Enhanced Due Diligence: HM Treasury's Advisory on High-Risk Countries

News / Enhanced Due Diligence: HM Treasury's Advisory on High-Risk Countries

The landscape of financial compliance is ever-evolving, with regulatory bodies worldwide continually updating their guidelines to combat money laundering and terrorist financing. In the United Kingdom, the HM Treasury plays a pivotal role in setting the standards for financial institutions to follow. A recent development from the HM Treasury has significant implications for businesses operating within the regulated sector. This blog post delves into the HM Treasury's latest advisory notice concerning money laundering and terrorist financing controls in High-Risk Third Countries (HRTCs) and what it means for compliance and due diligence processes.

Understanding the Advisory Notice

The HM Treasury has issued an advisory notice that impacts the way UK-regulated businesses approach customer due diligence (CDD), particularly concerning HRTCs. The Money Laundering, Terrorist Financing, and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) have been amended to redefine what constitutes an HRTC. Previously, HRTCs were listed in Schedule 3ZA of the MLRs, but the new amendment, effective from 22 January 2024, will require businesses to refer directly to lists published by the Financial Action Task Force (FATF).

The FATF is an international body that identifies jurisdictions with strategic deficiencies in their Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) regimes. The lists of 'Jurisdictions Under Increased Monitoring' and 'High-Risk Jurisdictions subject to a Call for Action' are updated thrice yearly following the FATF Plenary meetings. These updates are crucial for businesses to stay compliant with the enhanced due diligence (EDD) requirements mandated by the MLRs.

Enhanced Due Diligence Requirements

Regulation 33(1)(b) of the MLRs stipulates that enhanced customer due diligence and ongoing monitoring must be applied to any business relationship or transaction involving persons or parties established in HRTCs. This means that all customers, both new and existing, who are established in these jurisdictions must be subjected to rigorous scrutiny.

The level of due diligence and ongoing monitoring should be proportionate to the risk associated with the customer. Factors such as the specific shortcomings identified by the FATF and the risk typologies relevant to the jurisdiction should be considered. The HM Treasury advises that regulated businesses refer to sector-specific guidance approved by the Treasury for further details on fulfilling these obligations.

Implications for Group-Wide Controls

The HM Treasury's advisory notice has significant implications for group-wide controls, particularly for UK businesses with international branches or subsidiaries. Regulation 20(3) of the MLRs mandates that relevant persons ensure that their branches and subsidiaries in third countries apply measures that are at least equivalent to those required under UK AML regulations. This is especially pertinent for entities located in jurisdictions that do not have AML controls as stringent as those in the UK.

The challenge lies in navigating the varying legal and regulatory landscapes across different jurisdictions while maintaining a standard that meets or exceeds the UK's requirements. Firms must also consider the practicalities of enforcing these standards in countries where local laws may conflict with the FATF recommendations or where enforcement may be less rigorous.

FATF Public Statement and High-Risk Third Countries

The FATF's public statement, as referenced in the HM Treasury's advisory, is a critical document for financial institutions as it outlines the jurisdictions that have been identified as having strategic deficiencies in their AML/CTF regimes. It is crucial for businesses to monitor these lists regularly, as they are updated following each FATF Plenary meeting. The list of 'High-Risk Jurisdictions subject to a Call for Action' and 'Jurisdictions Under Increased Monitoring' serves as a guide for institutions to understand where enhanced due diligence is required.

The inclusion of countries such as Barbados, Bulgaria, and Türkiye, among others, on the list of HRTCs signals to UK businesses that they must apply a higher level of scrutiny to transactions and business relationships involving these jurisdictions. The advisory also notes that some countries are subject to additional financial sanctions measures, which require firms to take even more stringent actions.

In conclusion, the HM Treasury's advisory notice underscores the importance of staying vigilant and proactive in the face of evolving risks associated with high-risk third countries. Firms must ensure that their group-wide controls are robust and that they are prepared to adapt to the FATF's updates. The UK's strategy to combat financial crime is comprehensive, and adherence to these regulations is essential for maintaining the security and integrity of the global financial system.

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