Money Laundering and Terrorist Financing (Amendment) (No. 3) (High-Risk Countries) Regulations 2021

Lord Agnew of Oulton Excerpts

Thursday 25th November 2021 Lords Chamber

Moved by

[Lord Agnew of Oulton]

That the Regulations laid before the House on 1 November be approved.

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

My Lords, this Government recognise the threat that economic crime poses to the UK and are committed to combating 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 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 business in the UK. That is why we are taking significant action to combat economic crime, from introducing the economic crime levy to progressing the Government’s landmark economic crime plan. We are working closely with the private sector and our international partners to improve the investigation of economic crime, strengthen national 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 hostile actors. Under these regulations, businesses are required to conduct enhanced checks on business relationships and transactions with high-risk third countries. These are countries that have strategic deficiencies in their anti-money laundering and counterterrorism financing regimes, and 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. This is to mirror lists published by the Financial Action Task Force, the global standard-setter on anti-money laundering and counterterrorist 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 our national security and the UK’s international reputation, while securing businesses and the financial system from money launderers and terrorist financiers. Therefore, I beg to move.

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[Lord Tunnicliffe (Lab)]

My Lords, on the face of it, the regulations before us are very straightforward. The Financial Action Task Force has updated its list of high-risk countries, and we are mirroring those changes in our legislation. We have supported such instruments in the past and will continue to do so.

Paragraph 3.3 of the Explanatory Memorandum outlines the usual justifications for this instrument being laid under the “made affirmative” procedure. We accept the arguments, but it is a pity that the urgency in laying these SIs is not always matched when it comes to the Government’s wider efforts to crack down on money laundering. Although it is true that the task force has given the UK a good rating in general terms, we know that concerns have long been expressed about the UK’s supervisory regime. As my colleague Pat McFadden said in the Commons, the Treasury itself has conceded that FATF sees our systems as “only moderately effective” and that the international body also believes that there are

“significant weaknesses in the risk-based approach to supervision”

in the UK.

The UK is understandably a target for illicit funds, given the size and global status of our financial services sector. The Magnitsky case is a well-known example of funds being funnelled through UK institutions, but we know it is not the only one: that much has been seen with the recent publication of the Pandora papers. The Financial Conduct Authority is reportedly running several active investigations in this area. We wish it well with those probes and hope that any wrongful behaviour is punished in an appropriate way.

The Minister said yesterday that, despite the lack of criminal convictions secured through FCA action, the body is nevertheless taking robust action. He pointed to the imposition of a number of major fines in recent years, such as those against Standard Chartered. However, it is not clear that these punishments are changing behaviour or preventing the recurrence of bad practice. On Monday, Minister Whately outlined some of the limited examples of government action. We welcome the allocation of funds to this fight, but it is hard to take seriously her claim that everything possible is being done to make the UK

“a hostile place for illicit finance and economic crime”.—[Official Report, Commons, 16/11/21; col. 532.]

Many of the initiatives cited have been announced and re-announced without meaningful action following. For example, Companies House has been given an additional £63 million of funds to assist with its reform, but there is little sense that the changes being made will empower that body and lead to better outcomes.

Minister Whately also failed to provide clear justification of the UK Government not classifying countries such as Russia and Afghanistan as high risk. It is true that this instrument is designed solely to administer the task force list, but does the Treasury not see a case for taking action of its own where UK interests are at stake? We await with interest the outcome of the task force’s ongoing analysis of recent events in Afghanistan. It will be interesting to see whether that country is added to the list when we consider the first of these SIs in 2022 but, on Russia, I will simply repeat one of Pat McFadden’s questions: do the Government really not judge Russia to be as big a risk as some of the countries listed in these regulations?

As I said earlier, we are privileged to have a significant financial services sector in this country. Lots of talented people, both regulators and people in the sector, work night and day to detect and stop economic crime and obviously we support them in their endeavours. However, the fact remains that, despite the efforts of individuals, the UK Government’s regulatory framework of choice is seen by the international community as insufficient. As a global leader in financial services, we have a responsibility not only to replicate international initiatives but to lead them from the front. I hope the Minister can outline today exactly how the Treasury intends to do this.

[Lord Agnew of Oulton (Con)]

I thank noble Lords for their contributions and I will try to answer the queries raised.

I turn first to the noble Lord, Lord Purvis, and the register of overseas entities’ beneficial ownership. The Government remain absolutely committed to these reforms. When implemented, this register will be an important new tool in our wider efforts to tackle economic crime and will be complemented by the broader powers we are now proposing for Companies House. Once implemented, the register will be one of the first of its kind in the world. That is good news for the UK, maintaining our global leadership role on corporate transparency and enhancing our already strong reputation as an honest and trusted place to do business. The Bill will reflect the pre-legislative committee’s recommendations to ensure that the legislation is as effective as possible in tackling the use of UK property for the purposes of money laundering. I cannot give the noble Lord a precise date, but I am the counter-fraud Minister and I am pressing hard to get that commitment, because I share his concern on this important additional weapon in our arsenal.

I turn to the number of important points raised by the noble Lord, Lord Tunnicliffe, and will try to address as many of them as possible. In terms of the views of FATF, the UK has achieved the best ratings of any country assessed so far in this round of its evaluations, outperforming other states who are at the forefront of tackling money laundering and terrorist financing. I must stress that we are not complacent, and I take the noble Lord’s challenges and criticisms very seriously. The Government will continue to enhance our response to illicit finance as new risks and methodologies emerge.

The UK continues to be guided by FATF standards in our domestic response to money laundering and terrorism financing. Our strategy for combating these crimes is set out in the Economic Crime Plan. This plan contains 52 actions, and its comprehensive agenda will ensure that the UK maintains its global leadership. Key actions include the reform of the suspicious activity reporting regime and improving the supervision of anti-money laundering compliance in the regulated sector. We have made progress in delivering on the Economic Crime Plan, with 24 of the actions complete and a further 10 implemented and being undertaken as an ongoing activity.

In terms of the weakness in the RBA to supervision, the FCA is changing its risk-based approach to anti-money laundering supervision by implementing new data-driven analytical tools and a targeted modular supervision model. This means it will be better placed to balance the two perennially competing aspects of any regulatory oversight regime—depth and breadth—to make the supervisory approach more bespoke, flexible and targeted. The FCA expects firms to implement their obligations effectively and has taken meaningful and impactful enforcement action against firms who failed to implement effective systems. As committed to in the Economic Crime Plan, the Treasury is undertaking a review of the UK’s anti-money laundering regulatory and supervisory regimes. The review will consider the structure of the UK’s supervision regime and the role and powers of the Office for Professional Body Anti-Money Laundering Supervision. We will publish a report setting out the findings of the review and intended next steps in June 2022.

I turn to Companies House reform. The Government have issued their response to the corporate transparency and register reform consultation of last September and set out their plans to reform Companies House and strengthen the UK’s ability to combat economic crime. The reforms are significant and will deliver alongside other broader reforms to clamp down on the misuse of corporate entities. They will deliver more reliable information on the companies register via verification of the identity of people who manage, control or set up companies. There will be greater powers for Companies House to query and challenge the information submitted to it, and the removal of technological and legal barriers to allow enhanced cross-checks on corporate data with other public and private sector bodies.

The noble Lord specifically asked about Russia and Afghanistan. The high-risk third countries list is only one of the tools that the Government have to signal to the private sector which jurisdictions are currently at risk. We also have the national risk assessment of money laundering and terrorist financing, which advises firms where they should take extra caution in building business relationships, given cross-border money laundering risks. The money laundering regulations require firms to consider geographical risks so, regardless of listing, firms have to be nuanced and risk-assess their business relationships taking into account credible sources.

In the FATF assessment of Russia, the judiciary’s lack of independence and corruption were both highlighted. For example, FATF noted that levels of corruption are high in Russia. This is why we are at the forefront of global actions spanning operational policy and diplomatic communities to target the money launderers and the enablers who underpin corrupt elites and serious organised crime. To go back to the point made by the noble Lord, Lord Purvis, there is a horrible interconnection with what is happening with the migrant boats. If they get 50 people on to one of those boats at £2,000 each, that is £100,000 and it probably costs them £1,000 to buy the boat, so the noble Lord is completely right. That is why we are not in any way complacent about this.

Some of our response will be visible through law enforcement policy and international engagement. Other options will be less visible but no less impactful. Our response continuously evolves with the threat. In relation to Afghanistan, our engagement with the private sector tells us that there is already a very high level of scrutiny of money laundering, terrorist financing and sanction evasion risks. The presence of sanctions entities in Afghanistan and its potential money laundering and terrorist financing risks have been well-publicised, with alerts from UK supervisory bodies and other credible sources available for the regulated sector to draw on to assess the risks.

The noble Lord asked how we intend to lead the fight from the front. We are trying to lead by example and our freely accessible public register of company beneficial ownership is one of the most open and extensively accessed company registers in the world. The UK has been at the forefront in delivering greater corporate transparency. We have led international reform efforts. This year, we used our G7 presidency to agree landmark commitments to implement and strengthen beneficial ownership registries, securing commitments from countries such as the US, Canada and Japan which had not previously been made.