U.K. revisions to its anti-money laundering and counter terrorist financing regime come into force on 10 January 2020.
The U.K.'s revisions implement the European Union's Fifth Anti-Money Laundering Directive, commonly referred to as "5MLD"1 and are designed to strengthen the U.K.'s AML and CTF regimes in order to meet the Financial Action Task Force's global standards.2 The U.K. has opted to go further than certain of the EU's requirements, indicating that it intends to continue in its position as a leading global financial center, and its strict regulation and enforcement of the AML and CTF regimes.
EU Member States must implement the provisions set out in 5MLD by 10 January 2020. Therefore, even though the U.K. is scheduled to leave the EU on 31 January 2020, as a Member State on the implementation date, it is required to transpose the provisions of the Directive into domestic law.
Money Laundering and Terrorist Financing (Amendment) Regulations 2019
On 20 December 2019, the U.K. Government published the Money Laundering and Terrorist Financing (Amendment) Regulations 20193 ("the 2019 Regulations"), the statutory instrument that will give effect to most of the legislative changes required under 5MLD. The 2019 Regulations amend the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 20174 ("the 2017 Regulations")—the domestic legislation that gave effect to the EU's Fourth Anti-Money Laundering Directive in the U.K. These laws require companies to know their customers and to manage the risks of AML/CTF.
The 2019 Regulations impact the U.K.'s AML and CTF regimes in a number of ways, including:
- extending the scope of persons subject to the 2017 Regulations;
- extending customer due diligence measures;
- creating bank account portals to be accessed by financial intelligence units ("FIUs") and national regulators;
- creating a system of registration for crypto-asset businesses.
The majority of the provisions set out under the 2019 Regulations come into force on 10 January 2020, with the exception of those governing customer due diligence on anonymous prepaid cards and requests for information about accounts and safe-deposit boxes, which will come into force on 10 July and 10 September 2020 respectively.
The 2019 Regulations take account of responses to HM Treasury's consultation5 on 5MLD implementation, which concluded in June 2019 ("the Consultation"). HM Treasury has announced that it intends to publish feedback on responses received during the Consultation in due course.
New Persons Subject to the 2017 Regulations
Under the 2019 Regulations, the scope of persons subject to the 2017 Regulations will be expanded to include crypto-asset exchange providers, custodian wallet providers and crypto-asset automated teller machines. Interestingly, the scope of the U.K.'s definition of "crypto-asset" is broader than the equivalent "virtual currency" definition laid out under 5MLD and acts as an example of the U.K.'s willingness to develop and expand the scope of the EU's rules when it considers it appropriate to do so.
The regime is also to be extended to include the letting agency sector for high value transactions (i.e. where properties command monthly rents of €10,000 or more) and to art market participants for transactions that exceed €10,000.
The expansion of persons subject to the 2017 Regulations has been introduced in order to close perceived loopholes, in addition to taking account of advances in financial technology and changes in behavior.
In a deviation from the proposed measures published by the U.K. before the Consultation, publishers of open-source software and non-custodian wallet providers will not fall within the scope of the 2017 Regulations.
Customer Due Diligence
Under the changes introduced by the 2019 Regulations, letting agency businesses and art market participants, as well as crypto-asset exchange providers and custodian wallet providers, will be required to apply customer due diligence measures (subject to existing de minimis thresholds), together with all other obligations under the amended 2017 Regulations.
In line with recent changes to FATF standards, the 2019 Regulations also enhance the stringency of due diligence requirements, requiring relevant individuals to take reasonable measures to understand the control structure and ownership of their clients, and to verify the identities of managing officials where beneficial ownership of a corporate entity is unclear.
Bank Account Portals
Under the 2019 Regulations, FIUs and national regulators must be given access to details about U.K. bank accounts, building society accounts and safe deposit boxes for certain specified purposes, including where a national crime agency is carrying out its FIU functions, or any other law enforcement authority is investigating money laundering, terrorism or carrying out its supervisory functions. In practice, this means authorities will be able to obtain details, such as account IBAN numbers, dates of the opening and closing of accounts and the names, dates of birth and addresses of relevant account holders and beneficial owners. The intention is to improve the effectiveness of those tasked with investigating and regulating the AML and CTF regimes.
As can be seen from the measures set out above, the U.K. implementation of 5MLD seeks to strengthen the AML/CTF regulation of crypto-assets. The 2019 Regulations also appoint the U.K.'s Financial Conduct Authority as the supervisor of U.K. crypto-asset businesses for AML/CTF purposes. The FCA has published information on the scope of the activities caught by the 2019 Regulations, how entities should obtain registration as well as its approach to supervision of crypto-asset businesses.6 Registration with the FCA for AML/CTF purposes is not equivalent to a firm obtaining authorization to conduct regulated activities in the U.K. and the FCA warns crypto-asset businesses not to mislead their customers as to their status and any protections that may apply.
Under the 2019 Regulations, new crypto-asset businesses are required to have registered with the FCA before they can conduct crypto-asset activities. Crypto-asset businesses that are already operating in the U.K. prior to 10 January 2020 will be afforded a transitional period until 10 January 2021 in which to register. To be registered, a crypto-asset business must demonstrate that it and its owners and senior managers or officials are "fit and proper." However, the FCA has confirmed that regardless of registration it will begin supervision of in-scope crypto-asset businesses on 10 January 2020. Those businesses that pose the highest money laundering and terrorist financing risk are likely to be subject to an enhanced supervisory focus. Crypto-asset exchange providers and custodian wallet providers must comply with certain reporting requirements and the FCA will maintain a register of such entities.
The 2019 Regulations follow a policy statement and guidance issued by the FCA in June 2019 on when crypto-assets will fall within the U.K. regulatory perimeter.7 Those publications made clear that certain crypto-asset activities, including the issuance of e-money tokens or use of tokens to facilitate regulated payment services, may well fall within the FCA's existing regulatory ambit and that such activities are expected to become an accepted aspect of the U.K. financial system going forward. HM Treasury is considering whether to expand the FCA's regulatory perimeter to capture more crypto-asset business. The FCA's enhanced focus on crypto-asset money laundering risks reflects a growing international concern with the increased use of crypto-assets.
AML and CTF Post-Brexit
The potential for the U.K. to deviate from the EU's legal and regulatory frameworks in the post-Brexit era has been a topic of much debate in recent years. However, all indications suggest that the U.K. is unlikely to reduce the AML and CTF measures to be applied by those subject to the 2017 Regulations following withdrawal from the EU.
Of course, until the U.K.'s withdrawal from the EU and the conclusion of the transition period, which is currently scheduled to come to an end on 31 December 2020, most EU laws, including those concerning AML and CTF will continue to apply. Therefore, the U.K. must adhere to the current EU standards, as well as any further EU legislation that may come into effect in this area for at least the next eleven months or so. Thereafter, the scope for divergence will depend on the nature of the U.K.'s future relationship with the EU.
Article 82 of the revised Political Declaration published in October 2019,8 which sets out the U.K. and EU's intentions for their future relationship, states that it should cover arrangements for cooperation in "anti-money laundering and counter terrorism financing". Article 89 states that the U.K. and EU also agree "to support international efforts to prevent and fight against money laundering and terrorist financing, particularly through compliance with [FATF] standards and associated cooperation."
At present, the Political Declaration is merely a list of aspirations. Nevertheless, even when there remained the chance that the U.K. would leave the EU without reaching any form of agreement, HM Treasury publicly committed to transposing 5MLD regardless of whether the U.K. was a Member State on the date of implementation. Indeed, the Explanatory Memorandum9 to the 2019 Regulations states that "as a leading member of the FATF, the U.K. will continue updating anti-money laundering policies according to international standards, ensuring the U.K.'s AML/CTF regime is kept up to date, effective and proportionate."
Further revisions to international AML/CTF standards are expected in the coming years. In December 2019, the Council of the EU adopted strategic priorities for further reforms to the EU's AML/CTF regime and has requested that the European Commission take action to put those priorities into effect.10 A report on the European Commission's progress is expected in June 2020. The EU also shares the concerns expressed by international bodies that global "stablecoin" projects should be subject to appropriate regulatory frameworks and that money laundering and terrorist financing risks are amongst the issues to be addressed.11
Therefore, as matters currently stand, where the EU introduces further legislation to implement FATF or other globally recognized standards, the U.K. is likely to remain in close alignment and as the 2019 Regulations demonstrate, in some areas, the U.K. may well go further.
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