UK Regulators Tighten Anti Money Laundering Efforts with Proposed Changes

The Scope of the Consultation

The UK government’s economic and finance ministry, Her Majesty's Treasury (HMT), has recently opened a consultation regarding proposed updates to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs). The proposed changes include:

• Implementation of the travel rule to crypto-asset transfers. 
• Changes relating to the coverage of the art market under the MLRs.
• Amendments to reflect the latest national risk assessments. 
• Clarificatory changes to strengthen supervision. 
• Alignment of the obligation to report discrepancies in beneficial ownership to ongoing customer due diligence (CDD) obligations.
• Changes regarding information sharing and gathering. 

The consultation is open until 14 October, with views taken forward through secondary legislation due to be laid in Spring 2022.

The Proposed Changes

Transfers of Crypto-Assets

A core element of the consultation is the proposed implementation of the “travel rule” to crypto-asset transfers. The relevant amendment to the MLRs would ensure that the UK complies with the Financial Action Task Force (FATF) Recommendation 16 by applying, insofar as practicable, the rules applicable to bank transfers to crypto-asset transfers by crypto-asset exchange providers and custodian wallet providers. The move by the HMT follows recent technological developments which make compliance with the travel rule for crypto-asset transfers feasible. Through the consultation, the HMT seeks industry views on the potential impact, including the costs, of the implementation of the travel rule on businesses. In line with the Funds Transfer Regulations, the consultation paper proposes:

• Information that must accompany crypto-assets transfers dependent on the value of the transaction (and whether the crypto-asset provider carries out business in the UK).
• Intermediary crypto-asset service providers must ensure information is retained with the transfer.
• Crypto-asset service providers must (i) implement effective procedures to verify for incoming transactions the accuracy of beneficiary information received, as well as detecting missing beneficiary or originator information; and (ii) take appropriate steps to ensure sending crypto-assets providers meet the information requirements.

Art Market Participants

The art sector was included into the scope of regulated entities as part of the transposition of the 5th European Union (EU) Anti-Money Laundering Directive into UK law. It was not the government’s intention to include artists who (regularly) sell their own works of art for more than EUR 10,000 as Art Market Participants (AMPs). The government is therefore proposing to amend Regulation 14 of the MLRs and seeks views as to whether the suggested amendments accurately cover the intention to clarify the exclusion of artists from the AMP definition, where it relates to the sale and purchase of (their own) works of art, taking into consideration the lower risk of money laundering and terrorist financing (ML/TF) in this area.

On the other hand, the consultation also seeks views on whether further amendments are needed to bring into scope of the MLRs those who trade in the sale and purchase of digital art. Digital art, defined in the consultation as “art that has been created using digital technology,” for example computer-generated art, does not fall within the definition of sculptures, engravings, tapestries, ceramics, printed photographs, pictures, collages and paintings executed by hand and is thus currently outside the scope of the MLRs.

In-Scope Sectors for the MLRs

The sectors in scope under the MLRs are set out in Regulation 8. The risks inherent in each in-scope sector can vary, as assessed in the UK National Risk Assessment of Money Laundering and Terrorist Financing 2020. Sectors, or sub-sectors, may be added or removed from scope to the extent that inclusion under the MLRs becomes disproportionate. In this regard, the consultation proposes the following exclusions:

1. Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs)
   
   AISPs are used to offer an account aggregation service that allows customers to get a single view of all their payment accounts via one site. The government welcomes views on the possibility of excluding AISPs from the regulated sector, given their low inherent ML/TF risk. 
   
   PISPs are used to initiate a payment transaction from a customer’s account with another payment service provider, for example to pay a retailer or merchant. Similar to AISPs, the HMT seeks views on whether PISPs should be excluded from the MLRs. The HMT notes, however, the potential higher risk of PISPs relative to AISPs, which may warrant maintaining PISPs within the regulated sector.
   
   
2. Bill Payment Service Providers and Telecoms, Digital and IT Payment Service Providers
   
   Bill payment and Telecoms, Digital and IT Payment Service Providers are undertakings which provide payment services which enable the payment of utility and other household bills. The number of businesses in the UK falling under these categories is small.
   
   As the inherent ML/TF risks of these setups are considered low due to their dealing with relatively small funds and assisting only in the transfer of money between regulated bodies, the government is proposing that they are taken out of scope of the MLRs.

Reporting Obligation: Beneficial Ownership Discrepancies

Relevant persons are under the obligation to report to the company registrar discrepancies about beneficial ownership in a company between the information in the publicly available UK companies register and the information identified by the relevant person as a result of CDD measures at the outset of establishing a business relationship.

This requirement, therefore, by its definition, does not currently apply to situations where a relevant person subsequently identifies such discrepancies, i.e., during ongoing due diligence. The consultation seeks views on the alignment of the beneficial ownership discrepancy reporting obligation to the ongoing obligation on relevant persons to carry out CDD on the beneficial ownership of their clients. Such alignment would substantially support keeping data accurate and up to date on an ongoing basis.

Clarificatory Changes to Strengthen Supervision

1. Suspicious Activity Reports (SARs)
   
   The HMT has identified that the interpretation and approach by anti-money laundering and counter terrorist financing (AML/CTF) supervisors regarding the right to access and view SARs as part of their supervisory function is currently varied. The consultation is seeking views on whether it is useful or necessary for AML/CTF supervisors, for the purpose of fulfilling their functions, to collect and view the content of SARs. This proposal would give AML/CTF supervisors the legal permission to directly request SARs from members of their supervised population as part of their monitoring approach.
   
   
2. Credit and financial institutions 
   
   The consultation proposes updating the activities that make a relevant person a credit and financial institution, as per Regulation 10 of the MLRs, to align with Financial Services and Markets Act (FSMA). The government has noted stakeholders’ concerns that the current wording of Regulation 10 does not align well with other regulatory regimes for credit and financial institutions.

Expanded Requirements to Strengthen the Regime

1. Proliferation financing risk assessment
   
   Chapter 4 of the consultation seeks views on amending the MLRs to include provisions on proliferation financing to align the MLRs with the FATF standards. FATF (Recommendation 7 and 15), after being updated in October 2020 and June 2021, require countries and the private sector to assess and mitigate the risks of potential breaches, non-implementation or evasion of the targeted financial sanctions related to proliferation financing. The amendment of the MLRs would ensure that the existing requirements with regards to assessment and mitigation of ML/TF risks are expanded to include proliferation financing.
   
   
2. Services provided by Trust or Company Service Provider
   
   The consultation proposes to amend the wording of Regulations 12 and 4 of the MLRs to (i) include the formation of limited partnerships in the services list of the definition of Trust or Company Service Providers and (ii) expand the term “business relationship” to include one-off relationships, such as where a Trust or Company Service Provider is asked to form any type of business arrangement required to register with Companies House. This will ensure that all business arrangements and services provided, that are required to be registered with Companies House, are adequately covered under the MLRs.

Information Sharing & Gathering

The MLRs currently limit the disclosure or sharing of intelligence and/or information to provision from supervisory authorities (such as the Financial Conduct Authority) to relevant authorities (such as law enforcement or the Treasury), but not vice versa. The consultation suggests expanding these provisions by (i) making information disclosure and sharing provisions reciprocal, and (ii) expanding the list of “relevant authorities” to include other government agencies, such as the Department for Business, Energy and Industrial Strategy.

What Does This Mean for You?

The proposed amendments to the MLRs are currently at the consultation stage, with changes expected to come into force in 2022. Money Laundering Reporting Officers (MLROs) should nonetheless take action now by assessing the impact of the proposed changes on their institution’s businesses at an early stage. This approach will allow MLROs to respond to the consultation if they identify any unexpected, far-reaching (and potentially unintentional) impact(s) on their institutions. It will also help them to take anticipated changes into consideration for their functions at an early stage and monitor the situation. For regulated entities operating in both the UK and the EU, the consultation will be of additional interest: The EU has recently published a package of legislative proposals to strengthen the EU’s rules on combating ML/TF and the creation of a new AML/CTF Authority. In this context, the EU propose extending the existing travel rule in the Transfer of Funds Regulation (Regulation EU 2015/847) to crypto-asset transfers. It remains to be seen whether there will be a divergence as to how the EU and UK apply this rule going forward.

How Guidehouse Can Help

Guidehouse can rapidly review and assess your financial crime framework to determine whether it is operationally effective and meets the expected regulatory developments both in the UK and the EU. Guidehouse has in-depth knowledge of crypto-asset-related ML/TF and Sanctions risk and how to address these to mitigate the risk for your institution. Guidehouse’s relevant expertise includes:

• Compliance solutions
• Financial crime framework risk assessments and gap analyses
• Advising on the effectiveness and efficiency of financial crime processes and systems.
• Investigations and reporting.
• Compliance systems testing, system configuration, and model validation.

Please reach out to us if you would like to discuss further how we can assist you.