ICB's Director of AML Compliance, Stephen Hardwick, gives an update on the EU 5th Money Laundering Directive
The UK has made amendments to the Money Laundering Regulations through the Money Laundering and Terrorist Financing (Amendment) (EU Exit) Regulations 2020 which fully implement and update the 5th EU Money Laundering Directive into UK domestic law.
There are some amendments that affect ICB members in practice which are summarised below, these regulations are now effective, and you should amend your AML policies and procedures where necessary to take account of these amendments.
Electronic identification verification – Regulation 28 MLR: the previous regulations required that there was an appropriate level of assurance that the person claiming a particular identity is in fact the person with that identity, there has been a tightening of the wording in the regulations whereby there is now a requirement for assurance that the person claiming a particular identity is in fact the person with that identity, to a degree that is necessary for effectively managing and mitigating any risks of money laundering and terrorist financing.
See our guidance on electronic identification verification for further advice regarding electronic verification.
Discrepancy Reporting - Regulation 30A MLR:
HM Treasury has also amended and clarified the MLRs regarding some grey areas relating to the obligation to report discrepancies in the People with Significant Control (PSC) register which is covered under the above regulation.
Before establishing a business relationship with a UK company, unregistered company, LLP or Scottish limited partnership, a practice must obtain proof of their client’s registration or an excerpt of the register from Companies House that the UK company, unregistered company, LLP or Scottish limited partnership is registered there.
From 10 March 2022 a practice establishing a business relationship with a trust must obtain proof of the trust’s registration on the Trust Registration Service (TRS) if the trust is required to be registered. This only relates to trusts specified in Part 5 of the MLRs and will only become effective on 10 March 2022 when the Trust Register which is held by HMRC becomes publicly available. ICB will provide further information nearer this date.
If a practice identifies a discrepancy between the information that they gather while carrying out their duties under the 2017 Regulations (during client onboarding processes), and the information that is on the PSC register or TRS, the practice must report that discrepancy to Companies House or HMRC as applicable.
What constitutes a discrepancy?
The purpose behind PSC discrepancy reporting is to ensure that the information on the PSC register is adequate, accurate and current. It’s important to identify the legal and beneficial ownership of corporate entities to help prevent them from being used for illicit purposes including money laundering, bribery and corruption and other financial crimes. Accurate beneficial ownership information also helps law enforcement detect instances of these crimes. “Discrepancy” is not defined in the 2017 Money Laundering Regulations, but HM Government’s interpretation of the intention is for material differences to be reported. For further information (including what constitutes a material discrepancy) see the Companies House guidance.
When should a discrepancy be reported?
A discrepancy must be reported as soon as reasonably practicable after the discrepancy is discovered. The Consultative Committee of Accountancy Bodies (CCAB) guidance indicates that you should normally make a report within 30 days of identifying the discrepancy. Bulk reporting on a periodic basis is not permitted.
You are not required to wait for a response from Companies House (or HMRC for TRS) before taking on a client. The decision as to whether to establish a business relationship with that entity is up to you and should be based on your usual risk-based approach. You should assess the relevance of any discrepancies within your client due diligence (CDD) process and if it appears the discrepancy is intentional, you should consider the veracity of other information received from the client.
Discrepancies only have to be reported when establishing a new business relationship, there is no requirement to review the records of existing clients, or report during CDD refreshes.
A discrepancy report is not a substitute for a Suspicious Activity Report (SAR). Finding a discrepancy does not in itself require a practice to submit a SAR. The normal tests for when a SAR is required still apply and there is a SAR tutorial on the ICB website for further information on SAR reporting.
Time lags in updating the registers
Companies House will investigate the discrepancy report and, in most cases, make direct contact with the company concerned. If the information on the register is incorrect, Companies House can use a new power which allows them to remove incorrect information. They will expect the company to update the register and will initiate action if this doesn’t happen.
How do you report a discrepancy?
The Companies House guidance details how to report a discrepancy. You should keep records of any reports that are made to Companies House or HMRC for a period of five years, as they would for other Client Due Diligence records.
Reliance - Regulation 39 MLR When relying on the CDD applied by another professional (third party) or when you are providing reliance (acting as a third party) for another professional on the CDD requirements of the MLRs, this now allows for the third party to also carry out the discrepancy reporting required under Regulation 30A on behalf of the other professional. The professional acting as the third party must retain any records relating to discrepancy reporting for the statutory five-year period required under the MLRs.
