The HM Treasury recently updated its advisory notice on Money Laundering and Terrorist Financing Controls in high-risk third countries, effective December 4, 2023. This notice impacts businesses under UK regulation, especially in light of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs). The advisory outlines enhanced due diligence requirements for dealing with high-risk third countries.

Key Elements of the Advisory Notice

  1. Definition of High-Risk Third Countries: High-risk third countries are those specified in Schedule 3ZA of the MLRs. This definition is pivotal for understanding the scope of the regulations.
  2. Enhanced Customer Due Diligence Requirements: Regulation 33(1)(b) of the MLRs mandates that regulated businesses conduct enhanced customer due diligence and ongoing monitoring in any business relationship or transaction involving entities established in high-risk third countries.
  3. Establishment Criteria: The regulation defines being “established” in a country in two ways: for legal persons, it’s based on incorporation or principal place of business; for individuals, it’s based on residency.
  4. Update in High-Risk Country List: The Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) (No.2) Regulations 2023, effective from December 5, 2023, updates the list of high-risk countries in Schedule 3ZA. New additions include Bulgaria, Cameroon, Croatia, Nigeria, South Africa, and Vietnam, while Albania, Cayman Islands, Jordan, and Panama are removed.
  5. Alignment with FATF Lists: The updated list aligns with the Financial Action Task Force’s (FATF) lists of ‘Jurisdictions under increased monitoring’ and ‘High-risk jurisdictions subject to a call for action’.
  6. Enhanced Due Diligence on New and Existing Customers: The regulation requires enhanced due diligence and ongoing monitoring for all customers, new and existing, from high-risk third countries. The intensity and detail of these measures should be proportionate to the level of risk.
  7. Risk-Based Approach: Businesses are advised to take a risk-based approach, focusing on higher-risk customer groups and considering the level of information already gathered.
  8. Group Wide Controls: Regulation 20(3) requires that branches and subsidiaries in high-risk third countries apply measures equivalent to UK standards.
  9. FATF Public Statement: FATF’s latest statements, identifying jurisdictions with strategic AML/CTF deficiencies, play a crucial role in determining the high-risk countries.
  10. HM Treasury Advice: The advisory lists jurisdictions included in Schedule 3ZA, many of which are also subject to financial sanctions requiring additional measures.

Background Information

  • Financial Action Task Force (FATF): Established by the G7 in 1989, FATF includes 38 jurisdictions and two regional organisations (European Commission and Gulf Co-operation Council). It sets global standards for anti-money laundering and counter-terrorist financing.
  • UK Government Strategy: The strategy aims to use financial tools to deter, detect, disrupt, and hold accountable those responsible for crime and terrorism.
  • Regulatory Requirements: The MLRs require firms to implement policies and procedures to prevent money laundering and terrorist financing activities and apply enhanced customer due diligence on a risk-sensitive basis.
  • Restrictive Measures: Additional restrictive measures apply in the UK for some jurisdictions listed in this advisory notice.
  • Further Information and Resources: For more details on the UK government’s efforts in combating financial crime and to subscribe to financial crime alerts, one can visit the UK government’s official website.

Implications for Regulated Businesses

Businesses under UK regulation need to be aware of these changes and adjust their compliance processes accordingly. This involves updating the list of high-risk countries in their systems, ensuring that enhanced due diligence is carried out on new and existing customers from these countries, and aligning their policies with the FATF recommendations and UK regulations. The emphasis on a risk-based approach allows businesses to prioritise resources effectively while ensuring compliance.

Additionally, businesses must stay vigilant for future updates and advisories from HM Treasury to remain compliant.