Proposed removal of Regulation 8 of the Money Laundering Regulations 1993

The Treasury has recently issued a discussion paper, which outlines a number of proposals for changes to the Money Laundering Regulations 1993. Many of the proposed changes are being driven by the Second Money Laundering Directive, which entered into force on 28 December 2001. This Directive (amending the earlier 1991 Money Laundering Directive) has to be implemented by member states by 15 June 2003. The Treasury are proposing that implementation will be achieved in the UK through a revision of the 1993 Regulations. However, the Treasury are also taking the opportunity to consolidate and redraft the text of the 1993 Regulations, so as to improve clarity and ensure that references are consistent with recent legislation. They also wish to revisit certain provisions in the 1993 Regulations where they believe problems have become apparent. One of these provisions is regulation 8.

Regulation 8, known as the “postal concession, sets out a limited set of circumstances in which payment from an account held in a customer’s name at a bank or other credit institution may be capable of constituting the evidence of identity ordinarily required under regulation 7 of the 1993 Regulations. This concession was based on the principle that where a client and his funds have already been subjected to due diligence procedures on entering the financial system, it is unnecessary to subject him to double due diligence when he transfers some or all of those funds to another account held by him. The concession is limited to accounts where payment is made only to the account holder and where it is reasonable in all the circumstances for the payment to be sent by post or by electronic means, or for the details of the payment to be sent by post, given by the telephone or provided by other electronic means. However, the Treasury believes that the complexity of this regulation has led to considerable misinterpretation.

With regulation 8 as it stands, identification under regulation 7 has to occur only once in the system. However, there is no limit to the number of accounts that can be opened by the same account holder in reliance on the concession. Since only the payment that opens the account must be debited from an account at a credit institution, criminals can use the concession to open a network of accounts through which they can deposit and move funds around. Under regulation 7, the receiving bank relies on the identification procedures carried out by another and is unable to verify any “know your customer information it may have against documentary evidence. Without an accurate client profile, the Treasury argue that banks will find it difficult to detect “layering activity by money launderers.

The Treasury acknowledges that regulation 8 does not provide a blanket exemption or in any way dilutes the terms of regulation 7, as the financial institution always has the discretion to decide for itself what constitutes “satisfactory evidence of a client’s identity. Thus, it is always open to the institution to apply the identification procedures in accordance with regulation 7.

Nevertheless, the Treasury intends to remove regulation 8 from the revised version of the 1993 Regulations. The removal of the concession will, so the Treasury thinks, help to clarify the responsibility of firms and individuals to decide what form of identification is appropriate to the risks of their business.

The Treasury is presently seeking the views of the Money Laundering Advisory Committee on its outline proposals for revising the 1993 Regulations. Following discussions with the Committee, the Treasury intends to hold a three months’ consultation on the draft regulations, with a view to introducing legislation before the end of this year. This should allow firms the opportunity to prepare their systems and procedures before the 15th June deadline.

To access the Treasury’s discussion paper please click here. . For further information please contact John Newbegin at [email protected] or on +44(0)20 7367 2703, or contact Mayoor Patel at [email protected] or on +44(0)20 7367 2984, or contact Toby Blyth at [email protected] or on +44(0)20 7367 2042.