Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) (No. 2) Regulations

Lord Sharkey Excerpts

Wednesday 10th January 2024 Grand Committee

[The Parliamentary Secretary, HM Treasury (Baroness Vere of Norbiton) (Con)]

My Lords, these regulations have been laid to update the UK’s list of high-risk third countries in Schedule 3ZA to the Money Laundering, Terrorist Financing and Transfers of Funds (Information on the Payer) Regulations 2017, which I will refer to as the money laundering regulations.

The 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. The Government are committed to bearing down on kleptocrats, criminals and terrorists who abuse the UK’s financial and services sectors. The Economic Crime and Corporate Transparency Act built on the earlier Economic Crime (Transparency and Enforcement) Act to ensure that the UK has robust, effective defences against illicit finance.

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, which are listed for these purposes in Schedule 3ZA to the money laundering regulations. These are countries identified as having strategic deficiencies in their anti-money laundering and counterterrorist financing regimes which 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 Albania, the Cayman Islands, Jordan and Panama from the list, and adds Bulgaria, Cameroon, Croatia, Nigeria, South Africa and Vietnam. This means that the UK’s high-risk third-country list will be aligned with the decisions of the Financial Action Task Force, the global standard-setter for anti-money laundering and counterterrorist financing.

FATF’s methodology ensures that countries around the world are subject to expert, robust evaluations of their anti-money laundering and counterterrorist financing regimes. Where countries are found to have strategic deficiencies which they fail to address, FATF members can agree to add them to one of two lists: jurisdictions under increased monitoring and jurisdictions subject to a call to action.

By aligning our own high-risk third-country list with that of FATF, we ensure that the UK remains at the forefront of global standards on anti-money laundering and counterterrorist financing. This protects the UK financial system from illicit finance linked to the jurisdictions being listed. Where countries have made significant progress to address their strategic deficiencies, it is equally important that we recognise that and promptly remove them from the UK’s list.

This is the eighth SI amending the UK’s list of high-risk third countries to respond to the evolving risks. In June, Schedule 3ZA was amended to remove Cambodia and Morocco after they were de-listed by FATF, but otherwise updates to the high-risk third-country list have been paused since November 2022. As set out in the Explanatory Memorandum, that was to allow time for a full impact assessment to be conducted. This was required due, in particular, to the listing of Nigeria and South Africa, given their significant economic ties to the UK. The pause in updating Schedule 3ZA has led to the need for this more significant SI, with six countries being added and four removed.

I am aware that many noble Lords have expressed frustration at parliamentary time being taken up by these relatively routine matters, which keep our high-risk third-country list aligned to FATF. The Economic Crime and Corporate Transparency Act enables the Government to amend the money laundering regulations to create an ambulatory reference to the FATF lists. This will result in the same legal effect, with regulated businesses being required to apply enhanced due diligence to relevant business relationships and transactions with these countries, but without the need for secondary legislation after every change to the FATF lists.

The Government will bring forward an SI to implement this provision in the MLRs shortly and, in notifying the Committee of this, I emphasise two things. First, the Government retain the authority and autonomy to deviate from the FATF list at any time if the Government change their policy decision with regard to mirroring the FATF lists and, secondly, if we were to do so, it would require further secondary legislation and a debate in both Houses of Parliament.

I conclude by noting that the high-risk third-country list is an important mechanism that the Government have to clamp down on illicit financial flows from overseas threats, but we will also continue to use other mechanisms to respond to wider threats from other jurisdictions, including, for example, by applying financial sanctions.

These amendments will enable the money laundering regulations to continue to work as effectively as possible to protect the integrity of the UK financial system. I beg to move.

[Lord Sharkey (LD)]

My Lords, it is a pleasure to speak to this made SI, which is a model of its kind. It is succinct, admirably clear and well supported by a helpful EM and an exemplary impact assessment. We are happy to support it and we have only a few comments to make.

We continue, of course, to be enthusiastic about the work of FATF both in general and in the particular cases of money laundering and terrorist finance which are addressed by this SI. It is clear from the EM that FATF is extremely active in these areas. Reading the appendices to HMT’s updated guidance of 4 December makes it clear that there are both significant signs of progress and significant issues yet to be resolved. The removal of four countries from the old Schedule 3ZA is somewhat outweighed by the addition of six countries, two of which—Nigeria and South Africa—represent large challenges to the implementation of successful MLR regimes. Nevertheless, for many of the countries on the new Schedule 3ZA brought into being by this SI, FATF has been able to detect progress but not yet sufficient progress to warrant removal from the list.

As the Minister pointed out, the United Kingdom has revised this list seven times previously to follow FATF’s findings and I think we all hope that this revision will be the last in its current form. Debating this SI in the Commons on Monday, the Economic Secretary to the Treasury said, as the Minister explained:

“I am aware that many noble Lords have expressed frustration at parliamentary time being taken up in the other place by such relatively routine matters to keep our high-risk third countries list aligned to the task force’s”.—[Official Report, Commons, First Delegated Legislation Committee, 8/1/24; col. 4.]


I have no idea who these people are, but clearly they were extremely influential because the Economic Secretary to the Treasury has proposed a solution, as the Minister explained. He proposed using the powers in the Economic Crime and Corporate Transparency Act to amend the MLRs to create an ambulatory reference to the FATF list which will result in the same legal effect as at present, but without the need for a SI every time there are changes. All of that seems much more sensible than having to debate an SI every time the list changes, but it raises the question of whether the Government have in contemplation any adjustments to the current FATF list that they want to make independently of the list itself, as it were. Perhaps the Minister could comment on that when she replies.

Returning to the current instrument, I commend the impact assessment. It is thorough, reasoned and appropriately self-critical. I am, as are the authors of the assessment, somewhat sceptical about what appears to me a likely false precision in the associated costs of implementing this SI. The high-level estimate of £237 million for transition costs seems just that—very high—as does the upper estimate of £131 million per annum in ongoing costs. The impact assessment thoroughly explains the data problems involved in arriving at these estimates and explains the methods and proxies used to arrive at them. It concludes its summary by saying that:

“Over the longer term the government is taking proactive steps to improve the available data on the cost of compliance with MLRs, which should help to inform IAs in future years”.


Will the Minister write to us saying what these proactive steps are and over what timescale they will be adopted?

The IA reminds us that the NCA believes that,

“it is a realistic possibility that over £100 billion pounds is laundered every year through the UK or through UK corporate structures”.

It goes on to say that:

“In particular, the size of the UK’s financial and professional services sector, the openness of our economy and the attractiveness of London for investors makes the UK particularly exposed to international money laundering risks”.


These risks will not disappear, but the UK’s role as a money laundromat should reduce as the MLR provisions in this SI and elsewhere take effect. Will the Minister undertake, in any subsequent revisions to our MLR regime, to give us the latest estimates of money laundered through the UK or UK corporate structures? We need to see clear evidence that our MLR regime is working.