As a member of the European Union (EU), the UK was often one of the first Member States to apply the EU’s anti-money laundering (AML) and counter-terrorist financing (CFT) directives to help the bloc meet its AML/CFT harmonization objectives.
However, as of 1 January 2021, the UK has withdrawn from the EU, and this has serious implications for AML/CFT. While there was a period of uncertainty following the 2016 referendum and during the transition period, we now have some clarity around how the financial crime framework will evolve in the UK and the EU.
Our report on Brexit and implications for AML/CFT will provide an overview of the deal and how it addressed financial crime prevention, assess the immediate effects on compliance, law enforcement, and criminality, and consider future impacts and whether businesses can expect divergence, convergence or parallel development in the coming years.
The new landscape
As a member of the EU, the UK signed up to almost all the EU’s Anti Money Laundering Directives (AMLDs). The final one the UK signed up to was 5AMLD in June 2018; it became fully aligned with the new requirements that were introduced at the time.
The AMLDs generally only have a shelf life of a few years, however, and the UK has not signed up to the latest iteration – 6AMLD -which was introduced in October 2018 and came into force in June 2021. This means that while the UK meets EU requirements in certain areas, it may diverge on new measures introduced by 6AMLD and future directives such as the criminalization of the new predicate offenses for money laundering.
During the Brexit negotiations, there was a broad consensus that Brexit should cover AML and CFT. A Political Declaration issued in October 2019 states that the future EU and UK relationship should include arrangements for cooperation in criminal matters involving AML/CFT.
However, the Withdrawal Agreement made no real reference to AML/CFT, and the final Trade and Cooperation Agreement did not include specifics. Instead, it says that the parties will “support international efforts” and recognize “the need to cooperate” in preventing financial crime through the exchange of “relevant information” in line with their own domestic legal frameworks.
Immediate effects & compliance impact
Unfortunately, the impact of Brexit and the lack of specific requirements are already being felt by firms that are now struggling to comply with their AML/CFT obligations.
Most problematic is the fact that firms can no longer passport from the UK into the EU and vice-versa. This means that firms wanting to operate in the UK and EU must set up separate operations, doubling the amount of work required for firms to evidence their AML/CFT compliance. While talks are ongoing regarding the City of London gaining access to the EU single market for financial services, these are almost certainly destined for failure.
A second area where UK-EU agreements fall short is recognizing “equivalence” with regard to AML/CFT regimes. The agreement does not address this and thus makes the UK and the EU “third countries” to one another, something which has serious implications around how firms set up and manage their AML/CFT programs.
Although there are different levels of implementation between countries, firms could introduce clients from one jurisdiction to another in the EU with relative ease. Now, firms must do due diligence on overseas customers to both UK and local member state standards, and vice-versa. This can be challenging for UK firms where EU jurisdictions might have more stringent requirements and/or require more stringent standards on UK-based customers.
Looking to the future
The impact of Brexit on AML/CFT in the UK could be significant. However, the UK’s financial crime trajectory will be determined by the decisions it makes soon as it regulates its market away from the EU. There is likely to be an increased divergence in AML/CFT and sanctions regimes between the UK and the EU.
Meanwhile, the EU will continue to work towards harmonizing frameworks. At this time, there is little to indicate that the EU and the UK will recognize the mutual equivalence of their AML/CFT regimes. This will create friction and more bureaucracy despite having little impact on compliance on either side.
“Today, despite Brexit, the rise of digital platforms, services, and apps is making finance more fluid and accessible globally. With this flexibility also comes the responsibility to ensure that financial systems are not abused and fully compliant with regional and in-country regulations. This is why cross-functional collaboration between fintechs and reg-techs remains crucial to bridge the gap in helping to anticipate crime and preventing illicit financial flows.” – Ben Snowman, VP Partnerships & Advisory at Mambu.
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