could be amended to reflect an eventual deal on the future relationship or to deal with a no-deal scenario at the end of the implementation period”. I hope that that is not too far from what I initially said. Alternatively, it could be delayed until the end of the implementation period with the possibility of repeal or amendment, depending what happens. The answer to the noble Lord’s direct question is that if there was a deal, it would be, in my words, switched off, or, in the words that I have just read out, it would not come into effect, and the withdrawal Act would be the vehicle through which that happened.

My noble friend Lord Kirkhope mentioned the burdens on banks. It is important to focus on the fact that we are talking about relationships with correspondent banks with regard to the standards he referred to. As I understand it, at the moment there are two standards: one for inter-EEA banks and the higher one for outside. In future, there will be one standard, so to some extent it will be slightly easier for the banks. As I said at the outset, in many cases, the banks already provide the higher standards—the enhanced due diligence—even where they do not have to.

In response to the points my noble friend made, which were also made by the noble Baroness, Lady Bowles, we plan to have some transitional arrangements. I hope that they will help both my noble friend and the noble Baroness. We have announced plans to grant the regulators a temporary power to phase in these new requirements that would apply to firms in a no-deal exit. This power must be exercised by the regulators in accordance with their statutory objectives, as set by FiSMA. This is a sensible measure to ensure that the firms have the time they need to adjust in an orderly way to the changes brought about by Brexit. The regulators will be seeking industry views on where it would be appropriate to phase in new requirements. However, the short answer to my noble friend is that it is no longer appropriate to treat the EEA differently, so we must either reduce all the standards or enhance them. We have chosen to enhance the standards, which, as I said, meets the higher standards that I think we would expect in any case.

So far as politically exposed persons are concerned, this statutory instrument will not affect the regime for them following exit. My noble friend was rightly concerned about the effect on business and the financial services sector. We believe that the SI will have a minimal effect on businesses across the sector. As I said when I spoke at the beginning of the debate, we consider that the net impact on businesses will be less than £5 million a year. Picking up again on the point made by my noble friend, we understand from the FCA and industry that in practice this already takes place because of the risk that firms associate with correspondent banking relationships. As such, this will lead to minimal increased costs to businesses beyond the status quo.

I turn now to payment services providers which again were mentioned by my noble friend. They will also be legally required to provide a greater volume of information to their EEA counterparts in connection with the cross-border transfer of funds than is currently the case, thus equalising the requirement across third countries. We understand from the industry that this takes place already and any changes will require firms to expand their existing IT systems to firms with which they transact.

On the information requirements concerning the electronic transfer of funds, which was a point I made earlier, HM Treasury has communicated that it will bring forward measures to give the FCA some flexibility to phase in changes to the regulatory requirements on firms under the EU withdrawal Act. They will use the powers to waive or modify some requirements to allow for a smooth transition to the post-exit regulatory regime.

When there is a change, will there be any kind of notification for businesses and others? One of the biggest problems that, if you like, completely innocent people can experience when they are transferring money is that it gets suspended somewhere while further checks are made. That is more likely once we have gone into a third-country regime than being in the EEA. If you are transferring money for the purchase of a property or something significant for your business with a contract attached, to suddenly find that your money has been delayed by several days or a week can mean that you are in breach of the contract. Because of the particular way in which the money laundering rules operate, we are not allowed to warn people because of the risk of warning the potential money launderer. People should at least be aware that the rules are switching because that would be useful to know in order to build in some certainty. I am thinking in particular of businesses. They will have to realise that they must send money with time to spare.

I am grateful to the noble Baroness. The last thing we want is to have any turbulence at the point of transition or to have legitimate transactions held up. The FCA will be consulting with the banks and payment services providers concerned, particularly in the light of the transitional arrangements that I mentioned earlier. Of course they have known for some time that these changes are on the way so that they have been able to prepare for them. However, one of the consequences of what I have just said is that there does not have to be a sudden switchover on 30 March or 1 April because the Treasury and the FCA will be introducing transitional arrangements. There will be due warning before any change takes place.

The concern of those of us who have been involved over the years with these anti-money laundering directives is the way they have been implemented in different member states. This country has always been more than diligent about making sure that any directive we have prepared in Brussels has been implemented to the nth degree over here. In doing so, the FCA has been used in a way that I believe has meant that a lot of financial institutions have gone further than was necessary not only for their own economic convenience as much as anything else but also because we in Britain have been more draconian in terms of implementation as the anti-money laundering directives have been developed, in particular this fourth one. The whole point is proportionality; in other words, it is important that we have now introduced more balance to the way in which we hope that the fourth directive will be implemented in member states. However, yet again in this country the FCA and our own financial institutions have been more than zealous in their activities.

My noble friend suggests that we should always look for higher standards, but standards should not always be equated with obligations. The obligations we have placed upon our consumers and others in this country are very strong indeed. I hope that the FCA will not use the proposed flexibility and more room to manoeuvre to go in the wrong direction because that would put us at a massive disadvantage economically.

My noble friend will know that when we leave the EU, the obligation that we already have will be transferred. Thereafter, looking to the future, we will no longer be bound by EU regulation, so the opportunity for gold-plating them will not exist; we will be in control of our destiny. I am sure that my noble friend would not want in any way to water down the robust regime we have in this country to deal with money laundering, terrorist financing and the rest. We must get the balance right, which is what I think my noble friend was saying.

I intervene on that point because there is surely a contradiction. Surely when we leave the EU, the opportunity for the state to gold-plate—take present regulations and make them progressively more difficult—will be unfettered. The Minister has to convince us that, given that freedom, it will not be misused.

The noble Lord has repeated what I meant to say: at the point of transfer, the existing EU regime is on our statute book. We will no longer be bound by future directives so there will not be the opportunity to gold-plate: we will be master of our own house. Having said that, I am sure that the noble Lord and my noble friend would not want in any way to water down the tough regime we have against money laundering and terrorist finance, but we will be in control of our destiny rather than having to implement directives.

Reverting to the point that the noble Baroness made, the FCA does not expect firms or regulated entities providing services within the UK’s regulatory remit and other stakeholders to prepare now to implement the changes from exit day. The FCA is engaging with the industry extensively to ensure smooth and effective implementation of the changes.

The noble Lord, Lord Tunnicliffe, asked me about paragraph 2.12 of the Explanatory Memorandum. The SI confers power on the FCA to make certain technical standards in an area in which it has technical expertise. The transfer of power is necessary because the relevant standards are currently made by the European Commission. The technical standards specify what additional anti-money laundering measures are required to be taken by banks with branches or subsidiaries abroad. These measures include policies and procedures to counter money laundering and terrorist financing, and must be at least as strong as those required by the UK money-laundering regulations.

For example, if a UK bank has a branch abroad in a country that does not have anti-money laundering and terrorist financial requirements as strict as ours, the parent bank must ensure that the branch applies measures equivalent to the UK regulations. If the law of the country in question does not permit such measures, the UK parent bank must take additional measures to handle the risk of money laundering and terrorist financing effectively. The FCA will be able to make technical standards specifying what additional measures such a parent bank may take and the minimum action needed to handle those risks.

The noble Lord also asked about high-risk third countries and how the list will be updated. On exit day, the EU high-risk country list will be onshored and form part of retained EU law. Subsequently, references to the list will be static rather than dynamic, meaning that updates that the EU makes to the list will not flow through into UK law. The list will evolve only as amended by UK law. The Sanctions and Anti-Money Laundering Act 2018 gives the UK power to maintain a list of high-risk jurisdictions in connection with which enhanced due diligence needs to be performed. Updates to the list will be made through the affirmative procedure. Therefore, they can come into force before parliamentary approval but will then cease to have effect if both Houses do not approve them within 28 days of their being made. Parliament will have scrutiny on updates, while allowing updates to be made quickly to reflect changing circumstances in third countries. There will be a significant increase on current levels of scrutiny as Parliament has no direct influence over updates to the list at the moment.

Finally, the noble Lord asked how we would co-operate with the EU on anti-money laundering efforts once the UK leaves. National anti-money laundering authorities will continue to make use of international co-operation to detect, prevent and investigate money laundering. There is a legal gateway in the regulations that provides that UK supervisory authorities must take such steps as they consider appropriate to co-operate with overseas AML authorities. Moreover, the political declaration agreed with the European Union contains a statement of mutual intent that the future relationship should cover money laundering and terrorist financing. This includes commitments to put in place arrangements for effective and swift data sharing, allowances to support law enforcement, measures for practical co-operation between law enforcement authorities and agreements to support international efforts to prevent, and fight against, money laundering and terrorist financing.

I hope that I have answered the points that noble Lords have made.

Motion agreed.