Curbing money laundering and terrorist financing – new initiatives put in place

On Monday 26 June the Fourth Money Laundering Directive (4MLD) was transposed into UK law by the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs 2017). The MLRs 2017 replace the Money Laundering Regulations 2007 and the Transfer of Funds (Information on the Payer) Regulations 2007, and aim to enhance a risk-based approach to anti-money laundering and counter-terrorist financing (AML/CTF) procedures.

Key Changes

The MLRs 2017 introduce a number of key changes, with a shift towards a risk-based system at their heart. Businesses and individuals should ensure they are aware of the effect these will have on their current business practices, as well as current and future business relationships.

Risk assessments:

‘Relevant persons’ remain largely the same as under the MLRs 2007, with the addition of all gambling providers, where previously the regulations applied only to holders of a casino operating license. All relevant persons are now required to carry out risk assessments, and ensure they have adequate procedures and policies in place to guard against the risks identified. Senior management of board level or equivalent will be responsible for approving the adequacy of procedures, and for ensuring compliance with the Regulations. Risk assessments will also take place at a Government and supervisory body level, with companies required to provide their documented risk assessment to their supervisory body on request.

Customer due diligence:

Due diligence measures continue to be obligatory when forming a business relationship, as well as when any factors relevant to firms’ risk assessment change. The greater emphasis on risk-based procedures means measures will vary between different types of customer, with simplified due diligence (SDD) only applicable in cases deemed low-risk. The MLRs 2017 also stipulate a number of circumstances in which enhanced due diligence (EDD) must be applied, for example when a client is established in a high-risk country, or the transaction appears overly complex or unusually large.

Beneficial Ownership:

UK companies have already been obliged since June 2016 to keep an accurate and up to date record of beneficial ownership, and supply this information to the PSC (People with Significant Control) Register at Companies House. However, a key change under the MLRs 2017 is that similar provisions now apply to trust and company service providers (TCSPs).  TCSPs are required to maintain a register of beneficial owners of taxable trusts, with HMRC acting as the registering authority for those not registered with the FCA.

Politically Exposed Persons (PEPs)

EDD must now be applied to domestic PEPs (and/or their families and close associates) where previously it applied only to foreign and overseas individuals. As a result, firms will need to reconsider and potentially re-categorise individuals with whom they have pre-existing business relationships.

The level of risk posed by a PEP will dictate the measures appropriate. The FCA has published guidance that provides personal, professional and geographical indicators that may suggest a PEP is higher or lower risk, although it is generally considered that domestic PEPs will pose a lower risk. PEPs will need to continue to be monitored for a minimum of twelve months after leaving office, although enhanced measures applied to family and close associates (who do not themselves have the status of a PEP) must cease when the PEP leaves office.

Sanctions

Firms must be alert to the high compliance standards expected of them, and there will be an emphasis on making examples out of those who fall repeatedly or significantly short. Just like its predecessor, the MLRs 2017 contain a number of sanctions, both civil and criminal.

The MLRs 2017 also introduce a new provision to hold individuals accountable should they knowingly or recklessly make a false or misleading statement if in purported compliance with the investigation and/or enforcement provisions. The focus on enforcement action has been reiterated by supervisory bodies, for example it is clear from the FCA’s Business Plan 2017- 2018 that supervision and robust enforcement action will be at the heart of AML practices going forward.

The Future

The law in this area remains open to change. Initial amendments to 4MLD were proposed by the EU Commission in July 2016 in the wake of the Paris terror attack and the Panama papers, and have since been making their way through the EU legislative process.

Key areas of note relate to beneficial ownership, with proposals to create greater transparency by allowing wider access to the registers of beneficial owners of companies and trusts. Furthermore, amendments to the treatment of PEPs have been proposed to distinguish between low-risk domestic PEPs and others, to allow low-risk individuals to be subject to customer due diligence, rather than enhanced measures.

Until the conclusion of the Brexit negotiations, the UK will continue to consult on and implement amendments to 4MLD. For the time being however, the UK continues to put the wheels in motion towards creating an ‘increasingly hostile environment’[1] for money laundering and terrorist financing.

[1] Para 1; Money Laundering Regulations 2017: Consultation published 15 March 2017