Brexit: money laundering opportunities in the UK

The UK has become “the jurisdiction of choice for dirty money”, harming its national reputation and democratic institutions

A cross-party group of MPs have said as they urged a new government to focus on money laundering and corruption. The Russian invasion of Ukraine and the subsequent emergency measures taken against potentially illicit Russian money in the UK had been a wake-up call as to the scale of the issue, the MPs said.

 Kwasi Kwarteng said that agents from overseas would no longer be able to create UK companies on “behalf of criminals”.

Registering a new company in the UK can cost as little as £12. Mr Kwarteng told Parliament that oligarchs and kleptocrats have benefited from the “veneer of legitimacy” provided by UK-registered companies and partnerships while using high-end property to help “launder proceeds of corruption”. Mr Kwarteng said the new register would “shine a light” on who owns what in the UK so the government could “flush out the oligarchs, criminals and kleptocrats who think they can use UK property to hide their illicitly obtained wealth”.

The story goes back to Brexit, the UK left the EU on 31 January 2020, and the transition period ended on 31 December 2020.

Following Brexit Poll, On 24 December 2020, the EU and UK concluded the Trade and Cooperation Agreement (TCA), which regulates the future EU-UK relationship. The Withdrawal Agreement 2019 continues to apply. Under the Money Laundering and Transfer of Funds (Information) (Amendment) (EU Exit) Regulations 2019, the definition of a “third country” becomes a country outside the UK, as opposed to outside the European Economic Area (EEA).

EU nationals/clients have consequently become third-country entities for Anti-money laundering (AML) compliance. Transactions and business relationships involving EU nationals/clients should be subject to third country considerations and criteria. For example, an EU customer seeking residence rights or citizenship in exchange for transfers of capital, purchase of a property, governments bonds or investment in corporate entities is a “customer risk factor” to be considered in respect of compliance with regulation 33 (obligations to apply enhanced due diligence).

There have been no immediate changes to the AML framework for the UK after Brexit.

The UK transposed the 5th Anti-Money Laundering Directive into UK law, and the government has not announced any proposals to deviate from those requirements. Further, while the UK has opted out of transposing the 6th Anti-Money Laundering Directive (which was due by 13 December 2020), this is primarily because many of its requirements are already covered by existing UK law after Brexit.

One exception is the proposed new offence of corporate liability, where the UK government has announced a secondary review to be taken forward by the Law Commission.

Nonetheless, there are still some changes, current or future, that firms should factor into their programme, including:

• The UK adoption of future EU MLDs: In September 2019, the UK announced its intention to opt out of the EU’s 6th MLD, affirming that existing domestic legislation is largely compliant with the proposed measures and, in many cases, goes further.
• Third country status: From 1 January 2021, the definition of ‘third country’ changed from outside EEA to outside the UK. This required applying third-country criteria and considerations to EU nationals and companies for financial crime compliance during business relationships and transactions.
• High-risk countries: While initially carrying through the EU’ high risk’ country classifications, the UK deviated significantly in March 2021, prescribing its own high-risk third country list aligning to FATF classifications.
• Due diligence requirements: The MLRs, require UK credit and financial institutions engaged in correspondent banking relationships with such institutions outside the EEA to apply EDD measures to these relationships. EDD was not previously needed on intra-EEA correspondent relationships. However, the new statutory instrument (SI) equalises the treatment of correspondent banking relationships and requires EDD on all such relationships.
• Transfer of funds: The EU’s Fund Transfer Regulation requires a greater volume of information from payment service providers (PSP) identifying payers/payees for transfers of funds outside the EU. From 1 January 2021, UK PSPs are subjected to non-EU funds transfer requirements.

The Fifth Money Laundering Directive (5AMLD) introduced many critical changes to the European money-laundering regime, for example, extending the directive’s scope to cryptocurrency wallets and exchanges.

5AMLD came into effect in January 2020, yet despite its impending exit from the EU, the UK implemented the directive into national law. The implementation of 5AMLD brought the domestic regime in line with EU regulations, bolstered the UK’s AML rules, and ensured they continue to meet the global standards as set out by the Financial Action Task Force (FATF). 5AMLD was introduced into UK law primarily through the Money Laundering and Terrorist Financing (Amendment) Regulations 2019, which implemented the aforementioned vital changes.

“This is a huge problem. Our financial services and our defences against dirty money have been overrun.” Margaret Hodge said the Labour MP co-leading the initiative and chairs the all-party group on anti-corruption.

“London is now the laundromat for washing dirty cash, and we can’t go on like this. Britain will not prosper economically on the back of dirty money. Our national security is under threat, our economy is suffering, and our democratic values are undermined.” However, Hodge, who launched the manifesto in Parliament on Thursday alongside the Conservative MP Kevin Hollinrake, a co-chair of the all-party group on fair business banking, said more was needed. There had been a particular lack of action over money laundering. “That has meant that we have become the jurisdiction of choice for dirty money, a haven for dirty money,” she said.