HM Treasury has launched an extensive consultation with a view to improving the effectiveness of the Money Laundering Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (“MLRs”). The consultation identifies four “core themes” on which it seeks views from stakeholders:

1. Making customer due diligence (“CDD”) more proportionate and effective

As the consultation states, CDD is the “first line of defence against money laundering and terrorist financing in the UK”. However, engagement with relevant stakeholders revealed that many find the requirements burdensome, expensive, and even ineffective. Whilst the consultation makes clear that there is no intention to move away from the risk-based approach that requires CDD to be carried out in a way that reflects the understanding of the risk posed by an individual customer, it recognises that there are areas of ambiguity which might, for example, lead to an overly cautious approach being taken.

Three areas in particular are highlighted. First, the consultation seeks views on whether the primary triggers for CDD are sufficiently clear and easy to apply, raising the possibility of sector-specific triggers being introduced. Second, it recognises that there is some uncertainty about when source of funds checks are required, and asks whether greater guidance (such as sector-specific scenarios) might be helpful. Third, it seeks views on whether the language used in the MLRs in the context of verification checks when a person purports to act on behalf of another is sufficiently clear. Engagement from firms suggests that there is some confusion about “the scope of ‘acting on behalf’ requirements, for instance as regards how they apply when the customer or the person is a corporate entity” leading to overly risk-averse and burdensome practices among firms.

The consultation also covers topics such as digital identity verification, the expansion of the list of customer-related low-risk factors, whether the risks factors for enhanced due diligence are sufficiently helpful at identifying suspicious activity, whether the current rules regarding “complex or unusually large” transactions are effective, and whether burdens currently placed on firms by the High Risk Third Country rules should be removed or relaxed.

2. Strengthening system coordination

The consultation states that regulated firms subject to the MLRs are part of a wider system of inter-connecting entities in both the private and public sector which cooperate to combat economic crime. It considers ways to improve information flows across this system, including permitting the Financial Conduct Authority to share relevant information with the Financial Complaints Commissioner, extending the information-sharing gateway to other public bodies, and extending the legislative basis for cooperation between supervisors and Companies House. It also asks whether the MLRs are sufficiently clear on how regulated firms should complete and use their own risk assessment, and what sources of information firms should use to inform their assessment.

3. Providing clarity on scope of the MLRs

The consultation identifies what it considers to be “two pressing issues with respect to the scope of the MLRs”: the currency used for financial thresholds (in particular, whether the Government should retain reference to euros) and whether the regulation of so-called trust and company service providers should be expanded to include the sale of off the shelf companies. It also seeks views on the treatment of crypto assets, and in particular whether the MLRs should be updated to take into account and align with the upcoming regulatory changes under the FSMA regime.

4. Reforming registration requirements for the Trust Registration Service

Finally, the consultation considers the Trust Registration Service, introduced by the MLRs in order to increase the transparency of trust ownership by providing a central register of the beneficial owner of taxable trusts. It seeks views on the Government’s proposals to, among other things, require the registration of all non-UK express trusts which own UK land and have no UK trustees, and introducing a de minimis level for trust registration.

The consultation is open until 9 June 2024, and HM Treasury states that it is keen to hear from “a wide range of stakeholders in response to the consultation, including regulated businesses and their customers, supervisory bodies, law enforcement agencies, civil society organisations and members of the public.”

Read the consultation in full here.