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

Baroness Penn Excerpts

Wednesday 19th July 2023 Grand Committee

Moved by

[Baroness Penn]

That the Grand Committee do consider the Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) Regulations 2023.

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, this Government recognise the threat that economic crime poses to the UK and our international partners, and are committed to combating money laundering and terrorist financing. To help respond to these threats, and building on the recently enacted Economic Crime (Transparency and Enforcement) Act, the Government are currently taking through a second Bill, the Economic Crime and Corporate Transparency Bill, which will bear down on kleptocrats, criminals and terrorists who abuse the UK’s financial and services sectors.

The money laundering regulations provide the legislative framework for tackling money laundering and terrorist financing, and set out various measures that businesses must take to protect the UK from illicit financial flows. Under these regulations, businesses are required to conduct enhanced checks on business relationships and transactions with high-risk third countries. These are countries identified as having strategic deficiencies in their anti-money laundering and counterterrorist 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. It removes Cambodia and Morocco from the list to reflect changes agreed by the Financial Action Task Force, the global standard setter for anti-money laundering and counterterrorist financing. The FATF found that both Cambodia and Morocco have made the necessary domestic reforms to improve their compliance with FATF standards, which have been confirmed through on-site visits to both countries.

The Government will pass further changes in due course to add to the UK’s list of high-risk third countries those that the FATF added to its own list in February and June 2023. The reason for passing these changes separately is to give time to complete a full impact assessment for these additions.

This is the seventh SI amending the UK’s list of high-risk third countries to respond to the evolving risks from third countries. This update ensures that the UK remains at the forefront of global standards on anti-money laundering and counterterrorist financing. In 2018, the Financial Action Task Force assessed that the UK has one of the toughest anti-money laundering regimes in the world. The UK was a founding member of this international body, and we continue to work closely and align with international partners, such as the G7, to drive improvements in anti-money laundering and counterterrorist financing systems globally.

Lastly, this list of high-risk third countries is one of many mechanisms that the Government have to clamp down on illicit financial flows from overseas threats. We will continue to use other available mechanisms to respond to wider threats from other jurisdictions, including applying financial sanctions as necessary. This amendment will enable the money laundering regulations to continue to work as effectively as possible to protect the integrity of the UK financial system. It is crucial for protecting UK businesses and the financial system from money launderers and terrorist financiers. I therefore beg to move.

[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?

--- Later in debate ---

[Baroness Chapman of Darlington (Lab)]

My Lords, I am aware that we always follow the FATF’s recommendations but, given what we have just heard, it is just as well that we have this procedure as an opportunity to ask the Minister about some issues of concern that arise from the recommendations we are considering. I will not repeat everything that has already been said, because immediately following this we have another SI that took three and a half hours to consider in the Commons and, looking around the Room, I anticipate that it may take a little while this afternoon as well.

This instrument is perhaps relatively straightforward, but I will highlight a couple of the points that have been made in which we are especially interested. On the issue of reputation and our overseas territories, the fact is that Gibraltar and the Cayman Islands are on this list. Do the Government think that this has any reputational impact on the UK? What is the Government’s assessment of that? When this issue was considered in the Commons, providing some kind of support or input from the UK to Gibraltar to move things along was discussed. I do not think that the Minister there gave a particularly expansive response at that point so it might be helpful, if there is an opportunity, to hear from the Minister here today whether a request has been made by Gibraltar and whether any input has been forthcoming from the UK.

I will leave it there for today, given the next SI that we will consider and the fulsome contributions that have already been made by others, which I know the Minister will answer fully.

[Baroness Penn (Con)]

My Lords, I thank noble Lords for their contributions to this debate. I know that we have also touched on this issue in other Bills progressing through the House.

I will start with the FATF process. As I think I said in my opening speech, the UK is an active member of the FATF. We participate in mutual country evaluations, looking at its processes and rules, which we are fully supportive of. Indeed, we were a founding member of the FATF. The processes are agreed internationally and based on rigorous, detailed and robust technical assessment. The FATF also regularly co-ordinates with other major international organisations.

It is worth saying two further things on the FATF. First, as a member of the FATF, we will always look to improve its work and processes and we will always reflect on those. Secondly, it is an important piece of the picture on setting standards for international action on anti-money laundering and counterterrorist financing, but it is only one piece of the picture when it comes to the UK’s overall approach towards tackling economic crime more broadly and some of the issues raised in today’s debate.

Cambodia being delisted is within the scope of the SI. Cambodia has addressed key deficiencies relating to the legal framework for international co-operation and preventive measures, risk-based supervision, financial intelligence, investigation and prosecution of money laundering, asset confiscation and targeted financial sanctions for proliferation financing. By addressing those deficiencies, Cambodia met the criteria to be removed from the list.

The noble Lord, Lord Vaux, also raised Russia’s membership of the FATF. As he noted, in February 2023 the FATF suspended Russia from the organisation. It continues to call on all jurisdictions to remain vigilant to threats to integrity, safety and security of the international financial system arising from the Russian Federation’s aggression in Ukraine. We are absolutely clear that Russia’s actions run counter to the principles on which the FATF is based and we fully support the ongoing suspension of Russia’s membership of the FATF. We have taken a wide range of measures against Russia, including the most extensive sanctions regime that we have ever put in place. We will continue to bear down on the Russian state in that way.

The noble Lord, Lord Wallace, and the noble Baroness, Lady Chapman, asked about the overseas territories and Crown dependencies. The UK has engaged with both on this issue to share best practice, improve understanding of risks and increase compliance with the FATF standards. I went to the ministerial meeting of MONEYVAL, which is a regional organisation that feeds into the FATF process. Some of the Crown dependencies are members and I met the Ministers responsible for FATF compliance as part of that forum. We will continue doing that, as several of the Crown dependencies have assessments that are either ongoing or upcoming this year.

Gibraltar and the Cayman Islands were mentioned. Gibraltar continues to make good progress against its action plan with only one action remaining—for it to show that it can pursue more final asset confiscation judgments commensurate with its high-risk profile. When it comes to that action, judgments coming through can take time and that timing is not all within Gibraltar’s control.

I met representatives from the Cayman Islands this year and we touched on this area. They have made significant progress in addressing deficiencies since the Cayman Islands were listed in February 2021. In June 2023—just last month—the FATF made the initial determination that the Cayman Islands have substantially completed their action plan. On this basis, it plans to conduct an on-site visit in September to verify this, which is the final stage before delisting. We have a positive story to tell in both those areas.

--- Later in debate ---

[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.

Motion agreed.