The UK government has unveiled significant changes to the rules for how UK firms mitigate and manage money laundering risks. Some tweaks tightening up the rules are welcome but without robust supervision others could make the UK more vulnerable to dirty money.
So what are the main changes and what is their likely impact?
Undue diligence?
UK anti-money laundering rules require many businesses – such as law firms, accountants, and banks – to do proper checks on the money they handle. These ‘due diligence’ checks require them to look into who they are dealing with and what’s behind their business payments.
In certain higher risk situations (e.g if the customer is a politician), a firm must carry out more resource-intensive ‘enhanced due diligence’ (EDD) checks including on customers’ sources of funds and wealth. These rules that apply to the highest risk transactions are now set to change in two key ways:
- Firstly, firms will no longer have to conduct EDD on all “complex or unusually large” transactions, with this requirement being watered down to apply to only those considered “usually complex”.
- Secondly, requirements to do EDD on all transactions involving countries on FATF’s grey list have been scrapped, with these tighter checks now only mandated in relation to countries on FATF’s black list.
Regulated firms are strongly in favour of these changes partly because they are set to save them a lot of money – removing the requirement to do EDD on FATF grey list countries alone is estimated to result in savings of £178m per year.
It’s worth noting however that the government’s engagement with industry prior to the reform “did not unearth concrete examples of significant wasted resources” under the previous EDD regime on complex transactions. This raises questions over just how necessary this reform is given that even routine complex transactions in certain industries or circumstances can pose a high risk of money laundering.
Analysis
These changes are designed to help regulated firms focus resources on investigating genuinely high-risk activity. But there is a real risk that some unscrupulous or less conscientious firms exploit these changes to cut costs and corners to avoid doing EDD on risky transactions. This would be disastrous for the long-term health of the UK economy and fuel criminality and corruption.
It is therefore crucial that AML supervisors have a clear plan for monitoring whether firms are genuinely redirecting their resources to prioritise more high-risk activity, rather than cutting back on compliance altogether. Supervisors will also need to scrutinise and hold firms to account for how they judge what actually constitutes a high risk transaction requiring EDD, to avoid giving a free pass to shoddy compliance.
A key metric will be whether there are improvements in the quality of suspicious activity reports (SARs) sent to law enforcement and whether this results in increased enforcement.
What are the other changes?
The 13 other targeted measures are unambiguously positive. We particularly welcome changes which will help end the abuse of UK corporate structures, strengthen cross-system cooperation and close loopholes in cryptoasset transactions:
First, company formation agents will now need to apply customer due diligence when selling off-the-shelf companies. These companies – which can be purchased cheaply online – can be key to facilitating money laundering schemes, so this reform is long overdue as argued by our friends at Transparency International UK.
Second, AML supervisors will now have a duty to cooperate with Companies House. This new duty recognises that much closer collaboration and information-sharing is needed with supervisors to transform Companies House into a more proactive and reliable custodian of company data and help stop money launderers from abusing UK companies.
Finally, cryptoasset businesses will now need to carry out counterparty due diligence when starting relationships with other firms. This closes a massive loophole that has meant cryptoasset firms have been at serious risk of unknowingly transacting with illicit actors.
With crypto fuelling a £1.2 trillion surge in global illicit financial activity between 2023 and 2025 – a rate of nearly 20% each year – it’s deeply worrying that this urgent fix won’t come into force for another nine months.
What next?
The Statutory Instrument (SI) bringing these changes into effect was laid before Parliament on 25 March and, subject to debate in the Commons and the Lords, most of the provisions are expected to come into force in late June or early July 2026, with the remainder in 2027.
But while many of these changes are welcome, there are much bigger questions hanging over the adequacy of the UK’s AML regime as it gears up for a major review by the Financial Action Task Force in 2027. There are three key aspects to sorting out AML supervision in the UK.
- Push ahead with reforms to AML supervision
First, these rules are only going to strengthen the UK’s AML regime if firms know they will be scrutinised and called to account for their compliance with them. The government therefore needs to push ahead with its plans to make the FCA the super-regulator for money laundering – closing down the deeply unsatisfactory existing regime with 22 different bodies overseeing lawyers and accountants.
The government has said that this reform requires primary legislation; this must be announced in the next King’s Speech – potentially as part of the expected Financial Services Bill – if implementation is to begin ahead of the FATF review.
Our AML supervision tracker highlights the real ongoing issues with AML supervision, including low levels of compliance coupled with weak enforcement.
- In the legal sector for instance, the Council for Licensed Conveyancers has issued 22 times more informal actions than formal actions over the last seven years despite an average of 87% of the firms it reviewed over this time not being fully compliant with the Money Laundering Regulations (MLRs).
- Supervisors in the accountancy sector meanwhile have also displayed weak supervision, with the Association of Taxation Technicians issuing a total of just 5 formal actions since 2017/18, despite an average of 69% of its supervised firms that it reviewed not being fully compliant with the MLRs in that time.
- Update the money laundering rules
Second, Despite the reforms in this SI, there are still major issues with the MLRs themselves. The government has committed to look at whether businesses not currently being regulated should be – including certain businesses involved in certain property sales and renting, schools and universities, and football clubs – as highlighted by the government in its review of money laundering risks facing the UK.
- Close the enforcement gap
Finally, the government really needs to fix the major criminal enforcement gap on enablers, which sees those who enable high-end money laundering get off with a slap on the wrist from their regulator (at most) rather than tougher enforcement which is needed to provide robust deterrence.
To date, there has been only one corporate conviction under the MLRs (of Natwest in 2021), and vanishingly few prosecutions of professional enablers. Legislation to prosecute those that fail to report their suspicions is only used very rarely and has never been used against a company.
But without criminal enforcement, there will be little hard-edged deterrent for those willing to turn a blind eye to handling dodgy money.
