Sanctions and Anti-Money Laundering Bill [HL]
Wednesday 6th December 2017
(6 years, 11 months ago)
Lords ChamberSanctions and Anti-Money Laundering Act 2018 View all Sanctions and Anti-Money Laundering Act 2018 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: HL Bill 69-III Third marshalled list for Committee (PDF, 106KB) - (4 Dec 2017)
Lord Davidson of Glen Clova (Lab)
My Lords, I beg to move Amendment 68ZA and will refer to the other amendments standing in my name. The rationale for this amendment springs from the considerable and widespread concern that there is insufficient democratic oversight of the future anti-money laundering and counterterrorist financing regime, which together with broad delegated powers will permit any future Government to both bypass Parliament and weaken the UK’s anti-money laundering and terrorist financing regime. Accordingly, the amendment seeks to impose an expressly ameliorative obligation on ministerially created regulation in detecting, investigating or preventing money laundering or terrorist financing, or indeed implementing the standards of the Financial Action Task Force.
When the current Foreign Secretary talks of a low-tax, low-regulation dream of a post-Brexit UK, it will be appreciated that he creates concern over whether this includes deregulating our current anti-money laundering and terrorist financing regime in due course. Given the importance hitherto of the UK’s AML and terrorist financing regime marching in lockstep with the EU, the low-regulation rhetoric has a destabilising impact on the perceptions of our European partners. A low-regulation AML and terrorist financing regime in the UK would of course create a new and substantial weakness in the global battle against economic crime, and would be an allurement to organised crime.
The role of the City as the pre-eminent global financial centre places certain responsibilities on the Government, including the maintenance of a strong and up-to-date AML and terrorist financing regime. It would be interesting to hear from the Minister what consideration the Government have given to the adverse effect on access to EU financial markets if UK financial services were subject to an AML and terrorist financing regime diverging materially from the EU regime. Obviously, there will not be an impact assessment of this, but some indication might be helpful.
Be that as it may, the amendment would improve confidence that the UK will not succumb to any temptation to weaken its current regime, and go for a low-regulation regime, in the event that the UK leaves the EU. I beg to move.
Baroness Bowles of Berkhamsted (LD)
My Lords, I will speak to the amendments tabled in my name and in that of my noble friend Lady Kramer. First let me take a brief moment to set the context. At Second Reading the Minister, the noble Lord, Lord Ahmad, said that this Bill was,
“about powers and not policy—it is a technical Bill”—[Official Report, 1/11/17; col. 1374].
Later, when replying to the debate, stimulated by comments by my noble friend Lord McNally, he amended his comment that the Bill was technical and said that it was about principles.
I do not agree. I would say that the problem with the Bill is that there are no principles, because they have not been carried over; there are only unconstrained powers. That is even more the case in the money-laundering part of the Bill. The principles, the starting points, are not defined. In fact, current law is undermined—and, as has already been well expounded on previous days in Committee, the good intentions of the current Minister and the Opposition Front Bench are no safeguard for the future.
There is also the widening effect when EU legislation is no longer governed by the policy constraints of EU treaties or the Charter of Fundamental Rights, which has a particular place in relation to the subject matter of the Bill. In transposition, all that has gone. This leaves us with two fears to address: first, that good law might be wantonly minimised or revoked, and, secondly, that wide powers might be used oppressively or for the wrong purpose. Both those prospects take advantage of the inadequacy of statutory instruments as a way to deal with fundamental matters.
Amendment 68A, which would replace Clause 41, Amendment 69E, which is about standards and designations, Amendment 72A, which would delete Clause 44(3), and Amendment 69A, which deals with exemptions from amendment and revocation, together address the fears that I have outlined. Before getting into the detail I will explain how they fit together. Of course, at this stage they are probing and illustrative, and I know that they are not perfect.
Amendment 68A would delete Clause 41 and replace it with an anchored principle that the money laundering regulations 2017 will continue, and that if they are to be amended, it must be done by an Act of Parliament. Amendment 69E, which could have been rolled up into the same amendment but stands separately, would provide an exception to the requirement for an Act of Parliament for amendment, and would allow for regulations to follow Financial Action Task Force standards and to update the definition of high-risk countries.
I think that there is general agreement that that is needed, but within that context—my Amendment 69E is not perfect in this respect—I have to caution that following FATF standards does not necessarily take into account civil liberties, so a framework of policy is also needed for that. Clause 41 does not give any guarantees of any such framework being carried over, and that aspect needs more attention. So the two amendments that I have outlined lay the general shape as I see that it should be. There are, however, many ways in which the provisions of the Bill, and elsewhere, can render complete change or revocation to whatever shape is laid out.
Amendment 72A to Clause 44(3) would remove the prospect of shape shifting from within the Bill. It would remove the potential to change, by regulation, the definitions of terrorist financing that were themselves made in separate Acts of Parliament that did not envisage change by regulation.
Amendment 69A is there to remind us that shape shifting and revocation options exist externally of this Bill via the European Union (Withdrawal) Bill and the Legislative and Regulatory Reform Act 2006, which can, by regulation, revoke all or part of any Act or regulation in the name of efficiency. Of course, there is no escaping the fact that procedures to combat money laundering and terrorist financing must impose burdens, which to some means inefficiency. The noble and learned Lord, Lord Davidson, has already hinted at some of that. Amendment 69A would, therefore, exempt from revocation or amendment under the two Acts that I have just mentioned.
As regards the deletion of Clause 41, I, too, have had emails from NGOs and others raising concern about the lowering of standards, including one from Global Witness suggesting that Clause 41 be narrowed to permit only enhancement of legislation. I appreciate that is what the amendment moved by the noble and learned Lord, Lord Davidson, sets out to do, and I borrowed some of the language from that to use in one of my amendments. However, the problem is that it is not only in Clause 41(1) that legislation can be done away with by regulation. It appears again, particularly in Schedule 2, where, under paragraph 20, there is carte blanche to change or revoke the money laundering regulations 2017, and one can only interpret that as some kind of intention so to do. I have already mentioned the withdrawal Bill—Clauses 7 and 17 of that Bill are prime suspects—and the “revoke anything” provision in the Legislative and Regulatory Reform Act. So we need to do more to protect against revocation of things that we do not want to see revoked.
On the other fear, of being overbearing, there is the prospect that the already wide definitions of money laundering or terrorist financing could be extended. This is where Clause 44(3) comes in, which uses Clause 1 to modify definitions of terrorist financing that appear in the four other pieces of legislation mentioned in Clause 41(3). Thus Clause 1, which we have already heard quite a lot about as regards the sanctions part of this Bill, now creeps into the anti-money laundering part. It is also worth reminding ourselves that the Delegated Powers and Regulatory Reform Committee has already said in paragraph 37 of its report that each of prevention, detection and investigation have the potential to allow the grant of significant powers affecting the rights of individuals and bodies—and that is before any tinkering with the definition of terrorist financing and before considering the removal of European protections on civil liberties.
Of course, under Clause 1, one of the objectives for change includes furthering a foreign policy objective of the United Kingdom. I pointed out on the first day of debate how UK terrorist legislation was used to freeze the assets of Landsbanki for having reckless capital adequacy and interest rate policies. This was what got them into difficulty—things that were nothing to do with terrorism. Is that the kind of thing that in future might be a foreign policy objective? In that particular instance, I know that it was cooked up in the Treasury. But what guarantees are there against all kinds of disconnected foreign policy objectives? All that flows from Clause 1 becomes relevant in the money-laundering part of the Bill.
Baroness Kramer (LD)
My Lords, I support the thought process behind the amendment of the noble and learned Lord, Lord Davidson, and the noble Lord, Lord Collins, and I also support my noble friend Lady Bowles. I do not think that I can better the explanation that she has given but perhaps I can reinforce a few of the key points.
Clause 41 has a huge impact on the balance of power between this Parliament and the Executive. Historically, the laws that have governed not the crime of anti-money laundering but the anti-money laundering regulations that provide the network with which to prevent money laundering have gone through an intensive democratic process within the European Union. They have gone through consultation, scrutiny, debate and votes within the European Parliament, and through discussion and presumably votes within the Council. The consequence has been a directive from which flows implementation within the UK through regulation, but only in the context of the very extensive democratic scrutinising and challenging process that has taken place beforehand.
In this transposition, that entire democratic process is destroyed in Clause 41—it disappears entirely. The process that has taken place in the European Parliament and the European Council and its various committees, as well as in the consultation and everything that surrounds it, disappears to be replaced purely by statutory instruments. That is a fundamental shift in the balance of power between a democratic body and an Executive body. I thought that the whole purpose of Brexit was to take the powers that lay with the European Parliament and the Council and to transfer them to this place, not to transfer them wholly to the Executive so that they could use that very narrow strategy of regulation. As my noble friend pointed out, this goes deep and wide. There are no frameworks and no constraints within the Bill that limit the range of powers that it essentially conveys and confers upon the Executive.
The Delegated Powers and Regulatory Reform Committee obviously responded with great vehemence to all this. It concluded:
“We take the view that the FCO”—
the committee saw it as a Foreign Office Bill but I think we may get a response from the Treasury—
“has not provided sufficient justification for the delegation of powers by clause 41, particularly having regard to their wide scope and the significance of the powers conferred. Accordingly we consider the delegation of powers by clause 41 to be inappropriate”.
When we have talked—the Minister has been kind enough to agree to meetings with him and his officials—the argument that has been placed before us is that this enables us to act with speed because speed is essential in the anti-money laundering arena. I think we can all agree that speed and the processes of the European Parliament and Council are not tangled together. If the European Parliament and Council feel it is appropriate to take the time and focus to develop the policy framework then surely there is no urgency for the United Kingdom to throw it away simply to be able to move directly to regulation.
As my noble friend said, it is quite possible within the amendments she has drafted to carve out the small arena in which speed might be relevant. It is limited. It is rare. It might happen and it can be carved out without requiring the rest of the framework to be dismissed and abandoned for a purely regulatory process.
When we had those meetings, my understanding was that one of the reasons for drafting Clause 41 in this way was to allow the consequences of the fifth money laundering directive—which is currently in process in the European Parliament and Commission; I think it is in trialogue at the moment—to be implemented in the UK. That process has taken a sufficiently long time that it seems perfectly possible for it to go through a process within this Parliament with its democratic background. We will probably have those regulations in place before Brexit—perhaps with the possibility of a spillover. I believe that, for those specific regulations, that is something that could very quickly be accommodated. What is fascinating, though, is that if that were the Government’s purpose, there would have been a very tight sunset clause for this—perhaps one of days or a few weeks—but there is no sunset clause. This process of acting through regulation and not through democratic process would be in perpetuity.
I want to pick up the comments from the noble and learned Lord, Lord Davidson. When I speak with these Ministers and with the Opposition today, I understand that they have a personal commitment, and I believe the Government have a commitment, to strong but proportionate anti-money laundering processes. It is because of that personal commitment to proportionality and good regulation that they have felt it completely unnecessary to enshrine those two factors in the Bill. I like very much the phrase that the noble and learned Lord, Lord Davidson, used. When I say we are talking to sheep, I mean it only in the benign sense of sheep—I think sheep are lovely; I do not mean it in a passive way. However, the framework of a Bill designed around those who have benign intentions will provide equal power for those who do not have benign intentions. I think every one of us in this House has often had conversations with people—particularly in the City of London, where I spend a certain amount of my time—who believe that it is absolutely necessary to go back to light-touch regulation and that we are overly fussed about issues such as money laundering and really do not understand the dynamics of modern business; and that it might be necessary for our future, post Brexit, to move to something that is much looser to ensure that London remains attractive. I attribute none of that to the Ministers who are sitting here. But they must recognise that they have permitted the inaction of just such an approach through regulation alone by the language they have put in the Bill. I have no idea if Clause 41 and the related clauses have been drafted in this way simply because there was very little time and, frankly, very little effort put into them, or whether there was a fundamental attempt to achieve a transfer of power. If it was the latter, it is crucial that Ministers tell us why this particular structure has been chosen.
The Minister of State, Foreign and Commonwealth Office (Lord Ahmad of Wimbledon) (Con)
My Lords, I thank noble Lords for introducing their respective amendments. I recognise, as I did at Second Reading, that there has been a good deal of interest in the anti-money laundering provisions of the Bill. In that regard, noble Lords may have noticed—and I am delighted—that I have been joined by my noble friend Lord Bates beside me on the Government Front Bench. I shall defer to him for some of the groups that we will discuss today.
Importantly, I hope this emphasises three things to the Committee: first; the Government’s cross-Whitehall and collaborative approach to the Bill; secondly, the Government’s recognition, as I said, that this is an important Bill and our desire is to get it right; and thirdly, as I hope noble Lords acknowledge—I know I speak for myself and my noble friend—that the Government deeply value what this House brings to discussions and scrutiny and equally respect its role in this regard. That is also true of today’s Committee. We have therefore ensured that appropriate Ministers are present to listen to the points raised by noble Lords.
The description of a wolf in sheep’s clothing took me back to reading the story of the Big Bad Wolf to my three and five year-old children. I assure noble Lords that there are no surprises in the Bill. The intent is very clear. I shall also provide greater detail in laying out the context behind the Government’s response to the amendments before us because that is important to your Lordships’ Committee.
Amendments 68ZA, 68ZB and 68ZC propose that regulations made under Clause 41 may be made only for the purposes of improving the detection, investigation or prevention of money laundering or terrorist financing, or for improving the implementation of international standards published by the Financial Action Task Force. I agree with the intention behind these amendments. This Government and our predecessor have, since 2015, led the way in combating money laundering and terrorist financing. Earlier this year, we brought the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 into force, ensuring that our anti-money laundering and counterterrorist financing regime met the global standards set by the Financial Action Task Force. We are the only G20 country with a public register of company beneficial ownership and, through the Criminal Finances Act 2017, we are taking further action to permit banks to share information relevant to identifying financial crime.
The United Kingdom plays an active role in shaping the international standards set by the Financial Action Task Force, and has done so since it was first established in 1989. In view of the UK’s clear intentions and long record in leading the way in this area, and taking particular account of the commitment shown by this Government and our predecessor, I do not think these amendments are required to take us any further forward. I am sure that the noble and learned Lord, Lord Davidson, and the noble Lord, Lord Collins, would agree that, realistically, no Government would bring forward regulations under Clause 41 to weaken our abilities to detect, investigate or prevent money laundering or terrorist financing, or worsen our compliance with international standards. Therefore, I hope the noble and learned Lord may be minded to withdraw his amendment.
Turning to Clause 41 in more detail and Amendment 68A, I understand that Amendments 68A, 69A and 69E—tabled by the noble Baroness—seek to protect the current anti-money laundering regime. That is set out in the 2017 money laundering regulations—I set out the full title earlier and will not burden the Committee with it again—which implement the EU’s fourth money laundering directive. Although I sympathise with that intention, I hope I can reassure the Committee that the level of protection afforded by these amendments is excessive and may have unwelcome effects.
Current regulations on money laundering and terrorist financing follow the internationally agreed standards set by the FATF and impose granular obligations on regulated firms. The UK has chosen to follow the FATF standards as anti-money laundering regimes are more effective where they are aligned internationally. That is a general principle accepted by noble Lords. As a general point, the precise nature of the obligations contained in regulations, such as detail of how firms should approach conducting due diligence on their customers and the factors they should take into account in assessing risk, is better suited to secondary legislation than primary.
That follows the approach typically taken in the UK and elsewhere to establishing detailed obligations on regulated firms. For example, the UK transposition of the fourth EU money laundering directive was given effect through primary legislation, for matters of a general nature—including existing provisions of the Proceeds of Crime Act 2002, the Terrorism Act 2000 and the Anti-Terrorism, Crime and Security Act 2001—with more detailed requirements on firms relating to, for example, their approach to due diligence and identifying beneficial owners being made in the 2017 money laundering regulations. A similar approach to transposition was taken by other EU member states.
To provide more detail on the UK legislation relating to the prevention of money laundering, the Proceeds of Crime Act 2002 establishes the general obligations on the regulated sector to report details of transactions that give rise to suspicion of money laundering or terrorist financing. Part 7 of that legislation additionally establishes the substantive money laundering offences relating to the concealment, acquisition, use and possession of criminal property. The 2017 money laundering regulations establish further and more detailed obligations, such as how firms should conduct due diligence on customers, establish and maintain group-wide policies and procedures, and assess risk connected with different customers. Unlike the provisions contained in POCA, those obligations are better suited to secondary legislation, given the detailed requirements that they impose on firms and the need to keep the detail of such obligations updated, to address emerging risks.
An example of the need to address emerging risks can be found through the rapidly evolving policy framework at EU and international level. As noble Lords will be aware, the EU’s fourth money laundering directive was largely transposed into UK law in June via secondary legislation, through the money laundering regulations, as I have said. Yet noble Lords will also be aware that amendments to the fourth money laundering directive were being negotiated even before EU member states had transposed the original directive, demonstrating that anti-money laundering and counterterrorist financing standards can evolve at a rapid pace. The noble Baroness, Lady Kramer, made the point about the justification that the Government are giving and continue to give in this regard: to quickly and effectively address emerging risks and ensure that the UK is a hostile environment for illicit finance, it is right that we use secondary legislation to implement future policy changes. That will ensure that the UK stays aligned with the evolving international standards in this area.
Baroness Kramer
I hope that the Minister can clarify something. He said that it is important to have access to regulation to reflect changing policy standards. Where are those standards? Are they in a piece of legislation? Are they up for debate in this House? Are they really what one Minister decides is policy? Perhaps he can explain that, because that is the missing piece—there is no structure for policy to go through a democratic process.
Lord Ahmad of Wimbledon
As I have already indicated—and I will perhaps challenge the noble Baroness—when we take the legislation in a wider sense, whatever the legislation, there is primary and secondary legislation. As I have said before on secondary legislation, the procedure being put forward by the Government would allow that policy to be stated and debated in both Houses of Parliament.
I shall finish the point. In terms of existing money laundering, I have already alluded to the fact that with the previous directive the money laundering regulations laid out the detail to which the noble Baroness refers.
Baroness Kramer
I must press the Minister on this. He used the word “allow”. I am sure the Government can do what they wish in that sense and can bring forward primary legislation, which this is. Will the Minister confirm that it does not have to go through primary legislation? The—in effect—primary legislation that sits behind the 2017 regulations that he described took place within the extensive process of democratic debate, scrutiny and votes in the European Parliament. I am trying to understand where that piece goes in this legislation.
Lord Ahmad of Wimbledon
My Lords, once we leave the European Union—and I notice the change in tack from the noble Baroness who said “when” and not “if” any more—
Baroness Kramer
It was an error on my part. The more we go into this discussion, the more “if” sounds realistic.
Lord Ahmad of Wimbledon
The noble Baroness knows how much I care for the accuracy of Hansard. She has clarified that.
In this case, the Government’s view is that there will be scrutiny of all future legislation once we have left the European Union. The Government will decide what element of policy that is subsequently translated into legislation will appear as primary legislation or as secondary legislation. However, for the purposes of this Bill, which I will come on to in a moment, there are certain elements that we are laying out in primary legislation and in secondary legislation. In both cases, after we leave the EU it will not be scrutiny in the European Parliament but scrutiny in this Parliament, and the Government will ensure it. I ask the noble Baroness to reflect on this point. When I come to the more substantive comment, if she will allow me, there are mechanisms within secondary legislation to allow for the effective debate to which I alluded at Second Reading.
To get back to the point that I was making—perhaps we differ on this and I acknowledge what the noble Baroness says—we believe that in order to address emerging risks quickly and effectively it is important to ensure that the UK is a hostile environment for illicit finance. This is consistent with the broader regulatory regime relating to financial services, for example, which also requires swifter tools that can be more readily updated to address emerging risks than primary legislation. A similar approach to implementing the standards set by the FATF is applied outside the UK in countries such as the United States. There, the Currency and Foreign Transactions Reporting Act 1970 imposes requirements relating to the reporting of suspicious transactions and so is broadly analogous to the Proceeds of Crime Act 2002. The detailed requirements of the international standards relating to areas such as due diligence and record keeping are then established through regulations promulgated by the Financial Crimes Enforcement Network, housed within the Department of the Treasury.
The Government are committed to parliamentary scrutiny of legislation made through delegated powers as we leave the European Union. This is the point I wish to make to the noble Baroness. I have made it before, but I hope it will reassure some, if not all, noble Lords that regulations made under Clause 41 will be subject to the draft affirmative procedure, unless they update the list of high-risk third countries, in which case they will be subject to the made-affirmative procedure. I made this point previously. I emphasise that updates to the list of high-risk countries will still require parliamentary approval, but they need to be put in place swiftly, as I am sure many noble Lords accept, so that banks and businesses can start to apply the enhanced due diligence measures which are appropriate for these high-risk areas.
The use of secondary legislation to amend anti-money laundering and counterterrorist financing regulations is consistent with our legislative approach in the past. The noble Baroness, Lady Bowles, raised the use of secondary legislation with certain Acts, but in general that is not new. I believe I have already made this point, but it was used, for example, to put the money laundering regulations 2017 in place following the fourth money laundering directive. It also provides consistency with our approach to regulations related to financial services and ensures that our anti-money laundering and counterterrorist financing regime remains consistent with internationally agreed standards. It also avoids the unusual position whereby secondary legislation made by a Minister cannot be changed without primary legislation made by Parliament. I hope that I have convinced the House that Amendment 68A is unnecessary and would place an excessive burden on legislation that needs to be flexible and capable of rapid change.
Baroness Bowles of Berkhamsted
The Minister said that the reason this is done in regulations is because telling a bank how to do its due diligence is too detailed for primary legislation. But he is rather overstating the case, because Regulation 18 of the 2017 money laundering regulations says that, “A relevant person”—this would be the bank—
“must take appropriate steps to identify and assess the risks of money laundering and terrorist financing to which its business is subject”.
The first requirement there is:
“In carrying out the risk assessment required under paragraph (1), a relevant person must take into account … information made available to them by the supervisory authority”,
under Regulation 17. If you go back, you find that the supervisory authority has to take notice of what the Treasury and the Home Office have said. So this is a cascade that automatically updates. If there is a new risk, the Government identify it, along with mitigating measures, and tell the supervisors, which devise ways to update the information for their sectors. Then the onus is still on the individual businesses to work out how to do this. Yes, there is a list of factors to include, but it is within the power of the Government to say, “This is an extra factor; it does not even need any legislation”. However, it embeds the duties of the Government to have a position and to come out with their reports and then the duties of the supervisors. None of that is definitely retained, because everything to do with this money laundering directive can be rubbed out. So it is not about the excruciating detail that the Minister says it is—the excruciating detail comes from the supervisors.
Lord Ahmad of Wimbledon
I understand the point the noble Baroness makes, but it is not about—to use her term—the excruciating detail. Secondary legislation—with parliamentary scrutiny—provides the Government with the ability to react to rapidly changing circumstances. Relying on primary legislation would not allow the Government to do that. We have a difference of opinion in that regard—but, on the point she made, guidance to financial institutions would follow whatever legislation and whatever rules and laws prevail at that given time.
I turn to Amendment 69A. After the EU (Withdrawal) Bill receives Royal Assent, the powers under the Bill as they are drafted will allow changes to the money laundering regulations 2017 and to the funds transfer regulation which are appropriate to prevent deficiencies that arise as a result of the UK ceasing to be a member of the European Union. It will not enable any other changes to be made. I note that the noble Baronesses, Lady Bowles and Lady Kramer, are aware of the need to make such changes to the money laundering regulations 2017, as demonstrated by Amendment 69D, which we will discuss later today. However, the Government’s approach in this area is to ensure continuity for regulated firms, and certainty for businesses as to the nature of the obligations with which they need to comply.
In order to ensure that our anti-money laundering regime makes legal sense on withdrawal from the EU, we anticipate laying brief regulations made under the power in Clause 7 of the EU (Withdrawal) Bill so as to fix a limited number of deficiencies within the money laundering regulations and the funds transfer regulation. Our approach will make amendments such as—for example—removing references to the Government needing to have regard to reports published by the European Commission and to the Government having to file notifications of risk assessments with EU institutions. It would not be appropriate to keep these obligations, as I am sure noble Lords acknowledge, once the UK ceases to be a member of the European Union.
Given the necessity for such changes in order to have functioning UK law, I do not agree with Amendment 69A, which would remove the ability to make these necessary fixes to our existing laws. Being unable to make necessary changes of the type that I describe would not take account of the fact—the basic fact—that the UK will have ceased to be a member of the European Union.
Legislative reform orders that derive from the 2006 Act are designed to reduce the regulatory burden rather than achieve any policy changes. They must meet a number of preconditions before they can be used to reduce regulatory burdens. Most importantly, they are not allowed to remove any necessary protection, and are therefore not a risk to regulatory safeguards within the money laundering regulations 2017.
I do not agree with the proposed exclusion of a useful tool to ensure that the UK’s anti-money laundering regimes can be simpler, easier to understand and easier to comply with, while ensuring—a point well made by the noble Baronesses in speaking to their amendments—that standards are not driven down, which I agree with, and the strength of the system is maintained. That is another point of principle I agree with.
I hope the Committee will also consider how legislative reform orders are used. There is no convention to use them to make controversial changes, and the preconditions in the 2006 Act will always apply. I believe that the preconditions of the 2006 Act are the appropriate way of constraining the use of its powers. Further, disapplying legislative reform orders in a single case might suggest that it would be appropriate to use them in other similar contexts.
I turn now to the proposed new clause contained in Amendment 69E that would limit amendments to the money laundering regulations 2017 to only those which implement standards published by the Financial Action Task Force, or that identify or revoke a designation of a high-risk third country. I should add that I am again grateful that within the clause both noble Baronesses recognise that new powers are required to update the UK’s money laundering regime after we leave the EU.
The Government are committed to playing a leading role in shaping global anti-money laundering standards through our membership of the Financial Action Task Force. Noble Lords will be aware that we led a successful campaign through the FATF to clarify that only some charitable organisations, such as those working in conflict zones, are vulnerable to terrorist financing, and in doing so improved the ability of civil society organisations to function and receive funding. We have also actively worked to clarify the obligations on the private sector to share financial intelligence. In doing so, we are addressing a key priority for the private sector, which consistently delivers the message that we will be better able to manage financial crime risk if it is able to share more information regarding suspicious customers.
It is right that the Government have the power to update the UK regime when such standards change. There are, however, several areas where the UK’s anti-money laundering regime already goes beyond these standards. Our recently established register of trusts generating tax consequences, for example, goes beyond the standards set by the Financial Action Task Force. Similarly, the decision at Budget 2015 to regulate virtual currency exchanges for the purposes of anti-money laundering and counterterrorist financing did not reflect an expectation of the Financial Action Task Force—it went beyond and it was a policy decision to which we expect to give effect through transposing amendments to the fourth EU anti-money laundering directive.
Although we will remain aligned with Financial Action Task Force standards after the UK ceases to be a member of the EU, our anti-money laundering regime already exceeds its standards in certain areas and we will wish to ensure that our defences against misuse of the financial system remain ahead of global standards, rather than solely reflecting them. Ensuring that we can make regulations so as to detect, investigate and prevent money laundering or terrorist financing, as well as to implement the standards of the Financial Action Task Force, is the most certain method of placing future changes to our anti-money laundering system on a sound legal basis. Adopting the amendment would limit our ability to do so in future.
Baroness Bowles of Berkhamsted
I concede that maybe we should have said “be at least as strict as”, but there is nothing in the Bill that says we are going to maintain and be ahead of global standards. We would all be a great deal happier if there were something in there indicating that standards would be maintained. We know there are good intentions, the Government have been doing good things and the Front Bench opposite would do good things, but it is not there in writing. That is what is fundamental to this: the principles are not fixed.
Lord Ahmad of Wimbledon
I thank the noble Baroness for acknowledging the actions that this Government have taken and—I am sure I speak for the Front Benches—for the faith that she has in both Front Benches. I have listened carefully to her point. The point that I am making is that the UK has already shown that through our commitment to the FATF, which we will continue to be part of. Not only are we complying but we are leading, and that role will continue and indeed be strengthened by the UK’s membership of the FATF. The objectives and obligations that it asks member states to adhere to will continue after we leave the EU.
I turn to Amendment 72A. The definition of terrorist financing contained in Clause 41 of the Bill is identical to that which already exists in the 2017 money laundering regulations. This definition provides that “terrorist financing” means an act that constitutes an offence under various legislative provisions, being sections of the Terrorism Act 2000; the Anti-Terrorism, Crime and Security Act 2001, the ISIL (Da’esh) and Al-Qaida (Asset-Freezing) Regulations 2011 and the Terrorist Asset-Freezing etc. Act 2010.
As noble Lords will note, elements of the definition of terrorist financing within Clause 41 cross-refer to secondary legislation that creates a criminal offence; namely regulation 10 of the ISIL (Da’esh) and Al-Qaida (Asset-Freezing) Regulations 2011. This provides that any person who contravenes prohibitions contained elsewhere in those regulations commits an offence relating to the financing of terrorism. The offences created through those regulations play an important role in deterring the financing of terrorist organisations. Regulation 14 of those regulations further provides that a person guilty of the relevant offence is liable, on conviction on indictment, to imprisonment for a term not exceeding two years’ imprisonment or to a fine or indeed both.
Clause 1 of the Bill provides that an appropriate Minister may make sanctions regulations where doing so would further the prevention of terrorism, whether in the UK or elsewhere. It is possible that such regulations made under the powers conferred by Clause 1 could impose targeted sanctions and penalties similar to those that are established through the ISIL (Da’esh) and Al-Qaida (Asset-Freezing) Regulations 2011, and which are already captured within the definition of terrorist financing within the 2017 money laundering regulations. If such regulations are made, they will effectively update the UK’s regime for counterterrorist financing. I am sure noble Lords will also note that the reference in the definition to the Terrorist Asset Freezing Act etc. 2010 will become obsolete when Part 1 of that Act is repealed.
In these circumstances, it is right that the definition of terrorist financing within Clause 41 of this Bill can be updated so that the UK’s counterterrorist financing framework can be applied consistently, working off a single definition of terrorist financing. Clause 45(5) of the Bill provides that any regulations updating this definition would rightly be made through the draft affirmative procedure, providing Parliament with an opportunity for fully scrutinising any such changes. In the absence of such a power, the Government would otherwise be obliged to maintain a definition of terrorist financing within this legislation that could quickly go out of date and so limit the effectiveness of our response to the financing of terrorist groups.
Baroness Bowles of Berkhamsted
My Lords, there are a lot of regulations going on here that interact with one another. Will they be considered one by one, so that they can be looked at comprehensively, or will they come in a great big wodge—akin to the sort of thing we get on money laundering?
Lord Ahmad of Wimbledon
My Lords, I am sure that the noble Baroness will accept that there are times when it makes sense to discuss certain regulations together in a group. At other times, they will be discussed individually. We will certainly look at the context of each regulation and introduce it in the appropriate manner. The key point I would make in all this is that, under the procedure we have adopted, we want to ensure that there is effective scrutiny.
I totally accept the point of principle and have noted our difference of opinion on the point made by both noble Baronesses and others on primary and secondary legislation. However, I have explained why the Government believe their approach is the right one. I also appreciate the patience of Members of the Committee in our detailed discussions setting the context, which I am sure will be reflected in our discussions today. I thank noble Lords for their patience and indulgence, and hope that they are minded to withdraw or not move their amendments.
Lord Davidson of Glen Clova
My Lords, the patience of this side has not been strained by the Minister, who provided a complex and interesting setting-out of the way in which the UK envisages the future. The debate in this complicated and difficult area has been most useful.
The noble Baroness, Lady Bowles, provided an intensive forensic analysis, which, I suspect, may leave one or two questions that require answers that we may, no doubt, look at on Report. Plainly, there is a difference of view between the Government and the Opposition as to the way forward on minor matters but not on the substantive way forward. While I therefore recognise the tack made on the Bill by the noble Baroness, Lady Bowles, we do not share the way forward that she suggests. However, we recognise a number of the concerns she identifies.
The noble Baroness, Lady Kramer, set out her assessment of the damage to democratic scrutiny that this approach adopts. One does, of course, speculate what would happen if a Labour Government had proposed such wide powers for Ministers. One might imagine that certain Brexiteers would have fairly vociferous views on any such proposal.
The speed argument for the anti-money laundering aspect of this clause is not entirely clear, to this side at least. As to the answer stating that there are emerging risks, it would perhaps be useful to have some examples of how they have emerged and how the current system has failed to deal with them.
The noble Baroness, Lady Kramer, identified the possibility of a sunset clause. She will be pleased to see that my noble friend Lord Collins has an amendment proposing such a clause.
I must reject the ovine reference. We are trying to find a way forward that is consonant with a good, strong regime on AML and terrorist financing. I welcome the Minister’s intention to get it right. He sees improvement as a way forward and we share that approach. Our concern is that not every future Minister might share this Minister’s good intentions and is therefore to push the legislation in an improving direction, and it is for that reason alone that we advanced this amendment.
The Minister set out the UK position at length. Long may it continue; it certainly puts the UK in a strong, leading position in relation to money laundering and terrorist financing protection. At this stage, we will go way and think about this further. I beg leave to withdraw the amendment.
“Public register of beneficial ownership of UK property by companies and other legal entities registered outside the UK
(1) In addition to the provisions made under paragraph 6 of Schedule 2, for the purpose of preventing money laundering in the UK property market and public procurement, the Secretary of State must create a public register of beneficial ownership information for companies and other legal entities registered outside of the UK that own or buy UK property, or bid for UK government contracts.(2) The register must be implemented within 12 months of the day on which this Act is passed.”
Lord Hodgson of Astley Abbotts (Con)
My Lords, I begin by giving two apologies to the Committee. The first is on behalf of my noble friend Lord Faulks, in whose name the amendment was tabled. He is unavoidably detained overseas. As I shall explain in a moment, he and I tabled a similar amendment during Committee on the Criminal Finances Act, and he asked if I would take up the cudgel on his behalf tonight. I went to put my name down to the amendment but found that several other noble Lords had beaten me to the punch. Secondly, I apologise to the Committee for not having taken part in proceedings on the Bill before, but I have taken the precaution of reading the relevant sections of Hansard with care. With that, and knowing that several noble Lords want to contribute to this debate, I will cut to the chase, if I may.
At the outset, I thank the Minister my noble friend Lord Ahmad for his offer of a meeting to discuss this matter. Although I am always delighted to meet him, it seemed to me that such a meeting might be more productive after this debate, when he has had a chance to reflect on the range of concerns that may be raised around the Committee and that that might be a better use of his time.
The purpose of Amendment 69 is simple: it inserts a new clause which increases the pressure on the Government to fulfil their long-stated commitment to introduce a public register of the beneficial ownership of UK properties owned by companies and other legal entities overseas. To those Members of your Lordships’ House who were present during proceedings on the Criminal Finances Act earlier this year, the arguments are familiar—some might say, depressingly familiar—but we have a new pilot at the helm tonight, although he has temporarily left the Chamber. I am delighted to be talking to my noble friend Lord Bates. I was offered a meeting with my noble friend Lord Ahmad, so I thought that he might reply to the debate, but never mind. We have a new pilot, anyway, in place of my noble friend Lady Williams of Trafford, who was the Minister on the previous Bill, so, for my noble friend who is coming fresh to this topic, let me summarise the position.
The reasons why UK property is an attractive asset class for someone from overseas can be simply stated. First, property rights in the United Kingdom have been sacrosanct for nearly 400 years. Mr John McDonnell, the shadow Chancellor of the Exchequer, flirted with the idea of seizing property in North Kensington to be handed over to former residents of Grenfell Tower, but I am not sure that that has become Labour Party policy. Secondly, the cities of the United Kingdom remain attractive, engaging and safe places to live. Finally, in recent years at least, UK property as an asset class has appreciated in value.
If you live in less secure and happy circumstances than prevail in this country, where better than in the United Kingdom to buy a bolthole—the value of which has in recent years most conveniently grown enormously? The result has been a veritable flood of overseas money into the property market of London and other major cities. How great a flood is unclear—indeed, one purpose behind the amendment is to try to shed greater light and transparency on the extent of the flood—but, to put it no higher, there is suspicion that not all the hands from which the money to purchase these properties comes are as clean as they might be.
Noble Lords will have received briefings from the pressure group Global Witness which are self-explanatory. They may also have caught the article in last Sunday’s Telegraph, headed, “Fears that ‘dirty money’ paid for Uzbek dictator’s daughter’s £17 million Mayfair and Belgravia homes”.
As I said a few minutes ago, my noble friend Lord Faulks and I tabled an amendment to the Criminal Finances Bill on Report with broadly similar purposes to this one which we are discussing tonight. In her reply, my noble friend Lady Williams of Trafford gave some encouraging and soothing words. She said:
“I am pleased to have the opportunity to return to this issue. The clear abuse of the London property market and high-value properties across the country … to launder money, including the proceeds of corruption, has to be stopped. We must not allow this city to be a haven for kleptocrats hiding their ill-gotten gains. That is why the Government share the ambition of creating such a register”.
She went to say:
“Subject to the outcome of the general election, it remains our intention to introduce legislation to create the register as soon as parliamentary time allows. I hope this provides my noble friends”—
that is, my noble friend Lord Faulks and myself—
“with the reassurances that they seek”—[ Official Report, 25/4/17; cols. 1333-34.]
The general election is now out of the way, but no progress seems to have been made as regards to the implementation of this important policy promise.
It should not be forgotten that as long ago as May 2016, at the international anti-corruption summit held in London, the Government committed to creating a new register showing the beneficial owners of overseas companies that own or want to buy property in the UK, and of overseas companies involved in central government contracts. So this amendment is well in line with government policy.
In her ministerial foreword to the relevant consultation establishing such a register, Margot James MP emphasised that it was important,
“to ensure the integrity and reputation of the UK property market … A higher level of transparency will boost investor confidence”.
Responses to that consultation have now been in for more than six months, so what now is happening?
Of course I understand the eternal pressure of a crowded legislative programme, which has been made significantly worse by the results of Brexit, but the Long Title of this Bill makes it clear that its purposes are,
“to make provision for the purposes of the detection, investigation and prevention of money laundering and terrorist financing and for the purposes of implementing Standards published by the Financial Action Task Force relating to combating threats to the integrity of the international financial system; and for connected purposes”.
So no one can suggest that this amendment is out of scope with this Bill. Rather, it seems absolutely within the scope of the Bill and, moreover, consistent with government policy and, frankly, a matter of some urgency.
Given that the setting up of the register does, as I understand it, require primary legislation, I now have to ask my noble friends on the Front Bench the question: if not now, when? It is simply not adequate once again to respond by saying, “When parliamentary time allows”. I suspect that parliamentary time will not allow it in the near future, and this really important step for stamping out corruption will drift further and further into the middle and long distance.
There has been a tendency to think that this is an issue confined to London, so before I finish, I draw my noble friend’s attention to the extent that, as London property prices have risen, overseas purchasers have begun to turn their attention to other UK cities. In preparation for our debate earlier this year, I took some time to trawl through the provincial press and I found examples, inter alia, in Birmingham, Bristol and Manchester. I used the Manchester example in the debate then because I thought it would be of particular interest to my noble friend Lady Williams, because she is Baroness Williams of Trafford, in the City of Manchester.
The example in Manchester was of a development of 282 flats over 29 storeys at One Cambridge Street in that city. Purchasers were drawn from 18 different nationalities, including Azerbaijan, China, Japan and Zimbabwe, and 125 flats were bought as a bloc for £25.7 million by OFY, a company based in the British Virgin Islands. Only two of the 282 flats are owned by Britons. The developer’s sales brochure includes the statement:
“The generously proportioned apartments have … appeal to owner-occupiers, investors and renters. In other words, the scheme is appealing to several sectors of the market, including those looking to make the step towards getting on to the housing ladder and more established owner-occupiers”.
Whether first-time buyers would really think that a 99.2% overseas ownership was a fair result I leave to others to judge.
Baroness Bowles of Berkhamsted
My Lords, I have only a little bit to add on this—you may be relieved to know—because I was present during, and participated in, the debates on the Criminal Finances Bill. I saw that this amendment had been tabled and I was available at the time, and I thought that because there had been so much support for it during the passage of that Bill I had better get my name on this amendment quick, before the list got full up. That is why I am second on the list of names attached to the amendment. I did not table an amendment myself because I did not think that it was right to steal somebody else’s good work when I expected that something like this would arrive.
Almost everything has been said by the noble Lord, Lord Hodgson. This is something that needs to be done, and this is an opportunity to do it. It would need very persuasive reasons for me to concede that it should not be done now. As I did at Second Reading, again I remind noble Lords of the context which stretches across everything to do with money laundering and transparency, and that is that the eyes of the EU are upon us. These issues, such as people purchasing property in London with dubious money, are ones on which I often heard accusations when I was chair of the Economic and Monetary Affairs Committee. I was often trying to do something useful for the UK, and one weapon to try to take out my contribution was to attack the UK for not being such a good place because we allowed money laundering and the proceeds of money laundering to reside here in the UK and elsewhere. It is in that context that I suggest to the Minister that he looks kindly on this amendment and sees too that, as the noble Lord, Lord Hodgson, says, now is the time to do it.
Lord Rooker (Lab)
My Lords, I support the amendment. Like the noble Lord, Lord Hodgson, I apologise for not having been involved in previous aspects of the Bill, but I participated in the Criminal Finances Bill, and particularly on this area. As we have a new Minister, I shall use that excuse to develop a bit of what we have from history to assist his briefing. But it is a matter of regret that people still consider the UK, and London in particular, a bolthole for dirty money. London is not nicknamed “Londongrad” for no reason.
There is the legacy of the former Prime Minister, David Cameron, to whom I pay a massive tribute on this issue. He took a bigger stand than any previous Prime Minister, and I shall quote him on the record, because it is important. He made that speech in Singapore in July 2015, and he could not have been clearer. I shall quote three or four paragraphs, because it is important to what I want to say and the examples I want to give.
He said that,
“this is a challenge for everyone – including ASEAN, including Britain. We too must get our house in order – and we are. And that is why the UK government has legislated to ensure that from next year, Britain will become the first major country to establish a publicly accessible central registry showing who really owns and controls all British companies.
This will open up a new era of corporate transparency in Britain. But, of course, it will only apply in Britain and for British companies. So the aim should surely be for others to follow. To really tackle corruption effectively, we need to be able to trace data from one country to another. We don’t want criminals to be able to go unnoticed, just because they move money across borders or have assets in different countries. The torchlight should be able to follow them. If we are to win, we must make sure that there is nowhere to hide.
So I’ll continue to make the case for transparency with international partners – including the British Overseas Territories and Crown Dependencies. And I am willing to go further, and take concrete steps to force the pace. And that includes looking at whether we can get foreign companies investing in the UK to step up to the same level of transparency.
Now with £122 billion of property in England and Wales owned by offshore companies we know that some high-value properties – particularly in London – are being bought by people overseas through anonymous shell companies, some of them with plundered or laundered cash. Just last week, there were allegations of links between a former Kazakh secret police chief and a London property portfolio worth nearly £150 million.
I’m determined that the UK must not become a safe haven for corrupt money from around the world. We need to stop corrupt officials or organised criminals using anonymous shell companies to invest their ill-gotten gains in London property, without being tracked down”.
It was a seminal speech and an incredible read from a British Prime Minister. In some ways, I much regret that we do not get the same thing from the present Prime Minister, because it looks as though things have gone a bit flaky.
As part of the briefing for the Bill, Global Witness and Transparency International produced some of their previous examples. I will not go through them all but there are a couple that I want to raise. The research from Transparency International identified £4 billion-worth of property bought in London with suspicious wealth. Where information is available, Transparency International has found that 98% of the companies involved in the purchases are based in secrecy jurisdictions and that 90% are incorporated in the British Virgin Islands alone. Among this information—Global Witness was a partner—it was revealed that a £147 million property on London’s Baker Street could be linked back to Rakhat Aliyev, the former head of the Kazakh secret police, as referenced by the Prime Minister.
This made me go back to my monopoly chart, which was provided on the first kleptocracy tour of London in February 2016, when Members were invited to go with journalists to various places in London to hear the story of various properties, who bought them and where the money may have come from. The properties in Baker Street of Rakhat Aliyev, the former KGB chief, and their location in the building were pointed out—we had the address and the postcode. He could never have purchased those properties from his salary; it would have been absolutely impossible. We have to be careful about tracking him down because, in 2015, he was found dead in his prison cell in Austria—he had been up to other things and had been arrested.
There were other properties listed on the chart, but I am not going to go through any more of them because the examples are always there. When we have examples like this, we cannot just ignore them. But nothing seems to happen. Journalists, investigators and people who want a democratic, open, transparent and modern rule-of-law Russia come to London to look at the situation and to talk to people. However, there are issues relating to what we have done so far.
I shall come to the Land Registry in a minute, but the brief from Transparency International went on to say that its analysis of the recent Land Registry data, and that of Who Owns England? and Global Witness, revealed that in the two years since the property register was promised, nothing had changed. Financial investigators, civil society and the wider public are still in the dark about the real people behind the 86,397 properties in England and Wales owned by companies registered offshore in the secrecy jurisdictions. The analysis found that, just in 2015, 87% of all the properties owned by overseas companies had an owner in a secrecy jurisdiction, and 57,318 were owned by companies registered in the British Overseas Territories, jurisdictions which do not publish.
Over the last two years the UK Government have made some progress in tackling corruption and money laundering and set the global standard on beneficial ownership transfers by launching a public register of companies—and in the last Parliament, of course, they introduced the unexplained wealth orders. But we need to know who is behind the companies, and where their money has come from. That is absolutely crucial. Otherwise the proceeds of crime will continue to pour into the UK, particularly into London. Evidence has been given to the consultation that closed in March 2017, but as of today there are no results.
Before I make my final point, I advise the Minister, as I did his predecessor, to see the film “From Russia with Cash”—and I think there is also one called “From Ukraine with Cash”. They are easily available, and watching them would benefit the wider debate about what is actually happening here, in this country. I want to refer to the text of the amendment, regarding bids for UK contracts, because the same issue was raised by David Cameron in his Singapore speech. This should not just be about property, but also about overseas companies bidding for contracts in the UK. We should know who owns them.
Let us see how far we have got in the UK. David Cameron said in his Singapore speech that as a first step, he had asked,
“the Land Registry this autumn”,
that is, autumn 2015,
“to publish data on which foreign companies own which land and property titles in England and Wales. This will apply to around 100,000 titles held on the Land Register”.
One evening last week I put that to the test, and applied to the Land Registry for the overseas ownership data. I went through all the seven steps on the website: status, names, date of birth—which I thought was a bit irrelevant, but I filled it in—address and telephone number; I went through the process to prove I was not a robot, and then I agreed the terms. Fortunately, I was able, as I went through it all, to print each page, so I know exactly what information I gave. However, when I came to step 7—downloading the data sets—it said, “Please note these download links will only remain valid for 4 minutes 47 seconds”. After five minutes my little computer said that there were four minutes still to go—at which time, of course, the thing closed down. So I tried it again, and got exactly the same results.
No wonder people cannot find out information, on the basis of things that we have already done, and which we boast about. We are asking the Government to go further than they have already gone with regard to overseas companies, but it is being made difficult to access what is supposed to be there already for public access. There was no cost, and every step was completed, but I ended up with less than five minutes to download. Perhaps that is down to the barmy broadband speeds we have failed to provide. I was in central London when I tried to do this, by the way; I was not at home in Shropshire. This is crazy, and the Minister needs to look at it—although I may have done something completely wrong, in which case I will take advice.
I just want to strengthen what the noble Lord, Lord Hodgson, said, and what the noble Lord, Lord Faulks, said during the earlier attempts to do this. I realise that this discussion will definitely upset a lot of people, as the previous Prime Minister said. However, the fact of the matter is that so much money is piling into London—leaving aside the rest of the country—that there will come a time when it will put our economy at risk. We are talking about huge amounts. The National Crime Agency is concerned about it and people in that agency are on record as having said various things. It looks as though the instruction has been given, “Turn a blind eye to this money coming in because it is good that it comes in”. The fact that it is completely distorting London property prices and making London another country within the UK is beside the point.
Lord Freeman (Con)
My Lords, I very much support the comments of my noble friend Lord Hodgson. As the Minister knows, at Second Reading I very much supported the sentiments which have been expressed so clearly by my noble friend. Indeed, I believe that the proposed new clause in this amendment is very much in line with government policy. If there is a meeting, I hope that I might be included in it along with other colleagues.
Baroness Kramer
My Lords, everything that can be said has been said brilliantly. I hope that we will get an update from the Government which convinces us that this issue is back on track.
Lord Collins of Highbury (Lab)
My Lords, I note that the Minister was about to stand up but I cannot allow him to jump in so soon.
I congratulate the noble Lord, Lord Hodgson, on moving this amendment. I was disappointed that the noble Lord, Lord Faulks, was not present but he has done a grand job and a very persuasive one. Like my noble friend, I congratulate the former Prime Minister, David Cameron, on initiating consideration of this issue. We are talking not just about government policy but about a government commitment. The noble Lord, Lord Hodgson, is absolutely right—there is no better place than this Bill for this commitment to be delivered. That is why we wholeheartedly support this amendment.
I am glad that the noble Lord, Lord Bates, will respond to the amendment because he knows only too well the cost arising from this money flooding into London. We talk about the impact on London property prices and about corruption but we know that the poorest countries lose an estimated trillion pounds a year through tax evasion and corruption. The poorest in our world suffer as a result. That is why we must see the Government deliver on this solid commitment. My noble friend gave clear examples of what is happening and we have received briefs from Transparency International, but you have only to look down the river from the Terrace here to see St George Tower, a fantastic round tower. Two-thirds of it is in foreign ownership and a quarter is held through offshore companies based in tax havens. We only have to look there to see what is going on. This was a commitment of the former Prime Minister and it is an appropriate Bill. The commitment was that it would be introduced by April 2018.
We have heard how long it is since the consultation was concluded. The sad fact that the consultation has not been published is a bit of an indication about the timetable for any proposed legislation. We have an opportunity here and I hope the noble Lord, Lord Bates, will take it up. In previous Committee sittings we heard from the noble Lord, Lord Ahmad, about how he has been in listening mode and will take the opportunity to take this away. This is a perfect example of how we can deliver on a clear commitment made by the former Prime Minister.
Regarding commitments, at the Anti-Corruption Summit there was also a commitment to update the anti-corruption strategy by the end of 2016. That strategy is now long overdue. I hope the Minister will take the opportunity to say how the Government are committing to this general, overall strategy, because all these things are linked. I look forward with interest to hearing from the Minister how this commitment will be met.
The Minister of State, Department for International Development (Lord Bates) (Con)
My Lords, my noble friend Lord Hodgson began his remarks by welcoming me as a fresh face to this topic. That will probably turn out to be classic understatement, but I am delighted to be here on a very important topic.
I first pay tribute to all noble Lords—in particular to the noble Lord, Lord Hodgson, for standing in for the noble Lord, Lord Faulks, and for the energy and commitment they have both shown on this topic over some time. I guess noble Lords will want to hear about the current position so let me get straight to it.
This amendment would set down in legislation a commitment made at the 2016 Anti-Corruption Summit, which the UK convened, to establish a public register of company beneficial ownership information for foreign companies which already own or buy property in the UK, or which bid on UK central government contracts. This was a point referred to by the noble Lord, Lord Rooker.
The Government remain committed to this policy and our intention is to act in this space; that intention has not faltered since the noble Baroness, Lady Williams, gave a commitment earlier this year. My noble friend Lord Hodgson is right to table this amendment—just as my noble friend Lord Faulks and other noble Lords are right to support it—to remind the Government of this commitment. I welcome him doing so.
The UK is a world leader in promoting corporate transparency. We legislated in 2015 to establish a public register of company beneficial ownership—that was how we described it, and it was actually done. We remain the only country in the G20 to have established such a register. The noble Baroness, Lady Bowles, said that the eyes of the EU are on us. I hope they are because we are leading on this; we are not following. We have recently expanded the register to include other forms of legal entity established in the UK, and we remain committed to this agenda.
Earlier this year, the Department for Business, Energy and Industrial Strategy published a call for evidence on the design and implementation of the register of overseas companies that own UK property. As that call for evidence noted, this register will be the first of its type in the world, reflecting the Government’s continued commitment to being a world leader in this area.
The innovative nature of the register does, however, bring with it issues of legal complexity. The Department for Business, Energy and Industrial Strategy has identified that it will require complex amendments to the existing company law framework in the UK, with new functions being delegated to the Registrar of Companies, as well as the three land registries in England and Wales, Scotland and Northern Ireland. I will ensure that the comments about downloads are relayed to the Land Registry. Consideration will also need to be given to the acquisition, use and processing of information.
In addition, a robust enforcement mechanism will be essential, and the Government propose to implement this via the land registration system. Careful consideration will be needed as to how this will be applied to new and existing landowners, while ensuring appropriate protection for third parties. It will also require consideration of the appropriate penalty regime to be applied to persons who fail to comply with the obligation to include the necessary details on the register. These and other issues relating to the operation of the register were raised by respondents to the Government’s call for evidence earlier this year. We have been considering these so as to inform the design of the register.
I make it clear that the Government remain committed to establishing this register and to fulfilling our commitment at the 2016 Anti-Corruption Summit. My noble friend Lady Williams reiterated this commitment yesterday, speaking at the inaugural Global Forum on Asset Recovery in Washington DC. The Department for Business, Energy and Industrial Strategy expects to respond formally to the call for evidence early in the new year. That response will focus, as did the call for evidence, on how the register will be established and not on whether it will be established.
So as to fully take account of the extensive work that the Government, private sector and civil society have already conducted, and continue to conduct, on the design of this register, it is right that we allow the Department for Business, Energy and Industrial Strategy to conclude the process that is already well advanced and to publish its response to the call for evidence early in the new year. This will ensure that the register is well designed, takes full account of the representations received and provides a legally robust mechanism for registering the beneficial owners of overseas companies that own UK property. So as to further inform the response from the Department for Business, Energy and Industrial Strategy, I will ensure that it is fully aware of the points made by noble Lords today in support of establishing the register.
I should add that earlier my noble friend Lord Ahmad gave a commitment to meet my noble friends Lord Hodgson and Lord Freeman and other noble Lords who are interested in this area to update them on matters and to get further information on what they would like to see.
I hope that I have given the Committee some reassurance on our intention to act and on the next steps that we have planned, and that noble Lords can have confidence that no provision is required in this Bill to secure the progress that my noble friends Lord Faulks and Lord Hodgson seek. Therefore, I ask my noble friend to withdraw the amendment.
Lord Rooker
I am grateful to the Minister and would like to add one point. All these properties have been purchased in this country, so there has been conveyancing and the involvement of estate agents. Looking at the list, it is strange that all the lawyers and solicitors involved are the blue-chip City gang who are purchasing these properties. I know that Global Witness and Transparency International and others have to be acutely careful when they say anything publicly because the next day they get a letter from one of these companies advising them that it has been noted. It is not in these people’s interests that we have a register, but I say to the Minister that we will be watching this. He has given a very firm commitment, which I certainly appreciate, but a lot of people with vested interests—our own citizens and companies here in the City and in the legal structures—will not be happy with this, because all these properties have been purchased. Someone has done the conveyancing of this crooked money that has come into London and we have to be aware of that.
Lord Bates
That is right. We are certainly not going to shrink from the commitment from the previous Prime Minister, with which the current Prime Minister is in agreement. We want to see that happen. We have also, of course, taken certain actions in relation to this area. For example, the annual tax on enveloped dwellings, known as ATED, was introduced in April 2013 to ensure that those who place UK residential property in a company pay a fair share of tax.
My noble friend Lord Hodgson asked whether the number of purchasers was increasing. The anecdotal evidence and the facts suggest that. The ATED receipts in 2015-16 were £178 million, a 53% increase on the previous year. It is at least an indicator of the scale of the undoubted challenge. We stand by the commitment made earlier this year. However, because we lead the world in seeking to be the first major economy to have such a register, there are legal consequences. The same lawyers who do the conveyancing will be reading through the fine print of any legislation that comes forward. We have to make sure that it is watertight to ensure that the right people are affected by it and, as the noble Lord, Lord Collins, said, that other people are dissuaded from making those investments here.
With those reassurances and the commitment to meet again, I hope that my noble friend will withdraw his amendment.
Lord Hodgson of Astley Abbotts
My Lords, I am very grateful to all noble Lords who have spoken in support of this amendment: the noble Baroness, Lady Bowles, the noble Lord, Lord Rooker—he has shown that his investigative nose is as sharp as ever—my noble friend Lord Freeman, the noble Baroness, Lady Kramer, and the noble Lord, Lord Collins of Highbury.
My noble friend Lord Bates defended his wicket a great deal better than the English test team has been doing in Australia. He quite fairly drew attention to the Government’s efforts in relation to additional tax for properties owned inside a company and so on. But we have been round the familiar arguments, and nine months after the consultation closed seems a very long time for careful consideration.
I think we will take the Minister up on the invitation offered by his friend for a meeting. I am concerned that there will be a response early in the new year, just as we wave goodbye to this piece of legislation. I am not clear whether this requires additional primary legislation. If so, how will it be fitted into our programme? It could be tacked on to this Bill but once it has gone I am not aware of much else coming down the track where this register and all the other stuff could be included
We have been round this a great many times. I am grateful for the Minister’s initial response. He understands the strength of feeling on all sides of the House that this situation should not be allowed to continue. We look forward to the meeting and, in the meantime, I beg leave to withdraw the amendment.
“Failure to prevent money laundering
(1) A relevant body (B) is guilty of an offence if a person commits a money laundering facilitation offence when acting in the capacity of a person associated with B.(2) For the purposes of this section “money laundering facilitation offence” means—(a) concealing, disguising, converting, transferring or removing criminal property under section 327 of the Proceeds of Crime Act 2002 (concealing etc);(b) entering into an arrangement which the person knows, or suspects, facilitates (by whatever means) the acquisition, retention, use, or control of criminal property under section 328 of the Proceeds of Crime Act 2002 (arrangements); or(c) the acquisition, use or possession of criminal property, under section 329 of the Proceeds of Crime Act 2002 (acquisition, use and possession).(3) It is a defence for B to prove that, when the money laundering facilitation offence was committed, B had in place adequate procedures designed to prevent persons acting in the capacity of a person associated with B from committing such an offence.(4) A relevant body guilty of an offence under this section is liable—(a) on conviction on indictment, to a fine, (b) on summary conviction in England and Wales, to a fine, or(c) on summary conviction in Scotland or Northern Ireland, to a fine not exceeding the statutory maximum.(5) It is immaterial for the purposes of this section whether—(a) any relevant conduct of a relevant body, or(b) any conduct which constitutes part of a relevant criminal offence,takes place in the United Kingdom or elsewhere.(6) In this section, “relevant body” and “acting in the capacity of a person associated with B” have the same meaning as in section 44 of the Criminal Finances Act 2017 (meaning of relevant body and acting in the capacity of an associated person).”
Baroness Bowles of Berkhamsted
My Lords, this amendment introduces a new corporate criminal offence of failure to prevent money laundering. The UK already has two failure to prevent corporate criminal offences. The first is in Section 7 of the Bribery Act and the second was introduced recently in the Criminal Finances Act for tax evasion. The wording of the proposed offence is modelled on those existing offences, especially the more recent one that uses the form of facilitation.
Proposed new subsection (2) contains a definition of what the money laundering facilitation offence would be. Proposed new subsection (3) introduces the defence of adequate procedures being in place. The other proposed new subsections follow the format already established in earlier, similar offence types specifying fines, and also cover behaviour outside the United Kingdom.
The money laundering regulations 2017 already establish provisions about procedures for businesses most likely to be used for money laundering. Under those regulations, there are substantial regulatory fines for a company that fails to comply. However, regulatory fines, even large ones, are often taken as a cost of doing business, and they do not have the same impact on a company as a criminal conviction, which is taken much more seriously by both the company and the directors. As a consequence, it makes them sit up and take notice about the controls that are in place and the quality of their internal audit procedures.
In tandem with the possibility of entering into a deferred prosecution agreement, a “failure to prevent” can be a very powerful tool, both as a deterrent and a means of prosecution. Why do we need it? It is a well-known fact that, in the UK, it is almost impossible to find a large company guilty of a criminal offence because our criminal law applies a doctrine of intent derived from law relevant to an individual. Corporate intent requires the finding of a senior responsible individual or “directing mind”—and that is next to impossible in large companies where directors are not regarded as able to know everything and, indeed, the concept of collective responsibility of boards effectively prevents it. It can pay not to even look too hard. For small companies, a director is far more easily assumed to know everything. With little likelihood of being prosecuted in a large company, there is also little incentive for it to enter into a deferred prosecution arrangement—and that is reflected in prosecution statistics. Various other factors taken into account all favour large companies against small companies. Our law is unbalanced.
The Crown Prosecution Service’s legal guidance itself says under its “further evidential considerations” in paragraph 21:
“The smaller the corporation, the more likely it will be that guilty knowledge can be attributed to the controlling officer and therefore to the company itself”.
As long ago as 2010, the Law Commission, at paragraph 5.84 of its consultation paper 195 called the identification doctrine,
“an inappropriate and ineffective method of establishing criminal liability of corporations”.
The Attorney-General was not able to prosecute firms for LIBOR and the observation was made by the Telegraph’s chief business correspondent in 2016 with regard to LIBOR and Forex that,
“we outsource corporate accountability for criminality in the City to US prosecutors”.
The same story is repeated for money laundering. The US achieved deferred prosecution agreements against HSBC and a fine of £1.2 billion. In the UK, only regulatory investigations have been opened, and commentators have blamed the identification regime. Jonathan Fisher QC told the press that it would be “difficult and clumsy” for the FCA to criminally prosecute HSBC as the FCA,
“would have to show that a director or some other controlling mind in the parent company in London knew all about the alleged misconduct”.
So there are rewards for ignorance. Indeed, if any noble Lords watched the appearance of the HSBC chair, CEO and chair of audit before the various Commons Select Committees that they made appearances at, they would have seen that the issue of internal audit was one of the issues that was probed—without success. Sitting and saying nothing is by far the safest option.
The UK introduced a failure-to-prevent offence for bribery in Section 7 of the Bribery Act. The effect of that was reinforced by the introduction of deferred prosecution agreements in 2014. It is useful to consider the effect of the “before and after” of those provisions by looking at BAE, which represents the situation before, and Rolls-Royce, which represents the situation after. Before Section 7 of the Bribery Act, we had the longest-running bribery investigation ever: BAE settled with the SFO. I quote from the blog of David Corker, another lawyer specialising in financial crime litigation, who said that,
“BAE’s obduracy resulted in a humiliating settlement for the SFO and a profound defeat for the interests of justice … BAE was able to dictate the terms of the SFO’s surrender: a plea of guilt to an obscure books and records offence buried away in the Companies Act, the payment of a trifling gratuity to faraway governments at BAE’s discretion”—
that is, BAE chose whether to pay it or not—
“and an everlasting immunity for all its employees who had conducted and overseen the bribery”.
No wonder it was called “humiliating”.
In the “after” scenario in 2017, after Section 7, Rolls-Royce admitted its systemic corruption, paid a fine of £500 million and, instead of seeking immunity for its employees, committed itself to helping the SFO. The need for, and effect of, such a corporate criminal offence are therefore clear. Without such an offence, it will continue to be extremely difficult to prosecute large companies for money laundering offences and the UK will continue to outsource its justice to the United States. Again, I pray in aid the EU situation—but it is unlikely to impress in Brussels, which is progressively turning the handle on these issues and is well able to have them in a list of regulatory requirements that need to be in place to gain any equivalence, or any deal, on financial services.
I turn to Amendment 69C, which requires that if the correct anti-money laundering procedures are not in place—meaning that there had been a corporate conviction of a failure to prevent money laundering—the Secretary of State should ask the court to investigate whether the directors were fit and proper. An automatic finding that they were unfit is not intended; the intention is to mirror what happens under competition law where, following a breach of competition law, the director’s role is looked at. It is already possible for the Secretary of State to refer to the court under their own volition, but I am seeking that there should be some kind of routine follow-up to see whether the directors were, in effect, wantonly negligent or disregarding of their duties, in particular with regard to how they handled internal audit.
I am sure that the noble and learned Lord, Lord Davidson, and the noble Lord, Lord Collins—who submitted Amendment 69F, calling for a public consultation on corporate liability—will note the overlap with the issues of their concern. I will be interested to hear what is said. Personally, from the general evidence available—including from the Law Commission as long ago as 2010—I am not sure whether consultation is needed on the need to reform corporate liability in general. It is a matter of getting on with it and doing it. There are other areas in which the whole identification doctrine rears its head. Hopefully they will be looked at in due course—but right now, I believe that in the field of economic crime, where we have the precedents for failure-to-prevent offences, the mechanism is known and has been effective and we should proceed to avail ourselves of it. I beg to move.
Lord Hain (Lab)
My Lords, it is a pleasure to follow such an expert and impressive speech from the noble Baroness, Lady Bowles, in moving Amendment 69B. The amendment is supported by my noble friend Lord Collins, and I have put my name to it. It introduces a failure to prevent offence.
In June 2011, the then Financial Services Authority found shocking inadequacies in UK banks’ anti-money laundering controls, with one-third of banks accepting,
“very high levels of money-laundering risk”,
and three-quarters of banks failing to take adequate measures to establish the legitimacy of the wealth they were handling. The then acting head of financial crime at the FSA, Tracey McDermott, said publicly:
“The banks are just not taking the rules seriously enough”.
Yet, after all these strong words, what happened? Instead of the FSA—now the FCA—getting tough with the banks, since 2010 there have been only 10 convictions under the money laundering regulations, not one of them of a bank. It is therefore hardly surprising that there have been repeated money laundering scandals involving UK banks. There is simply no adequate deterrent or serious regulatory risk to make UK banks turn away profitable business that they are offered, and there will not be until the FCA starts prosecuting people and banks for failing to apply the regulations.
By chance, I met a business analyst this morning. Although I did not know it beforehand, he happened to be an expert in this area, and he described London as the money laundering capital of the world. If he is right, that is shameful. The UK is woefully behind where it should be on holding banks and financial institutions to account for money laundering. HSBC was fined $1.2 billion in the US in a criminal settlement for money laundering, and just a few weeks ago it was fined $352 million in France to settle criminal charges for money laundering. Despite being a UK-headquartered bank, and despite being under investigation since last December by the FCA, HSBC has not yet faced regulatory sanction in this country, even though it has been named repeatedly in corruption cases, for example in Nigeria in 2012 and during the 2000s. No UK action was taken against HSBC in any of those cases. Earlier this year, HSBC was again implicated, with other British banks, in laundering ill-gotten money out of Russia.
A failure to prevent offence for money laundering, as provided for in Amendment 69B, would make it significantly easier to hold large global banks such as HSBC to account for poor procedures and for turning a blind eye to handling corrupt wealth. Without this reform, as Jonathan Fisher QC, a money laundering expert, has explained, it would be difficult and clumsy for the FCA or any other agency to prosecute a bank such as HSBC because it would have to show that a director or some other controlling mind in the parent company in London knew about the alleged misconduct. Indeed, it would have to show that that director intended the misconduct to happen. This is an exceptionally high bar which makes it virtually impossible to hold large global financial actors such as HSBC to account in the UK.
In my speech at Second Reading on 1 November 2017, I described a vivid context for this Bill: the massive money laundering organised from the very top of government in South Africa—the presidency itself—and the systematic transnational financial crime network facilitated by an Indian/South African family, the Guptas, and the presidential family, the Zumas. British-based financial institutions such as HSBC, Standard Chartered, the Bank of Baroda and other international institutions have been conduits for laundering hundreds of millions of pounds or billions of rands, mostly through Dubai and Hong Kong.
The South African Parliament itself is in the process of holding a public inquiry into large-scale state capture involving even larger-scale corruption and looting of state-owned enterprises. On 21 November 2017, Mr Zola Andile Tsotsi, erstwhile chair of the state-owned electricity generator, Eskom, gave evidence under oath. What resulted is the first smoking gun implicating the President of South Africa, Jacob Zuma, who exerted shadow control over state-owned enterprises which have been exploited through large-scale looting and money laundering, from which his family and friends have benefited. He did this by deploying one of his nominees, Ms Dudu Myeni, a person near and dear to him—he fathered a child by her. Educated as a primary school teacher, in 2012 she was appointed chair of Africa’s largest state-owned airline, South African Airways. In early December 2015, the then Minister of Finance, Nhlanhla Nene, rejected her request to renegotiate a fleet renewal deal for SAA, because it smacked of corruption. Within days, the President sacked Minister Nene.
Evidence before the South African parliamentary public inquiry showed that, as chair of the state-owned airline, Ms Myeni not only facilitated looting by the Zuma and Gupta families, but also sought to control, instruct and manipulate the running of another state-owned power utility, Eskom, from which the Gupta family, through an intricate network of companies, have siphoned off billions of rands, via various banks, including London-based banks which I am asking the British authorities to investigate. I am grateful to the FCA for the contact it has had with me to pursue this.
First, Eskom chair Mr Tsotsi was ordered by the government Minister for Public Enterprises in February 2015 to refrain from “interfering” with the management of Eskom. He only chaired the Eskom board, after all—why on earth should he bother himself with holding to account the executives underneath him? This ministerial instruction, to put it simply, was aimed at stopping him scrutinising the decisions and behaviour of Eskom and instead ensuring he turned a blind eye to the corrupt award of multibillion-rand contracts to the benefit of the Gupta and Zuma families.
According to the evidence at the parliamentary inquiry that same day in February 2015, Mr Tony Gupta phoned Mr Tsotsi, accusing him of not “helping us with anything”, adding: “We are the ones that put you in the position you are in. We are the ones who can take you out!”. A few days later, on the eve of the newly appointed Eskom board’s first meeting, President Zuma called Mr Tsotsi, instructing him that the board meeting be postponed, without even giving reasons. Less than a week later, Mr Tsotsi was instructed by South African Airways chair Ms Dudu Myeni to attend the presidential residence on 7 March 2015, where she unlawfully ordered the suspension of three of Eskom’s key executive members. President Zuma arrived late to the meeting and ordered that Mr Tsotsi go along with the plan, resulting in one of the most notorious examples of looting in South Africa’s recent history. This Zuma-Gupta conspiracy then left the door wide open for the appointment of Gupta stooges, who in less than 18 months had bled the power utility dry. It now faces bankruptcy and has been downgraded by international financial institutions due to governance failures. I am explaining the background before coming to the point about money laundering and the responsibility of UK authorities.
Eskom has more than 471 billion rands in outstanding debt, the majority of which is guaranteed by the South African Government and owed mainly to funders outside the country. In October 2017, Eskom revealed to its largest shareholder, the South African Government, that the power utility only had 1.2 billion rands left in its cash reserves until the end of November 2017, when it should have had 20 billion rands. It is estimated that by the end of January 2018, Eskom will be running a deficit of 5 billion rands. Eskom’s virtually giving billions to the Gupta-Zuma syndicate through nonsensical consulting contracts, tenders for fictitious goods and services, and advances to allow them to buy the coal mines from which they then sold back overpriced, poor-quality coal is the underlying cause of what went wrong.
Similarly, in September 2017, South African Airways was given emergency Treasury funds to help it repay loans of 3 billion rand to Citibank, again diverting precious money from taxpayers into the pockets of the Zumas and Guptas. The bill is being picked up by taxpayers when there is a shortage of the decent schools, hospitals, housing and job opportunities those billions should be spent on.
Each South African state-owned enterprise has been looted using the same modus operandi by the same elite individuals at the very top of the chain—namely President Zuma and his family, and the now infamous Gupta family. They have placed cronies such as Ms Myeni in key decision-making positions in these public enterprises to ensure that all valuable tenders are siphoned off to the Guptas, and in return a cut is then given to the Zuma family. Hundreds of millions of pounds have been siphoned off these important public companies in a process that has been described by the South African media as “state capture”. What is more, well-placed South African whistleblowers inform me that UK financial and banking institutions have been used for the systemic transnational financial crime network run by Gupta and Zuma families.
Then there is the shadowy figure of Mr Nick Linnell, a “Mr Fixit” who, in the late 1970s, operated in the illegal racist white minority regime of Ian Smith in then Rhodesia. He was unlawfully hired by Eskom, on Ms Myeni’s instructions, to assist in unlawfully getting rid of certain executives, thereby clearing the way for the corrupt capture of Eskom. It has now emerged that South African Airways, through dubious unauthorised payments to Mr Linnell, and working hand-in-glove with the remnants of South Africa’s notorious apartheid police, has deliberately targeted well-known anti-corruption activists. This has resulted in unlawful arrests, detention and torture, as part of a desperate attempt to silence these courageous men and women, to stop them exposing systemic state-sponsored corruption. By the way, last weekend it was announced that Dudu Myeni had been appointed as the special adviser to the Transport Minister and that she came “highly recommended”.
I therefore hope not only that this amendment will be supported by the Government but that there will be an immediate investigation by the City of London Police, the Metropolitan Police and the financial regulatory authorities into all bank accounts held in London by any South African state-owned company. Can the Minister, in replying to the amendment, please give me an assurance that this investigation will proceed? Because of the South African Airways chair’s patently unlawful involvement with the Zuma and Gupta families, the authorities should start their investigations with the airline, which is known to bank here in London, to ensure that its UK accounts have not been used for the illegal laundering of moneys from the proceeds of financial crime in South Africa, and that payments from it into UK banks have not been used to pay off stooges who have unlawfully targeted corruption whistleblowers.
The British Government must not permit any UK-based financial institution to be complicit in the plundering of state-owned companies in foreign lands, especially when that plunder affects the poorest of the poor. South Africa suffered enough repression over the apartheid years, and we cannot stand idly by while economic repression replaces racial oppression, serving the greed of corrupt leaders, when we have the ability to help stop it.
The exposure of HSBC, Standard Chartered and the Bank of Baroda to the parasitic Gupta financial crime network is currently the subject of international law enforcement investigations from the FBI to our own FCA. Inevitably, when dirty money from a global criminal network infects one financial institution, it will sequentially infect a number of others. This is the result of what is known as “correspondent banking”—a term that I have just been educated in—which by its complex nature is often misunderstood. Correspondent banks are international banks that clear smaller, generally domestic banks’ foreign currency transactions through large financial centres. In practice, this means that one transaction can move through a chain of financial institutions from the point of payment before it reaches its intended beneficiary. This creates significant money laundering and terrorist financing risks because each bank in the chain has to rely on the other to correctly identify the customer, determine the real owner and monitor the transaction. In essence, the correspondent bank is only as strong as the weakest link in the chain.
Lord Davidson of Glen Clova
My Lords, I pay tribute to my noble friend Lord Hain for that remarkable and well-researched analysis of the real problems that money laundering can cause, and the need perhaps to look at money laundering enforcement in the UK rather more sharply than has been done in the past. He has set out the most remarkable tale of corruption in South Africa and the impact it has had on global banking, and not just within the UK.
On Amendment 69B, we are wholly supportive of the underlying principle of criminalising corporate failure to prevent money laundering. I assume that this amendment cannot be contentious. As the noble Baroness, Lady Bowles, pointed out, the Government and the Law Commission both concur in assessing the nigh impossibility of prosecuting large global commercial actors under current corporate liability legislation. It is clear that identifying the involvement of the directing mind in such entities is a major obstacle. Of course, as the noble Baroness pointed out, that skews prosecutions towards the SME sector and risks leaving major crimes unprosecuted. The Serious Fraud Office, which has the difficult and complex task of prosecuting such offenders, repeatedly has called for such an offence, as do Transparency International, Global Witness and Corruption Watch. It will be especially helpful to hear the Minister’s response given the terms of the EU’s current proposed money laundering directive, particularly Article 7, which covers a not dissimilar approach to questions of failures in the corporate sector.
Is it correct to assume the Government will adopt the proposed new EU directive? More generally, are the Government committed to maintaining regulatory alignment—to use a phrase—with the EU’s AML terrorist financing regime? Or do they envisage a different autonomous regime in due course? The autonomous regime approach has the potential to freeze the access of UK financial services to EU financial markets. I am not sure that I have detected thus far what the Minister’s response is to that particular concern.
The amendment standing in my name regarding consultation, to which the noble Baroness, Lady Bowles, kindly referred, resulted partly from the Government having opened a call for evidence in January this year on corporate liability for economic crime, which inevitably covers money laundering, but nothing appears to have emerged from the Ministry of Justice thus far.
True it is that the Government are reported to have proposed consultation for reform this year, but this year is running out. Amendment 69F seeks to create an obligation within a timeframe for consultation on corporate liability for money laundering, terrorist financing and other financially threatening offences. True it is that there has been a consultation process, a discussion of this area, for very many months, indeed years. As has been pointed out, perhaps we are getting to the point where action is required rather than further consultation. But consultation with a timeframe might at least assist the Government in moving forward even earlier. The fight against economic crime must have a real priority. Economic crime destabilises both fragile and developed economies, as my noble friend Lord Hain has pointed out so eloquently. Of course, one recognises that this Government sometimes seem to be having difficulty concentrating on any issue other than Brexit. This amendment will oblige the Secretary of State to give priority to corporate liability for economic crime.
Lord Bates
My Lords, I thank the noble Baroness, Lady Bowles, for introducing this amendment; she brings her own expertise in this area from her role in the European Parliament. That was evident in the way she went through a very complex issue, and I will come to the response on that.
These amendments propose creating a new corporate criminal offence for the failure to prevent money laundering, and launching a public consultation within six months of this Bill receiving Royal Assent regarding possible further reform of the law relating to corporate liability for money laundering, terrorist financing and offences which pose a threat to the integrity of the international financial system.
I understand and sympathise with the need to ensure that policies are in place which effectively prevent money laundering. However, I hope that the Committee will agree that it is of paramount importance to consider the evidence and current context before creating a new corporate offence, as the noble and learned Lord, Lord Davidson, invited us to do before introducing this element. He referred to the Ministry of Justice call for evidence earlier this year on potential reforms of the law relating to corporate liability for economic crime. Indeed, one of the options considered within that call for evidence was the potential for creating a corporate criminal offence of failure to prevent economic crime. I am sure the Committee can see the overlap with the new offence proposed by Amendment 69B and the provisions of Amendment 69C. The Ministry of Justice is considering the responses to its call for evidence, and will publish a response in the new year.
I should say that the responses to these consultations are like buses: you wait for a few months and then three of them come along together. The other one is of course on our anti-corruption strategy, which the noble Lord, Lord Collins, referred to. I mention it in this context to say that my noble friend Lord Ahmad and I have just been discussing it, and we will seek to provide a substantive update on progress towards the strategy by Report in the new year. Of course, because some of the consultations are outstanding, some of the elements of that strategy may need to wait until they are clarified.
Baroness Kramer
Just for clarification, is the Minister saying that before Report he will be publishing the MoJ’s response to its consultation? He said it would be in the new year.
Lord Bates
I did say the new year, but I was talking about two different things. That is my fault. The MoJ consultation response will be published in the new year—that is what we have said. Earlier the noble Lord, Lord Collins, asked what had happened to the anti-corruption strategy, which is an overarching approach by the Government. I was saying that after discussing that with my noble friend Lord Ahmad, who leads on these matters—
Baroness Kramer
Can I clarify that the MoJ response to the consultation will not be available before the Bill has completed its process through this House?
Lord Bates
The new year is the new year. I do not want to prejudge when that response might be. I have said enough, basically; obviously we are trying to respond to noble Lords’ questions on these matters as fully as we can, but that is as far as I am able to go at this point. What I was saying about the anti-corruption strategy was that we will seek to provide a substantive update by Report.
I hope the Committee can agree that it would be precipitous to introduce a further “failure to prevent” offence before we properly review this evidence. Similarly, this call for evidence substantively overlaps with Amendment 69F, proposing a new consultation relating to corporate liability for offences of the type referred to in Clause 41. It is right that we wait for the Ministry of Justice to respond to this call for evidence before undertaking a further public consultation that covers the same ground.
Further, the Government introduced corporate criminal offences of failure to prevent bribery, which the noble Baroness, Lady Bowles, referred to, through the Bribery Act 2010, and failure to prevent the facilitation of UK and foreign tax evasion in September through the Criminal Finances Act 2017. Consideration of the introduction of future “failure to prevent” offences should be informed by how those policies operate in practice. While the Bribery Act 2010 has been in force for a number of years, the relevant provisions of the Criminal Finances Act 2017 were commenced only in September of this year, meaning that as yet there is little evidence on how the offences established through that legislation are operating in practice.
I further note that many instances of corporate failures related to anti-money laundering are already captured by existing anti-money laundering legislation. The 2017 money laundering regulations, for example, already impose requirements to prevent money laundering on companies in the regulated sector, such as banks, lawyers and accountancy firms. Breaches of any of those duties by the company are subject to civil or criminal penalties, including fines. For example, firms are required to put and keep in place specific policies, controls and procedures to manage and mitigate effectively the risks of money laundering to their business, including by their clients or customers.
Those regulations, the previous regulations and related rules are well enforced. For example, the Financial Conduct Authority fined Deutsche Bank £163 million in January this year for failing to maintain an adequate anti-money laundering framework, after its investigations revealed that a UK division of the bank had failed to take reasonable care to establish and maintain an effective anti-money laundering control framework. Further, in 2015 the Financial Conduct Authority fined Barclays Bank £72 million for similar failures in guarding against financial crime, noting that Barclays,
“did not exercise due skill, care and diligence”,
and,
“failed to assess, manage and monitor those risks appropriately”.
These financial penalties substantively demonstrate that effective and proportionate penalties are already applied to UK-regulated firms that fail to put in place proper systems and controls to prevent money laundering.
Lord Hain
Perhaps I may press the Minister to respond to my request on red flag warnings to the British domestic banks. I am happy for him to write to me about it, but some government response on this matter is important to try to deal with this infection of our own banking system by a disease that is spreading throughout the South African economy.
Lord Bates
The noble Lord, as an experienced Member, will know that when there is an ongoing investigation, to which he referred, it is often dangerous for Ministers, who are supposed to be detached from the process, to comment. However, I recognise the seriousness of the allegations—as does the Chancellor—and they have been passed to the appropriate authorities. I am pleased that they are being investigated.
Lord Hain
I apologise to the Committee for probing this point. I am grateful for the Minister’s response but I have named other banks as well as those to which I previously referred—namely, HSBC, Standard Chartered and the Bank of Baroda. I hope that he or the Chancellor will send me a letter in the manner in which the Chancellor responded to my earlier request—even if the Minister cannot respond this evening, for reasons that I totally understand.
Baroness Bowles of Berkhamsted
My Lords, I thank the Minister for his responses to the amendments in my name and that of my noble friend. I am conscious that there are issues of due process around consultation, but forgive me if I also think that there was a bit of fancy footwork going on with the alacrity with which a call for evidence went out during the progress of the Criminal Finances Bill, when some distinguished Members of the other place started to take a great deal of interest in including an offence of failure to prevent. It is the best part of nine months since then and probably three months since I was contacted and asked whether it was okay to publish my submission to the call for evidence. I said yes, but still nothing has been published. I do not know why we cannot see some of the responses separately from the response of the Ministry of Justice.
However, one thing that has been established is that we have a pretty rubbish criminal regime on corporate liability. Something has to be done. In that context, it would be good to know how long the Minister thinks it might take for the Government to analyse whether any good has been done by having a second failure-to-prevent offence on tax evasion. I gave an exposition of how good it is to have one, and it will not be shown to be any weaker vis-à-vis tax evasion than it is vis-à-vis bribery. Therefore, to require specific evidence within the economic crime sphere is probably overegging it.
The Minister referenced fines, and there will potentially be more fines under the money laundering regulations 2017. I accept that, as well as what he said about the senior managers regime—but ultimately you have to be able to bet to board level. It is, importantly, board members who ultimately control how much resource goes to internal audit. That is behind the director disqualification point. It is always somebody further down, not the people at the top—the people who are able to pass the buck to some junior person who may not necessarily have been given the resources. They are the ones who carry the can, mainly in the senior managers regime.
I therefore hope that the Minister will listen to and think about these points, and consider how much use the Secretary of State is making of the potential for director disqualification when it is discovered that procedures have not been in place in the regulatory environment. The Secretary of State could still say, “Right, I want investigations of whether the directors are fit and proper because they have allowed these things to go on within the companies for which they are ultimately responsible”.
Lord Hain
I would be grateful if the noble Baroness and my noble friend Lord Collins would consider putting this amendment to a vote on Report. I worry that the consultation will go on for so long that the Bill will have passed through this House—and possibly the Commons as well—before we have a chance to vote on this important failure to prevent offence.
Baroness Bowles of Berkhamsted
I thank the noble Lord, Lord Hain, for his support. It is certainly a matter to which we will return—not least because the other place has shown interest in this subject. There are problems with the timing; it may be on the never-never, as he suggests. But for now, I beg leave to withdraw the amendment.
“Money laundering: technical amendment
(1) Until two years after exit day, as defined by section 14 of the European Union (Withdrawal) Act 2017, an appropriate Minister may by regulations made by statutory instrument amend the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (S.I. 2017/692) in order to—(a) replace references to EU directives and regulations with corresponding references to UK legislation;(b) transpose references to European Supervisory Authorities and any review, report, guideline or Regulatory Technical Standards requirements of the European Supervisory Authorities into corresponding requirements of UK supervisory bodies with any obligations to take account of international developments and to consult also being carried over;(c) transpose requirements for European Commission reports into report requirements from the Treasury and Home Office, including any obligation to take account of international developments;(d) transpose references to delegated acts into provisions for regulations made by the affirmative procedure;(e) update references relating to EEA passport rights or replace them with any corresponding or negotiated right; (f) amend definitions of credit institutions and financial institutions or any other definition lists to eliminate EU cross-references and establish corresponding entity lists;(g) convert any amount in euros to sterling;(h) modify or delete provisions relating to the EEA to retain reference as appropriate or combine with third country provisions;(j) replace reference to the identifying of high risk third countries by the Commission with corresponding UK procedure that takes account of international provisions.(2) A statutory instrument containing regulations under this section may not be made unless a draft of the instrument has been laid before, and approved by a resolution of, each House of Parliament.”
Baroness Bowles of Berkhamsted
My Lords, the amendment is a very probing amendment—a very “proby” probing amendment—and an illustration of what technical changes could look like, not just with the money laundering regulations but in financial services more generally. It is a vehicle to discuss further what transposition from an EU directive means. The interest is in the contrast between the sorts of things I am going to talk about and what happens through the withdrawal Bill. I drafted the amendment as an add-on to preserved money laundering regulations. While it could be what Schedule 2 could look like, it could be used in the context of the withdrawal Bill, which I understand has to be even more generic. However, it all looks rather “smoke and mirrors” and is not clear on the scope of what might be considered appropriate or redundant, or what might emerge from it. I confess that what I have produced was initially based on my own little check-list of what I might look for in the future, and I thought it would be useful to discuss it.
The amendment says that the Minister “may” make regulations, but some of the points are essential and here we should at some point say there “shall” be carry-over of the relevant policy elements. That is what I am driving at—that one should not lose the policy framework.
Paragraphs (a), (f) and (g) are simply terminology corrections: instead of defining financial institutions with reference to the EU capital requirements directive and markets in financial instruments directive, one just transposes that into a UK list of entities. That is doubtless the sort of thing the Government will be doing. I also suggest changing amounts in euros to sterling. In the context of the fifth money laundering directive, one should probably go further and also be able to change the amounts by regulation. I would have no problem with that.
However, paragraph (b) should perhaps contain “shall”. It provides that reports, reviews and guidelines that were previously to be done by European supervisory authorities be taken over and carried out by UK supervisors, and policy guidance be carried over,
“to take account of international developments”.
My fear here is that in eliminating what are regarded as superfluous EU references, we inadvertently end up disregarding the policy. As my noble friend pointed out, the Government have not addressed the loss of policy framework alongside putting in compensation for a loss of power framework. The Government have said repeatedly that they do not intend to change policy in making post-Brexit or ready-for-Brexit changes, but then you cannot leave behind some of the policy that came from the EU. On the money laundering directives, that would include provisions on proportionality.
Lord Patten (Con)
My Lords, rising for the second time during Committee, I remind the Committee, as on the previous occasion, that I have interests in the financial services world. Having declared that, I must also declare that I love the new concept that the noble Baroness, Lady Bowles, has introduced of not a probing amendment but a “probing probing amendment”, which is exactly what Hansard will, now that I have repeated it, have to record tomorrow for posterity. This will go down over the centuries and may be multiplied in many more ways.
I am fascinated by the point that she made about the read across from EU directives, but I rise to make a “probing speech”—I am more modest—about whether we need to take account in our discussion in Committee today of the announcement that the EU made only yesterday, 5 December, when the Economics Commissioner for the first time blacklisted 17 countries for money laundering. This is the first time that the EU has ever done this. It included Barbados and Grenada. It also grey listed—that is, put on watch—a whole load more, including British territories such as the Isle of Man, Jersey, Guernsey, Bermuda and the Cayman Islands, for possible money laundering. Do we need to consider this? It is a listing, not a directive, but it is linked to what the EU specifically called “aggressive tax avoidance”, which is what we are very concerned about and do not want to see.
This is the first time that the European Union has gone into this issue. Commissioner Moscovici has urged all members to continue to agree on “dissuasive national sanctions”—believe me, Hansard, those are the words he used: “dissuasive national sanctions”. I thought that we had long ago done just this, in this country and in other international fora, when we produced endless lists of countries that should or should not be under the cosh of being blacklisted or grey listed. Do we need any more of this? Were we involved with the EU in discussing whether there should be blacklisting or “grey” listing of the countries? Did we try to dissuade it from going around the same old course again and making it very much more complicated in this first, highly immature step into such listings?
My probing question is: do we approve of what the EU has done? My second probing question is: does it relate to the Bill in any way, and should we be concerned with it, because I strongly support the Bill?
Baroness Kramer
My Lords, the noble Lord, Lord Patten, may be very interested in the next group of amendments, given the theme that he has just raised. He may have raised it because he cannot remain for that group, but if he has the opportunity, he will get a thorough response to the questions that he has just raised—possibly not from the Government, but certainly from other Benches.
I rise to explain the origin of this particular amendment. This came as a consequence again from the meetings that the Minister very kindly was able to offer to discuss the content of the Bill. The Minister will be aware of how strongly I feel about the importance of keeping the democratic process embedded in creating anti-money laundering legislation by essentially taking those powers that are undertaken by the European Parliament and the Council and transferring them to this Parliament, rather than to government Ministers and executive control. That is the underlying issue that essentially faces this Bill, and we discussed some of that earlier.
When we were in that discussion and proposed something very simple—the text of Amendment 68A, which took the existing 2017 regulations, put them on to the face of the Bill and then said they could be amended only by primary legislation in order to make sure that that democratic process continued—two primary issues were raised with us. First, it was said that sometimes action would need to be fast-tracked. We took care of that, as your Lordships who were here will remember, under Amendment 69A, which provided a fast-track mechanism for those moments of emergency. However, I notice from the Delegated Powers and Regulatory Reform Committee report that, when it probed to try to find examples of those emergencies, the FCO could not come up with a single one, which the committee was not very impressed by. But let us accept that there are times when there are emergencies—and there certainly is a role that FATF plays—so we made a carve-out for that.
The second issue that was raised with us was that it would be impossible to change in the Bill the language of regulations tied to the European Union and convert it over to a UK equivalent—that was almost too impossible for anybody who was sitting there drafting the Bill even to contemplate. The noble Baroness, Lady Bowles, who is a fearsome drafter, very rapidly took pen to paper and drafted an amendment which pretty much does that. She accepts that the amendment may not be absolutely perfect, but she does not have the resources or legal staff that the department has available to do the checks and complete conversions. I believe that this particular transposition took about an hour, and I think that anybody on the government Benches would agree that, in terms of making that shift, the amendment probably does 98% to 99% of what is necessary and is in need of only a little refinement.
The amendment makes it clear to the Government, since such a challenge was thrown down, that there is a very simple way—it is a relatively short new clause—to cover what, apparently, was one of the primary obstacles or difficulties for moving through the primary legislation route. This would leave the policy framework and principles in place as part of a democratic process, rather than requiring that all of those be abandoned and we just go to a regulation process on these very fundamental issues.
As my noble friend has said, these provisions can place great burdens on business and—we will come on to this later—can lead to the creation of criminal offences, with imprisonment for up to two years; can define the defences available against prosecution; can put in place new supervisors and change the powers of those supervisors; and can redefine every other piece of legislation that uses the phrase “terrorist financing”, using sweeping wide powers.
I understand the Government would have loved to have been able to do that in primary legislation but could not see a way through and was therefore forced to try and do this through a regulatory mechanism. This amendment is just one of those examples that makes it clear that it can be done, and I hope the Government will take it seriously.
Lord Bates
My Lords, I thank the noble Baroness, Lady Bowles, for doing this. I have to say that I am growing in awe of the noble Baroness and her drafting skills. Should there be any vacancy among the clerks in the Public Bill Office, they will be quite impressed by the notion that the noble Baroness can draw up this technical amendment in one hour—it is very impressive indeed.
My noble friend Lord Patten perhaps did the noble Baroness a disservice by saying that it was a “probing probing amendment”; I think it was a “very probing probing amendment”, which the record should capture. Having read through her handiwork in the drafting, I think she did not do herself justice. The amendment certainly provides a welcome opportunity—which is, I know, its purpose—for us to put on the record some further remarks about how we see this particular issue being addressed.
Lord Naseby (Con)
My noble friend Lord Patten said that there was a black list and a grey list, but the Minister is now saying that there is no such thing as a grey list. That is quite an important clarification, because either the overseas territories are on the black list or they are fully co-operating and on the non-existent grey list. So there is a degree of clarity required about an important matter such as this one.
Lord Bates
My noble friend is right, and I am sorry if I have not been very clear on this. The key point was that the stylistic terms “grey list” and “blacklist”, which may be for general convenience, were not reflected in what we were saying—rather, it is a demonstration of commitments by the 30 jurisdictions named to address the concerns of the EU Code of Conduct Group. So we are more discussing the semantics of the terms that might be used to describe a jurisdiction which is complying or not complying, or progressing or not progressing, towards addressing concerns of the Code of Conduct Group.
Lord Patten
It is extremely important that we have the terminology right. If I have got it wrong, I apologise to the territories involved. I think—I ask my noble friend to reflect on this—that it is perfectly daft to put a British Overseas Territory such as Bermuda on a list of whatever shade of grey, because I believe that it is a very upright outfit and a suitable, well-run territory for financial services, and I do not believe that it is involved in money laundering. But it has been fingered in reports, and Commissioner Moscovici said yesterday that it was on some sort of grey list. We need a certain amount of clarity, because it is damaging to those people who do business with Bermuda. So I agree with my noble friend.
Baroness Kramer
Can I just be helpful? I am sure that there will be a better note from the Box, but is the correct phrase “on notice” for the group that falls within the terminology of the grey list? Is that the correct terminology?
Lord Bates
That may indeed be a very helpful intervention from the noble Baroness, Lady Kramer. However, for the record, because this is a serious point, the note that I read out may not fully reflect the announcement to which my noble friend has referred. To make sure, I shall seek some additional clarification. The next group is very germane to the issue that he raises in relation to overseas territories. Therefore, perhaps without presuming on my noble friend too much, we may have some further information that will better answer that particular point.
In fact, a note has arrived, and I can say that the list published yesterday relates to tax. The EU maintains a separate list of countries which represent a high risk of money laundering and terrorist financing, to which UK firms must have regard. That may be part of the answer; more will come in the next group, if my noble friend can bear with us.
On the EU withdrawal Bill, which the noble Baronesses, Lady Bowles and Lady Kramer, asked about, Clause 7 is very clear—it is a power to remedy deficiencies in law that arise as a result of the UK leaving the EU, no more and no less. That is a level of certainty which I hope will offer some reassurance to the noble Baroness. We do not intend to make changes to the 2017 regulations other than to make those fixes. The 2017 regulations refer to guidelines issued by the European supervisory authorities. Amendment 69D enables those references to be removed only if they are replaced by references to those issued by the UK supervisory authorities. Those would cause additional work and a risk of duplication with other guidance. So, in response to that, and after what I am sure has been a very helpful debate, if not fully illuminating at this stage, I invite the noble Baroness to withdraw her amendment.
Baroness Bowles of Berkhamsted
I thank the Minister for his response. As he perhaps imagines, we will return to the issue again. I take his assurance about the withdrawal Bill not being to make changes of policy, but we still have the problem of what this Bill will be doing. It opens the door to very substantial changes of policy and principle, and that is the problem—nowhere does it have such reassurance that that is not going to happen. I think that the Minister has understood that there are things, especially in financial services regulation, where there is a policy framework, as we have tended to refer to it. Without duplication, you make sure that it is within scope of what the UK supervisory authorities would do—or there are provisions that there should be reviews, which have been put into European legislation for good and proper reason. I probably put a lot of them there myself, and I was probably cheered on by people in the Treasury for doing so. It would be quite appropriate to have something that says that we will continue in the same vein.
I thank the Minister for his comments about my drafting skills. As he probably knows, this involves about 100 directives and I remain available to assist if somebody does not know why they are there, because I probably do. At this point, I beg leave to withdraw the amendment.
Baroness Stern
“Public registers of beneficial ownership of companies in the British overseas territories
(1) For the purpose of preventing money-laundering, the Secretary of State must provide all reasonable assistance to the governments of—(a) Anguilla;(b) Bermuda;(c) the British Virgin Islands;(d) the Cayman Islands;(e) Montserrat; and(f) the Turks and Caicos Islands,to enable each of those governments to establish a publicly accessible register of the beneficial ownership of companies registered in that government’s jurisdiction.(2) No later than 1 January 2019 the Secretary of State must prepare an Order in Council, and take all reasonable steps to ensure its implementation, in respect of any British overseas territories listed in subsection (1) that have not by that date introduced a publicly accessible register of the beneficial ownership of companies within their jurisdiction, requiring them to adopt such a register.(3) In this section a “publicly accessible register of beneficial ownership of companies” means a register which, in the opinion of the Secretary of State, provides information broadly equivalent to that available in accordance with the provisions of Part 21A of the Companies Act 2006 (information about people with significant control).”
Baroness Stern (CB)
My Lords, I rise to speak to Amendment 69G in my name and those of the noble Baroness, Lady Kramer, and the noble Lords, Lord Collins and Lord Kirkhope, who regrets very much that he cannot be here. The amendment continues the debates that began in what is now the Criminal Finances Act 2017. It reflects the widespread and continuing concern about how the lack of transparency in the offshore financial centres of the British Overseas Territories—that is, Anguilla, Bermuda, the British Virgin Islands, the Cayman Islands, Montserrat and the Turks and Caicos—enables the corrupt and criminal to find a haven for their ill-gotten wealth.
The publication of the Panama papers in April 2016 revealed information about thousands of questionable financial transactions. Half of the companies disclosed by the Panama papers—around 140,000—were registered in the British Virgin Islands, which we have heard mentioned a number of times today in relation to property transactions. Those revelations brought home to many the highly damaging effects of the lack of transparency in those overseas territories. During the proceedings of the Criminal Finances Bill, a similar amendment to this was debated, which would have required the Government to help the British Overseas Territories to produce publicly accessible registers of beneficial ownership by the end of 2018. Should any of the territories fail to produce such a register, the Government would require them to do so through an Order in Council no later than the end of 2019.
The amendment became victim to the wash-up before the general election, and an alternative government amendment became part of the Act. This requires the Government to,
“prepare a report about the arrangements in place between … (a) the government of the United Kingdom, and (b) the government of each relevant territory, for the sharing of beneficial ownership information … The report … must be prepared before 1 July 2019, and … must relate to the arrangements in place during the period of 18 months from 1 July 2017 to 31 December 2018 … The relevant Minister must … publish the report, and … lay a copy of it before Parliament”.
Considering the impending dissolution of Parliament and the lack of time, the government amendment was very welcome.
Baroness Kramer
My Lords, it is a privilege to support this amendment. I, too, participated in the passage of the Criminal Finances Act, and I can say with complete confidence that, had it not been for wash-up, the amendment proposed by the noble Baroness, Lady Stern, would undoubtedly have passed this House, and I think it was evident to everybody, including the Government, that it would not have been opposed in the other place either. It would now have been in place in law, which would have been a very good result both for this country and for those who suffer from this combination of kleptocracy, terrorism and industrial-scale criminal behaviour.
I think we agreed in the House then that those activities, which are so distasteful to everybody here, can survive only because there are portals that enable that black money to be converted to white. We have a responsibility to close down each and every one of those portals; it cannot be done in one fell swoop, but we need to do as much as we can as rapidly as we can. Indeed, when we look at much of the instability and much of the suffering across the globe, if we cannot make it financially disadvantageous for those who carry out so much of this rotten and corrupt behaviour, we will have very little ability to make fundamental change.
This amendment has long and far-reaching consequences because it takes such a significant step in continuing the British leadership role in closing down those portals. This is one reason why I am speaking here today. Another reason is to raise the EU question—yet again. The noble Lord, Lord Patten, inadvertently brought the issue forward in the previous group, I think possibly because he had to leave—he is not in his place at this moment—and he thought it important to raise it. The UK in its role has, in a sense, almost worked in two ways. It has worked to put pressure on the overseas territories and Crown dependencies to move to central registers, which I applaud. That process is under way and, for some countries such as Bermuda, has been in place for many generations. Getting to central registers is a very important step in the process of trying to counter tax haven abuse and money laundering. I recognise all that and, in fact, it would be interesting if the Minister could update us on the point that that progress has reached.
The benefits of that process rely on those central registers then being accessible to enforcement agencies in this country and other locations. If they identify a potential criminal, they can then try to chase down whether they have assets hidden in various locations—in this case, particularly in the overseas territories and Crown dependencies. That is an important step, but I am conscious—as is everybody in this Chamber, I suspect—that our law enforcement authorities have very limited resources. An issue, a name, a crime has to come to their attention; there has to be something that indicates to them where assets related to that may be located and they then have to pursue that process. They may get responses very quickly but, if I were a kleptocrat or a criminal, I would reckon the odds were so much in my favour that no enforcement agency would ever find my name and be able to identify the information that was necessary to enable it to pursue me. The odds are overwhelmingly in favour of those who continue to abuse this and to hide their assets.
That is why a public register is so crucial. We as a country have recognised that ourselves. We have made our own register of companies public and transparent. That is a huge and important achievement. We did not do it lightly; we did it because fundamentally, we felt that it was absolutely necessary, and that simply saying that enforcement officials could seek information from the register was insufficient.
Initially, Prime Minister David Cameron intended that the overseas territories and Crown dependencies would follow very much in that direction. But since then there has been new resistance in many, though not in every one, of those locations. Their argument is that they dare not move any faster than the pace of overall international change in increasing transparency. We all recognise very long grass when we see it. Our contribution must be to use the powers that we possess, and the relationships that we have with our overseas territories—it is much more difficult with the Crown dependencies—to achieve that transparency and those public registers.
An additional, much smaller but not irrelevant, issue faces us now if we go through the process of Brexit. As my noble friend said earlier, the EU has become much more aggressive in trying to tackle issues around tax havens and money laundering. An article in the Observer on Sunday—I am sure the Minister read it—contained a fair amount of evidence that the British Government have used their influence to try to protect the overseas territories and Crown dependencies from appearing on the blacklist being developed, and even not to have them on the “on notice” list. In the end, on the “on notice” list are Guernsey, Jersey, the Isle of Man, Bermuda and the Cayman Islands: that is not the complete set of overseas territories and Crown dependencies, but many of them are on the list.
There is a general perception that some of those places might have made it on to the blacklist had there not been protection from the British Government. I do not mean that in a corrupt way, but there is a sort of—how shall we say?—professional courtesy that one member of the European Union offers to another in understanding its particular issues and concerns, and in holding back its hand. If we leave the European Union that will no longer be there. If those countries turn up on the blacklist, the consequences for them will be severe, and the consequences for us—as, in a sense, the overarching authority—will also be severe. If we leave we will be in the position of trying to negotiate a continued relationship in financial services that lets us sell those services across the European Union and keeps us, in a sense, as the primary centre for financial services for the EU and the continent of Europe. That will not be facilitated if we are seen as standing in the way of action that could bring about the transparency that is necessary.
I fully understand that we have often been ahead of the curve, and that is brilliant—but I am talking realpolitik here. With the EU catching up on the positions that we have taken, and looking at the crucial decisions that could be made if we were to Brexit, it becomes additionally important that we tackle this issue now. This is our only opportunity to do that in a timely way. So I hope very much that the Minister will look at this issue and all its complexities.
The noble Lord, Lord Hain, made a passionate speech earlier, and we were all shocked by the exposé that he brought so significantly to our attention. That simply underpins the fact that the amount of money involved, and the extent and dimensions of abuse in the world of finance—whether by kleptocrats, terrorist organisations or criminals—are enormous, and reach into every aspect of life. This is an issue that we have to take seriously: this is our chance to take another step forward in tackling it, and I hope that the Government will seize it.
The Earl of Kinnoull (CB)
My Lords, it is always a pleasure to follow the noble Baroness. I am grateful to her for having responded with such grace and clarity to a point I made six months ago in a similar debate. I should begin by declaring my interests and saying that I am in the curious position of deeply respecting the people who have signed the amendment, and usually agreeing with everything they say, but of disagreeing with what they say tonight. I will explain why.
If we in this Chamber sought to legislate for Scotland in a matter of devolved competence, and we did so without the consent of the Scottish Parliament, we can imagine what a hell of a hullaballoo would be raised immediately. We would be reading about it in every newspaper and the media would be full of it. Indeed, the media are fairly full of warnings from the Scottish Government every day that we must not do that. As a resident of Scotland—not so far from Glen Clova, in fact—I can tell the House that there are deep feelings in Scotland about someone coming into our competence. I know that that will be the same in Wales. I was with the EU Select Committee when we visited the Welsh Parliament, and in the course of a day that point was made to me probably half a dozen times by different Welsh politicians, from every different denomination and party within Wales.
Indeed, as a Parliament we developed the Sewel convention to cope with this situation, and it has been put into the memorandum of understanding. The October 2013 version says that,
“the UK Government will proceed in accordance with the convention that the UK Parliament would not normally legislate with regard to devolved matters except with the agreement of the devolved legislature”.
Indeed, we put that into statute—certainly in the Scotland Act 2016, and I think in the equivalent Wales and Northern Ireland legislation. It has, of course, been litigated.
I have here the Miller judgment, and in his outstanding judgment—from which I shall quote shortly—the noble and learned Lord, Lord Neuberger, rather elegantly reminds us, in paragraph 144, that the Sewel convention was not invented at that time, but that its substance was actually in effect between the UK and Southern Rhodesia, because the leading case in the Privy Council from 1969 discussed that. The Sewel convention represents something that this Parliament has had for a long time, and it stretches out to our Commonwealth as well as to our devolved Administrations here.
In the final paragraph of the five pages considering the convention, the noble and learned Lord says:
“In reaching this conclusion we do not underestimate the importance of constitutional conventions, some of which play a fundamental role in the operation of our constitution. The Sewel convention has an important role in facilitating harmonious relationships between the UK Parliament and the devolved legislatures”.
I repeat all that, and make a meal of it, because I have to say that the countries concerned and named in the amendment—I use the word “countries”, having lived in Bermuda for a number of years—are very proud and sophisticated places. Bermuda is incredibly sophisticated: its GDP per head is much bigger than that of the UK; its reinsurance industry overtook the UK’s in size in 2004, and is much bigger and very sophisticated. It would hate any infection of the sort of corrupt and criminal behaviour that has been elegantly referred to by the noble Baroness, Lady Stern. Everyone working on Bermuda feels—as I and every Member of this House does—that chasing down these corrupt and criminal individuals and their money is very important.
Therefore, we should not legislate without at least consulting these Parliaments, and getting their agreement to do so. It would be deeply wrong and very counter- productive not to do that. If one were to think of legislating, one should do so under the Sewel convention if there is strong evidence that something very bad is going on, and there is no ability to address that. However, I have to say that the evidence is the other way. I looked again at the Wikipedia article on the Panama papers. About half way down that article, there is a rather good league table of the banks that had been involved in that affair. Four of the top 10 banks listed in the league table were based in Luxembourg. None of the top 10 banks was based in any of the countries listed in this amendment. Therefore, we are getting slightly ahead of ourselves. Certainly, there appears to be a bit of work to do at home in the EU before it starts trying to do a lot of work outside.
When responding on the then Criminal Finances Bill, the noble Baroness, Lady Williams—I am sorry not to be able to read out the relevant bits—said that the Government and the overseas territories discussed these issues round the table almost as if they were members of a family, and that there were a lot of subtle ways in which the British Government could try to make sure that there was continual progress on this very important issue. She assured the House that such measures produced continual progress. In my experience, I think they do as well. The thinking behind this amendment is admirable. I hate all this disgusting stuff perpetrated by corrupt and criminal people as much as anyone, but I do not think that the amendment pushes the ball further up the pitch. It would be very damaging constitutionally to our relationships with our loyal overseas territories. We should continue to take the road we have taken so far, which is to push the ball gradually up the pitch, as and when our Government meet representatives of our overseas territories and discuss issues such as that which came out of the EU yesterday.
Lord Naseby
My Lords, I declare an interest as vice-chairman of the All-Party Parliamentary Group for the Cayman Islands. In addition, a member of my family lives in the Cayman Islands. I very much support what the noble Earl, Lord Kinnoull, has just said.
We have come a long way in the best part of 18 months from a situation in which there was no statutory methodology whereby United Kingdom law enforcement agencies could get information from any of the overseas territories in a reasonable length of time and know that it had been properly produced. Speaking only from my knowledge of the Cayman Islands, that information is now available 24 hours a day, 365 days a year. That is rather better than Her Majesty’s Companies House is capable of doing. I think that is a great advance.
I deeply regret what the noble Baroness, Lady Kramer, said: namely, that when Cayman Islands representatives went over to Brussels recently, they were protected by Her Majesty’s Government. They went on their own, put their material before the authorities there, and, quite rightly, the authorities listened properly and recognised the progress that had been made. That is why the Cayman Islands are not on the blacklist. Of course, the volume of financial operations in Bermuda and the Cayman Islands is extensive—so, understandably, anybody who is concerned about financial transactions will keep a watch on what is happening. That is absolutely right and justified.
The noble Earl, Lord Kinnoull, rightly referred to Luxembourg. Top four—not the bottom four. What about other parts of the world? The USA is probably in the clear, as I am sure that the central government of the USA is in the clear. However, it is totally incapable of controlling Delaware, Nevada and half a dozen other states. We are supposed to have a special relationship with the United States. That is not much good if we accept an amendment such as this and find that all the people in our overseas territories are thrown out of business as their legitimate business is undercut totally by Delaware and Nevada—particularly Delaware.
Therefore, I say to your Lordships, “Tread carefully. Recognise that huge progress has been made in the last 18 months and that we now have a situation where our authorities can get concrete evidence when it is required”. We are not getting that out of the present system of control in the United Kingdom. We can go out of this Chamber tonight, go through the smart parts of central London and see how many of those houses are unlit. Do none of us wonder who owns those houses? Do we think the British own them? We all know in our heart of hearts that they are not owned by British people, and almost certainly not by continentals. That money has come from somewhere. It seems to me pretty likely that it is hot money. So I ask noble Lords to think long and hard before they start to destroy these overseas territories.
I was sorry that the noble Baroness who introduced this amendment brought in human rights. I have had the privilege of working and living in Pakistan, India and Sri Lanka and I know that part of the world extremely well. Legitimate British companies working there are not exploiting people. They have brought employment there, better living conditions and all the rest. The noble Baroness is quite wrong to suggest that every company operating there—or the vast majority—is exploiting these poorer countries. I ask the noble Baroness and others to find some real, concrete examples rather than generic ones. That is why I will resist the idea of a public register until such time as we have given the existing one time to work, and until such time as the EU and the United Kingdom persuade the United States to join in with producing uniform reporting. I say to my noble friend on the Front Bench that I hope Her Majesty’s Government will tread carefully and recognise the work that has been achieved so far in a pretty short measure of time.
Lord Collins of Highbury
My Lords, I thank all noble Lords who have contributed to this debate. I very much appreciate the comments that the noble Baroness, Lady Stern, made in moving this amendment. She is probing at this stage. We want to find out exactly what has happened—because, unlike the noble Lord, Lord Naseby, I do not think that progress has been made quickly. We have been making demands on these issues since 2013.
When we are talking about cost, it is not just criminal activity that we are talking about but tax evasion. Sometimes it is called tax avoidance but the cost of tax evasion to developing countries runs to billions of pounds. Again, I come back to the vital point that those who can least afford it are suffering the most from the activities of territories that hide people’s activity. We should not be racing to the bottom. Transparency is about good business and doing good business. That is what this amendment is about. It is not about trying to punish territories or communities that have been trying to develop or extend their economy.
The Earl of Kinnoull
Before the noble Lord sits down, could he give some comment on the Sewel convention-type points that I made? I was making a constitutional point and it would be very helpful to understand the Opposition’s view.
Lord Collins of Highbury
The Opposition’s view, in terms of global economic theft, for want of a better word—the noble Baroness, Lady Kramer, raised this point—is that we are not talking about domestic industries or domestic activities. We are talking about transactions that are going global in terms of what I would call international crime. Not only the Panama papers but also the Paradise papers are showing that these activities are causing far more damage.
I believe that the overseas territories have an obligation to comply with international agreements, certainly regarding our UN obligations on sanctions. If we sanction a country for corrupt activities, the overseas territories have to comply. If it is good enough for sanctions, it is important that we consider it important enough for some of the crimes we have heard described this afternoon.
Lord Ahmad of Wimbledon
My Lords, I thank all noble Lords who have taken part in this debate. In particular I thank the noble Baroness, Lady Stern, for tabling this amendment. It would require the Secretary of State to provide all reasonable assistance to the Governments of certain of the British Overseas Territories with significant financial centres to enable each of those named overseas territories to establish a public register of company beneficial ownership. It further provides that if, by 1 January 2019, such overseas territories have not established such a register, the Secretary of State should take all reasonable steps to ensure that the Privy Council legislates to require each relevant overseas territory to do so. With your Lordships’ indulgence, I shall refer to the overseas territories as the OTs to save a degree of time.
I also appreciate that, as the noble Baroness articulated in moving the amendment, it was a probing amendment. That allows me to outline what steps have been taken. The OTs, as you know, are separate jurisdictions with their own democratically elected governments. They are not represented in this Parliament and so it has only been in exceptional circumstances that we have legislated for the OTs without their consent.
Financial services are the domestic responsibility of territory Governments. This creates an entirely different relationship from examples where we have had to legislate. For example, we have acted over international human rights obligations and, indeed, on decriminalising homosexuality. On the governance structures in which these territories work, as the noble Earl and my noble friend Lord Naseby have indicated, and as the territories and the House will recognise, legislating for the OTs without their consent would effectively disfranchise their own elected representatives. It would create considerable ill-feeling, which the Government do not wish to do.
Legislating to require certain OTs to establish public registers of company beneficial ownership when they do not wish to do so of their own volition would also mean that the territories would be less keen to maintain their current level of co-operation. This would jeopardise the progress—which I shall come to in a moment—that has already been made in this area and the spirit of working in partnership that we have fostered with them. The noble Lord, Lord Collins, said that I was running off to the joint ministerial council—I think I ran from it. We covered this subject; indeed, it was also covered by my right honourable friend the Prime Minister in her meeting with the overseas territories. Jeopardising progress in this respect is not something any of us want to do. Given the necessary lead-in period for establishing any new register of beneficial ownership, this would set back UK law enforcement’s ability to access information relating to the beneficial ownership of companies in the OTs.
Let me assure noble Lords that this does not mean we are content for no action to be taken in this space. It simply means that we wish to take action within the existing framework of friendly co-operation, building on the progress already made. The noble Baroness, Lady Stern, made the point that I am the Minister for Overseas Territories. I have been dealing quite extensively with them, as noble Lords will understand, particularly certain territories, because of the tragic hurricanes that struck. We raised these issues directly, and we have seen good progress.
As noble Lords will know, the UK is a global leader in the cause of corporate transparency. We are the only country among the G20 to have a fully established public register of company beneficial ownership, and we continue to push for this to become a global standard. The international standards set by the Financial Action Task Force do not require it, however, reflecting the lack of international consensus in this area. These standards require only that:
“Countries should ensure that there is adequate, accurate and timely information on the beneficial ownership and control of legal persons that can be obtained or accessed in a timely fashion by competent authorities”.
Nevertheless, should public registers become the global standard, we would expect the OTs to meet it. The UK is far ahead of other countries in this area. The current EU framework does not require all member states to establish public registers of company beneficial ownership, so many have chosen not to do so. There is already progress in this area and we need to build on it within the existing framework of friendly co-operation, to which I have alluded. Under the arrangements that we concluded with the OTs in 2016, overseas territories with significant financial centres committed to hold beneficial ownership information in central registers or similarly effective systems, and to provide UK law enforcement authorities with automatic access to such information within 24 hours of a request being made, or within one hour in urgent cases.
These arrangements—also known as the “exchange of notes”—came into effect on 30 June this year and are in the process of being fully implemented by the OTs. An important point is that effective implementation of these arrangements will put the OTs ahead of many G20 members and many individual states of the United States—a point made well by my noble friend Lord Naseby.
I am pleased to report that Bermuda, the British Virgin Islands, the Cayman Islands and Gibraltar have central registers of beneficial ownership information or similarly effective systems in place, and they are taking forward population of their systems with beneficial ownership data.
We are also providing support to the Government of Anguilla to establish an electronic search platform providing access to beneficial ownership information, as well as support in drafting underpinning legislation. We are now working with Anguilla to finalise a memorandum of understanding on the terms for provision of our support, and we expect its beneficial ownership system to be established in the spring of 2018, notwithstanding the current rebuilding challenges it is facing following the hurricane. Work on establishing a central register in the Turks and Caicos Islands has been delayed owing to the impact of Hurricane Irma, but we expect this to be in place soon.
We did not seek a bilateral arrangement with Montserrat, as we had with the other OTs with financial centres, because Montserrat had already committed in November 2015 to include beneficial ownership information in its existing public companies register. A Bill requiring the inclusion of beneficial ownership information in the existing register will be introduced to Montserrat’s Legislative Assembly this month. The target date for the addition of that information to the register is 1 April 2018.
Having heard that detail, I hope your Lordships will agree that it demonstrates what can be achieved by working consensually with the OTs. It is right, therefore, that we focus on the implementation of the existing arrangements and that future work in this area be carried out within the existing framework of friendly co-operation, rather than generating ill will by imposing upon the OTs without their consent.
We are committed to following up on these arrangements to ensure that they deliver in practice, are implemented effectively and meet our law enforcement objectives. There is explicit provision in the exchange of notes for the operation of the arrangements to be reviewed six months after they came into force—that is, at the end of this year—and subsequently on an annual basis. These formal review processes are in addition to ongoing monitoring of the practical application of the exchange of notes by the UK and each relevant OT.
In addition, noble Lords will recall that Section 9 of the Criminal Finances Act 2017 amended Part 11 of the Proceeds of Crime Act 2002 to establish a statutory review process for the implementation of the exchange of notes. This report must be prepared before 1 July 2019 and relate to the implementation of the exchange of notes from 1 July 2017 to the end of December 2018. Once prepared, it will be published and laid before Parliament. The Government are clear that OTs with significant financial centres must fully implement the exchange of notes to which they have each agreed. The noble Baroness, among others, asked whether this matter had been raised. I have already said that it was raised at the JMC, and the Prime Minister reiterated this at her meeting with the leaders of the OTs last week. These arrangements have been made and must be honoured.
A key feature of the Government’s approach has been to maintain a level playing field between the OTs with financial centres and the Crown dependencies. As I am sure noble Lords reflecting on my contribution will see, we have robust review processes for the implementation of these arrangements, both on an ongoing basis with the Crown dependencies and the OTs and through the Criminal Finances Act. If these review processes demonstrated that full implementation of the exchange of notes was not taking place in any individual jurisdiction, it would be right for us to consider the issue further.
My noble friend Lord Patten, who I see in his place, raised the EU blacklist. Perhaps I may, first, give some factual information. I will check Hansard but I believe that he mentioned that Bermuda was on the blacklist. Bermuda is not on it; nor are the Cayman Islands or the Crown dependencies. Bermuda, the Cayman Islands and the Crown dependencies are on a separate list—I am quoting here—of co-operative jurisdictions which have been assessed by the EU as being unsuitable for the blacklist. They have also further committed to address any remaining concerns by the end of 2018. I can be quite specific in saying that this is not a grey list; on the contrary, it is a demonstration of the progress and positive commitments that have been made and are being achieved.
Baroness Stern
I thank all those who have spoken in support of the amendment and those who have spoken strongly against it. A debate is always very good for the brain. I thank the Minister very much for the information he has given us, for the hard work he has done at the joint ministerial council and for the progress that is being made. It is likely that this matter will be returned to on Report but, for now, I beg leave to withdraw the amendment.