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Steve Smith

Partner, Eversheds Sutherland

Quotation Marks
Encouragingly, the consultation seeks input on the extent of the guidance needed on the use of digital identity verification during the CDD process

The UK government’s consultation on the Money Laundering Regulations

The UK government’s consultation on the Money Laundering Regulations


Steve Smith assesses the government’s consultation in the context of the legal profession

HM Treasury may have given an early birthday gift to the UK’s now 30-year-old anti-money laundering (AML) regulatory regime. This is through the latest consultation on ‘Improving the effectiveness of the Money Laundering Regulations’. Published on 11 March, the consultation provides the potential for a positive step forward in improving the effectiveness and proportionality of the current regime.

The UK’s AML regime has grown significantly since it was introduced by the Money Laundering Regulations 1993 (which came into force on 1 April 1994). In 1994, the UK’s AML regime simply obliged financial institutions to have systems in place to identify customers and make suspicious transaction reports to the then National Criminal Intelligence Service. Since 1994, there have been numerous amendments to the regulatory regime, which has expanded both in terms of the scope of the business activity it covers and the requirements on those working in those businesses.

The consultation follows the findings of the 2022 review of the UK’s AML/CFT regulatory and supervisory regime and is linked to the Economic Crime Plan for 2023 to 2026. The consultation appears to be well thought through, relevant and balanced. However, it is based on the government’s assessment that the regime is generally adequate and, subject to an identified need for a number of updates, fit and able to keep pace with today’s global financial system and the financial crime threat faced. It follows that, while a positive step forward, the question of whether more fundamental change is needed is avoided. There is also a risk that good intentions to create efficiencies may lead to increased risk for regulated firms.

The main driver is to achieve better proportionality and an improved balance between the burden placed on regulated firms and their customers against the risk of money laundering and terrorist financing. Central to this discussion is the question of how to support firms in confidently designing and deploying a risk-based approach to help achieve this balance. Those who are stakeholders in AML compliance in the legal sector would find value in responding to the consultation to seek to influence positive outcomes from the consultation.

The core themes

The consultation principally considers:

  • making customer due diligence more proportionate and effective,
  • strengthening system coordination and the sharing of information between supervisors and other government bodies,
  • the scope of the regulations, and
  • reforming the registration requirements for the Trust Registration Service.

HM Treasury is also separately keen to hear from stakeholders regarding the cost of compliance.

Customer due diligence (CDD)

The consultation recognises that CDD and ongoing monitoring is expensive and that some firms may choose to ‘over-comply by taking a blanket or overly risk-averse approach […] consumer feedback indicates that customers often feel that checks are intrusive, administration heavy or don’t reflect their understanding of the risks they pose’. The consultation explores how firms may better apply a risk-based approach and identifies three areas where there is a risk of ambiguity in doing so:

  • the trigger points for when CDD and enhanced due diligence (EDD) is required,
  • when source of funds checks are required, and
  • the checks required when a person purports to act on behalf of a customer.

These are areas that would certainly benefit from greater clarity.

Encouragingly, the consultation seeks input on the extent of the guidance needed on the use of digital identity verification during the CDD process. The questions are relevant and confirm a desire to accelerate the confident use of digital identity verification. The consultation does not seek input on the more fundamental issue of whether a centralised digital database of identity information maintained by the UK government could ultimately be the solution to enable a more efficient and less intrusive CDD process. However, the consultation does provide a good opportunity to continue to push the agenda on how digital identity can be used to fulfil identification requirements. The legal sector should take this opportunity to influence on this.

Those law firms that have exposure to clients or transactions based in high-risk third countries will be interested in questions about ‘how’ and ‘when’ EDD should be conducted and when those circumstances apply. More leeway is suggested to support a risk-based approach to EDD rather than requiring a mandatory set of checks to be conducted. The current requirements are overly clumsy and need better clarity. However, there is a risk that providing more scope for a risk-based approach could cause the pendulum to swing too far the other way and inadvertently increase the compliance burden on firms. Any changes should be supported by clear and pragmatic guidance.

The consultation recognised that some firms would like more clarity and guidance on when source of funds checks are required. HM Treasury takes the view that this could be unhelpful, and firms should deploy their own risk-based approach to this. Incidentally, the publishing of the consultation coincides with the updated Sectoral Risk Assessment issued by the Solicitors Regulation Authority on 4 March 2024 which highlighted new money laundering risks associated with (1) vendor fraud (selling properties without the consent of the owner), (2) pooled client funds (where it is difficult to identify the source of funds from different participants), (3) third-party managed accounts, and (4) irregular methods of transferring funds.

The consultation identifies that some businesses, including solicitors, who operate pooled accounts are facing barriers in accessing or maintaining a client account with banks. This is due to restrictions on being able to provide the bank with a list of clients whose funds are held in the account due to confidentiality reasons. This conflicts with the regulations requiring banks to ensure they have access to this information to enable simplified due diligence to be conducted. The consultation seeks views on the extent and nature of customer due diligence requirements that should apply in relation to pooled accounts. Given the obvious impact on those working in the legal sector this is an area where firms may wish to contribute to the consultation.

The author would like to thank Deborah Williams for her assistance in writing this article.