Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) Regulations 2023

Lord Purvis of Tweed Excerpts

Wednesday 19th July 2023 Grand Committee

[Lord Vaux of Harrowden (CB)]

My Lords, I thank the Minister for introducing and explaining the regulations. I realise that all they do is follow the recommendations of the Financial Action Task Force, FATF, to change the list of countries designated as high risk and therefore subject to enhanced due diligence requirements in relation to anti-money laundering, counterterrorism financing and counterproliferation financing. In that respect, so far so uncontroversial.

It has to be said, however, that the list is somewhat surprising—both for those on it and, in particular, those not on it. The changes made by these regulations are also somewhat surprising: they remove Morocco and Cambodia from the high-risk list. It seems rather odd that Cambodia, which is generally regarded as among the most corrupt countries in Asia, is no longer treated as high risk. I am very fond of Cambodia and have spent a lot of time in that country, but that does not change the fact that it is extremely corrupt.

According to Transparency International’s Corruption Perceptions Index, Cambodia is ranked 150 out of 180 countries on the index. This is a slight improvement on previous years, but still considerably lower than many countries that remain on the high-risk list, such as Albania at 101, Panama at 101, the Philippines at 116, Barbados at 65, Burkina Faso at 77, Iran—which is on the blacklist—at 147, Jamaica at 69, Jordan at 61 and Mali at 137. I could go on. In fact, Cambodia has a worse corruption score than all but seven of the 27 countries that remain on the FATF high-risk list. It is not only Transparency International that ranks Cambodia badly. With perhaps more relevance to this regulation, the Basel AML Index ranks Cambodia as having globally the seventh worst money laundering and terrorism financing score. Despite that, we are reducing the level of due diligence that the regulated sector will have to apply to it. Seriously, is there anybody in this Room who believes that Cambodia should be treated better than, say, Gibraltar, Barbados or even the Philippines? I should like the Minister to look me in the eye and state that she really believes Cambodia is not a high-risk country for corruption.

This starts to beg the question about the value and legitimacy of the FATF high-risk assessment process, known as the mutual evaluation assessment. That value is called into even greater question when we look at the countries not included in the high-risk designation. I will give a high-profile example: until February of this year, Russia was a member of the FATF. In February, the FATF suspended its membership because of the war against Ukraine—somewhat belatedly, one could say. I emphasise “suspended”; Russia has not been expelled. It is evidently a paragon of virtue when it comes to money laundering and terrorism financing because, unlike the British territory of Gibraltar, Russia is not designated as high risk and therefore not subject to enhanced due diligence. It is odd, then, that we have spent so much time passing Bills in this House specifically to deal with the stolen laundered money coming from Russia. Almost unbelievably, in its last review of Russia in 2019, the FATF praised Russia’s efforts to prosecute terrorist financiers and suggested that AML/CFT is afforded the highest priority by the Russian Government. This is a country that finances and supports organisations such as the Wagner Group, while Putin’s Government is generally regarded as a kleptocracy. Other countries not on the list, and therefore not subject to enhanced due diligence, include such famously uncorrupt ones such as Somalia, Venezuela, Libya, Turkmenistan, Nicaragua and Zimbabwe, to name but a few. All score worse than Cambodia in the corruption index; all are apparently low risk, according to the FATF. The Explanatory Memorandum refers to the FATF’s “robust assessment processes”; frankly, those do not stand up terribly well to scrutiny, if this list is anything to go by.

It is worth quoting the recently departed FATF CEO, David Lewis, who was very highly regarded. He said the agency structure of “mid-level bureaucrats” means that it does not have the scale to take on the big global financial crime issues. He said that they are

“very comfortable dealing with the finest minutiae of technical detail, but aren’t comfortable or able to have big picture discussions and are often only in their jobs for one of two years”.

He stated that genuine reform of the FATF is difficult to achieve, with typically two to four countries blocking consensus, meaning it is rare that you can get any meaningful change, which probably explains the list we are looking at.

Concerns are often raised about the FATF’s lack of transparency. The minutes of plenary sessions that make these risk designations are not published and it is clear that political horse-trading plays a significant role in the decision-making process. To be fair, there is no doubt that the FATF has had a positive impact on global financial crime since its inception in 1989, but there are growing doubts about its ability to cope with the challenging global situation we currently face. In an article for RUSI, Tom Keatinge of the Centre for Financial Crime and Security Studies makes some helpful suggestions about how the FATF could be improved. He suggests, first, greater transparency: it should provide greater assurance of independence and oversight. Its activities should be overseen by an independent board and its evaluation should be independently reviewed, not subject to the evidently politicised horse-trading that occurs currently. The minutes of the plenaries should be published, or the plenaries themselves could be livestreamed. Secondly, it needs to create a dedicated technical-assistance capability to ensure that unintended negative consequences, such as financial exclusion and the use of the FATF recommendations by autocratic regimes against civil society organisations, are addressed.

Thirdly, he suggests that the FATF needs to show greater ambition. Ultimately, the question is whether it is addressing financial crime effectively. It currently evaluates how effectively its recommendations are implemented, but not the extent to which financial crime is addressed as a result. He suggests an independent review of the FATF’s effectiveness, which seems a simple and sensible suggestion 45 years after it was founded.

Fatima Alsancak, also of the Centre for Financial Crime and Security Studies, suggests that Russia is a good

“case study in the deficiencies of the … FATF mutual evaluation process, which allows countries with high levels of institutionalised corruption to complete their evaluations despite the lack of integrity in their AML systems”.

She goes on to say:

“It is essential for the watchdog to revisit its standards”,


and again highlights the need for greater transparency in the decision-making and listing process.

I was going to ask why South Africa, Nigeria, Croatia, Cameroon and Vietnam are not the list, but the Minister answered that in her opening statement. I mentioned earlier that Gibraltar, a British Overseas Territory, is on the high-risk list. Will she please comment on that, too?

There are important questions to answer about the value of the FATF evaluation process. We should not rely passively on what are, frankly, flawed recommendations. Do the Government agree that FATF’s procedures and the high-risk list itself appear to have important deficiencies and, if so, what are they doing about it? Do they agree with the recommendations that I referred to earlier?

[Lord Purvis of Tweed (LD)]

My Lords, it is a pleasure to follow the noble Lord, Lord Vaux, who made a probing and persuasive argument about the deficiencies in some of the process. I have two questions for the Minister.

In a debate on a previous instrument, in which I spoke, the Government made the case that, with the new freedom as a result of Brexit, they would immediately make the decision to remove British sovereignty by having an automatic updated list of the Financial Action Task Force. I thought that rather inconsistent with the argument that we had left the European Union to gain freedom: the very first act was to give that freedom away.

The noble Lord highlighted the inconsistencies, and I will add another. The Minister has heard me talk about the Wagner Group and its lack of proscription, and the fact that it operates almost with impunity in many countries. One of the countries in which it has been operating, which is not on the list, is Sudan. It is beyond me that the UK, having done excellent work through our diplomats, development and security operations in that conflict-afflicted country, would not want the ability to act immediately in putting Sudan on the list, whose two warring parties, the Sudanese Armed Forces and the Rapid Support Forces, are operating across organised crime, including conflict. Why would that not be a high-risk third country? If the Minister is saying that we have made the decision simply to adopt an external organisation for making determinations of what would be high-risk third countries, what was the point of seeking the sovereignty to make decisions ourselves?

My second question relates to the United Arab Emirates, which maintains its position on the list. I have asked for the text of the UK-UAE investment agreement, but it has not been forthcoming. Why not? If there is an investment agreement that binds the UK into certain preferential market treatment for financial vehicles within the UAE, and the UAE is on a UK list of high-risk third countries, we should, as a matter of good governance, be able to see the text of the UK-UAE investment agreement and to consider what elements in it ensure that we comply with all the elements that would be required of our financial relationship with the UAE. This is even more important given that, in Grand Committee debates on the sanctions regime for Russia, we have raised the joint ventures that operate between the UAE, Russia, the Wagner Group and countries such as Sudan. I hope the Minister will be able to respond by saying that new regulations will be brought forward at pace to ensure that these loopholes are now closed.

--- Later in debate ---

More broadly, noble Lords asked why the UK aligns with the FATF when, under the Sanctions and Anti-Money Laundering Act 2018, we can create our own list of high-risk third countries. There are benefits to aligning with the international standard-setting body: the FATF has a detailed and extensive set of standards, which countries are monitored against, and it uses a peer-review mechanism to conduct that monitoring. In aligning with the FATF, the UK is in line with international standards and the identification of countries is underpinned by a consistent and technical methodology. As a result, enhanced measures are implemented in a co-ordinated manner by the international community, which can magnify the preventive effect. But it remains open to the UK to review our list and amend it accordingly if our assessment of the risks deems that to be necessary. To date, that has not been the case.

[Lord Purvis of Tweed (LD)]

I look forward to the Minister writing to me, because I was a little alarmed to hear her say—if I heard her correctly—that the UK would work with Sudan on this. There is no one to work with in Sudan at the moment and, if a case cannot be made for the UK not to act on Sudan, which has a civil war, with two warring partners and with considerable financial interests on each side—SAF and RSF—then I cannot see a case that would be stronger.

[Baroness Penn (Con)]

I will write on Sudan to the noble Lord, Lord Purvis, as I committed to do, and I will copy in the Members in this debate.

The UAE is making swift progress on its FATF action plan. It has several actions still to complete, focused on money laundering investigations, transparency of beneficial ownership and the investigation of money laundering cases. We hope to see further progress on those areas, as it looks to deliver on its action plan.

I have not managed to cover in detail all the points raised by noble Lords. They have gone slightly wider than the countries in question on the listing today, but I understand noble Lords’ interest in the process that we use to update these lists, adhering to international standards. I will read Hansard and ensure that I write to noble Lords if I have not addressed any questions.