The past 12 months has resulted in substantive change and challenges with anti-money laundering (AML) and Sanctions compliance – navigating this is critical to avoid costly remediation and regulatory scrutiny.
Not least of all the Brexit transition period which ended on 31st December 2020 and resulted in the UK no longer being subject to European Union (EU) laws related to Sanctions and Anti-Money Laundering (AML). With its own Sanctions and Anti-Money Laundering Act (the Sanctions Act) and related statutory instruments (SI) in effect, there have been changes that organisations need to keep a check on.
Although the UK has more or less adopted the United Nations (UN) and EU sanctions, it has also added its foreign policy objectives into the law. For instance, a UK-based company who are dealing with Russia (or vice versa) will need to refer to the UK Sanctions Act and exit regulations in order to understand whether they can continue in the same way as before. This is not only the case for geographical locations such as Russia, but also for thematic regimes including human rights, counter terrorism and so on.
Over the last few months, organisations have been working towards achieving compliance with the new UK AML and Sanctions regimes. Unlike the EU regulations which had some loopholes for organisations to benefit from, the new UK regulations are broadened and deep. The UK has sanctioned additional entities and designated individuals which are not in the EU sanctions list. Other changes like new licensing requirements and exception requirements have also been included.
Due to these modifications, now is the time to remind ourselves of the key changes and reflect on our progress to find out where we are and where we need to be.
We are witnessing a more substantive change in UK’s Sanctions regime
From 1st January 2021, the UK started following new rules under its Sanctions Act:
- Implemented UN sanctions to meet foreign policy objectives;
- Mirrored EU Sanctions (which UK has chosen to carry over) through domestic legislation; and
- Introduced enhancements to strengthen the UK’s domestic security and counter terrorism measures.
The UK has new sanctions and asset freeze lists which introduced a comprehensive list of entities, persons and ships that organisations are restricted from dealing with. The Sanctions Act and related statutory instruments now also introduces new detail and provisions, including:
- Extended ownership/control and asset freezing definitions: The Sanctions Act introduces an extended definition and covers both direct and indirect ownership and control. There are also tightened provisions and prohibitions on dealing with funds or economic resources to designated persons.
- New licensing requirements: Any licenses issued by OFSI under the EU laws will continue to remain valid. All new license requirements will come under the new UK licensing grounds (derogations).
- Secondary sanctions - United States aspect: Prior to 31st December 2020, the UK followed the EU Blocking Statute to counter the extra-territorial impact of certain US sanctions (e.g. Iran, Cuba). The UK has since adopted the Blocking Statute as a retained EU law, however any authorisations granted by the EU under the Blocking Statute will not be recognised by the UK from 1st January 2021 and will require UK approvals.
- Extended geographical and thematic sanctions regime: Although in many areas the UK has mirrored EU and UN sanctions, extended prohibitions and provisions have been introduced for certain regimes (for example Russia, human rights, counter terrorism).
Switching our attention to the UK’s AML regime, the commencement of the Temporary Transitional Power (“TTP”) from 1st January 2021 has not resulted in any major overhaul when compared to sanctions. Nonetheless, there are still some changes, current or future, that firms should factor into their programme, including:
- The UK adoption of future EU MLD’s: In September 2019, the UK announced its intention to opt out of EU’s 6th MLD affirming that existing domestic legislation is largely compliant with the proposed measures and in many cases goes further.
- Third country status: From 1st January 2021, the definition of ‘third country’ changed from outside EEA to outside the UK. This required application of a third country criteria and considerations to EU nationals and companies for the purposes of financial crime compliance during business relationships and transactions.
- High risk countries: While initially carrying through the EU ‘high risk’ country classifications, the UK deviated significantly in March 2021 prescribing its own high risk third country list aligning to FATF classifications.
- Due diligence requirements: The MLRs, require UK credit and financial institutions engaged in correspondent banking relationships with such institutions outside the EEA to apply EDD measures to these relationships. EDD was not previously required on intra-EEA correspondent relationships. However, the new statutory instrument (SI) equalises the treatment of correspondent banking relationships and requires EDD on all such relationships.
- Transfer of funds: The EU’s Fund Transfer Regulation requires a greater volume of information from payment service providers (PSP) identifying payers/payees for transfers of funds outside EU. From 1st January 2021, UK PSPs are subjected to non-EU funds transfer requirements.
Should you need more information on how you are placed or want to talk about any of the above topics in detail, please don’t hesitate to contact us.