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Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) Regulations 2022

Volume 821: debated on Monday 25 April 2022

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) Regulations 2022.

Instrument not yet reported by the Joint Committee on Statutory Instruments

My Lords, the Government recognise the threat that economic crime poses to the UK and to our international partners, and are committed to combatting money laundering and terrorist financing.

Illicit finance causes significant social and economic costs through its links to serious and organised crime. It is a threat to our national security, and it risks damaging our international reputation as a fair and open rules-based economy. It also undermines the integrity and stability of our financial sector and can reduce opportunities for legitimate businesses in the UK.

That is why we are taking significant action to combat economic crime, including legislating for the economic crime levy and the Economic Crime (Transparency and Enforcement) Act, and progressing the Government’s landmark economic crime plan. We are also working closely with the private sector and our international partners to improve the investigation of economic crime, strengthen international standards on corporate transparency and crack down on illicit financial flows.

The money laundering regulations support our overall efforts. As the UK’s core 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. Under the regulations, businesses are required to conduct enhanced checks on business relationships and transactions with high-risk third countries. These are countries that are identified as having strategic deficiencies in their anti-money laundering and counterterrorism financing regimes that could pose a significant threat to the UK’s financial system.

This statutory instrument amends the money laundering regulations to update the UK’s list of high-risk third countries by adding the United Arab Emirates and removing Zimbabwe from the list. This is to mirror lists published by the Financial Action Task Force, the global standard setter for anti-money laundering and counterterrorism financing. As the Financial Action Task Force carries out its periodic reviews and regularly updates its public lists of jurisdictions with strategic deficiencies, we also need to update our own. Updating our list shows that we are responsive to the latest economic crime threats and ensures that the UK remains at the forefront of global standards on anti-money laundering and terrorist financing.

This amendment will enable the money laundering regulations to continue to work as effectively as possible to protect the UK financial system. It is crucial for protecting UK businesses and the financial system from money launderers and terrorist financiers. I therefore hope that noble Lords will join me in supporting this legislation. I beg to move.

My Lords, I support these measures. My noble friend Lady Kramer has been suffering from Covid, as, regrettably, are so many colleagues. She would ordinarily have been here, and I wish her the best and a speedy recovery and return as soon as possible. I spoke to the previous set of measures involving a change to the list when the orders were brought to remove Botswana, Ghana and Mauritius, and I took the opportunity to ask the noble Lord, Lord Agnew, questions about how robust our internal systems were with regard to organised financial crime and the interaction between drug trafficking, money laundering and terrorist activities.

At the time, I also asked when we were likely to get the register of beneficial ownership. It shows how fast time flies, as he is no longer the designated Minister for financial crime and we have moved ahead in so many of these areas. We may well do, but I should be interested to know whether, after the more recent changes in government, we have a Minister with a designated portfolio who has taken over from the noble Lord on money laundering and financial crime. I know it is normal practice that these instruments and schedules are signed off by Government Whips rather than Ministers—the previous ones were too—but I should be grateful to know how that is structured in government.

However, I am grateful to the Minister for introducing these regulations. If she will tolerate me asking a number of questions, I would like to do so because these measures make changes with regards to individual countries and are also a policy change. Apparently, the Government will now automatically use an external set of decision-making for the classification of countries in the grey category by the FATF, the Financial Action Task Force. We have also been told repeatedly that we are moving away from the European Union’s approach, in which we would take the Commission’s view, so that we have the freedom to set our own approach. However, it seems as if one of our very first acts in having that new freedom is to give it away to another organisation for it to make some decisions on our behalf. I would be interested to know the rationale for that. In the Explanatory Memorandum, the Government simply say that, because we are aligned to the FATF, it makes sense for us to copy it for efficiency purposes. However, we were previously aligned to our European colleagues; I am not really sure what has changed.

One consequence of this, of course, is the change of countries. In particular, there is a difference in Zimbabwe because, as has been stated, it has been removed. I would be interested to know what the Government’s representations are, or what the position of UK Ministers is, in the FATF. I understand that it met at a ministerial level last week; I was in Washington while that was taking place. Given that there is Russian investment in Zimbabwe, particularly in mining, and given our interaction with Russia in terms of our sanctions, I am interested to know why decisions have been made with regards to Zimbabwe that may have a negative effect on our reducing the possibility of money laundering—especially when it comes to those who are investing in mineral extraction in these countries—and on trading. I would hate to think that one of the first actions of this measure was to create potential loopholes for Russia.

In that regard, there are new countries on the list. I support that but I see that, for Haiti, Mali, Malta, the Philippines, South Sudan, Turkey and the UAE, there is a difference of approach. In a previous debate on our sanctions regime, I singled out a mercenary group that is under the pay of the Kremlin: the Wagner Group. I have seen it at first hand, on a visit to Khartoum. I know that it is active in Mali, Chad and the Central African Republic, but it also operates in other countries. I am on the record as asking for the process to be started to proscribe the Wagner Group as a terrorist organisation. It would then be under the proscription legislation and would come within this legislation. With Mali being a high-risk third country, I would be interested to know how that interacts with our work in seeking to reduce the scope of the mercenary operations from Russia. I hope that there are no gaps between the way we would operate under this approach and the FATF and our sanctions legislation. The destabilising work of that group in particular needs to be stopped; the UK can play a significant role in that.

With regard to the UAE, I am interested in the lack of information I have seen from the DIT on GOV.UK to inform those operating in our 19th-largest market that this measure is now in place. I understand that there will obviously be a lag in information when legislation has been put in place, but this had been signalled a fair bit in advance. I have seen plenty of government promotional material highlighting the £10 billion UK investment partnership with the UAE sovereign wealth fund, but there is a lack of information stating that the UAE is now in an at-risk category as far as doing trade in that area is concerned.

I looked at the impact statement. It highlighted that the cost to businesses doing trade with the UAE as a result of this measure—of it now being on the list—will be just £2.5 million, due to them having to conform with the requirements in paragraph 4 of the impact assessment. Given that the investment relationship the Government have promoted is a whole set of complex legal and financial arrangements under that overall banner, I question whether the statement has correctly captured the whole significance of the requirement. I therefore believe that it would have been beneficial for a full impact assessment to have been carried out. The Government have used as their formula simply adding up all the people conducting this business, but I am not sure whether simply taking into consideration UK nationals doing this work will correctly capture all the implications of this measure regarding our investment portfolios, which by definition involve international bases.

I do not have any criticism of the UAE being part of this. I would like to know from the Government their understanding of why it is now on the high-risk third country list. The Minister simply stated that it was on it. More information on the record as to why that is the case could be helpful. While the Government are promoting more investment from and more business with the UAE, they cannot be silent as to why they now believe it is a high-risk third country to do that business. At the moment I have not seen anything on the DIT website on GOV.UK for doing trade with the UAE, but given its significance I hope that it will appear. In the meantime—before that arrives on the government website—I would be grateful to hear information from the Minister today.

My Lords, I am grateful to the Minister for introducing these latest updates to the list of high-risk countries. She will know that we fully support mirroring the list produced by the Financial Action Task Force—the FATF—so we will not oppose these regulations remaining on the statute book beyond the 28-day scrutiny period. As has been outlined, the latest iteration of the FATF list sees the removal of Zimbabwe and the addition of the United Arab Emirates.

I wonder whether the Minister can provide a little more information on the FATF’s rationale for these changes. Although Zimbabwe is no longer listed in the schedule, can she confirm whether the UK has decided to maintain any specific enhanced measures relating to that country? If she is unable to provide these updates today, can she commit to writing and placing a copy of the correspondence in the Library?

The last time this list of high-risk countries was debated, in November 2021, there was much debate around the absence of both Afghanistan and Russia. Is the Minister able to provide any update on the situation regarding Afghanistan, including any steps taken by the UK outside the FATF framework? Just because there have been other geopolitical developments in recent times, we must not forget that Afghanistan continues to undergo significant social and economic change. Much of that is unrelated to this policy framework but some of it may be. Clearly, the events in Afghanistan do not currently meet the FATF’s threshold for the country to be included on this list. However, it would be comforting to know whether and how the UK is keeping these matters under review.

Turning to Russia, the conflict in Ukraine has altered the picture significantly. In response to the actions of Vladimir Putin, the UK Government and other nations have sanctioned a variety of Russian businesses and individuals. The Labour Party has supported this and will continue to do so. Sanctions may act as a brake on Russian money-laundering operations for the time being but can the Minister confirm how such matters will be factored into the eventual winding down of sanctions? We must not return to business as usual.

We all know that the UK has a reputation as a destination for dirty Russian money. After sustained pressure to act, the Government recently brought forward a limited economic crime Bill. That legislation facilitated the creation of a register of overseas entities but it is no secret that it will take time for such a register to be operational. Once it is, it will be a useful tool, but it is no silver bullet. Can the Minister provide any update on the implementation of that register?

The Government committed to a progress report to Parliament within eight weeks of Royal Assent. We have not quite reached that date but we are only a couple of weeks short and mere days away from Prorogation. I would hope that the Treasury and others have made great strides, but have any of the enabling regulations yet been laid? Can the Minister comment on what has become known as the economic crime Bill part II, which has been promised early in the new parliamentary Session? I know that the Government normally resist pre-empting the contents of Her Majesty’s most gracious Speech. However, we know that this Bill is coming, and it is vital to get that follow-up legislation right if we are truly to crack down on the illicit acts that the FATF was established to tackle.

I appreciate that these questions go slightly beyond the contents of this particular SI but I am sure that the Minister will agree they deserve to be asked. I look forward to her reply and to the House playing a constructive role in these matters in the months ahead.

I would like to bring up one or two issues that are related not particularly to the SI but to the Explanatory Memorandum. In the past, I have found the very last part of the memorandum, labelled “Contact”, a useful device when I was having trouble understanding SIs. The contact on this occasion is Stephanie, who has a surname that I fail to be able to pronounce; I hope she will forgive me for not doing so. She is at HM Treasury and

“can be contacted with any queries regarding the instrument.”

The ability to contact a relevant civil servant has been really helpful to me in the past but, on this occasion, there is neither a contact telephone number nor an email address. I put to the Minister that this is utterly unacceptable. It has crept into Treasury Explanatory Memorandums whereas many other departments—including the Department for Transport, which we previously had here today—have maintained the standard of a telephone number and an email address. I do not expect an answer now but I would like a written response.

The problem with reading paragraph 15.1 is that one is then tempted to read paragraph 15.2, which states:

“Emily Bayley, Deputy Director for Sanctions and Illicit Finance at HM Treasury can confirm that this Explanatory Memorandum meets the required standard.”

I am sure that this has appeared before but it is the first time my eyes have got this far through an Explanatory Memorandum. I have been campaigning for years to know what the standard for Explanatory Memorandums is, particularly in terms of the requirement I believe they should have that they can be understood by people other than those seeped in the detail of the subject. Can the Minister forward to me what the required standard is?

My Lords, I thank both noble Lords for their contributions to this debate and join the noble Lord, Lord Purvis, in wishing his colleague, the noble Baroness, Lady Kramer, all the best.

The noble Lord, Lord Purvis, started by asking about the change in approach from the UK Government to mirror the FATF’s list for high-risk countries after leaving the EU, rather than setting out our own list. The approach that the UK has taken, to align with the FATF, was first set out in an SI in April 2021. The reason for that approach is that the FATF is the international standard-setting and monitoring body for anti-money laundering, counterterrorist financing and counterproliferation financing. It has a detailed and extensive set of standards, which countries are monitored against using a transparent and rigorous peer-review mechanism.

By aligning the UK’s approach to the FATF, the UK is in line with international standards and the identification of countries is underpinned by the FATF’s consistent technical methodology and robust assessment processes. As a result, enhanced measures are implemented in a co-ordinated manner by the international community, thereby magnifying the preventive effect. I think that this approach to international standards is welcomed by noble Lords. However, it remains open to the UK to review and amend the list according to our own assessment of risks if necessary.

The noble Lord also referred to the EU’s procedures. The EU mostly follows the FATF, with some exemptions; it does not mirror it entirely. For example, EEA countries listed by the FATF are excluded from the EU’s list. Also, changes to the EU list happen less frequently than to the UK list, meaning that it is not reflective of geographic changes in risk profiles. That was an issue repeatedly raised by regulated entities in the UK when the EU list had legal effect in the UK. None the less, we will continue to work closely with European countries and the European Union on countering shared money laundering and terrorist financing risks to ensure a co-ordinated and targeted response.

The noble Lords, Lord Purvis of Tweed and Lord Tunnicliffe, both asked further questions as to why the FATF has added the UAE and removed Zimbabwe from its list. The FATF mutual evaluation of the UAE, adopted in February 2020, found significant deficiencies in the UAE’s illicit finance regime, with 10 of 11 measures of effectiveness rated low or moderate. As a result, the FATF placed the UAE under enhanced scrutiny. At the March 2022 FATF plenary, the FATF concluded that the UAE should be added to its list of jurisdictions, with significant weaknesses in its regimes for countering illicit finance. The UAE has expressed its high-level political commitment to making further reforms in a number of areas to exit the FATF list. Zimbabwe, following its evaluation in 2016, underwent a process of enhanced monitoring, similar to that of the UAE, but has now completed its FATF action plan to address the key deficiencies that had been identified in its anti-money laundering and terrorist financing regime back in 2016. Therefore, the FATF decided to remove Zimbabwe from its list.

The noble Lord, Lord Purvis of Tweed, asked how the Government have informed those who may be affected by the changes to the list and, in particular, by the addition of the UAE to it. Her Majesty’s Treasury engaged with the sector ahead of adding the UAE to the list and published an advisory notice ahead of the change being made. Supervisors are also in communication with the regulated sector about the update to this list.

Following the delisting of Zimbabwe, both noble Lords also asked about the UK maintaining any specific enhanced measures in relation to that country. No specific enhanced measures remain in relation to Zimbabwe following the delisting. None the less, firms should continue to apply risk-based measures across their customer base, and to take appropriate measures where higher risks are confirmed. When assessing whether there is a high risk of money laundering or terrorist financing in a particular situation, firms will need to consider customer risk factors, the risk factors of particular products or services, as the noble Lord mentioned, or delivery channels, as well as geographic risk, as identified by credible sources such as the FATF, the EU, the UN, the IMF or the World Bank. When assessing risk, firms also need to take into account information made available to them by anti-money laundering supervisors or the national risk assessment.

The Minister is being very thorough in responding, and I am grateful. Could she write to me in answer to my next question? I do not expect her to reply now. It has been helpful for her to outline the FATF’s position on the UAE, but it is worrying if 10 out of the 11 are within this area of concern. Does the UK sovereign investment partnership with the UAE include elements seeking that the UAE makes progress on the areas that have been highlighted? It is worrying if a partnership investment worth £10 billion does not have within it mechanisms to make progress on areas where we have inserted that country into a high-risk category while having financial investment relationships with that very entity. The Minister does not have to answer that now if she does not want to. I do not expect to her to answer it now, but I shall be very happy if she wishes to write to me.

What I can do now is talk about the UK’s role and influence at the FATF, which in turn works with countries on the lists that we are discussing, to improve their performance. The UK as a founding member plays a leading role through its place on the FATF’s steering group, and makes significant voluntary financial contributions to the FATF and its global network on core projects and through extensive involvement in the FATF assessment. So the UK is absolutely committed through that channel to improving countries’ performances. I shall write to the noble Lord on his specific point about the UK’s sovereign investment partnership. If he will forgive me, I will also write to him on the specific points he raised in relation to Mali and other specifics in that area.

The noble Lord, Lord Tunnicliffe, asked about an update on the situation in Afghanistan and how the UK is keeping these matters under review. The UK is absolutely keeping the evolving situation in Afghanistan under review, and we continue to work with public and private sector partners to maintain an up-to-date understanding of money laundering and terrorist financing risks in that country.

The noble Lord also asked about how the current deterrents of sanctions on money laundering from Russia will be factored into the eventual winding down of sanctions. In lockstep with our allies, we are introducing the largest and most severe economic sanctions that Russia has ever faced to help to cripple Putin’s war machine. These co-ordinated sanctions go broader, deeper and sharper in punishing the actions of Putin and the Russian Government. They are having an impact on Russia’s economy; Putin has acknowledged the problems and difficulties caused by sanctions. Current estimates are that two-thirds of the assets available to the Russian Government have been frozen, strangling access to funding for military aggression.

We are particularly starving Russia’s access to finance, with asset freezes on major banks including Russia’s largest bank and the removal of selected banks from SWIFT. We have sanctioned Russia’s largest banks with global assets worth £500 billion pre-invasion. Since the invasion, we have also sanctioned well over 1,400 high-value individuals, entities and subsidiaries. However, we are not complacent and will continue to revise and reform our response to illicit finance to ensure that, as illicit finance threats evolve, our response does too. As the noble Lord noted, we brought forward the Economic Crime (Transparency and Enforcement) Act and we are preparing a wider economic crime Bill at pace. This is alongside a new kleptocracy cell in the National Crime Agency to target sanctions evasion and corrupt Russian assets hidden in the UK. That means that oligarchs in London will have nowhere to hide.

As I just touched on, the noble Lord asked about the implementation of the measures in the Economic Crime (Transparency and Enforcement) Act, specifically on the overseas entities register. Since the legislation received Royal Assent, the Government have been working at pace to ensure the register is in place as soon as reasonably practicable. The Companies House digital designs team is making strong progress in building the register for operational readiness.

The noble Lord also asked about the planned economic crime Bill part two. We have published details of upcoming legislation, including fundamental reform of Companies House, enhanced information-sharing powers and new powers to seize crypto assets which are designed to clamp down on money laundering and illicit finance. We do not have long to wait for the Queen’s Speech at this stage, when I am sure more information will then be made available.

The noble Lord, Lord Tunnicliffe, made a final point on Explanatory Memorandums. His point is well made that we often discuss quite technical matters in this Committee, sometimes at short notice, and therefore the Explanatory Memorandums are incredibly important to noble Lords. Of course, it was not the fault of the official named that their contact details were not there, and it is for Ministers to ultimately take responsibility for the information provided to Parliament. On the noble Lord’s specific question about the standards for Explanatory Memorandums, I will undertake to write to him if he permits me to. With that, I beg to move.

Motion agreed.

Committee adjourned at 6.08 pm.