Money Laundering and Terrorist Financing (Amendment) (High-Risk Countries) Regulations 2021

Lord Agnew of Oulton Excerpts

Tuesday 27th April 2021 Grand Committee

Moved by

[Lord Agnew of Oulton]

That the Grand Committee do consider the Money Laundering and Terrorist Financing (Amendment) (High-Risk Countries) Regulations 2021.

Relevant document: 51st Report from the Secondary Legislation Scrutiny Committee

[The Minister of State, Cabinet Office and the Treasury (Lord Agnew of Oulton) (Con)]

My Lords, the Government are committed to combating money laundering and terrorist financing and recognise the threat that economic crime poses to our financial system. Illicit finance not only damages our reputation as a global financial centre but can impact on our national security by undermining the integrity and stability of our markets and institutions. Furthermore, illicit finance can impact opportunities for legitimate business in the UK and cause serious social and economic costs through its links to serious and organised crime.

That is why the Government are focused on making the UK a hostile environment for illicit finance. As part of this work, we have taken significant action to tackle money laundering and to strengthen the whole system response to economic crime. Underpinning these efforts are the money laundering regulations, the legislative framework which sets out a number of requirements that businesses falling within its scope must take to combat money laundering and terrorist financing. These requirements include the need for firms to implement measures to identify and verify the people and organisations with whom they have a business relationship or for whom they facilitate transactions.

Additionally, the regulations require financial institutions and other regulated sector businesses to carry out greater scrutiny or “enhanced due diligence” in respect of business relationships and transactions involving so-called “high-risk third countries”. These are countries that have been identified as having strategic deficiencies in their anti-money laundering and counter- terrorism financing regimes and that pose a significant threat to the UK’s financial system. The statutory instrument under discussion today amends the definition of a high-risk third country in the money laundering regulations.

Let me explain the background to this instrument, which I note was reported by the Secondary Legislation Scrutiny Committee as an “instrument of interest”. At present, the definition of a high-risk third country in the money laundering regulations is linked to retained EU law and references the list of countries identified by the European Commission as high risk. This list was previously updated via EU law, which now no longer has an effect in the UK. If our legislation is not amended, the list will become outdated and could leave the UK at risk from those with poor money laundering and terrorist financing controls. Furthermore, the UK will risk falling behind international standards set by the Financial Action Task Force, the global standard setter for anti-money laundering and counter- terrorist financing measures.

This instrument will therefore amend the money laundering regulations to remove references to the EU’s high-risk third countries list and instead insert a new list of countries identified in Schedule 3ZA. This will be the UK’s new autonomous high-risk third countries list. It will mirror exactly the list of countries identified by the Financial Action Task Force as having strategic deficiencies in their anti-money laundering and counterterrorist financing regimes, and it will keep the UK in line with international standards.

The change which I have just outlined will allow us to continue to protect businesses and the financial system from those who pose a significant threat, while ensuring that the UK remains at the forefront of global standards in combatting money laundering and terrorist financing.

I thank all noble Lords for their examination of this important legislation. In summary, this instrument will create a new autonomous list of high-risk third countries. Businesses that fall under the scope of the money laundering regulations and that deal with these countries must take extra scrutiny measures. In addition, this instrument will ensure that the money laundering regulations remain up to date and ready to respond to the threat posed by nations with poor money laundering and terrorist financing controls.

This instrument will enable the money laundering regulations to continue working as effectively as possible to protect the UK financial system. It will allow the UK to continue playing a full part in the fight against economic crime. I hope that noble Lords will join me in supporting this legislation. I beg to move.

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[Lord Agnew of Oulton (Con)]

My Lords, I begin by thanking all noble Lords who have taken part in the debate for their thorough consideration of the statutory instrument. It is an important subject and some excellent points have been made.

My noble friends Lady Wheatcroft and Lord Robathan asked about the challenge of ensuring that the UK’s new autonomous list mirrors those countries that have been identified by the Financial Action Task Force in its public documents as having deficiencies in their anti-money laundering and counterterrorism financing controls. By aligning its approach with that of the Financial Action Task Force, the UK is in line with international standards, and the identification of countries is underpinned by the FATF’s methodology and assessment processes. It remains open to the UK to review the list and amend it according to our own assessment of risks if necessary.

On the FATF’s assessment of Russia, the judiciary’s lack of independence and corruption were both highlighted in its report. For example, the FATF noted that levels of corruption are especially high in Russia. The money laundering regulations require enhanced due diligence in a range of situations that present a high risk of money laundering or terrorist financing, not just where a transaction or business relationship involves a country that is listed as high-risk.

When assessing if there is a high risk of money laundering or terrorist financing, a number of factors are taken into consideration, including geographical risk, when countries have been identified by credible sources as having high levels of corruption, such as terrorism. The high-risk third countries list should not be viewed in isolation. Enhanced due diligence, which comes through the money laundering provisions, is applied regardless of geographic risk in certain situations, such as when a customer or potential customer is a politically exposed person, family member or known close associate of a politically exposed person. Under the money laundering regulations, the regulated sector is also required to apply enhanced due diligence in any other case which by its nature could present a higher risk of money laundering and terrorist financing, including where there are geographic factors.

The noble Lord, Lord Chidgey, is also concerned and asks about transparency and beneficial ownership. The Government are committed to ensuring that our anti-money laundering regulations support the identification of criminal and terrorist financing activity, without placing disproportionate burdens on the regulated sector. In answer to the challenge from the noble Lord, I want to be clear on the Government’s intention to introduce a package of reforms to limit the risk of misuse of companies, including by verifying the identity of people managing or controlling companies, providing the registrar with new powers to query and remove information and investing in investigation and enforcement capabilities. This was set out in September last year in our response to a consultation on Companies House reform. We will legislate on that reform programme when parliamentary time allows.

On AML supervision, we remain committed to ensuring that our AML/CTF regime is robust and responsive. The Treasury already works closely with the Office for Professional Body Anti-Money Laundering Supervision, known as OPBAS, to ensure high standards of effectiveness and consistency among supervisors.

I turn to the noble Lord, Lord Tunnicliffe, and how the list will be updated. The Government intend, before updating the list, to use the affirmative procedure to ensure alignment between the UK’s high-risk third countries lists and the Financial Action Task Force lists, which are updated three times a year and, therefore, we have the flexibility to do the same.

On implementing the FATF’s recommendations in the UK following the report of July 2019, the Government and private sector have jointly published a landmark economic crime plan, which provides a collective articulation of the 52 actions that the UK is taking to tackle economic crime and, in particular, prioritises risk areas by filling in the gaps identified by the Financial Action Task Force’s mutual evaluation report. Key actions include the reform of the suspicious activity reporting regime and improving supervision of anti-money laundering compliance in the regulated sector.

On progress, the Government are bolstering the UK Financial Intelligence Unit with an addition of more than 70 new staff, enabling more feedback of reports and better analysis of suspicious activity reports. As outlined earlier, these regulations introduce a new, autonomous high-risk third countries list, which will ensure that the UK legislation remains up to date and continues to protect the financial system from money laundering and terrorist financing. This legislation represents the UK’s new approach to high-risk third countries; it will allow the UK to take its own view on which countries are high risk without referencing EU legislation and remain in line with international standards in the fight against money laundering and terrorist financing.

Motion agreed.