News 07th Jul 2017

UK Rushes to Meet Deadline, but Do They Get Full Marks?

Ben Cowdock

Senior Investigations Lead

Ben is responsible for leading research into corrupt money entering the UK. He joined TI-UK as an intern in September 2015, helping support the work of the UK advocacy and research team. Ben holds an MA in Governance and Corruption from the University of Sussex.

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The Panama PapersThe Russian Laundromat and the $10 billion mirror trading scandal – the last year has seen the UK involved in a number global money laundering cases. In a bid to end the UK’s role as a safe haven for corrupt funds the UK Government took emergency steps two weeks ago to meet a key EU deadline to improve anti-money laundering standards by bringing in new legislation.

Bypassing Parliamentary rules that state a minimum of 21 days should be given to consider legislation, the UK Government introduced The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs 2017). This consists of updates to the UK’s previous money laundering regulations dating back to 2007, bringing them up to the standard required by the EU’s Fourth Money Laundering Directive.

New requirements for estate agents

The new rules include steps to thwart money laundering through UK property by ensuring estate agents conduct due diligence on prospective buyers as well as sellers. Previously, estate agents had been relying solely on solicitors to conduct due diligence on property buyers – a loophole exposed by the Channel 4 documentary, From Russia with Cash.

More checks for company formation agents

The regulations include efforts to clarify pre-existing rules which may not have been followed. Those creating companies and other corporate vehicles must now carry out due diligence on the individuals they are providing services for even if they are only incorporating a single company for their client. This is a significant step as previously company service providers felt the rules exempted them from making these checks on their customers. An investigation by Reuters published last year found half of company formation agents surveyed were not carrying out due diligence on clients. This lack of due diligence has resulted in criminals around the world gaining access to UK legal entities and using them as ‘respectable’ vehicles to launder substantial amounts of illicit funds.

However, it remains to be seen whether the new requirements will be effective. The MLRs 2017 only require simplified due diligence – the most basic kind – for the creation of ‘low risk’ entities which require the true owner to identify themselves on annual confirmation statements. This requirement now applies to almost all UK corporate vehicles, meaning money launderers will only come up against very basic checks when setting up vast networks of shell companies they use to move illicit funds around the world.

A new watchdog for the money laundering watchdogs

Helping to oversee these rule changes will be a new body – The Office for Professional Body Anti-Money Laundering Supervision (OPBAS) – which will be created to increase the co-ordination amongst the 22 private sector supervisors responsible for enforcing the new regulations.

In the past the UK’s supervisory regime has been criticised for providing a lack of cohesion and transparency, as well as lacking sufficient sanctions for those failing to prevent money laundering. Whilst the creation of OPBAS represents an acknowledgement of a flawed system, concerns remain over how well it will be able to overhaul these. The new system will still have too many supervisors with differing levels of resources, sanctioning powers and transparency requirements.

Measures to uncover the real owners of trusts and Scottish Limited Partnerships (SLPs)

The new regulations also introduce the requirement for ‘express trusts’ – trusts set up with written instructions as to who benefits – to hold accurate and up-to-date information on their beneficial owners and any potential beneficiaries. HMRC will also be tasked to create a private register of trusts with tax purposes. If implemented properly, this would will allow law enforcement agencies to gain access to the real people behind trusts.

These changes reflect the growing evidence that trusts can be used to launder corrupt wealth. For example, Expedito Machado, the son of a former Brazilian politician implicated in the Petrobras corruption scandal, used trusts to purchase two UK properties worth £8 million in total in 2015. The new reforms are welcome but consideration should also be given as to how information on who controls trusts can be made public so that civil society and journalists can also use this data in investigations.

Unlike trusts, the UK Government has chosen to grant public access to information on who owns SLPs through the Scottish Partnerships (Register of People with Significant Control) Regulations 2017. This little known type of corporate vehicle has become popular amongst those seeking to launder corrupt wealth – as highlighted in our report Offshore in the UKWe found 71 per cent of all SLPs registered in 2016 were controlled by anonymous companies based in secrecy jurisdictions, meanwhile over 100 SLPs were used to launder up to $80 billion in the global laundromat scandal.

Transparency over who controls SLPs is a welcome step, however due to the high number that have been involved in financial crime, Companies House should be resourced to verify all beneficial ownership information it receives from SLPs so there is confidence in the accuracy of the information provided. Alongside this, the UK Government should also seek to ban the use of corporate partners and directors in most circumstances to make it more difficult for UK legal entities to be used as money laundering vehicles for corrupt individuals and organised crime groups.

Will the changes have an effect?

Overall there is some good progress being made, but the new legislation fails to address the vulnerability of UK property to corrupt wealth. There is no mention of a public register of ownership for overseas companies holding UK property despite David Cameron vowing to expose the owners of anonymous companies owning UK homes two years ago.

The next year will be a crucial test of how well the UK has responded to money laundering threats. The UK Government have committed to carrying out a new national money laundering risk assessment, whilst more importantly the Financial Action Task Force – the global standard setters for anti-money laundering defences – will be releasing an assessment of the UK’s efforts in 2018. Only time will tell whether the UK can plug the remaining gaps in its legislation and ensure that what’s on paper is put intro practice.