Draft Money Laundering and Transfer of Funds (Information) (Amendment) (EU Exit) Regulations 2018
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The Economic Secretary to the Treasury (John Glen)
I beg to move,
That the Committee has considered the draft Money Laundering and Transfer of Funds (Information) (Amendment) (EU Exit) Regulations 2018.
May I say what a pleasure it is to serve under your chairmanship this morning, Ms McDonagh? As the Committee will be aware, the Treasury has been undertaking a programme of legislation to ensure that if the UK leaves the EU without a deal or an implementation period, there will continue to be a functioning legislative and regulatory regime for financial services in the United Kingdom. To deliver that, the Treasury is laying statutory instruments under the European Union (Withdrawal) Act 2018, several of which have already been debated in both Houses, with plenty more to come—we have another tomorrow afternoon.
The draft regulations are part of that programme. They will fix deficiencies in UK anti-money laundering law to ensure that it continues to operate effectively post exit. Their approach aligns with that of other statutory instruments laid under the 2018 Act, providing continuity by maintaining existing legislation at the point of exit but amending it where necessary to ensure that it works effectively in the event that we leave the EU without a deal in place.
Many hon. Members present will be familiar with the existing anti-money laundering legislation. The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 set out the requirements for regulated firms to combat money laundering and terrorist financing. The EU funds transfer regulation specifies the information that must accompany electronic transfers of funds. The Oversight of Professional Body Anti-Money Laundering and Counter Terrorist Financing Supervision Regulations 2017 established the Office for Professional Body Anti-Money Laundering Supervision within the Financial Conduct Authority early in 2018.
Anti-money laundering legislation is designed to combat illicit finance while minimising the burden on legitimate businesses. In a no-deal scenario, the UK will be outside the European economic area and the EU’s legal, supervisory and financial regulatory framework, so the three pieces of anti-money laundering legislation that I mentioned will need to be updated to reflect the UK’s new position and ensure that their provisions work properly. The changes that the draft regulations will make to the UK’s anti-money laundering regime will primarily affect the financial services sector, but their impact will be minimal and we have engaged extensively with industry to ensure that affected firms are aware of them.
First, the draft regulations will transfer to the FCA responsibility for making technical standards to specify the additional measures that credit and financial institutions with branches or subsidiaries abroad are required to take. Such standards are of a similar type to those that the FCA already makes and are in an area in which it has deep technical expertise, so it is the appropriate body to take on that responsibility. The transfer of this power is necessary because the relevant standards are currently made by the European Commission.
Secondly, the draft regulations will remove the obligation for certain UK persons to have regard to guidelines published by the European supervisory authorities. The UK will be outside the EU’s regulatory framework, so it would be inappropriate for UK persons to be legally required to have regard to those guidelines. However, it is important to remember that firms will continue to be required, under the broader obligations of the FCA, to have regard to guidance developed by the UK supervisory authorities and industry bodies.
Thirdly, the draft regulations will equalise the regulatory treatment of EEA member states and third countries for correspondent banking relationships, which arise when one bank provides banking services on behalf of another. Currently, UK financial institutions apply enhanced due diligence measures to correspondent banking relationships with financial institutions outside the EEA, but those measures are not required for intra-EEA relationships. The draft regulations will equalise regulatory treatment so that enhanced due diligence will be required for all correspondent banking relationships. That change better aligns with the Financial Action Task Force standards on the issue and with the existing practice of many UK institutions that apply enhanced due diligence because of the risks associated with correspondent banking relationships.
Fourthly, the draft regulations will equalise regulatory requirements with respect to the information about the payer and payee that accompanies the electronic transfer of funds. UK payment service providers will be required to provide the same volume of information to accompany transfers into EEA member states as to other countries. Those changes are being made to reflect the UK’s new position outside the EU’s regulatory framework. The position of the Crown dependencies within the UK’s payments area will remain unaffected.
Finally, the current money laundering regulations require certain information to be communicated to EU institutions. Those provisions will be removed, as they will no longer be appropriate once the UK ceases to be a member of the EU.
The House of Lords Secondary Legislation Scrutiny Committee queried the change in requirements to transmit information to EU institutions. It also queried whether the FCA will co-operate with its counterparts in other countries to combat illicit finance. However, the draft regulations’ changes to information submission requirements relate to specific duties to provide directly to EU institutions information such as the national risk assessment of money laundering and terrorist financing. Legal obligations to submit such information would be inappropriate once the UK leaves the EU, but it is important to emphasise that UK supervisory authorities, including the FCA, will continue to have an obligation to co-operate, as they consider appropriate, with overseas anti-money laundering authorities in relation to firms that have offices in the UK.
The Treasury has worked closely with the FCA in drafting the regulations. We have also engaged with the financial services industry on them and will continue to do so in relation to other statutory instruments in the onshoring programme. To maximise transparency for Parliament and industry, we published the instrument in draft in November, along with an explanatory policy note.
The Government believe that the draft regulations are necessary to ensure that the UK’s anti-money laundering and counter-terrorist financing regime operates effectively and that the legislation will continue to function appropriately if the UK leaves the EU without a deal or an implementation period. I hope that colleagues will join me in supporting them; I commend them to the Committee.
John Glen
It is a pleasure to respond to the hon. Members for Oxford East and for Aberdeen North, who raised a series of thoughtful questions. I have to say at the outset that the draft regulations are about creating the functioning regime that we will need in a no-deal situation. A whole range of points that were raised were discussed during the passage of the Sanctions and Anti-Money Laundering Act 2018, but I will seek to respond to them.
The hon. Member for Oxford East raised concerns about the EU’s high-risk third country list. I can confirm that we will use the Sanctions and Anti-Money Laundering Act to update the high-risk register. We will use the affirmative procedure, which will enable Parliament to vote on any changes. International standards will be considered as part of any updates.
The hon. Lady also raised the Financial Action Task Force and its recommendations, and I will come on to some of those around the resourcing of the FIU. However, it is important for the Committee to understand that the comprehensive review of the UK regime that took place last year, which is done on a 10-year basis, judged the UK to be in the best state of all 60 countries that have been evaluated. However, I acknowledge that there are pieces of work that need to be undertaken to improve it.
There has been an 80% reduction in Scottish limited partnerships.[Official Report, 17 January 2019; Vol. 652, c. 9MC.] The Department for Business, Energy and Industrial Strategy, which leads on this area, published a report in December that set out a series of elements, including tighter regulation, the need for a firmer connection to the UK, increased transparency of information and giving the registrar the power to strike off dormant partnerships. I accept that there is work to be done, but progress is being made.
The hon. Members for Oxford East and for Aberdeen North raised the issue of co-operation with the EU. Paragraph 84 of the political declaration explicitly sets out that the UK and the EU should co-operate on anti-money laundering. I am not able to give chapter and verse on specific mechanisms, but it is important to remind the Committee that the UK is known as a world leader in setting the agenda in this area and it is inconceivable that the Government would not wish to continue to take a lead in driving forward these standards.
Obviously in a no-deal scenario, work would have to take place to establish how the FCA’s relationship with the EU would work, in the context of a thorough and holistic piece of legislation on financial services. The Treasury, working across Government with the Home Office and the Ministry of Justice, takes its responsibilities in this area very seriously. I gave evidence to the Treasury Committee’s inquiry on economic crime and we look forward to its report, which will guide us and to which we will respond.
The Home Office leads on the resourcing of the FIU and the SARs reform work, so I am not able to give a detailed answer, but shall write to the hon. Member for Oxford East.
Anneliese Dodds
Would the Minister mind also writing to me to indicate when the Government will release their response to the consultation on creating an offence of failure to prevent economic crime?
John Glen
I would be happy to respond on that matter as well.
A point that often comes up in these discussions is the resourcing of the FCA. I acknowledge the great work that it has done over the last 18 months in helping the Government to prepare these SIs. It is funded by an industry levy and has set out in its business plan the resources involved in working towards exit. The Government are confident that the FCA has made adequate preparations ahead of leaving. If additional resources are needed in the event of no deal, it would be able to raise those funds very quickly, but we would all be in a situation where we would have to do things that we had not anticipated. This programme of SIs is about getting to the basic starting point that allows us to have confidence in the regulatory regime, but I do not deny that a considerable amount of work would need to take place.
On maintenance of standards and equivalence with the EU on anti-money laundering, the hon. Member for Oxford East discussed the use of the word “may” versus “must”. I want to clarify that what we have removed is the obligation to report in a specific way, as per the legislation. It is not our intention to remove ourselves from either the spirit or substance of that obligation; it is just that it would be inappropriate to leave a legal obligation to an entity when we are a third party. That is the only way that I can describe it.
To expand further on future co-operation, through the bilateral agreement with the EU, we expect to have an expansive relationship that would have a wide scope of cross-border activity. The changes in the SIs do not preclude deep co-operation between UK and EU regulators in the future. It is desirable to have that co-operation.
The hon. Member for Aberdeen North raised the burden on banks’ IT systems. When one makes a transfer between one bank and another, if it is in an unfamiliar, non-mainstream destination in Africa—I will not name an individual country for fear of getting a letter from its ambassador—some checks would be done, because the bank would then obviously receive those funds. A check would be done on that, but because that sort of transaction is inherently risky, the same degree of checking will need to take place—and does take place in practice in the banking industry—with countries in the EU that are more familiar to us. Broadly, there is harmony on that matter anyway.
I mentioned the SARs reform, which the Home Office leads on. We anticipate that new IT will provide a more user-friendly portal for reporters from all sectors and that improved data processing, storage, analytics and distribution will be required. Work is being done across the Treasury, the Home Office and the MOJ to look at how we can refine that.[Official Report, 17 January 2019; Vol. 652, c. 10MC.] At the moment, the basic problem is that there is a high volume of SARs and we could better interrogate that data pool.
The hon. Member for Oxford East mentioned the concerns raised by the Thames Valley police and crime commissioner. He has also raised them with me and I will get in touch with him about them. Obviously, we do not rest on our laurels with respect to the FATF evaluation. I have mentioned the concerns that the Government have acknowledged in terms of the FIU, and the improvements to SARs and to the Companies House register, on which we expect a Government report in Q1 or Q2 of this year.
The statutory instrument is needed to ensure that the UK’s anti-money laundering and counter-terrorism financing regime operates effectively and that the legislation functions appropriately if the UK leaves without a deal. I hope that I have adequately responded to the points raised.
Kirsty Blackman
When the Minister was talking about the resourcing of the FCA in the event of a no deal, he suggested that it would be able to draw down extra money very quickly. Is he basically suggesting that, in the event of a no deal, on 1 April, Parliament will come in and approve lots of money to be given to lots of different Government agencies to deal with that scenario, or will that happen in advance of a no deal? We have only 80 days to go.
John Glen
My colleague the Chief Secretary has set out comprehensive budgets for each Department for the financial year with respect to a no deal, and a process for urgent requests. The FCA would be able to raise its levy autonomously and separately from Government. It will have contingency arrangements for doing that quickly. I obviously cannot address all Government agencies and Departments, because it will be done through different Ministers in different Departments, but I can say that the Treasury has fully communicated the process for making additional requests in a no-deal situation to all Ministers in all Departments.
Kirsty Blackman
What about communicating that to Parliament rather than just to Ministers? I know that the scrutiny process is rubbish and Parliament does not have much say on Government spend generally, but surely it should have some say on that.
John Glen
If I take the Department for Education, for example, where a large portion of the budget is for providing food in schools, in a no-deal circumstance where additional costs might be associated with that food, the Minister would need to make a statement to Parliament about that and respond to it. Inherently in the process, there is a mechanism for the Government and different Departments to bring matters to Parliament. They would need to justify where they would spend that additional money and the basis for it. With respect, I think that is beyond the scope of the statutory instrument—at least, that is my judgment.
The Chair
John Glen
I am sorry for that. I hope the Committee has found the debate informative and will now be able to support the regulations.
Question put and agreed to.
Resolved,
That the Committee has considered the draft Money Laundering and Transfer of Funds (Information) (Amendment) (EU Exit) Regulations 2018.