Following a series of consultation processes, HM Treasury has published a draft of the Money Laundering Regulations 2017. These proposed regulations will supersede the current regulations (2007) and represent efforts to transpose the EU’s Fourth Money Laundering Directive and the relevant aspects of the Fund Transfer Regulations into law. It is expected that the Regulations will come into effect prior to 26 June, 2017. Key changes to the current regulations will effect Due Diligence Requirements, impose more stringent compliance requirements on Estate Agent Businesses and institutions involved in correspondent banking, as well as establishing a central register of information concerning beneficiaries of express trusts in the UK. A number of the proposed changes included in the draft regulations are set out below:
Due Diligence Requirements
The draft regulations alter the current due diligence requirements and those who are affected by the regulations (“relevant persons”) will be required to adopt a risk-based approach in more cases, when conducting due diligence. The following are some of the more significant changes in relation to due diligence:
- The turnover threshold for persons who are subject to the regulations has been raised from £64,000 to £100,000;
- With respect to Customer Due Diligence (“CDD” – the practice of obtaining documentation from your purported customer in order to be able to sufficiently identify them), the new regulations include a summary of risk factors that relevant persons should refer to when undertaking a risk-based approach assessment of whether CDD is required;
- Similarly, the regulations include a non-exhaustive list of factors that should be considered when assessing whether Simplified Due Diligence (“SDD”) should be undertaken. Again, relevant persons should have reference to these factors when determining whether SDD is appropriate, using a risk-based approach;
- Third Parties – there has been a significant expansion of the third parties that can be relied upon to provide CDD information. However, companies’ will remain personally liable for any failure to apply appropriate measures.
- In line with other changes to Due Diligence requirements, the draft regulations require relevant persons to undertake a risk-based approach assessment in relation to all potentially Politically Exposed Persons (“PEPs”). It will be incumbent on relevant persons to assess the level of Enhanced Due Diligence (“EDD”) required to be undertaken in respect of anyone deemed to be a PEP. More discrimination will be required by the relevant person when undertaking their risk-based approach assessment and the EDD requirements may be more or less onerous, depending on the actual level of risk associated with the PEP.
Institutions involved in correspondent banking (financial institutions that provide services, such as facilitating wire transfers or business transactions on behalf of other financial institutions, at one step removed from the client) have been identified as high risk, in terms of potential exploitation for the purposes of money laundering. As a result, financial and credit institutions engaged in cross-border correspondent relationships with a third country respondent institution will be required to undertake EDD, in addition to CDD. Additionally, credit and financial institutions are not only prohibited from entering into a correspondent relationship with a shell bank (a bank with no physical presence in any country) but must take enhanced measure to ensure they do not enter into a correspondent relationship with an institution which is known to allow its accounts to be used by a shell bank.
Trusts and Beneficial Ownership
The new regulations provide for the establishment of a register of beneficial ownership of taxable express trusts. Under the regulations, HMRC must establish and maintain such a register and trustees will be required to provide and to regularly update the following information in relation to all beneficial owners of the trust and any other individual referred to in any document, such as a letter of wishes, relating to the trust:
- Their name;
- Their correspondence address and other contact details;
- Their date of birth;
- If they are a resident in the UK, their National Insurance Number or their Unique Taxpayer reference; and
- If they are not a resident in the UK, their passport or ID number with its country issue and expiry date
The National Risk Assessment identified the purchase of real estate as an attractive vehicle for money laundering and, as a result, the new regulations seek to clarify the position and obligations of estate agents with respect to CDD. Under the new regulations, an estate agent is considered to be entering into a business relationship with both the purchaser and seller of a property. As a result, Estate Agents will be required to undertake CDD for both parties to any transaction.
In response to submissions that sought clarification on the definition and treatment of a PEP, the Financial Conduct Authority will publish guidance concerning the treatment of domestic and foreign PEPs, their family members and their known close associates. EDD is not required to be applied to family members and known close associates of PEP’s, once the PEP ceases to be entrusted with a prominent public function. However, in those circumstances, EDD will continue to apply to the PEP for at least 12 months.
Finally, credit and financial institutions will be prohibited from setting up anonymous accounts or passbooks for any new or existing customers and will be required to apply CDD measures to all anonymous accounts and passbooks in existence at the date on which the regulations come into force.
The proposed changes to the Money Laundering Regulations will see a shift towards a risk-based approach when addressing due diligence requirements, as relevant persons will be required to assess the risks that potential clients pose and the appropriate response on a case-by-case basis. As a response to the identification of high-risk activities, stricter obligations and further prohibitions will affect estate agents and institutions involved in correspondent banking. Additionally, the establishment of a central register of information concerning the beneficial ownership of express trusts will require trustees to disclose and update a significant amount of information concerning beneficial owners and others with interests in taxable express trusts.
Oliver Rutledge and Nikos Keim