Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) Regulations 2022

Baroness Penn Excerpts

Monday 25th April 2022 Grand Committee

Moved by

[Baroness Penn]

That the Grand Committee do consider the Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) Regulations 2022.

Instrument not yet reported by the Joint Committee on Statutory Instruments

[Baroness Penn (Con)]

My Lords, the Government recognise the threat that economic crime poses to the UK and to our international partners, and are committed to combatting money laundering and terrorist financing.

Illicit finance causes significant social and economic costs through its links to serious and organised crime. It is a threat to our national security, and it risks damaging our international reputation as a fair and open rules-based economy. It also undermines the integrity and stability of our financial sector and can reduce opportunities for legitimate businesses in the UK.

That is why we are taking significant action to combat economic crime, including legislating for the economic crime levy and the Economic Crime (Transparency and Enforcement) Act, and progressing the Government’s landmark economic crime plan. We are also working closely with the private sector and our international partners to improve the investigation of economic crime, strengthen international standards on corporate transparency and crack down on illicit financial flows.

The money laundering regulations support our overall efforts. As the UK’s core legislative framework for tackling money laundering and terrorist financing, they set out various measures that businesses must take to protect the UK from illicit financial flows. Under the regulations, businesses are required to conduct enhanced checks on business relationships and transactions with high-risk third countries. These are countries that are identified as having strategic deficiencies in their anti-money laundering and counterterrorism financing regimes that could pose a significant threat to the UK’s financial system.

This statutory instrument amends the money laundering regulations to update the UK’s list of high-risk third countries by adding the United Arab Emirates and removing Zimbabwe from the list. This is to mirror lists published by the Financial Action Task Force, the global standard setter for anti-money laundering and counterterrorism financing. As the Financial Action Task Force carries out its periodic reviews and regularly updates its public lists of jurisdictions with strategic deficiencies, we also need to update our own. Updating our list shows that we are responsive to the latest economic crime threats and ensures that the UK remains at the forefront of global standards on anti-money laundering and terrorist financing.

This amendment will enable the money laundering regulations to continue to work as effectively as possible to protect the UK financial system. It is crucial for protecting UK businesses and the financial system from money launderers and terrorist financiers. I therefore hope that noble Lords will join me in supporting this legislation. I beg to move.

[Lord Purvis of Tweed (LD)]

My Lords, I support these measures. My noble friend Lady Kramer has been suffering from Covid, as, regrettably, are so many colleagues. She would ordinarily have been here, and I wish her the best and a speedy recovery and return as soon as possible. I spoke to the previous set of measures involving a change to the list when the orders were brought to remove Botswana, Ghana and Mauritius, and I took the opportunity to ask the noble Lord, Lord Agnew, questions about how robust our internal systems were with regard to organised financial crime and the interaction between drug trafficking, money laundering and terrorist activities.

At the time, I also asked when we were likely to get the register of beneficial ownership. It shows how fast time flies, as he is no longer the designated Minister for financial crime and we have moved ahead in so many of these areas. We may well do, but I should be interested to know whether, after the more recent changes in government, we have a Minister with a designated portfolio who has taken over from the noble Lord on money laundering and financial crime. I know it is normal practice that these instruments and schedules are signed off by Government Whips rather than Ministers—the previous ones were too—but I should be grateful to know how that is structured in government.

However, I am grateful to the Minister for introducing these regulations. If she will tolerate me asking a number of questions, I would like to do so because these measures make changes with regards to individual countries and are also a policy change. Apparently, the Government will now automatically use an external set of decision-making for the classification of countries in the grey category by the FATF, the Financial Action Task Force. We have also been told repeatedly that we are moving away from the European Union’s approach, in which we would take the Commission’s view, so that we have the freedom to set our own approach. However, it seems as if one of our very first acts in having that new freedom is to give it away to another organisation for it to make some decisions on our behalf. I would be interested to know the rationale for that. In the Explanatory Memorandum, the Government simply say that, because we are aligned to the FATF, it makes sense for us to copy it for efficiency purposes. However, we were previously aligned to our European colleagues; I am not really sure what has changed.

One consequence of this, of course, is the change of countries. In particular, there is a difference in Zimbabwe because, as has been stated, it has been removed. I would be interested to know what the Government’s representations are, or what the position of UK Ministers is, in the FATF. I understand that it met at a ministerial level last week; I was in Washington while that was taking place. Given that there is Russian investment in Zimbabwe, particularly in mining, and given our interaction with Russia in terms of our sanctions, I am interested to know why decisions have been made with regards to Zimbabwe that may have a negative effect on our reducing the possibility of money laundering—especially when it comes to those who are investing in mineral extraction in these countries—and on trading. I would hate to think that one of the first actions of this measure was to create potential loopholes for Russia.

In that regard, there are new countries on the list. I support that but I see that, for Haiti, Mali, Malta, the Philippines, South Sudan, Turkey and the UAE, there is a difference of approach. In a previous debate on our sanctions regime, I singled out a mercenary group that is under the pay of the Kremlin: the Wagner Group. I have seen it at first hand, on a visit to Khartoum. I know that it is active in Mali, Chad and the Central African Republic, but it also operates in other countries. I am on the record as asking for the process to be started to proscribe the Wagner Group as a terrorist organisation. It would then be under the proscription legislation and would come within this legislation. With Mali being a high-risk third country, I would be interested to know how that interacts with our work in seeking to reduce the scope of the mercenary operations from Russia. I hope that there are no gaps between the way we would operate under this approach and the FATF and our sanctions legislation. The destabilising work of that group in particular needs to be stopped; the UK can play a significant role in that.

With regard to the UAE, I am interested in the lack of information I have seen from the DIT on GOV.UK to inform those operating in our 19th-largest market that this measure is now in place. I understand that there will obviously be a lag in information when legislation has been put in place, but this had been signalled a fair bit in advance. I have seen plenty of government promotional material highlighting the £10 billion UK investment partnership with the UAE sovereign wealth fund, but there is a lack of information stating that the UAE is now in an at-risk category as far as doing trade in that area is concerned.

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[Baroness Penn (Con)]

My Lords, I thank both noble Lords for their contributions to this debate and join the noble Lord, Lord Purvis, in wishing his colleague, the noble Baroness, Lady Kramer, all the best.

The noble Lord, Lord Purvis, started by asking about the change in approach from the UK Government to mirror the FATF’s list for high-risk countries after leaving the EU, rather than setting out our own list. The approach that the UK has taken, to align with the FATF, was first set out in an SI in April 2021. The reason for that approach is that the FATF is the international standard-setting and monitoring body for anti-money laundering, counterterrorist financing and counterproliferation financing. It has a detailed and extensive set of standards, which countries are monitored against using a transparent and rigorous peer-review mechanism.

By aligning the UK’s approach to the FATF, the UK is in line with international standards and the identification of countries is underpinned by the FATF’s consistent technical methodology and robust assessment processes. As a result, enhanced measures are implemented in a co-ordinated manner by the international community, thereby magnifying the preventive effect. I think that this approach to international standards is welcomed by noble Lords. However, it remains open to the UK to review and amend the list according to our own assessment of risks if necessary.

The noble Lord also referred to the EU’s procedures. The EU mostly follows the FATF, with some exemptions; it does not mirror it entirely. For example, EEA countries listed by the FATF are excluded from the EU’s list. Also, changes to the EU list happen less frequently than to the UK list, meaning that it is not reflective of geographic changes in risk profiles. That was an issue repeatedly raised by regulated entities in the UK when the EU list had legal effect in the UK. None the less, we will continue to work closely with European countries and the European Union on countering shared money laundering and terrorist financing risks to ensure a co-ordinated and targeted response.

The noble Lords, Lord Purvis of Tweed and Lord Tunnicliffe, both asked further questions as to why the FATF has added the UAE and removed Zimbabwe from its list. The FATF mutual evaluation of the UAE, adopted in February 2020, found significant deficiencies in the UAE’s illicit finance regime, with 10 of 11 measures of effectiveness rated low or moderate. As a result, the FATF placed the UAE under enhanced scrutiny. At the March 2022 FATF plenary, the FATF concluded that the UAE should be added to its list of jurisdictions, with significant weaknesses in its regimes for countering illicit finance. The UAE has expressed its high-level political commitment to making further reforms in a number of areas to exit the FATF list. Zimbabwe, following its evaluation in 2016, underwent a process of enhanced monitoring, similar to that of the UAE, but has now completed its FATF action plan to address the key deficiencies that had been identified in its anti-money laundering and terrorist financing regime back in 2016. Therefore, the FATF decided to remove Zimbabwe from its list.

The noble Lord, Lord Purvis of Tweed, asked how the Government have informed those who may be affected by the changes to the list and, in particular, by the addition of the UAE to it. Her Majesty’s Treasury engaged with the sector ahead of adding the UAE to the list and published an advisory notice ahead of the change being made. Supervisors are also in communication with the regulated sector about the update to this list.

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[Lord Purvis of Tweed (LD)]

The Minister is being very thorough in responding, and I am grateful. Could she write to me in answer to my next question? I do not expect her to reply now. It has been helpful for her to outline the FATF’s position on the UAE, but it is worrying if 10 out of the 11 are within this area of concern. Does the UK sovereign investment partnership with the UAE include elements seeking that the UAE makes progress on the areas that have been highlighted? It is worrying if a partnership investment worth £10 billion does not have within it mechanisms to make progress on areas where we have inserted that country into a high-risk category while having financial investment relationships with that very entity. The Minister does not have to answer that now if she does not want to. I do not expect to her to answer it now, but I shall be very happy if she wishes to write to me.

[Baroness Penn (Con)]

What I can do now is talk about the UK’s role and influence at the FATF, which in turn works with countries on the lists that we are discussing, to improve their performance. The UK as a founding member plays a leading role through its place on the FATF’s steering group, and makes significant voluntary financial contributions to the FATF and its global network on core projects and through extensive involvement in the FATF assessment. So the UK is absolutely committed through that channel to improving countries’ performances. I shall write to the noble Lord on his specific point about the UK’s sovereign investment partnership. If he will forgive me, I will also write to him on the specific points he raised in relation to Mali and other specifics in that area.

The noble Lord, Lord Tunnicliffe, asked about an update on the situation in Afghanistan and how the UK is keeping these matters under review. The UK is absolutely keeping the evolving situation in Afghanistan under review, and we continue to work with public and private sector partners to maintain an up-to-date understanding of money laundering and terrorist financing risks in that country.

The noble Lord also asked about how the current deterrents of sanctions on money laundering from Russia will be factored into the eventual winding down of sanctions. In lockstep with our allies, we are introducing the largest and most severe economic sanctions that Russia has ever faced to help to cripple Putin’s war machine. These co-ordinated sanctions go broader, deeper and sharper in punishing the actions of Putin and the Russian Government. They are having an impact on Russia’s economy; Putin has acknowledged the problems and difficulties caused by sanctions. Current estimates are that two-thirds of the assets available to the Russian Government have been frozen, strangling access to funding for military aggression.

We are particularly starving Russia’s access to finance, with asset freezes on major banks including Russia’s largest bank and the removal of selected banks from SWIFT. We have sanctioned Russia’s largest banks with global assets worth £500 billion pre-invasion. Since the invasion, we have also sanctioned well over 1,400 high-value individuals, entities and subsidiaries. However, we are not complacent and will continue to revise and reform our response to illicit finance to ensure that, as illicit finance threats evolve, our response does too. As the noble Lord noted, we brought forward the Economic Crime (Transparency and Enforcement) Act and we are preparing a wider economic crime Bill at pace. This is alongside a new kleptocracy cell in the National Crime Agency to target sanctions evasion and corrupt Russian assets hidden in the UK. That means that oligarchs in London will have nowhere to hide.

As I just touched on, the noble Lord asked about the implementation of the measures in the Economic Crime (Transparency and Enforcement) Act, specifically on the overseas entities register. Since the legislation received Royal Assent, the Government have been working at pace to ensure the register is in place as soon as reasonably practicable. The Companies House digital designs team is making strong progress in building the register for operational readiness.

The noble Lord also asked about the planned economic crime Bill part two. We have published details of upcoming legislation, including fundamental reform of Companies House, enhanced information-sharing powers and new powers to seize crypto assets which are designed to clamp down on money laundering and illicit finance. We do not have long to wait for the Queen’s Speech at this stage, when I am sure more information will then be made available.

The noble Lord, Lord Tunnicliffe, made a final point on Explanatory Memorandums. His point is well made that we often discuss quite technical matters in this Committee, sometimes at short notice, and therefore the Explanatory Memorandums are incredibly important to noble Lords. Of course, it was not the fault of the official named that their contact details were not there, and it is for Ministers to ultimately take responsibility for the information provided to Parliament. On the noble Lord’s specific question about the standards for Explanatory Memorandums, I will undertake to write to him if he permits me to. With that, I beg to move.

Motion agreed.