HM Treasury review of the Money Laundering Regulations 2017
On 24 June, HM Treasury (HMT) published its review of the UK's anti-money laundering (AML) regulatory and supervisory regime.
The review sets out the next steps and areas of focus for the government.
It sits alongside two post-implementation reviews on:
- Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs)
- the Office for Professional Body Anti-Money Laundering Supervision (OPBAS)
The review follows two HMT consultations on:
- amendments to the MLRs 2017 statutory instrument 2022
- review of the UK’s anti-money laundering (AML) and counter-terrorist financing regulatory and supervisory regime
Proposed changes to the MLRs
HMT found that the MLRs are comprehensive, robust and allow a risk-based approach.
However, it identified challenges with:
- supervision – HMT identified continuing deficiencies in effectiveness, particularly from professional body supervisors
- implementation – including with poor risk understanding and deficiencies in customer due diligence (CDD)
The most significant change impacting the legal profession is the proposal to reform the supervisory regime.
HMT states there is a strong case for supervisory reform, with the aim of improving:
- risk-based supervision
- enforcement against non-compliance
- information and intelligence sharing
It identified four potential models of varying ambition, which the government will formally consult on before finalising.
More broadly, HMT highlighted areas in which minor changes are needed. This includes:
- removal of prescriptive enhanced due diligence (EDD) for high-risk third countries
- additional criteria for applying simplified due diligence (SDD) to pooled client accounts
- application of EDD to domestic politically exposed persons (PEPs)
- the high-risk third countries listing process
- wording around "complex or unusually large transactions"
Some of this further work will go forward as a separate consultation. This includes:
- defining effectiveness
- developing a system of metrics to track progress
- how best to support effectiveness (for example, through greater guidance)
- use of new technology to meet obligations
Proposals are still to be developed, with timelines for these consultations to be decided on by government.
MLRs statutory instrument 2022
HMT laid its draft MLRs statutory instrument (SI) in Parliament on 15 June.
Alongside the SI being laid, HMT also published:
- an explanatory memorandum that sets out a high-level explanation of the changes throughout the SI
- a government response to the SI consultation held in summer 2021
The SI introduces 14 measures. The most notable impacts on the legal profession are measures to:
- allow AML supervisors and regulators to access the content of suspicious activity reports (SARs)
- require a proliferation financing risk assessment
- expand the discrepancy reporting in beneficial ownership information to Companies House
The legal profession plays an important role in the fight against economic crime and takes its anti-money laundering responsibilities very seriously.
While we welcome HMT’s commitment to making the AML regime proportional and effective, the current regime does not promote a risk-based approach.
Instead, it drives ‘tick box’ compliance to satisfy overly prescriptive requirements, which is a particular challenge for small firms.
The current AML system is designed with the financial sector in mind, so any reforms must be evidence-based and address the different issues faced by the legal profession.
For example, enhancing the role of supervisors for suspicious activity reports (SARs) would need to:
- take into account legal professional privilege weighed against the duty to report
- consider the serious implications for confidentiality and data protection, as supervisors do not have the appropriate infrastructure to manage SAR-sensitive material
What we're doing
- July 2022 – we expect the draft MLRs SI to be debated in Parliament
- June 2022 – HMT published its review of the UK's AML regulatory and supervisory regime and laid the draft MLRs SI in Parliament
- October 2021 – we called for a risk-based approach to be adopted in our responses to the statutory instrument consultation and the call for evidence
- Summer 2021 – we took part in a series of targeted engagement sessions with HMT to represent the views of the profession and our members
We anticipate the SI will be debated in the House of Commons and House of Lords ahead of the recess on 21 July.
We look forward to helping develop and apply a regime that is both proportionate and effective in tackling economic crime, as well as being workable for solicitors.