HMT is updating the MLRs - here's what you need to know

HMT has published the UK government's response to its 2024 consultation on the Money Laundering Regulations (MLRs).

In its response it indicates its intention to make various changes to the MLRs, whilst leaving some other matters to non-legislative means such as improvements to sectoral guidance.

In the coming months it will seek technical feedback on a forthcoming draft SI before laying it in Parliament later this year if parliamentary time allows.

The changes HMT will make generally follow the preferences of the majority of respondents to the consultation, so many will be uncontroversial.

Here are the highlights for financial services firms.

Amendments to the MLRs

• EDD will be required on "unusually complex" transactions, instead of on all complex transactions.  This is a helpful clarification and will help to reduce both inconsistency and unnecessary compliance burden.
• EDD will be required for transactions or relationships implicating a FATF Call for Action country (currently DPRK, Myanmar and Iran), not - as presently - for all FATF High Risk Third Countries.  The implication of a High Risk Third Countries will remain a geographic risk factor for AML purposes.  This is a welcome and principled change.
• With some businesses still struggling to access pooled client accounts (PCAs), HMT will try a new approach: removing the link between PCAs and simplified due diligence (SDD), instead including new and more permissive requirements for PCAs.  For the details, we'll need to wait for the draft SI.
• Cryptoasset firms will be pleased that HMT will remove the need for cryptoasset firms to be registered under the MLRs once they are authorised under FSMA.
• We can also expect to see the change in control thresholds for cryptoasset firms aligned with those of FSMA. 
• An amendment will be made that gives banks that urgently onboard customers from other insolvent banks certainty that they need not first verify customers' identities and instead need only do so as soon as practicable.
• Oh, and references to EUR in the MLRs will be changed to GBP and thresholds will be converted to GBP on a one-to-one basis (finally!) 

Guidance and initiatives

• There are calls for greater clarity on when EDD is needed - but no clear consensus emerged during the consultation.  So, HMT has decided only to work with supervisors and industry bodies on clarifying guidance.
• New guidance will cover when a business relationship with a customer is established for the purposes of applying CDD and what is intended by the concept "an element of duration".  The response says that it is likely that differing interpretations of these concepts are resulting in inconsistent application of CDD. This is very probable although there is a risk that overly prescriptive guidance curtails firms from being able to pursue a common sense and risk-based approach to whether they really do have a business relationship with a customer and what an element of duration looks like in their business model.
• The industry will widely welcome HMT's decision to work with the Department for Science, Innovation and Technology (DSIT) to produce guidance on using digital identifies for MLRs identity verification.  This position will be welcomed by payments firms and digital banks seeking to remove friction from the CDD process where possible and appropriate, and will give all firms greater certainty when upgrading their onboarding processes.