Virtual Brexit negotiations are currently being held between UK officials and EU representatives. So far, there has been little progress towards an alignment or a mutual agreement between the two sides.
Michel Barnier, the EU’s chief Brexit negotiator has made it clear that if the UK wants a frictionless trade deal it must comply with EU regulations across multiple sectors, however, Boris Johnson has been steadfast in his resolve to deliver Brexit on terms that will benefit and suit the UK.
In the month ahead the Brexit negotiations are likely to continue to be a bumpy ride and a potential for a ‘hard Brexit’ —where the UK leaves the European Union without a trade deal in place – is a real possibility. Only after the withdrawal will the trading and regulatory relationship between the UK and the EU be clear. So, how will this affect the regulatory environment, specifically in regard to Anti-Money Laundering (AML)?
5th Money Laundering Directive (5th MLD)
Early this year on the 10th January 2020, the EU’s 5th Money Laundering Directive (5thMLD) came into force in the UK and its effects have been far-reaching. The UK Government agreed with the EU that it would continue to apply 5MLD during the Brexit transition period.
Following Brexit however, the 5MLD will change slightly as the EU member states will have to treat the UK as a ‘third country’. Currently, EU regulation requires UK financial providers to supply specific documentation from official sources such as Government and public registers in connection with transfers of funds between the UK and EU. However, treating the UK as a ‘third country’ will require moving from a simplified way of verification to enhanced due diligence checks, which could slow processes down and have a negative impact on trade.
The implementation of such techniques may take some time and, in the interim, ultimately will give ‘bad actors’ further opportunity to commit fraudulent activity, increasing the risk of money laundering.
If the negotiations completely breakdown between the two sides, resulting in a ‘no deal’ Brexit, the UK will need to make a choice on whether to continue to comply with the 5MLD or not. So far, there has been no specific indication from the Government about this.
Some observers believe that the UK could use the opportunity to significantly reduce financial regulations to gain a competitive advantage over the EU when attracting big business. However, although relaxing regulation could make the UK more attractive for global business, it would also likely increase exposure to money laundering activities, as opportunist criminals searching for methods to move illicit funds will naturally gravitate towards any structural weaknesses.
Having said that, this approach is very unlikely. Historically the UK has been tough on AML laws and the government’s rhetoric on economic crime is such that it is expected that the UK will continue this approach.
One aspect of the 5MLD that has created a great deal of confusion is the requirement for member states to create an Ultimate Beneficial Owner (UBO) register that is publicly accessible within 18 months of 5AMLD’s implementation date to provide further transparency. However, there has been little direction from the Government so far about how the private sector is required to build the architecture for sharing beneficial ownership information. This will be a labour-intensive task for both the Government and private sector, so there will be some debate about whether there is a need for the UK to implement these provisions. One practical difficulty with having such a debate, however, is timing.
Will the 6th Money Laundering still apply to the UK?
The 6th Money Laundering Directive (6MLD) is less of a concern for the UK because our laws already comply with the vast majority of the 6MLD. This includes, for instance, an obligation to prohibit laundering of the proceeds of specified predicate offences, whereas the UK’s laws already apply to any predicate offence.
But there is one intriguing exception, in the form of a requirement to make corporate entities vicariously liable for acts of money laundering committed for their benefit by an individual in a leading position, or which have been made possible by a lack of supervision or control of such an individual.
The UK’s laws on corporate liability are roughly consistent with the first of these categories, but not at all with the second, which looks more like the extended ‘failure to prevent’ model that has been sitting in the in-tray of the Ministry of Justice for some years. So, it will be intriguing to see whether the Government finds time to enact a new corporate offence of ‘failing to prevent money laundering’ before the 6MLD transposition deadline of 3 December 2020.
Again, whether the UK is bound to do this after leaving the EU depends on what, if any, withdrawal agreement applies. In the current version, that 6th MLD deadline falls narrowly within the transition period. But in the event of ‘No deal’, the UK would again have a choice on whether to remain aligned with the EU or not.
In practical terms, the impact is in whether the UK is treated as an equivalent jurisdiction for the purposes of due diligence obligations. Whether, for instance, a bank in France is entitled to assess the risks of, or require documentation and information from, a UK customer to roughly the same standard as one from an EU member state. Ultimately, it is the value of that equivalence status that will need to be weighed up against the burdens of complying with MLDs generally, as the UK ‘takes back control.’