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I beg to move that the Committee considers this package of changes to the money laundering regulations. They are aimed at improving the effectiveness of the UK’s anti-money laundering and counter-terrorist financing regime.
The money laundering regulations sit at the heart of the UK’s preventive, risk-based approach to tackling illicit finance. They ensure that the UK’s modern and open economy cannot be exploited by criminals seeking to hide the proceeds of their crimes. By requiring banks and other regulated businesses to take reasonable, proportionate steps to detect and prevent money laundering and terrorist financing, the regulations protect the integrity of the UK’s financial system.
However, as new technologies emerge and criminals find new ways in which to launder illicit funds, the regulations must evolve with them. The changes before the Committee represent a significant update to the regime. They ensure that the regulations are focused on the highest-risk activities and threats to the UK system, while closing loopholes and making the regime clearer and easier to use.
This SI reflects the Government’s determination to ensure that regulations strike the right balance between managing risk and enabling growth, as set out in the modern industrial strategy and the regulation action plan published last year. These changes are part of a broader push under the economic crime plan 2023 to 2026 to build a more effective system that turns the tide on dirty money, including major changes that the Government are making to improve our anti-money laundering supervision regime.
Progress is already being made. In the year ending December 2025, there were 8,486 prosecutions for money laundering as a principal or non-principal offence, a 19% increase compared with the previous year. In the year ending March 2025, £285 million of criminal assets were recovered, a 15% rise compared with the previous year, with £47 million in compensation paid to victims out of confiscation order receipts—a six-year high.
I am aware that the Secondary Legislation Scrutiny Committee raised concerns about the timeliness of this legislation in its 57th report. I am grateful to the committee for its input. However, it is important to recognise the complex nature of some of the measures in the SI. Following the public consultation, further technical discussions with industry and anti-money laundering supervisors were necessary on a number of measures, including in relation to bank insolvency, pooled client accounts and crypto assets. I know the Committee will appreciate the importance of getting the drafting right first time to avoid unintended consequences.
This SI consists of measures on four core themes: making customer due diligence more proportionate and effective; strengthening system co-ordination; closing gaps in coverage; and reforming registration requirements for the trust registration service. There are also additional minor and technical changes that serve to improve consistency and ensure the UK complies with the standards set by the Financial Action Task Force, the global standard setter on anti-money laundering.
I turn first to the measures on customer due diligence. These aim to ensure the checks required on customers are proportionate to the risks. This includes the removal of the requirement for regulated businesses to apply enhanced due diligence checks on countries listed by the Financial Action Task Force as jurisdictions under increased monitoring. These are countries found by the FATF to have strategic deficiencies in their regimes. The FATF does not require these checks, and permitting more flexibility here recognises that being linked to a listed jurisdiction does not automatically make a customer high risk. The Government estimate that this change alone will generate savings of £178 million per year for regulated firms, which can then be reinvested in higher-value compliance activity that identifies genuinely suspicious activity. Other changes on customer due diligence include important measures to increase the availability of pooled client accounts for businesses with a legitimate need, and to facilitate continued access to banking services for customers in the event of a banking insolvency.
I turn to the system co-ordination. The SI makes changes to strengthen co-operation and information-sharing between anti-money laundering supervisors and other public bodies such as Companies House, which plays an increasingly integral role in the UK’s defences against illicit finance. To close gaps in coverage, the SI brings the activity of selling off-the-shelf firms within the scope of regulated activities. The SI also makes changes to ensure owners of crypto asset firms do not escape fit and proper checks by the Financial Conduct Authority.
I turn finally to the trust registration service. The SI makes a number of changes to close loopholes that could be leveraged to obscure asset ownership, improve transparency of beneficial ownership of trusts with significant UK connections and refine registration requirements for other types of trust.
The implementation of these measures will be swift, with the majority of measures coming into force 21 days after the SI is made. There are limited exceptions to this, such as for the measures on crypto assets, where a longer implementation period is necessary to give regulated businesses sufficient time both to adjust their systems and processes and to align with the introduction of the new financial services regulatory regime for crypto assets, which will come into force in October 2027. Safeguards have been built into the SI to mitigate risks in the interim period.
In conclusion, these regulations strengthen the UK’s defences against illicit finance by better targeting high-risk activity and closing loopholes in the regime. I beg to move.
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My Lords, I thank the Minister for his expansive introduction to this SI. I wish to express concern about two elements of it: the change in the transactions and the change in the rules on trusts.
This all comes at a moment when the OECD and the Financial Action Task Force are pushing every major jurisdiction in the direction of having more transparency, more openness and more recording. It weakens the UK’s stance when we ask other countries to tighten their own procedures. Both the OECD and the FATF have been pushing countries to make registers of beneficial ownership more complete and more accessible. The message that is being sent is, “We need to widen the net”.
Of course, historically, the UK has held itself up as a leader in this area, however hard it might have been to justify that claim. One of my questions for the Minister is: how does this measure align with the Government’s 2025 anti-corruption strategy, which is supposedly aimed at driving dirty money out of the UK and strengthening national security?
I note that, in December, the City of London Police was awarded an extra £15 million to expand its anti-corruption efforts. The Justice Secretary then said that the UK
“will no longer be a haven for dirty money and dictators’ laundered assets”
and promised action to tackle “professional enablers”— the lawyers, bankers and estate agents who we know have been at the heart of some very murky, shall we say, transactions. As the Justice Secretary said at the time, all too often, the trail of dirty money “leads back” to London; he also noted that that is
“exploited by those Kremlin-linked elites who enable Putin’s aggression”.
I come to my two specific points. The greatest area of concern that I can identify—the Minister alluded to this—is the jurisdictions under enhanced monitoring. The SI replaces high-risk third countries with FATF “call for action” countries in the enhanced due diligence trigger. Therefore, we are picking up only countries that are blacklisted now: North Korea, Iran and Myanmar. Previously, the regulations that applied to so-called grey list countries, which called for increased monitoring, included the UAE, South Africa, Turkey, Nigeria and the Philippines.
UK firms transacting with counterparts in those jurisdictions will no longer be automatically required to imply the enhanced due diligence. This seems to place a great deal of trust in UK companies that do not have a great record; I cross-reference back to what the Justice Secretary said in December about dirty money flowing into London. So, in effect, this SI represents a substantial retreat at exactly the moment when we are supposed to be cracking down on illicit finance.
My second area of detailed concern is the register provisions. New paragraph 23A of Schedule 3A to the 2017 regulations will create the first-ever general sized-based exemption from the trust register. If a trust holds no UK land, has under £2,000 in current assets, has never held more than £10,000 over its lifetime and earns under £5,000 a year, it never has to register.
This anti-abuse rule stops only a single settler, but does not allow for the situation where a wealthy family spreads a pot across a spouse, parents, adult children and who knows who else with each acting as a settler. Regulation 25(3) removes stamp duty reserve tax as a registration trigger, quietly pulling share-owning trusts that would otherwise have appeared on the register out of the scope of the register.
For those who might be listening, stamp duty reserve tax is a 0.5% tax when you buy UK shares electronically, so if a trust buys £100,000 worth of UK shares, it pays £500 in SDRT. It is a tiny tax and a tiny tax liability, but at the moment that triggers the registration. There are express trusts that have to register because of what they are, but there are also a large number of trusts that have to register only because of this provision. Trusts that own UK-listed shares are exactly the kind of structure where transparency matters to cleaning up the dirty money and I think to the general public as well. They are how anonymous foreign money often holds stocks in UK companies. The current position means that any trust active in the UK equity market at any scale has been caught, regardless of where it is based or who set it up, so removing it punches a hole in the net specifically to oversee shareholding trusts. I would like to hear some more from the Minister on how the Government see this deregulation as being any kind of positive when we are trying to crack down on the flows of dirty money that the Government acknowledge are flooding into London.
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My Lords, these regulations introduce a number of changes following the Government’s 2022 review and the 2024 consultation. I thank the Minister for his clear introduction and for emphasising the important principle of getting things right first time, which partly explains why these reforms have taken time to come in. Some of the changes appear to be sensible. Refining due diligence requirements so that enhanced due diligence applies to unusually complex transactions rather than all complex transactions seems a proportionate step. Likewise, reforming the trust registration service to close identified gaps, while creating an exemption for low-value, low-risk trusts, appears to strike a reasonable balance between maintaining safeguards and reducing unnecessary burdens. To that extent, His Majesty’s Opposition welcome the direction of travel.
However, these regulations also raise a wider and very important question about whether the current anti-money laundering regime is operating as effectively, proportionately and fairly as it should. It is right—indeed, it is essential—that we are robust in tackling money laundering, terrorist finance and financial crime, but it is also essential that the system does not impose excessive costs, drive firms into defensive behaviour or leave innocent customers and legitimate businesses without access to banking services.
The purpose of anti-money laundering regulation is, of course, to prevent crime, but there is growing evidence that the regime can also have a serious unintended consequence, and customers who have done nothing wrong are nevertheless finding themselves excluded from banking services because they are deemed too costly, too complex or too risky to serve. The IEA’s 2024 report, Debanked, argues that under the current regime certain categories of customer may present a higher initial risk profile, but that the cost of establishing whether they are, in fact, engaged in criminal activity can exceed the value of their business to the bank. The result is that some accounts are closed pre-emptively.
The same report also estimates that compliance with anti-money laundering regulations costs UK banks £34 billion a year. That is a very significant burden and one that is ultimately borne by consumers and businesses. That is a huge multiple of the £178 million of savings in compliance costs which I think the Minister mentioned. To put it into context, the sums spent on some of the enforcement agencies are also relatively small. Nearly £100 million is spent on the Serious Fraud Office and £195 million on the Insolvency Service. Police funding, because police are very important in money laundering, costs nearly £20 billion, but that includes the excellent efforts of the City of London Police in this area, which were mentioned by the noble Baroness, Lady Bennett.
What assessment have the Government made of the impact of the current AML regime on access to banking services? Are the considerable costs—the £34 billion I mentioned—imposed by this regime being matched by clear evidence of a proportionate reduction in financial crime, drawing on the resources I have described? Will the Government consider a broader review not merely of whether the system is functioning according to its own internal processes but whether it is delivering the right outcomes in the real world and whether the enforcement regime is fit for purpose? The Minister has mentioned the economic crime plan.
I turn to the issue of complexity. An anti-money laundering and sanctions regime must be clear if it is to be effective. I know this from my experience of trying to enforce the law in the business area. Professional advisers and regulated entities struggle to understand their obligations. If this happens, the result will naturally be worse enforcement. I was slightly concerned to hear that the Solicitors Regulation Authority has described the UK sanctions regime as “complex and challenging”. That should give us pause for thought. If professionals whose work depends on understanding and applying the law find the regime difficult to navigate, we should not be surprised when banks and firms respond by taking the safest possible course—even when that means withdrawing services from customers who may pose no real risk.
Can the Minister confirm whether organisations such as the SRA were consulted before these regulations were laid? Can he explain whether the regulations will materially reduce the complexity in the system? Do the Government intend to bring forward wider reforms to make the regime easier to understand, easier to apply and therefore more effective in achieving its core purpose and preventing financial crime?
Finally, I turn to redress. The consequences of debanking can be severe. A person or business whose account is closed may be left unable to receive payments, pay staff, meet obligations or even operate normally. Yet the process for challenging these decisions can be slow, opaque and deeply frustrating. In 2024, the APPG on Fair Business Banking published a report which found that thousands of customers were being debanked each month, often as a result of financial, regulatory and reputational pressures on banks. Shortly afterwards, the Treasury Committee published data showing that debanking-related complaints to the Financial Ombudsman Service had risen by 44% from 2023. These figures should concern us as they suggest a more systemic problem.
There are also particular groups that appear to be disproportionately affected: individuals with links to higher-risk jurisdictions, politically exposed persons such as ourselves, small businesses, charities and organisations with international connections—at a time when we are trying to encourage overseas investment. A further group the Government should examine closely is defence companies. A survey by ADS, the trade body representing 1,500 small defence companies, found that nearly three-quarters had struggled to access basic banking services, with respondents citing reputational concerns as a key factor behind that trend. I think I will return to this subject when we come to debate the financial services Bill.
These groups are not necessarily illegitimate customers yet, in practice, they seem to be treated, with the way in which the current regime operates, as though they are inherently suspect. Given the Government’s stated priorities of driving economic growth and increasing defence spending, this is surely an issue to which the Minister should be paying close attention. What consideration have the Government given to the impact of the AML regime on these groups? What steps are being taken to ensure that banks do not respond to regulatory pressure by simply excluding legitimate customers? Does the Minister accept that, if increasing numbers of affected customers are turning to the Financial Ombudsman Service, there is a strong case for looking at not just individual complaints but the structure of the regime itself? I asked that question at the beginning of my remarks.
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My Lords, I thank the noble Baronesses for their questions. They were many in number so we will scour Hansard and, if there are any that I do not answer, we will of course respond with letters.
I turn first to the points made by the noble Baroness, Lady Bennett; I hope to cover them all, though not necessarily in the order in which she made them. She mentioned enhanced due diligence as far as high-risk jurisdictions, especially the likes of Russia and China, are concerned. The money laundering regulations contain specific provisions requiring enhanced due diligence in relation to geographic risk, which are unchanged by this SI. Firms must still assess and manage geographic risk as part of their overall risk-based approach and apply EDD wherever high risk is identified, in line with the requirements set out in the regulations. Firms will be expected to consult government guidance, such as the National Risk Assessment of Money Laundering and Terrorist Financing 2025, which provides a more UK-focused, nuanced and sector-specific view of the risks. Jurisdictions that present a risk in the UK but are not currently listed by the Financial Action Task Force, such as Russia, China and the UAE, are referred to in the national risk assessment for the UK.
On the changes to the due diligence requirements, some countries on the FATF’s increased monitoring list are recognised as presenting more of a regional risk than an international one, perhaps due to the lack of specialised and international-facing financial sector or strict currency controls. The Financial Action Task Force recommends enhanced due diligence to be mandatory only for countries on the separate “call for action” list, which will continue to be the case following this change.