On January 10, 2024, a pivotal shift in the UK’s regulatory framework will unfold as the Money Laundering and Terrorist Financing (Amendment) Regulations 2023 come into effect.
These regulations are not just procedural updates; they are a response to the Financial Services and Markets Act 2023, which has endowed the HM Treasury with enhanced powers. Specifically, these changes pivot around the customer due diligence measures pertaining to UK-based politically exposed persons (PEPs), marking a significant departure from previous practices.
Fenergo, a SaaS-based solution that helps firms manage KYC, AML and regulatory compliance, has explored how the change will impact compliance in the UK.
The heart of the 2023 Amendment is a reevaluation of the due diligence process for domestic PEPs. These individuals, who hold prominent public roles within the UK government, are now distinguished from their foreign counterparts. The amendment introduces a presumption of lower risk associated with domestic PEPs, deviating from the more rigorous scrutiny typically applied to international PEPs. This shift emerges in the wake of concerns voiced by Members of Parliament, who highlighted the overly stringent requirements that occasionally led to UK politicians and their relatives being denied essential financial services.
This recalibration in the treatment of domestic PEPs is laudable, as it aims to mitigate the practical challenges these individuals face. The amendment seeks a delicate equilibrium: preserving the robustness of the financial system while ensuring that domestic politicians are not unduly encumbered in accessing necessary financial services. This change is in line with the overarching goal of fostering an environment conducive to the effective discharge of public duties by political figures.
However, this regulatory pivot prompts a crucial question: How do these modifications align with the international standards set by the Financial Action Task Force (FATF)? The FATF is a pivotal global entity that crafts and champions the implementation of measures to combat money laundering, terrorist financing, and other threats undermining the international financial system’s integrity. Central to the FATF’s recommendations is a rigorous customer due diligence framework, particularly concerning PEPs, to curtail the risks of illicit financial flows.
While the UK’s regulatory amendments are geared towards addressing practical challenges encountered by domestic PEPs, they potentially signify a shift away from the FATF’s advocated risk-based approach. The FATF underscores the importance of tailoring due diligence measures proportionally to the risks posed. Hence, the UK’s move to soften the scrutiny on domestic PEPs might be viewed as a divergence from this risk-based paradigm. Striking an optimal balance—facilitating financial access for UK politicians while adhering to international standards—will be paramount for the success and legitimacy of these regulatory changes.
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