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His Majesty’s Treasury (HMT), published in March 2024 a consultations on improving the efficiency of regulations on money laundering. The consultation ends on June 9. Some of the consultation topics come from the 2022 HMT review UK regulatory and supervisory regime against money laundering and terrorist financing.
Separately, in parallel with the latest consultation, HM Treasury is running a survey on the costs of compliance with UK Money Laundering Regulations (MLRs). This will help the HMT to better understand how regulated firms are complying with the regulations and to assess the impact of future changes on MLRs.
Cryptoasset service providers in the UK need to understand the key themes and issues contained in these consultations and surveys. Some of the topics may have a greater or lesser impact on crypto firms, but as they are part of wider changes to the MLRs, firms should be aware of the consultation, and more importantly, firms should be encouraged to provide their feedback when they feel the regulations need more clarity or changes or if they disagree with the proposed changes.
What does it cover?
The consultation covers a range of general AML/CTF topics within the MLR, but also includes some specific crypto-asset topics. We have tried to extract a summary of some of the key issues, but we recommend that you read the full consultation if you are interested in any of these topics. The consultation is divided into 4 chapters:
- Chapter 1: Making customer due diligence more proportionate and effective
- Chapter 2: Strengthening System Coordination
- Chapter 3: Providing clarity on scope and registration issues
- Chapter 4: Reform of Registration Requirements for Trust Registration Services
We highlight two crypto-specific issues below, and the remaining topics are covered further in this article:
Crypto firm controllers
The consultation seeks to obtain views on whether there should be alignment of the MLR with Law on Financial Services and Markets (FSMA) on the Scope and Criteria for Assessing a ‘Controller’ of a Crypto Firm – Regardless of Whether a Crypto Firm is Covered future FSMA crypto regime. (paragraphs 3.33-3.36)
It is important to note that firms that may be within the future FSMA crypto regulatory regime will be affected by these changes anyway, not by this regulation, but by changes to FSMA. However, crypto firms that are not covered by FSMA and are only MLRs should consider these changes as they will affect who can act as a controller (ie someone who can have significant influence and can direct the company).
I expect the change to move the MLRs simply reflects a desire to move the MLR framework to a more robust regulatory standard – and based on regulatory views of risk perceived by crypto firms.
This will allow the FCA a wider set of criteria and judgment when assessing the “fitness and propriety” of a crypto firm’s controller. In my opinion, many for the majority of UK crypto firms will be caught under the new FSMA crypto regime, so this change to MLRs may not be a consequential change, as they will be subject to FSMA standards anyway. However, any crypto firm not within the new scope of FSMA, but still within the scope of the MLRs alone, will find that the questions and judgment the FCA will have about a controller or a change of controller is much broader than the current MLRs.
NFT and utility tokens
The draft consultation on the potential MLR range issued for NFTs and utility tokens is not entirely clear, at least in my opinion. It seems to suggest that certain “[crypto] firms that provide certain types of irreplaceable or experiential tokens [utility tokens]” can be considered within MLR (see Chapter 3: Change of control for cryptoasset service provider).
When you are reading this in relation to HMT’s Response to the Consultation on the future financial services regulatory regime for cryptoassets2023, he seems to suggest distinguishing NFTs that are essentially ‘art’ from those that might be identical and sold at the same price. Where this is the case, they suggest that it could be within the scope of the MLRs and that such exchanges would need to be registered under the MLRs. Firms offering such sales of NFTs should therefore consider whether they will be affected and consider what steps they can take, as well as any response to the consultation, including potentially seeking registration under the FCA.
The 2023 response reads:
“Conversely, something sold as an NFT could fall under the future financial services regime for cryptoassets if it were used in practice as an exchange token. For example, a large class of NFTs can be forged that are technically unique but largely indistinguishable from one another. If customers purchased them as a financial services instrument (in the general sense) or a product without favoring one NFT over another (for example, if there was little or no price difference between different tokens), this could be considered token exchanges for those purposes and exchanges on which the token is traded subject to the applicable financial services regulatory regime.”
Other topics included in the consultation
Make the client’s Due Diligence more proportionate and efficient
This chapter of the consultation covers whether further guidance or legislative clarity is required for various standards of general topics relating to Know Your Customer (KYC), for example, The various due diligence standards include: consumer due diligence, simplified due diligence and enhanced due diligence due diligence analysis, verification of sources of funds, digital identification, etc.
For the most part, the consultation takes the initial position that the general principles within the MLR are appropriate, but seeks respondents’ views on whether there are any changes or clarifications that might help to provide a more proportionate and cost-effective approach to due diligence.
Therefore, as these are core elements of KYC and risk, crypto firms should consider whether they would benefit from further guidance/clarification on the current MLRs or if there are areas where the risk criteria can be better focused when responding to the consultation.
Strengthening system coordination
The consultation confirms that supervisors will receive a set of information from supervised firms, which may include personal and/or sensitive data. The legislation therefore prescribes the circumstances in which supervisors may share information they hold in connection with their supervisory functions. The restrictions are intended in part to ensure that regulated firms can communicate openly with supervisors, with the expectation that disclosed sensitive information will not be shared without good reason.
There are specific data sharing approaches that allow supervisors to share information with other supervisors, law enforcement agencies and other relevant public bodies for purposes related to money laundering, terrorist financing, law enforcement or the integrity of the international financial system. However, these gateways are necessarily limited in scope.
For example, the Financial Regulator Complaints Commissioner, who is required under Part 6 of the Financial Services Act 2012 to review complaints about the actions or inaction of current UK financial services regulators, may sometimes be asked to investigate a complaint about the FCA AML/ CTF supervision. There is no data exchange gateway between the FCA and the Financial Regulators Complaints Commission.
Respondents are therefore asked for their views on whether the MLRs should be amended to create gateways for the exchange of data between the FCA and:
- Financial Regulator Complaints Commissioner
- other public bodies to support system coordination, and if so, which public bodies
- registrar for the House of Companies and the Secretary of State to the extent that he is responsible for the House of Companies
These changes are unlikely to have any direct impact on crypto exchange operations, but as this could mean the FCA could share data with a third party other than a crypto supervisor, a crypto exchange may want to consider the implications of doing so and consider should you make that clear in your response to the consultation.
Providing clarity on the scope and issues of registration
Currency thresholds
The thresholds and currencies used in the UK MLRs vary between Euro, Dollar and Pound Sterling as it looked to align with FATF (Financial Action Task Force) international standards which are denominated in Euro and Dollar, but also reflect historical the transposition of EU directives before the exit of Great Britain from the European Union. The Government recognizes that, following the UK’s exit from the European Union, the retention of foreign currency in domestic legislation may create uncertainty and does not accurately reflect the new situation in the UK.
The general change seems sensible to HMT as well, and is seeking views on how it should change both in terms of common sense, but also in a way that minimizes industry costs, as any change to currency and/or monetary thresholds will have an impact on internal exchange cryptocurrency. systems and controls and likely require IT change.
The consultation raises a number of questions about whether there should be an alignment with GBP/pound sterling, and if so, on what basis that alignment should be.
Regulation of resale of companies and finished companies by TCSP
A trust and company service provider (TCSP) is a business or individual that provides services, as defined in the MLRs, in connection with the establishment, management or administration of legal entities such as trusts or companies. The extent of increased anonymity can make corporate structures an attractive tool for criminals, and their use is regularly identified in money laundering investigations
The activities of a TCSP defined in Regulation 12(2) of the MLR include cases where a TCSP “sets up a business” as a service for third parties. However, MLRs do not specifically cover where the establishment of the firm is not for a specific customer but is intended to be held in stock. MLRs also do not cover the resale of these firms.
The consultation seeks views on expanding TCSP activities to address these gaps.
These changes do not seem unreasonable and it is clear that this could be of interest to crypto firms. However, if crypto firms interact with TCSP, they should consider whether i so that they can respond to the consultation.
Trust Registration Service (TRS) application reform
The TRS was introduced to increase the transparency of trust ownership by providing a central register of beneficial ownership of taxable trusts. One of the purposes of TRS is to document information about trusts and make it available to law enforcement agencies to assist in their investigations.
Consultations consider:
- require the registration of all express funds outside the UK without a UK trustee, which own UK land
- sharing trust information of express trusts outside the UK without a UK trustee that own land in the UK by subjecting these trusts to the current trust information sharing process
- harmonization of the registration requirements of some trusts required for registration after the death of the settlor
- clarifying that Scottish living trusts are not required to registerr
- introducing a de minimis level for trust registration.
Again, these changes do not seem unreasonable.
In many cases in this consultation, apart from the interpretation of the application of MLR to certain NFTs and utility tokens which is more substantive and may produce different views from crypto firms, the changes proposed by HMT generally seem quite reasonable and understandable. However, as this forms part of the MLR framework, it is important that firms understand the changes they are consulting on and whether they lead to any consequential changes to their processes and KYC approach. In particular, this consultation provides firms with an excellent opportunity to engage with the HMT if they feel that the current KYC approach could benefit from further clarification.
Watch this space for further updates on this consultation, and if you have any questions, we’re always available for a discussion to work out what this could mean in practice.
EMEA regulators and government
