MLD 5: HMT consultation on UK transposition

Although the consultation is obviously primarily driven by the requirement to transpose MLD 5, it is clear that, in certain cases, the government is minded to go beyond what is strictly required for the transposition of MLD 5. For instance, the proposals take into account recent FATF recommendations.

We reported on the key changes that MLD 5 will introduce in our briefing note of June 2018. In this briefing, we address how the government now says it intends to transpose some of these changes, highlighting areas where there may be a degree of goldplating and where there are proposals not directly driven by MLD 5.

The consultation provides an opportunity for firms and their industry bodies to make representations at a time when the proposals are still expressed as high-level statements of policy intent rather than specific legal drafting, with the government open to views about the practicalities and costs implications of the proposals and having time to give effect to changes. The government specifically encourages firms and industry to provide as much evidence as possible, which will help to shape its policy decisions.

Deadline for comments and next steps

The consultation period closes on 10 June 2019.

Although the consultation paper does not mention this, we would expect the government to consult again on the terms of the draft legal instrument once it has processed the responses to this consultation (although, as was the case with MLD 4, this may be last minute and not fully public, with only a short window within which to make comments).

The government has confirmed that MLD 5 will be transposed by way of amendments to the MLRs with effect from 10 January 2020. Brexit will not affect this.

The headlines

Customer Due Diligence

• MLD 5 will impose a new requirement, where a customer is on the beneficial ownership register, for the firm to collect proof of such registration or an excerpt of the register when entering into a new business relationship – the government proposes to transpose this requirement as is but will clarify that it will not have retrospective effect (so that it will not be necessary to collect such proofs/excerpts in relation to preexisting customers as of 10 January 2020) – see Annex 2, Item 2.
  
  
• When conducting CDD measures in relation to a customer constituted as a body corporate, firms will be required to identify and verify the names of senior management (currently the MLRs require firms to take "reasonable measures" to do this). The government is following a FATF Recommendation in this regard, rather than transposing an MLD 5 requirement – see Annex 2, Item 3.
  
  
• Where, when carrying out CDD measures in relation to a body corporate, a firm has exhausted all possible means to identify the beneficial owner and there are no grounds for suspicion, the person who holds the position of senior managing official is the beneficial owner; MLD 5 will introduce a new requirement for the firm to take the reasonable measures to verify the identity of that person. The government proposes to transpose this requirement in line with MLD 5 – see Annex 2, Item 4.
  
  
• Whereas it is currently a requirement to take "reasonable measures" to understand the ownership and control structure of a customer that is beneficially owned by another person, the government proposes to convert this into an absolute obligation (again, following a FATF Recommendation rather than in transposition of an MLD 5 requirement) – see Annex 2, Item 5.
  
  
• In addition to refreshing CDD measures in relation to existing customers on a risk sensitive basis or where the customer's circumstances changes, firms will also need to do this where UK law requires them to contact the customer for the purposes of reviewing any relevant information relating to the beneficial owners of the customer or if they have this duty under the UK's International Tax Compliance Regulations 2015 – see Annex 2, Item 7.
  
  
• MLD 5 will introduce a new set of prescribed, mandatory enhanced due diligence measures that firms must carry out in relation to business relationships or transactions "involving" high risk third countries. The government is seeking views as to how this mandatory list of measures might be transposed into UK law in a "proportionate and effective" way, suggesting that there may be some flexibility here and not simply a "copy out" – see Annex 2, Item 8.

PEPs

• The UK is required to issue and keep up-to-date a list which indicates the "exact" functions which qualify as prominent public functions (for the purposes of identifying PEPs); the government will follow the same approach that has been adopted by the FCA in its PEP Guidance in terms of identifying the relevant prominent public functions and will spell these out exhaustively – see Annex 3, Item 1.

Mechanisms to report discrepancies in beneficial ownership information

• In terms of beneficial ownership information, in what may prove to be a disproportionately onerous obligation depending on how the legal instrument is drafted, firms will be required to report any discrepancies they discover between the information they hold and the information on the PSC Register; the government proposes that such reporting will be to Companies House, via a yet-to-be launched "bespoke reporting mechanism" – see Annex 4, Item 1.

Registration of trusts

• A large number of express trusts which to date have not been under an obligation to register with HMRC's Trust Registration Service (i.e. because they do not generate UK tax consequences) will have to do so in future. Unregistered trusts in existence as of 10 March 2020 will have until 31 March 2021 to register. New express trusts will have to register within 30 days of their creation. Although the government says its hands are tied with regards to granting any exemptions, it accepts that trusts are used for a variety of purposes in the UK, including for charitable purposes, commercial purposes and when structuring pension schemes. It will take this into account when determining its approach and says that it wants to apply the registration process proportionately. In addition, the government recognises that express trusts are widely used in the UK in circumstances that would be essentially contractual in civil law jurisdictions in other Member States and is therefore "willing to explore the possibility of having regard to the way such trusts would be dealt with in other Member States when clarifying registration requirements". This statement of approach from the government perhaps provides some comfort given that the registration requirement could prove to be disproportionately burdensome for a number of UK trusts, particularly those that are used widely in the financial markets as legitimate and efficient legal devices designed to reduce systemic and other risks (e.g. those associated with settlement and other financial markets activities). These so-called "financial markets trusts" are generally special purpose trusts which are used to enhance market confidence in the completion of settlement and/or the holding of securities. They help to support the safe and efficient operation of financial market infrastructures, do not generate UK tax consequences and are very far removed from the types of trust and their higher risk of money laundering and terrorist financing which the legislation is primarily targeting – see Annex 4, Item 2.
  
  
• Although, as mentioned above, the government notes that MLD 5 requires the UK to register all UK
  resident "express trusts" and does not provide scope for carve outs, exemptions or de minimis thresholds, it does nonetheless request views on its proposed approach to the definition of such express trusts. In the consultation paper, it says that the term "express trust" is generally defined as a trust that was expressly (i.e. deliberately) created by a settlor, as opposed to being created in other ways – for example, through a court order or through statute. This tallies with what H.M. Treasury previously said when transposing MLD 4- i.e. that the term should be taken to mean a trust that has been deliberately created by a settlor who is transferring property to a trustee for a valid purpose and it does not include a "statutory, resulting or constructive trust". However, MLRs do not currently define "express trust". With the removal of the requirement for there to be UK tax consequences, and the potential for many more trusts to become registrable, it is likely to prove necessary to reflect the government's stated definition of "express trust" in the MLRs (or at least in clear guidance from, for example, HMRC) – see Annex 4, Item 2.
  
  
• Although persons with a "legitimate interest" will be able, on request, to access the information on the Trust Registration Service, the government wishes to define this narrowly – see Annex 4, Item 4.

Bank Account Register

• Firms should note that banks and other payment providers will be required to include certain information on a register in relation to any individuals or firms holding or controlling bank accounts and payment accounts and that such information will be available to FCA, NCA, SFO, HMRC, Companies House, the police and others for the purposes of criminal and civil recovery investigations and asset recovery investigations – see Annex 5, Item 1 and Item 2.

Groups

• Firms which are part of a group are already required to establish and maintain policies, controls and
  procedures throughout the group for data protection and sharing information; however, the government proposes to amend the MLRs in line with a FATF recommendation so that there would be a specific additional obligation to have policies requiring customer, account and transaction information to be provided to the firm from its branches and subsidiaries – see Annex 7, Item 1.

The payments instrument derogation

• The thresholds that form part of the CDD exemption for low risk e-money products (i.e. the payments instrument derogation) will be lowered and credit institutions and financial institutions acting as acquirers will only be able to accept payments carried out with anonymous prepaid cards issued in third countries where such cards satisfy the amended payments instrument derogation) – See Annex 1, Item 1.