ICAEW has submitted its response to a recent government consultation on improving the effectiveness of the Money Laundering Regulations 2017 (MLRs). Michelle Giddings, ICAEW’s Head of AML, looks at the proposals and draws out the key points for ICAEW-supervised firms.
“In our role as a supervisory body, we broadly agree with the suggested measures and areas for change identified in the government’s consultation document,” says Michelle. “We acknowledge there are aspects of the anti-money laundering (AML) regime that require reform and recognise the need to ensure requirements are proportionate to the risk and do not create a burden for firms or customers.”
HM Treasury (HMT) launched the consultation as part of a wider programme to reduce the risks of money laundering, as set out in the Economic Crime Plan 2023-26. In 2022, a review of the UK AML regime concluded that the MLRs’ principal requirements were mainly fit-for-purpose, but there was some potential for technical changes to make the system more effective and proportionate.
The consultation picks up these changes in four areas: making customer due diligence (CDD) more proportionate and effective; strengthening system coordination; providing clarity on the scope of the MLRs; and reforming registration requirements for the Trust Registration Service.
“We want ICAEW-supervised firms to operate within a compliance framework that is as effective, proportionate and streamlined as possible,” stresses Michelle. “In submitting our response, we’ve drawn attention to some of the issues we see in the sector and, based on our experience as a supervisor, added our comments on proposals designed to support improved compliance.”
Source of funds checks are required under the MLRs, but the legislation doesn’t set out specific scenarios or time periods. The consultation notes that some firms would like more clarity in this area.
HMT’s view is that amending the law to include specific examples of when to carry out source of funds checks is unnecessary. Instead, the consultation asks whether additional guidance or detail is needed to help firms understand when to carry out the checks and, if so, in what form this guidance would be most helpful.
“Overall, our view is that it would be useful for firms to have more guidance on source of funds checks and when they should be happening,” says Michelle.
“However, in our response, we are clear that although additional guidance may be helpful, we don’t view it as something on which HMT should issue separate guidance,” she explains. “We think it could be achieved by incorporating the scenarios currently in the Joint Money Laundering Steering Group (JMLSG) guidance into the accountancy sector guidance, but adapted to make them relevant to the sector.”
HMT notes that responses to the last consultation on the MLRs and ongoing engagement show that some regulated firms find complying with the mandatory requirements for HRTCs expensive and burdensome.
The consultation points out, however, that this needs balancing against the need to manage cross-border risks effectively and ensure that the UK complies with international standards set by the Financial Action Task Force (FATF), which leads global action to tackle money laundering and terrorist financing.
HMT asks for views on whether removing the list of checks in the regulations, or making the list non-mandatory, would help to reduce the burden.
“There's a specific list of checks in the MLRs that you have to do if your client is based in a location that's an HRTC,” explains Michelle.
“In our response, we point out that the mandatory list of checks appears to be based on the premise of someone being high risk on the basis of being based in an HRTC,” she says. “But this is not necessarily the case.”
“Navigating and mitigating jurisdictional risk in HRTCs can be difficult,” she stresses. “And, quite often, the checks in the regulations never actually address the associated risks of the particular jurisdiction.”
“An HRTC is defined very specifically in the regulations and is linked to the FATF black and grey lists,” adds Michelle. “And part of the issue with the lists is that they change regularly.”
“For example, the UAE went on to the list for a while and then came off again. When it was on the list, firms had to do EDD for any client in the UAE. But within a relatively short time frame they had to turn it off again, simply because those clients dropped out of the list.”
“We’re also concerned that the risks posed across different sectors are not the same, so it does not seem appropriate to have prescriptive requirements across all sectors.”
In its response, ICAEW notes that removal of the entire regulation could prove challenging and acknowledges that it is helpful to have a clear indication of the checks firms should be doing. “We think a good compromise would be to make the list of checks non-mandatory,” says Michelle.
“We often talk about the concept of professional enabling,” says Michelle. “And there are two parts to this: first, there is negligence where someone is not doing what they’re required to do; and second, there’s positive wilful involvement with criminal groups.
“A robust supervisory regime and good compliance will deal with the negligent,” she explains. “But to deal with professional enablers who are doing it knowingly, system coordination becomes vital. We need the information and intelligence sharing channels to work properly so that critical information can flow between supervisors and law enforcement and other public bodies.”
ICAEW therefore supports proposed moves to strengthen system coordination, including amending the MLRs to permit the Financial Conduct Authority to share relevant information with the Financial Regulators Complaints Commissioner.
“We have made some points about director verification,” says Michelle. Under the MLRs, the relevant person has to take reasonable measures to determine and verify the full names of the board of directors for a corporate body.
The accountancy sector guidance includes an explanation that this means the relevant person must confirm the director is who they say they are (normal identity checks on the individual such as a obtaining a passport) but this may be done on a risk-basis.
Although HMT has approved this guidance, neither the JMLSG nor legal sector guidance documents include equivalent wording.
“Other sector guidance isn’t explicit on what director verification involves,” says Michelle. “HMT has approved AMLGAS with the additional detail included, but the other sectors have not included that same detail.”
ICAEW is therefore asking the government to make it clear whether verification checks on a director should be the equivalent to the verification checks on a beneficial owner.
“It’s important that we have consistent approaches on director verification across all regulated sectors,” emphasises Michelle.
ICAEW is also drawing attention to an anomaly in HMRC’s role as default AML supervisor. “We think HMRC should be given a stronger remit to say no or refuse supervision,” says Michelle
“In the legislation, HMRC is the default supervisor, so they will supervise those who are not members of a professional body,” she explains. “But if we have excluded someone, which is our most serious sanction, these individuals may continue to offer accountancy services because ‘accountancy’ isn’t a reserved term. They can then become supervised by HMRC.”
ICAEW believes the MLRs should be amended to allow HMRC to consider professional body exclusion, or AML misconduct, as a relevant factor for refusal of supervision. This would help strengthen the profession’s overall ability to hold those who fail to comply with AML requirements to account.
“As always, we will keep firms informed and update them on any legislative developments, and the timescales involved,” says Michelle. “We don’t expect anything to change this year, so there is no need for firms to do anything at this point.”
HM Treasury (HMT) launched the consultation as part of a wider programme to reduce the risks of money laundering, as set out in the Economic Crime Plan 2023-26. In 2022, a review of the UK AML regime concluded that the MLRs’ principal requirements were mainly fit-for-purpose, but there was some potential for technical changes to make the system more effective and proportionate.
The consultation picks up these changes in four areas: making customer due diligence (CDD) more proportionate and effective; strengthening system coordination; providing clarity on the scope of the MLRs; and reforming registration requirements for the Trust Registration Service.
“We want ICAEW-supervised firms to operate within a compliance framework that is as effective, proportionate and streamlined as possible,” stresses Michelle. “In submitting our response, we’ve drawn attention to some of the issues we see in the sector and, based on our experience as a supervisor, added our comments on proposals designed to support improved compliance.”
Source of funds guidance
“One of the key points we’ve commented on is whether more clarity is necessary on when firms need to conduct ‘source of funds’ checks,” explains Michelle.Source of funds checks are required under the MLRs, but the legislation doesn’t set out specific scenarios or time periods. The consultation notes that some firms would like more clarity in this area.
HMT’s view is that amending the law to include specific examples of when to carry out source of funds checks is unnecessary. Instead, the consultation asks whether additional guidance or detail is needed to help firms understand when to carry out the checks and, if so, in what form this guidance would be most helpful.
“Overall, our view is that it would be useful for firms to have more guidance on source of funds checks and when they should be happening,” says Michelle.
“However, in our response, we are clear that although additional guidance may be helpful, we don’t view it as something on which HMT should issue separate guidance,” she explains. “We think it could be achieved by incorporating the scenarios currently in the Joint Money Laundering Steering Group (JMLSG) guidance into the accountancy sector guidance, but adapted to make them relevant to the sector.”
High risk third countries
The consultation also considers whether changes could be made to improve the proportionality and effectiveness of enhanced due diligence (EDD) for high risk third countries (HRTCs).HMT notes that responses to the last consultation on the MLRs and ongoing engagement show that some regulated firms find complying with the mandatory requirements for HRTCs expensive and burdensome.
The consultation points out, however, that this needs balancing against the need to manage cross-border risks effectively and ensure that the UK complies with international standards set by the Financial Action Task Force (FATF), which leads global action to tackle money laundering and terrorist financing.
HMT asks for views on whether removing the list of checks in the regulations, or making the list non-mandatory, would help to reduce the burden.
“There's a specific list of checks in the MLRs that you have to do if your client is based in a location that's an HRTC,” explains Michelle.
“In our response, we point out that the mandatory list of checks appears to be based on the premise of someone being high risk on the basis of being based in an HRTC,” she says. “But this is not necessarily the case.”
“Navigating and mitigating jurisdictional risk in HRTCs can be difficult,” she stresses. “And, quite often, the checks in the regulations never actually address the associated risks of the particular jurisdiction.”
“An HRTC is defined very specifically in the regulations and is linked to the FATF black and grey lists,” adds Michelle. “And part of the issue with the lists is that they change regularly.”
“For example, the UAE went on to the list for a while and then came off again. When it was on the list, firms had to do EDD for any client in the UAE. But within a relatively short time frame they had to turn it off again, simply because those clients dropped out of the list.”
“We’re also concerned that the risks posed across different sectors are not the same, so it does not seem appropriate to have prescriptive requirements across all sectors.”
In its response, ICAEW notes that removal of the entire regulation could prove challenging and acknowledges that it is helpful to have a clear indication of the checks firms should be doing. “We think a good compromise would be to make the list of checks non-mandatory,” says Michelle.
System coordination and cooperation
The consultation highlights the importance of updating the MLRs to ensure there is effective coordination and cooperation between relevant bodies in view of emerging threats, technological developments and changes in the legislative landscape.“We often talk about the concept of professional enabling,” says Michelle. “And there are two parts to this: first, there is negligence where someone is not doing what they’re required to do; and second, there’s positive wilful involvement with criminal groups.
“A robust supervisory regime and good compliance will deal with the negligent,” she explains. “But to deal with professional enablers who are doing it knowingly, system coordination becomes vital. We need the information and intelligence sharing channels to work properly so that critical information can flow between supervisors and law enforcement and other public bodies.”
ICAEW therefore supports proposed moves to strengthen system coordination, including amending the MLRs to permit the Financial Conduct Authority to share relevant information with the Financial Regulators Complaints Commissioner.
Strengthening the regime
As well as responding to the questions posed in the consultation, ICAEW has offered some additional suggestions to improve the regime’s effectiveness.“We have made some points about director verification,” says Michelle. Under the MLRs, the relevant person has to take reasonable measures to determine and verify the full names of the board of directors for a corporate body.
The accountancy sector guidance includes an explanation that this means the relevant person must confirm the director is who they say they are (normal identity checks on the individual such as a obtaining a passport) but this may be done on a risk-basis.
Although HMT has approved this guidance, neither the JMLSG nor legal sector guidance documents include equivalent wording.
“Other sector guidance isn’t explicit on what director verification involves,” says Michelle. “HMT has approved AMLGAS with the additional detail included, but the other sectors have not included that same detail.”
ICAEW is therefore asking the government to make it clear whether verification checks on a director should be the equivalent to the verification checks on a beneficial owner.
“It’s important that we have consistent approaches on director verification across all regulated sectors,” emphasises Michelle.
ICAEW is also drawing attention to an anomaly in HMRC’s role as default AML supervisor. “We think HMRC should be given a stronger remit to say no or refuse supervision,” says Michelle
“In the legislation, HMRC is the default supervisor, so they will supervise those who are not members of a professional body,” she explains. “But if we have excluded someone, which is our most serious sanction, these individuals may continue to offer accountancy services because ‘accountancy’ isn’t a reserved term. They can then become supervised by HMRC.”
ICAEW believes the MLRs should be amended to allow HMRC to consider professional body exclusion, or AML misconduct, as a relevant factor for refusal of supervision. This would help strengthen the profession’s overall ability to hold those who fail to comply with AML requirements to account.
Next steps
The three-month consultation closed on 9 June. When the government has considered respondents’ views, it will publish its response outlining the next steps, including draft legislation if appropriate.“As always, we will keep firms informed and update them on any legislative developments, and the timescales involved,” says Michelle. “We don’t expect anything to change this year, so there is no need for firms to do anything at this point.”
