Emerald Group Publishing Limited
Copyright © 2008, Emerald Group Publishing Limited
Article Type: Editorial From: Journal of Financial Crime, Volume 15, Issue 2.
The UK's response to the European Union Third Money Laundering Directive has led to the implementation of the Money Laundering Regulations 2007 on December 15, 2007 which replace the Money Laundering Regulations 2003 and are designed to further combat money laundering and particularly the financing of terrorism. The new regulations extend supervision to most UK financial businesses, and for the first time, bring in the supervision requirements for estate agents, trust or company providers and consumer credit businesses. The regulated sectors now comprise of credit institutions, financial institutions (including money transmitters, bureaux de change, cheque cashers), auditors, insolvency practitioners, external accountants and tax advisers, independent legal professionals, trust or company services providers, estate agents (excluding letting agents), high-value dealers and casinos. The regulations also introduce additional requirements and safeguards for situations of higher risk which include:
stricter checks on “politically exposed persons” and non face-to-face customers;
stricter tests to ensure money services business and firms which set up and manage trusts and companies for clients are not run for criminal purposes;
more detailed obligations regarding customer due diligence which are now divided into two new categories namely simplified due diligence and enhanced due diligence; and
the requirement to identify not just the customer but the beneficial owner of the customer.
In addition, the new regulatory regime also represents a particular milestone in how regulated businesses must tackle the issue and the challenges in customer due diligence and risk exposure through the adoption of the risk-based approach.
The risk-based approach in money laundering and terrorist financing controls means that resources should be allocated on a proportionate and cost-effective basis in relation to concrete risks and impact faced by the regulated sector. This less prescriptive approach will change the way many firms within the regulated sectors operate, and certainly how money laundering and terrorist financing risk is managed in the UK. The risk-based approach recognises that the threat posed to the regulated firm by money laundering and terrorist financing varies across customers, jurisdictions, products and delivery channels. It allows the firm to differentiate between its customers in a way that matches the risk in its particular business so that senior management can apply its own approach to the firm's compliance procedures, arrangements, systems and control in particular circumstances. In fact, not all firms will require complex or highly sophisticated anti-money laundering and counterterrorist financing procedures to meet the requirements established by the Money Laundering Regulations 2007. Each regulated firm should identify the money laundering and terrorist financing risks that are relevant to the firm. It should assess the risks presented by the firm's particular customers, products, delivery channels and geographical area of operation in order to design and implement controls to manage and mitigate these assessed risks. The firm should also monitor and improve the effective operation of these controls as well as recording in an appropriate manner. As a result, the firm should be able to focus its resources on the minority of customers who represent a higher risk, simplify the document requirements and reduce unnecessary duplication of identity checks. The concept of risk-based approach is based on sound principles, however, in practice, it poses certain challenges in generating a flexible and effective framework which will have impact on money laundering and terrorist financing but not excluding people from the financial system.
During the last two years, there have been major changes in the anti-money laundering and counterterrorist financing arena; from revised Guidance published by the Joint Money Laundering Steering Group, the abolition of the Money Laundering Sourcebook by the Financial Services Authority to most recently the implementation of the Money Laundering Regulations 2007. There is no doubt that these new regulatory requirements are going to be more robust in combating money laundering and terrorist financing. However, will the fight against money laundering and terrorist financing take place at the expense of the UK economy? Some of the key concerns about the introduction of the new regulatory requirements include the cost of compliance, the impact of UK competitiveness and the reputational risk if found to be non-compliant. Furthermore, there is always the fear that even dedicated attention to compliance will only serve as mitigation should an offence actually occur. Indeed, the efficacy of the Money Laundering Regulations 2007 needs to be evaluated and monitored closely so as to ensure that the costs of the new regulatory regime do not outweigh the benefits.
Angela V.M. Leong