Part 5: Upcoming changes to the UK’s anti-money laundering regime

In July 2021, HM Treasury launched a new AML consultation entitled ‘Amendments to the Money Laundering Terrorist Financing and Transfer of Funds Regulations 2017’. This consultation outlined ways in which the government intended to amend the UK’s money laundering regulations (MLRs) with several time-sensitive updates. The planned updates are required to ensure that the UK continues to meet international AML standards, whilst also clarifying how the UK’s anti-money laundering and counter-terrorist financing (AML/CTF) regime works. 

The changes to the MLRs have been made through draft secondary legislation entitled ‘the Money Laundering and Terrorist Financing (Amendment) (No. 2) Regulations 2022’. Most of the measures in this SI will come into force on 1 September 2022, subject to parliamentary approval

In this series of blog posts, we take a closer look at what these changes will mean for anti-money laundering compliance.

Transfer of cryptoassets and the Travel Rule

The consultation set out the government’s proposed changes to comply with the expansion of the application of FATF Recommendation 16, regarding information sharing requirements for wire transfers, to cryptoassets (known as the ‘Travel Rule’). 

The government will no longer require both fiat currency and cryptoasset transfers to be considered for the calculation of the de minimis threshold. The government has also decided to make the information requirements relating to unhosted wallet transfers applicable on a risk-sensitive basis only. 

The government has decided to allow for a 12-month grace period, to run from the point at which the amendments to the MLRs take effect until 1 September 2023, subject to parliamentary approval, during which the cryptoasset businesses will be expected to implement solutions to enable compliance with the Travel Rule.

Use of provisions from the Funds Transfer Regulation

Regarding the applications of the relevant provisions of the FTR to the cryptoasset sector, there was broad acceptance of the proposed information that would need to be collected and shared by cryptoasset businesses. 

The government has decided to maintain the information sharing requirements as set out in the consultation, since this information reflects FATF requirements and cannot be changed while remaining compliant with FATF standards. 

Also, these requirements align with similar requirements in other jurisdictions and so the UK cannot adopt significantly different requirements, as this would mean firms would be inconsistent in regard to regulatory requirements for cross-border transfers.

The government concluded that the concept of an intermediary cryptoasset business is sufficiently clear and workable, but the legislation will make clear that the Travel Rule only applies to intermediaries that are cryptoasset exchange providers of custodian wallet providers and will not capture others, like software providers, to whom the Travel Rule is not intended to apply. 

Provisions specific to cryptoasset firms

The government has modified its proposals with regard to unhosted wallets. Instead of requiring the collection of beneficiary and originator information for all unhosted wallet transfers, cryptoasset businesses will only be expected to collect this information for transactions identified as posing an elevated risk of illicit finance. The minimum factors that firms should consider when making such a determination of risk will be set out in the legislation.

The government has not decided that unhosted wallet transactions should automatically be viewed as higher risk, as many people who hold crytpassets for legitimate purposes use unhosted allets. Nevertheless, the government is conscious that completely exempting unhosted wallets from the Travel Rule could create an incentive for criminals to use them to evade controls.

The FATF do not currently require information collected for unhosted wallet transfers to be verified. The government has decided against amending the proposals to require verification, as they decided this would pose practical difficulties for both cryptoasset businesses and users, and that it would be impractical.

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