Guidance

Money Laundering and Transfer of Funds (Information) (Amendment) (EU Exit) Regulations 2018: explanatory information

Published 13 November 2018

1. Context

The EU Withdrawal Act 2018 (EUWA) repeals the European Communities Act 1972 on the day the UK leaves the EU and converts into UK domestic law the existing body of directly applicable EU law. The purpose of the Act is to provide a functioning statute book on the day we leave the EU.

The EUWA also gives Ministers powers to make Statutory Instruments (SIs) to prevent, remedy or mitigate any failure of EU law to operate effectively, or any other deficiency in retained EU law. We refer to these contingency preparations for financial services legislation as ‘onshoring’.

HM Treasury is using these powers to ensure that the UK continues to have a functioning financial services regulatory regime in the event of a no-deal scenario.

This SI is part of the wider work the government is undertaking to prepare for the UK’s withdrawal from the EU. It is not intended to make policy changes, other than where appropriate to reflect the UK’s new position outside the EU, and to smooth the transition. The changes made in this SI would not take effect on 29 March 2019 if, as expected, we enter an implementation period.

2. Notice

The attached draft SI is intended to provide Parliament and stakeholders with further details on our approach to onshoring financial services legislation. The draft instrument is still in development. The drafting approach, and other technical aspects of the proposal, may change before the final instrument is laid before Parliament.

3. Policy background and purpose of the SI

3.1 What does the underlying EU regulation and UK law do?

The Fourth EU Anti-Money Laundering Directive (4AMLD) was transposed into UK law by the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the MLRs). 4AMLD updated the EU anti-money laundering regime to reflect the 2012 update to the international anti-money laundering and counter-terrorist financing (AML/CTF) standards set by the Financial Action Task Force (FATF). 4AMLD specifies types of firm, including credit and financial institutions, that must be regulated for AML/CTF purposes, and makes provision on issues including beneficial ownership registration and record-keeping, customer due diligence requirements (CDD) and the circumstances in which enhanced levels of CDD are required.

The EU Funds Transfer Regulation (FTR) specifies what information must accompany electronic transfers of funds carried out by payment service providers (PSPs). The FTR gives legal effect to a FATF standard, and is part of the UK’s wider AML/CTF regime.

The Oversight of Professional Body Anti-Money Laundering and Counter Terrorist Financing Supervision Regulations 2017 (OPBAS Regulations) provided the Financial Conduct Authority (FCA) with a new role overseeing the AML/CTF supervision by 22 professional body supervisors within the accountancy and legal sectors. The establishment of OPBAS was intended to make the UK’s AML/CTF supervisory regime more consistent and effective.

3.2 Deficiencies this SI remedies

This SI addresses deficiencies in each of the MLRs, FTR and OPBAS Regulations that arise from the UK leaving the EU to ensure that this legislation continues to operate effectively. There are no substantive policy changes within this SI to the wider AML regime – the only changes that it makes are to ensure that the UK’s AML regime continues to operate effectively once the UK ceases to be a member of the EU.

Changes introduced by the SI include:

• Removal of references to EU institutions, and an equalisation of the regulatory treatment of EEA Member States and ‘third countries’

ESA Guidelines – Part 2 of the SI

The MLRs, FTR and OPBAS Regulations each currently require certain UK persons to have regard to guidelines published by the European Supervisory Authorities (ESAs). When the UK leaves the EU, the UK will no longer fall under the regulatory procedures of the ESAs and so it would not be appropriate for UK persons to be legally required to have regard to the ESAs’ guidelines. These references are therefore being removed.

Transmission of information to EU institutions – Part 2 of the SI

The MLRs currently require certain information (such as the UK’s National Risk Assessments of Money Laundering and Terrorist Financing) to be communicated to EU institutions, including the European Commission and the ESAs, as well as to other EEA Member States. These provisions are requirements of 4AMLD. It would not be appropriate to retain these provisions within the MLRs once the UK has ceased to be a member of the EU.

Levels of due diligence applied to intra-EEA correspondent banking relationships – Part 2 of the SI

The MLRs currently require UK credit and financial institutions engaged in correspondent banking relationships with such institutions outside the EEA to apply enhanced due diligence (EDD) measures to these relationships. EDD is not required on intra-EEA correspondent relationships. This SI will equalise the treatment of correspondent banking relationships, and require UK credit and financial institutions to conduct EDD on all such relationships which they enter into. This will align with the existing practice of many UK institutions, and with the FATF standards on this issue.

The MLRs reference the European Commission’s high-risk third country list. This list is referenced in the MLRs because a relevant person must apply enhanced customer due diligence and monitoring to manage risks arising in a business relationship with a person established in a high-risk third country. The EU list will be onshored as of exit day, and form part of UK law. Onshoring this list will mean subsequent updates the EU makes to the list will not flow through into UK law. Therefore, the reference in the Regulations will be static rather than dynamic, and the list will only evolve as amended by UK law.

FCA ability to make technical standards – Part 2 of the SI

This SI will empower the FCA to make technical standards to specify what additional measures are required to be taken by credit and financial institutions with branches or subsidiaries abroad; when national law outside the UK does not permit group-wide policies and procedures to be implemented that are at least as strong as those that are required by the MLRs. This function is currently exercised by the European Commission.

Information accompanying electronic transfers of funds – Part 3 of the SI

The FTR currently requires that a greater volume of information identifying payers/payees is provided by payment service providers (PSPs) for transfers of funds outside the EU than is the case for intra-EU transfers of funds. This SI will equalise the regulatory treatment to require that the same levels of information are provided by PSPs, regardless of whether other PSPs to which funds are being transferred are within or outside the EU. The effect of this will be to require UK PSPs to provide greater volumes of information accompanying transfers of funds into EU Member States than is currently the case.

Consistent with the government’s cross-cutting approach to fixing deficiencies within retained EU law, the SI will ensure that electronic transfers of funds between the UK and Gibraltar will be treated for the purposes of the FTR as being equivalent to transfers within the UK.

3.3 Stakeholders

This SI will affect PSPs, AML/CTF supervisory authorities, and firms that are regulated through the MLRs. These stakeholders are already either regulated through the UK’s AML/CTF regime, or have responsibilities for supervising the compliance of regulated entities. As already noted, the intention of this SI is not to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition to this position. HM Treasury has engaged with industry bodies where possible to ensure awareness of these changes.

4. Next steps

HM Treasury plans to lay this instrument before Parliament before exit.

5. Further information

Read HM Treasury’s approach to financial services legislation under the European Union (Withdrawal) Act 2018.

6. Enquiries

If you have queries regarding this instrument, email [email protected].