Consultation Outcome: Improving the Effectiveness of the Money Laundering Regulations

On 11 March 2024, HM Treasury launched a consultation on the Money Laundering, Terrorist Financing, and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs). The consultation aimed to improve the effectiveness of the MLRs while minimising burdens on legitimate customers, focusing on closing loopholes and clarifying requirements for businesses. The consultation ran until 9 June 2024 and received over 200 responses from stakeholders across a broad range of industries, including regulated businesses, law enforcement agencies, and civil society organisations.

Overview of the consultation

HM Treasury’s consultation formed part of a broader initiative set out in the Economic Crime Plan 2023-2026, designed to address challenges related to economic crime. The consultation examined potential updates to the MLRs, which play a crucial role in requiring businesses to identify and prevent money laundering and terrorist financing. The consultation addressed four key themes:

1. Making customer due diligence (CDD) more proportionate and effective
2. Strengthening system coordination
3. Providing clarity on the scope of the MLRs
4. Reforming registration requirements for the Trust Registration Service (TRS)

Key findings and response

The consultation response outlines the following key findings and proposed changes to the MLRs:

1. Customer Due Diligence (CDD)

• The government will provide additional clarity in sector-specific guidance on when a business relationship is established for non-financial firms.
• Transaction-based CDD triggers for art market participants and letting agents will now align with those for high-value dealers.
• Source of funds checks will remain unchanged, but sector-specific guidance will be enhanced to support clarity.
• Clarifications will be made regarding the “acting on behalf of” provision to apply to entities acting on behalf of individuals or organisations.
• HM Treasury will collaborate with the Department for Science, Innovation, and Technology (DSIT) to produce joint guidance on using digital identities for MLRs identity verification checks.
• The MLRs will provide carve-outs to facilitate rapid access for customers of insolvent banks to new accounts.

2. Enhanced Due Diligence (EDD)

• The risk factors for EDD will remain, with clearer guidance provided through collaboration with supervisors and industry bodies.
• The MLRs will be amended to require EDD only on “unusually complex” transactions.. Firms must still consider wider geographic, product and customer risk factors when carrying out customer and transaction risk assessments.
• The MLRs  will be amended in respect of High Risk Third Countries (HRTCs), mandating EDD only where the relevant transactions or customer relationships involve a person established in a Call for Action country, not an Increased Monitoring List country. Broader requirements around assessing geographic risk will remain, including provisions which state that regulated firms must consider both FATF lists when carrying out customer risk assessments.
• Regulated entities will continue to be required to apply EDD based on geographic risk factors, as per Regulation 33(6)(c). This regulation lists several sources which firms must take into account when assessing geographic risk, including both FATF lists and other FATF assessments.

3. Simplified Due Diligence (SDD)

• The link between Pooled Client Accounts (PCAs) and SDD will be removed from the MLRs, and new requirements for PCAs will be includedinto the MLRs.

4. Strengthening System Coordination

• The Financial Regulators Complaints Commissioner will be added to the list of relevant authorities in Regulation 52 of the MLRs.
• HM Treasury will also make two minor changes to Regulations 52A and 52B, which cover the disclosure by the FCA of confidential information relating to MLRs supervision, in order to improve the operation of these provisions. These changes will expand the scope of confidential information which the FCA is empowered to share in the course of delivering its functions under the MLRs to include information about MLRs supervision of cryptoasset firms. They will also amend the defence to the offence of breaching confidentiality restrictions to align further with the defence for breaching the confidentiality restriction at s.348 of the Financial Services and Markets Act (FSMA).
• Regulation 50 will be amended to include the Registrar for Companies House and the Secretary of State responsible for Companies House.
• There will be no change to the MLRs regarding the National Risk Assessment (NRA).  HM Treasury will instead work with relevant supervisors, to ensure that guidance is sufficiently clear on how to carry out risk assessments, encouraging the production of sector-specific guidance and case studies where possible.  The NRA 2025 is scheduled to be published shortly and will provide an updated system-wide risk assessment that firms can use as a key source for their own risk assessments.

5. Clarity on Scope and Registration Issues

• References to the EUR in the MLRs will be replaced with GBP at a one-to-one conversion, except in specific instances where a one-to-one conversion would create potential non-alignment with FATF recommended thresholds.

6. Registration and change in control for cryptoasset service providers

• The consultation raised whether the requirement for cryptoasset firms to register under both the MLRs and to be authorised under FSMA should be removed. This was in light of plans to introduce a new financial services regulatory regime for cryptoassets in the UK. HM Treasury will address this issue via upcoming legislative reforms through the future financial services regulatory regime for cryptoassets (regulated activities) which will be to extend FSMA to parts of the cryptoasset market, requiring these cryptoasset firms to be subject to fit and proper checks prior to FCA authorisation under FSMA6.
• The upcoming regulatory regime will make changes to ensure firms authorised for the new cryptoasset activities will not be required to additionally register as “cryptoasset exchange providers” or “custodian wallet providers” under the MLRs, these firms will only need to seek authorisation under FSMA with the FCA.
• The registration and change in control thresholds will also be amended to align with FSMA thresholds. This will mean that there is appropriate consistency across the cryptoasset sector and ensure owners of cryptoasset firms involving complex ownership structures are not missed from the fit and proper checks, which could allow bad actors access to the UK markets.

7. Further Revisions to the MLRs

• Counterparty due diligence for cryptoasset firms
• As part of the intended package of amendments to the MLRs, changes are planned to ensure that the UK remains in alignment with those requirements with the focus on FATF recommendation 13 (Correspondent Banking) read with recommendation 15 (New technologies). These changes will align certain requirements for cryptoasset businesses in the MLRs with existing requirements for credit and financial institutions.

Looking ahead

HM Treasury’s response to the consultation outlines reforms aimed at improving the effectiveness of the UK’s anti-money laundering regime. These changes are designed to strengthen the regime by closing loopholes in the existing regulations, addressing new and emerging threats, and clarifying requirements so that they are more targeted and effective.

For businesses operating in regulated sectors, it will be essential to stay updated on these changes and adapt internal processes to meet the updated requirements.

For more information on the consultation response, you can read the full document here.

How Neopay can help

At Neopay, we understand the complexities businesses face in complying with evolving anti-money laundering regulations. With the recent updates to the Money Laundering Regulations, staying on top of regulatory changes is more important than ever. Neopay offers tailored compliance services to support businesses in adapting to the new requirements, ensuring that your processes are effective, efficient, and aligned with the latest regulations.

Our team of experts can assist with:

• Compliance audits: Thorough reviews of your existing systems to ensure they meet the updated MLRs and other regulatory requirements.
• Customer Due Diligence & Enhanced Due Diligence: Guidance on implementing proportionate and effective CDD and EDD practices tailored to your business sector.
• Training and support: Engaging training solutions for your team to ensure they understand and comply with the latest MLR updates.
• Regulatory updates: Ongoing monitoring of changes in legislation to keep your compliance practices current and effective.
• FCA application support: Expert advice and support with authorisations, change in control or variation of permissions applications to the FCA,

Neopay’s expertise ensures that you can navigate these changes with confidence and avoid potential pitfalls. Contact us today to discuss how we can support your compliance journey.