Key Changes in Anti-Money Laundering and Terrorist Financing Regulations

There has been significant movement in Anti-Money Laundering (AML) and Terrorist Financing regulation over recent months.

A Dear CEO letter in May 2021, issued by the FCA to retail banks, discussing the weaknesses within the AML Framework, alongside an HM Treasury led Consultation (Link). The UK Treasury has also made amendments to the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 (MLRs), adding a list of High-Risk Countries within Schedule 3ZA Regulation 33 (essentially, a copy of the FATF Higher-Risk jurisdictions).

FCA’s AML Dear CEO Letter – May 2021

Within this letter the FCA identified 4 areas of weakness within the current AML framework, namely:

  • Governance;
  • Risk assessment;
  • Transaction monitoring;
  • Suspicious Activity Reports (SARs) failings.

Due to these weaknesses, it is likely that firms should expect a more intrusive FCA approach when it comes to regulatory reviews of their AML systems and controls; which aligns with the themes seen within the FCA business plan, issued July 2021.

Alongside this, the FCA also expects senior management to be able to demonstrate appropriate oversight and understanding of the risks of financial crime arising from businesses for which they are responsible. This will work hand in hand with the FCA’s more intrusive style as oversight will be more stringent and thus transparency within the firm will be vital. The SMF roles with responsibility for financial crime will be expected to show sufficient oversight and understanding of the issues their firms face.

Additionally, firms will also be expected to be able to evidence decisions and governance processes to show acknowledgement of AML processes and systems within these decisions, to best safeguard customers. This evidence needs to be recorded and accessible if required by the FCA.

These expectations by the FCA demonstrate a move towards a better understanding not only of the regulations in place, but how those regulations are implemented within firms and the effects they have on each firm’s processes.

Another key area in which the FCA requires improvement is that of SARs failings. Within the Dear CEO letter the FCA details that the process can be unclear, not well documented or not fully understood by staff and therefore can lead to potential AML issues. By simply creating a better SARs system within your firm you could start to pick up potential areas of AML risk and address them before they are exploited. This could require additional training and clear lines of reporting to the Nominated Officer, charged with reporting SARs to the NCA (National Crime Agency).

HM Treasury Consultation

The consultation was launched July 2021 and closes on 14th October 2021 with a view to make some time sensitive updates to the MLRs, to ensure the UK meets international standards, whilst also strengthening clarity on the regulations. It is also notable that there is a separate call for evidence looking to assess the overall effectiveness of the Regulations and Regimes in control to ensure that they work as intended, with this call also closing on 14th October 2021.

The key details to highlight from the paper are:
  • Changes in scope: to reflect latest risk assessment, this looks to amend the scope of the regulated sector, to exempt particular payment service providers that may present low risk of Money Laundering and Terrorist Financing. These include: –
    • Account Information Providers;
    • Bill Payment Services Providers;
    • Telecom Payment Service Providers;
    • Digital Payment Service Providers;
    • IT Payment Service Providers.
  • Clarificatory changes to strengthen supervisions: allowing AML and CTF supervisors the right to access/view contents of SARs reports on request, through amendment of MLRs. Also, there is potential to amend regulation 10 of the MLRs to align views of activities that make a defines a credit and financial institution with that of the Financial Services and Markets Act definition.
  • Expanded requirements to strengthen the regime: Amendment of the wording of Regulation 4 and 12 to include formation of Limited Partnerships under the services listed for Trust or Company Service Providers, and to clarify formation of a Limited Partnership constitutes a ‘business relationship’. Benefit of carrying out Customer Due Diligence on beneficial ownership of clients to align with beneficial ownership discrepancy reporting obligation.
  • Information Sharing and Gathering: Expanding regulation 52 of the MLRs to allow for reciprocal protected sharing from relevant authorities to supervisors, as well as expanding the list of what is defined as a ‘relevant authority’. There is also suggestion of expanding the FCA’s supervisory powers under Annex 1 of the MLRs.
  • Transfer of Cryptoassets: Implementing ‘travel rule’ under R.16.2 of the Financial Action Task Force (FATF) in which firms need to obtain information around the transfer of Cryptos of the originator and beneficiary and keep these on record.

Any changes that come from this consultation paper are currently scheduled to be implemented in the Spring of 2022.

MLR High-Risk Countries List

HM Treasury has also put a list of High-Risk countries together within Schedule 3ZA of the MLRs. When dealing with these countries it is advised to apply Enhanced Due Diligence under Regulation 33 paragraph 3(a). The latest list was published in July 2021 and contains 24 countries. This should become a key reference for firms undertaking their country risk-assessments.

Conclusions

There is an increased focus on AML/CTF issues by the FCA and HM Treasury. The AML landscape is in transition, and it is essential firms keep up to date with the changes that will be implemented and how this will affect their systems and processes going forward. The FCA has indicated that it is going to be more focused on firms’ AML systems, thus requiring firms to act quickly to meet the FCA’s expectations. Firms will be required to ensure that their AML systems and controls are up to scratch.

Additionally, the FCA and HM Treasury are looking to close the gap on higher risk instruments, such as Cryptoassets, within AML in the UK in the process.

Key Dates

  • 14th October 2021: End of consultation and call for evidence.
  • Spring 2022: Implementation of findings from consultation.