Financial Crime consultations: proposals for low risk firms
- Posted on: 11 August 2021
- Written by: David Rodriguez
HMT Financial Crime Consultation Series
On 22 July 2021, HM Treasury (HMT) released two important financial crime regulation consultation documents. To help regulated firms and other stakeholders understand and consider the proposals, we are publishing a short series of articles.
Our first article considered the implementation in the UK of the commonly named and long awaited 'Travel Rule'.
In this, our second article, we discuss the proposal to exclude some firms that are considered to have a low risk of money laundering and terrorist financing from the requirements of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the MLRs).
Who are these low risk firms?
There are essentially two types of firm that are highlighted.
Firstly, firms that provide certain payment services:
Account Information Service Providers (AISPs);
Payment Initiation Service Providers (PISPs);
Bill Payment Service Providers (BPSPs); and
Telecom, Digital, and IT Payment Service Providers (TDITPSPs).
Secondly, Art Market Participants (AMPs), but here the consultations propose to remove artists from scope of the definition and to bring into scope those who trade in the sale and purchase of digital art (for example, works of art tokenised in a Non-Fungible Token (NFT)).
AISPs and PISPs
The proposal within the consultations attempt to address a grey area that exists within the current MLRs, and specifically their suitability for AISPs and PISPs.
Guideline 14 of the European Banking Authority (EBA) Guidelines for Authorisation (applicable to payment institutions, including PISPs) require firms to have in place "Internal control mechanisms to comply with obligations in relation to anti money laundering and counter terrorist financing". This suggests that, despite a low risk of money laundering and terrorist financing, PISPs are still required to comply with the MLRs as an 'obliged entity'.
The situation is less clear for AISPs, as the applicable EBA Guidelines for registration do not make any mention of anti money laundering (AML) or counter terrorist financing (CTF) compliance. So, apart from some fraud risks it seems to be safe to assume that this activity should not be in the scope of the MLRs, given the almost non-existent money laundering and terrorist financing risks associated with AISP activities.
The consultations clarify that despite the National Risk Assessment 2020 considered the overall money laundering and terrorist financing risks for payment services to be medium, AISPs are different. They are mere information tools that do not come into possession of funds and cannot access accounts to execute payments. Therefore, they would be of limited value for money launderers.
Similarly, PISPs do not execute the payment transactions themselves and do not hold payment services users’ funds. However, since these firms are involved in the payment chain (by initiating a payment transaction from a customer’s account with another payment service provider), they may represent a marginally higher risk.
Consequently, the government is seeking views regarding:
the possibility of excluding AISPs from the regulated sector obligations of the MLRs.
the inherent risks associated with PISP activities, but noting that they are minded to keep PISPs within the scope of the MLR in view of the higher potential risks.
BPSPs and TDITPSPs
These firms present a low money laundering and terrorist financing risk. This conclusion is based on the fact that BPSPs and TDITPSPs are dealing with relatively low funds and assisting only in the transfer of money between regulated institutions. Therefore, it is being proposed that these firms are removed from the scope of the MLRs. In this event, they would not need to register with HMRC for anti money laundering supervision, which would be expected to reduce the costs and administrative burden on both the HMRC and the BPSPs and TDITPSPs.
Art Market Participants
The implementation of the 5th EU Anti-Money Laundering Directive (5MLD) in the UK brought the art sector into scope of the MLRs. This resulted from an HMT consultation on the transposition of 5MLD into UK law. Analysis of the responses to this consultation determined that Art Market Participants (AMPs) would be incorporated into the MLRs.
AMPs were defined as 'persons trading or acting as intermediaries for transactions exceeding EUR 10,000 and including but not limited to, art galleries, auction houses and freeports'. The intention was that this would exclude peripheral services relating to the sale of art, for example transportation. The definition of 'works of art’ was aligned with the definition of ‘work of art’ in section 21(6) to 6(B) of the Value Added Tax Act 1994. It was, however, not the intention to include artists who sell their own works of art over the EUR 10,000 threshold, but it could currently be interpreted to mean they are in the scope.
Considering the low risk of money laundering and terrorist financing associated with artists selling their own work, the latest consultations propose modifying the AMP definition in Regulation 14 to exclude artists who sell their own works of art over the EUR 10,000 threshold. Also, since artists may be selling through a company or partnership, the government is proposing to exclude from the definition of an AMP 'a company or partnership when selling work created by a shareholder or partner'.
Digital art and NFT dealers
Views are being invited about whether further amendments are needed to bring those who trade in the sale and purchase of digital art into the scope of the MLRs. For the purposes of the consultation, the term 'digital art' means art that has been created using digital technology, for example, computer generated art or tokenised art in the blockchain. This is certainly an interesting area of discussion.