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Money Laundering and Terrorist Financing (Amendment) (No. 2) Regulations 2022

Volume 823: debated on Tuesday 19 July 2022

Considered in Grand Committee

Moved by

That the Grand Committee do consider the Money Laundering and Terrorist Financing (Amendment) (No. 2) Regulations 2022.

Relevant documents: Instrument not yet reported by the Joint Committee on Statutory Instruments. 6th Report from the Secondary Legislation Scrutiny Committee.

My Lords, I begin by emphasising that this Government recognise the threat posed by economic crime to the UK, and we will continue to do whatever it takes to combat money laundering and terrorist financing at home and abroad. The UK has played a pivotal role in tackling illicit finance internationally by building political commitments, championing global standards as a founding member of the Financial Action Task Force and pioneering domestic powers, which are being replicated around the world. The international standards set out by the FATF are at the heart of the UK’s approach to fighting money laundering and terrorist financing. We are also clear that global leadership must be underpinned by strong domestic action.

Although our domestic action must be strong, it must also be proportionate to ensure that we minimise the burden on legitimate customers and businesses. In January 2020, we transposed the EU’s fifth money laundering directive, which provided for the addition of art market participants, letting agents and crypto asset businesses to the regulated sector and set out discrepancy reporting requirements to ensure the accuracy of the UK’s beneficial ownership registers. We also made separate changes to the money laundering regulations earlier this year in relation to high-risk countries and trusts. These changes give us the opportunity to debate the latest economic crime risks and help us target strategies to better protect the UK from overseas illicit finance flows.

Despite that progress, we know that there is more work to be done to deter money laundering and terrorist financing actively and effectively in the UK in a way that is proportionate and manages burdens on businesses. As part of that work, we are making further necessary updates to the money laundering regulations through the secondary legislation we are discussing today.

It is vital that AML regulation keeps pace with the rate of technological change so that no part of our financial system is prone to exploitation by criminals. This instrument therefore extends FATF recommendation 16, known as the travel rule, for crypto asset firms. The travel rule requires that information on the identity of the originator and beneficiary of a transfer of funds or assets is sent and recorded by the firms making the transfer. This means that transfers of crypto assets will become subject to the same rigorous AML requirements as bank transfers, allowing money laundering and terrorist financing to be detected and investigated effectively.

We are also closing the gap in the regulations by requiring proposed acquirers of already-registered crypto asset firms to notify the FCA ahead of such acquisitions, allowing it to object to such acquisitions or changes in control before they take place. This will stop unregistered firms gaining access to the UK market, ensuring further robustness of the regulations. We would like to implement this important change at the earliest opportunity, 21 days after the SI is made.

This instrument also makes several other discrete, targeted changes which are intended to ensure that the regulations are aligned with the updated risk assessments and new international standards. I will highlight just a few of them. For example, to ensure we are aligned with FATF standards on proliferation financing, this instrument will introduce a requirement for supervised persons and the private sector to identify and assess the risks of potential breaches, non-implementation or evasion of the targeted financial sanctions related to proliferation financing. Her Majesty’s Treasury will also be required to carry out further national risk assessments of proliferation financing, and financial institutions and relevant persons must complete proliferation financing risk assessments and take steps to mitigate risks identified.

This instrument will go further by strengthening and clarifying how the AML regime operates, and by ensuring that the UK’s AML supervisors have the right powers available to respond to new and emerging threats. That is why the instrument will also expand the requirement in the regulations to report discrepancies between the information gathered by regulated firms and that held at Companies House, both in the course of ongoing business relationships and in respect of entities in scope of the new register of overseas entities. Not only does this change address concerns raised by industry that the discrepancy reporting provision in the regulations provides insufficient clarity but it will enhance the accuracy and integrity of the companies register, closing a clear gap in the current system.

We are also amending the definition of a trust and company service provider, or TCSP, to cover the formation of all business arrangements, not just companies, that are required to register at Companies House and ensure that customer due diligence must be conducted on these business arrangements when they are the customers of TCSPs. This change will support the objectives of BEIS-issued proposals on limited partnership reform and improving the transparency and integrity of the companies register.

It is also important that we improve the information and intelligence-sharing gateway in the regulations, which was an important focus in the first economic crime plan and a key ask from industry. Therefore, we are expanding the information-sharing gateway to allow for reciprocal sharing from relevant authorities, including law enforcement, to supervisors. We are also expanding the list of relevant authorities in the regulations explicitly to include key government agencies, such as Companies House. This instrument also makes several technical and clarificatory changes to the regulations, to ensure that they are up to date and continue to work in the best way possible.

Noble Lords will be aware that the Secondary Legislation Scrutiny Committee raised the regulations as an instrument of interest in its sixth report, published on 30 June. Noble Lords will have hopefully also had sight of the statutory instrument’s impact assessment, published on 14 July. Unfortunately, the impact assessment received a red rating from the Regulatory Policy Committee. Despite this, I support the SI proceeding given the time-sensitive nature of some of these measures and the impact of choosing not to address the loopholes and changes in risk where we have identified them. Her Majesty’s Treasury is undertaking further analysis this summer to improve the data available for future impact assessments.

I thank noble Lords for their examination of this important legislation and hope they will join me in supporting the instrument. I beg to move.

My Lords, I am grateful to the noble Baroness, Lady Penn, for introducing this SI, following last week’s postponement. Let me say from the start that we support these revisions to the money laundering regulations, or MLR. Any proportionate measures that strengthen our hand in the fight against illicit or terrorism financing are a good thing.

It could be argued that some of these measures should have been introduced earlier. In recent months we have discussed the Government’s mixed record in relation to tackling money laundering and fighting financial crime. However, rather than trying to score political points today, I instead wish to ask the Minister a series of questions about the Treasury’s approach.

First, can the Minister tell us about the process underlying the accompanying impact assessment? She very kindly wrote on 14 July to inform me that the assessment had been rated red, or “not fit for purpose”. Nevertheless, the Treasury wanted to push ahead with the debate as planned. Despite that correspondence saying that the IA had been published online, I was unable to find it on the website last Wednesday afternoon. This debate was therefore delayed. This may be a fairly minor concern in the grand scheme of things, but legislative processes are important.

Although we have concerns about the IA achieving a red rating, we will nevertheless support the regulations’ passage. As I said earlier, many of these changes are sensible and technical updates. The technical nature of the money laundering regulations, however, gives rise to another question. The success—or otherwise—of MLRs relies on formal guidance for individual sectors. These documents need to be updated and get final approval from the Treasury before dissemination. When is that process expected to begin and how long is it likely to take?

Turning to other issues, could the Minister go into a little more detail on the Government’s approach to crypto assets. It seems sensible to extend the so-called travel rule, as well as the power of the Financial Conduct Authority in relation to annex 1 companies dealing with crypto assets. Since the Russian invasion of Ukraine, we have seen the exploitation and movement of crypto assets as a means of circumventing international sanctions. We are also seeing more and more criminal funds funnelled into different forms of digital assets, as there is a perception that using such avenues carries significantly less risk of intervention by law enforcers and regulators. If the new measures help to tackle these realities, that is welcome, but does the Minister agree that the need for wider regulation in this area is becoming ever more urgent?

The previous Chancellor was a big supporter of crypto. He stated his ambition for the UK to become a “global hub”—indeed, this will be the subject of a Question on Thursday. Can the Minister confirm that the new Chancellor shares Mr Sunak’s enthusiasm, or are we likely to see a change in both ambition and regulatory direction?

We are, of course, in the midst of a wider review of the UK’s anti-money laundering regime. According to the Explanatory Memorandum, that review is

“intended to shape the UK’s broader direction on AML for the coming years”.

If I am not mistaken, completion of that review was expected in June. Can the Minister confirm that it was completed as planned and, if so, might she be able to commit to a timescale for the publication of its outcomes?

Given the UK’s participation in the Financial Action Task Force, just how much flexibility do the UK Government have? We are free to deviate from the FATF in instances where there is minimal risk, but will the Government want to threaten getting a cleaner bill of health as part of the body’s 2025 UK review?

This SI makes minor changes to the Economic Crime (Transparency and Enforcement) Act to ensure that discrepancies in company records are reported in a timely manner. Can the Minister provide an update on the implementation of the register of overseas entities? Enabling SIs are gradually being laid and debated, but do we have a firm date for enactment?

In addition, do we have an update on what has become known as the economic crime Bill part 2? The noble Lord, Lord Callanan, stated on multiple occasions that the Government aimed to deliver that Bill early in the new Session. I am not aware of its impending publication, but I hope the Minister can set me straight on that. Central to that Bill will be Companies House reform. These regulations do not go that far, but they give that agency and its parent department greater access to information about suspected money laundering. Can the Minister set out exactly what rights Companies House has at present? If these have long been deemed insufficient, why are changes being made only at this point?

I appreciate that I have bombarded the Minister with a variety of questions, so perhaps she could use the early portion of her Summer Recess to write.

My Lords, I thank the noble Lord for his questions. I will attempt to answer them now as best I can so that, hopefully, we can both enjoy a quieter Summer Recess. If I do not manage to, I will write on the outstanding ones.

He asked first about the process underlying the impact assessment. The Treasury sought to collect quantitative data on the costs and impacts of the proposed amendments to the money laundering regulations through extensive stakeholder engagement and the SI’s consultation period, but it did not obtain as much data as anticipated. Further attempts were made by officials to gather urgent evidence to rectify some of the data gaps that were identified, but unfortunately efforts were limited by the need to deploy resource on to pressing issues arising from the Russian invasion of Ukraine.

I am assured that the impact assessment was published on on 14 July and on the GOV.UK page, where the consultation and government consultation response for the instrument were also published. I have not navigated those websites myself, so they are perhaps not as user-friendly—

I wonder whether the Minister could accede to my ageing years and inability to get these funny things out of that funny website and just send them to me.

I will happily do that. Skipping ahead slightly to the money laundering regulations review that the noble Lord referred to, the Government published their review on 24 June, which I will send to the noble Lord along with the impact assessment I referred to. On that review, the report sets out the future direction of anti-money laundering policy, including reforms to the UK’s supervision regime and potential changes to the money laundering regulations to ensure that they remain proportionate and effective.

The noble Lord asked about guidance. The guidance to support firms in their compliance with the money laundering regulations, as he noted, is drafted by sector- specific expert bodies and then approved by the Treasury. Updates to the guidance to reflect the changes brought in by this SI are already under way. The Treasury will commence its approval process to ensure accuracy and consistency once it has received that draft guidance. I do not have an end date for the process but I can reassure the noble Lord that it has already begun.

On crypto, I cannot speak for the new Chancellor, but I can speak for the Government’s position in terms of both being ambitious for the UK as a market for crypto currency but within that making sure that it is well regulated. Those two things go hand in hand. We will see measures in the forthcoming financial services and markets Bill relating specifically to the regulation of stablecoins, which are a form of crypto, as well as further consideration from the Government about the wider regulation needed in that area.

The Financial Action Task Force is the international standards setter for anti-money laundering and counterterrorism financing. Where members do not sufficiently meet their obligations to implement FATF standards, they are publicly identified by the FATF and subject to enhanced monitoring. All FATF members must report three times a year on the measures they are taking to protect against money laundering. As an FATF member, we are committed to maintaining those standards, particularly post EU exit, where the FATF is the international standards setter in this area. As I referred to in my opening speech, some of the measures here address some points from the FATF on proliferation financing.

The noble Lord asked about progress on implementing the economic crime Act part 1 and the register of overseas entities. During the Bill’s passage through Parliament, the Government undertook to deliver the register as soon as practicable. The three UK land registries, together with Companies House, have been working at pace to ensure that we can get the register up and running as quickly as possible and that it works as intended. We had statutory instruments laid before the House in June and further regulations approved by the House last week. The register is planned to begin operating over the summer, with further instruments to underpin the register’s operation made in the autumn.

On the economic crime Bill part 2—to use its unofficial name—I reassure the noble Lord that my noble friend’s commitments still stand, and I believe that we expect to see the Bill introduced to Parliament shortly after the Summer Recess, which I think would still count as “early in the Session”.

The powers of Companies House to investigate are narrowly defined under current legislation. Funding was allocated at the spending review to improve data-sharing capabilities and develop a system to verify identities of directors and deploy machine learning to identify suspicious activity. However, we need to go further through reforms proposed in the new economic crime Bill. That is why noble Lords have pressed us so hard on its introduction.

This is a complex area of law. The Companies House reforms amount to the largest change to our system of setting up and operating companies since the companies register was created more than 170 years ago, so we need to ensure that the proposals are effective and work coherently. As I said, the Government intend to introduce this legislation shortly after the Summer Recess.

I hope that I have addressed the noble Lord’s points. I owe him a letter containing the documents we discussed anyway. If I have not addressed any of his points, I will make sure that they are included there. I commend these regulations.

Motion agreed.