As I have indicated, this is not a departure from what already exists. I have already quoted previous Acts and talked about the ways in which Governments of different political colours have used secondary legislation in the past for this purpose.
More generally, noble Lords may recall that it is not unusual for requirements, which can be enforced using criminal penalties, to be set in delegated legislation. In response to my noble friend, in the area of financial services, for example, the Regulated Activities Order under the Financial Services and Markets Act 2000 specifies which activities are or are not regulated. Carrying on such activities without permission from the regulator is a criminal offence.
I assure noble Lords that I am sympathetic to the arguments on the constitutional position, and I say to the noble and learned Lord, Lord Judge, that I have listened very carefully to his contributions—we have had positive engagement on various parts of the Bill. However, as I have indicated, it remains the Government’s position that it is neither unusual nor improper for Parliament to confer powers of this type on Ministers, as we have done previously and has been accepted. I shall turn to the appropriate safeguards relating to these powers in a moment.
I would like to set out why the ability to create criminal offences specifically for the UK’s anti-money laundering regime is necessary. When the Government consulted on whether to remove the specific criminal offence provisions in previous Money Laundering Regulations, the British Bankers’ Association stated that removing such provisions would be at odds with the objective of driving an effective anti-money laundering regime. Furthermore, the Crown Prosecution Service argued that provisions for creating criminal offences in the Money Laundering Regulations different from those in the Proceeds of Crime Act 2002 serve a separate and useful function in tackling money laundering. In some instances, prosecuting according to the Proceeds of Crime Act 2002 could jeopardise ongoing investigations. It said:
“In such cases, the ability to prosecute for a regulatory offence relating to defective”,
anti-money laundering or counter-terrorist financing,
“systems can be an important tool”.
Finally, in response to the same consultation, HMRC noted that abolishing criminal sanctions for breaches of regulations “carries significant risk” to its ability to tackle money laundering. In lieu of such sanctions, if the UK wishes to maintain a functioning anti-money
laundering and counterterrorist financing regime post our departure from the European Union, it is vital that the Government continue to have the power to create criminal offences for those regimes.
As the noble Baroness, Lady Bowles, pointed out, there are other amendments in this group. Amendments 90 and 92 envisage the same effect as that of Amendment 71A. Amendment 90 aims to prevent future regulations containing provisions to create new criminal offences, while Amendment 92 deals with provisions relating to penalties for such offences. As I set out to noble Lords previously, removing the Government’s ability to create criminal offences would seriously weaken the enforceability of new regulations, thereby, we believe, lowering the effectiveness of the UK’s anti-money laundering regime.
Amendment 72 proposes to restrict the scope of anti-money laundering regulations in several ways. First, it aims to prevent the making of regulations that are detrimental to the UK’s anti-money laundering and counterterrorist financing regime. Secondly, it aims to ensure that future regulations prescribe measures which are duly proportionate. Thirdly, it seeks to ensure that regulations cannot create new criminal offences, and, fourthly, it makes provision restricting the ways in which powers in the Bill can be used to update the definition of “terrorist financing”.
I have stressed from the Dispatch Box many times that the Government are listening to concerns expressed by noble Lords about the aims of these regimes, the need for a proportionate approach and the best way to keep definitions up to date. I am pleased to be able to confirm to the House that, having engaged directly with noble Lords on this matter, we will be tabling new amendments for Third Reading which aim to address the concerns contained within limbs (a) and (b) of Amendment 72. I have set out my position on criminal offences in relation to limb (c), and so do not propose to repeat that. I can further confirm that the Government will seek in the other place to restrict the ability to add to the definition of “terrorist financing” in Clause 41. This was also something that we discussed very constructively. I assure noble Lords that it will be limited to cases where any relevant regulations under Clause 1 are for the purposes of compliance with UN or other international obligations or to further the prevention of terrorism, or both. I hope that this is sufficient reassurance to enable the noble and learned Lord not to press this amendment so that we can table amendments and engage constructively with those issues again at Third Reading.
Amendment 74 proposes to create a corporate criminal offence of failure to prevent money laundering. The effect of this amendment would be to provide that a company or partnership is guilty of a criminal offence in cases where the company’s employee, agent or other service provider commits one of the substantive money laundering offences contained in Part 7 of the Proceeds of Crime Act 2002. The relevant company would have a defence if it could prove that it had adequate procedures in place to prevent its employees and agents from committing such an offence.
I would like first to note that, as noble Lords may be aware, in 2017 the Ministry of Justice carried out a call for evidence on corporate criminal liability for economic crime, such as money laundering, fraud and
false accounting, to establish whether further reform of the law was necessary. Noble Lords will accept that this is a complex and controversial area of the law, attracting views from across a broad spectrum. Responses were received from a wide variety of stakeholders and expressed diverse and often conflicting views, as well as raising several important issues that need careful consideration. As I have told the House when dealing previously with this Bill, the Government’s response is being finalised and will be published in due course. I hope we can agree that it would make no sense to muddy the waters by introducing a further failure to prevent offence before there has been a proper review of the evidence.
I emphasise and assure noble Lords that there is no gap in the regulatory regime for financial services that would be addressed by the introduction of a failure to prevent offence for money laundering, which was a concern expressed. The senior managers regime requires that relevant financial services firms, such as banks and building societies, allocate a senior management function for overseeing the firm’s efforts to counter financial crime, including money laundering, to a specific senior person.
The requirement to maintain this role is in addition to the requirement for a money laundering reporting officer, or MLRO, who is directly responsible for ensuring that measures to combat money laundering are effective. Noble Lords may wish to note that the MLRO has a personal responsibility for the oversight of the firm’s compliance with Financial Conduct Authority rules on anti-money laundering systems and controls.
The senior managers regime is robust in the additional requirements it places on senior managers responsible for overseeing firms’ defences against financial crime. Such senior managers are required to obtain pre-approval as fit and proper from the Financial Conduct Authority and the Prudential Regulation Authority. If there is a contravention of the money laundering reporting requirements by a firm, the Financial Conduct Authority can take action against the responsible senior manager, if they can prove that they did not take such steps as a person in their position could reasonably have been expected to take to avoid the contravention occurring. This enforcement action includes fines and disbarment from undertaking regulated activities.
The senior managers regime currently applies to banks, building societies, credit unions, Prudential Regulation Authority-designated investment firms and UK branches of foreign banks.
The Government have legislated for it to apply across all financial services firms, and this will be implemented in due course—the regulators have been consulting on the final design of this extension of the regime. The introduction of the senior managers regime has significantly enhanced the ability to hold individuals responsible for failures of the systems and controls of relevant firms. Its expansion across the financial services sector will do more in this regard.
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These measures are in addition to the measures mandated by the money laundering regulations 2017, which already require regulated firms to have policies,
controls and procedures to mitigate and manage risks of money laundering and terrorist financing. We have legislated to require that these policies, controls and procedures must be proportionate with regard to the size and nature of the firm’s business, and approved by the firm’s senior management. Failure to comply with these requirements can be sanctioned through either civil or criminal means. The Financial Conduct Authority and other supervisors are able to take action against firms if their measures to counter money laundering are deficient. Recent regulatory penalties related to firms’ anti-money laundering weaknesses include a £163 million fine for Deutsche Bank in January 2017 and a £72 million fine for Barclays Bank in November 2015. All those requirements are additional to the substantive money laundering offences in the Proceeds of Crime Act which apply to any individuals, and companies; such as entering into arrangements which facilitate the use of criminal property.
The Government have previously introduced two similar offences: failure to prevent bribery in 2010 and failure to prevent the facilitation of UK and foreign tax evasion in 2017. These are structured in a similar way to the proposed amendment. They were introduced, however, following clear evidence of gaps in the relevant legal frameworks which were limiting the bringing of effective and dissuasive enforcement proceedings. We have already established that these offences apply to legal entities regardless of whether they operate within the regulated sector.
The situation in relation to money laundering is very different. The international standards set by the Financial Action Task Force and the UK’s money laundering regulations apply to banks, financial institutions, certain professional services firms and other types of entity that act as gatekeepers to the financial system. As I said, such firms are already required to have policies and procedures in place to prevent their services being misused for money laundering. Subsection (6) of the amendment would, however, require all companies, regardless of where they were incorporated, to have procedures in place to prevent persons connected with them laundering money. That would not be proportionate. It would risk making non-regulated firms liable for the actions of their regulated professional advisers, when responsibility for anti-money laundering compliance should properly rest with the regulated sector. Given the robustness of the senior managers regime and the additional requirements placed on MLROs by existing legislation, I see no clear evidence showing that there are any regulatory gaps that a failure to prevent money laundering offence would address.
Amendment 76A has been tabled as there is some concern about the words,
“without prejudice to the generality of section 41”,
in paragraph 1 of Schedule 2. I hope that I can reassure noble Lords that the normal rules of statutory construction mean that these words do not enable any Minister using this power to circumvent the clear limitations expressed in paragraphs 1 to 17 of that schedule. Those limitations will continue to apply in respect of the matters set out in those paragraphs. The words simply make it clear that regulations under Clause 41 may, for the purposes mentioned there,
make provision of a kind which is different from, but related to, the kinds of things mentioned in paragraphs 1 to 17.
For example, applying the general rules of statutory construction to Schedule 2, as amended by government Amendments 77 to 89, 91 and 93 to 97, those words could not be relied on by the Minister to make regulations under Clause 41 imposing requirements of the kind mentioned in paragraphs 3 and 4 on persons other than relevant persons—that is to say, persons carrying on business of a kind which entails risks relating to money laundering, terrorist financing or other threats to the integrity of the international financial system. Nor could such regulations be made authorising a supervisor other than the FCA or HMRC to impose civil monetary penalties. Those words do not, and are not intended to, allow provision to go beyond the limitations on the powers that I have explained.
I am also aware that concerns were raised by noble Lords about whether a gap in existing data protection law could arise from the anticipated replacement of the Data Protection Act 1998, which currently regulates the processing of personal data. The money laundering regulations 2017 contain an express provision that states:
“Any personal data obtained by relevant persons for the purposes of these Regulations may only be processed for the purposes of preventing money laundering or terrorist financing”.
These regulations cross-refer to the Data Protection Act 1998 in providing further detail on the circumstances in which personal data can be used, and the information that regulated firms must provide to customers before entering into a business relationship or occasional transaction with them.
The Data Protection Bill that is currently proceeding through Parliament will update the UK’s data protection regime, reflecting the requirements of the general data protection regulation, or GDPR, which will be directly applicable in the UK from May of this year. Any references to the current Data Protection Act in the money laundering regulations will be updated in line with the new Data Protection Act at the same time as the Act takes effect.
When the UK ceases to be a member of the EU, the GDPR will be further incorporated into the UK’s domestic legal regime by virtue of Clause 2 of the European Union (Withdrawal) Bill. The same provision will also preserve the money laundering regulations 2017 within the UK’s legal framework, ensuring that the Government’s objective of embedding data protection requirements within the UK’s anti-money laundering regime is met, and will continue to be met when the UK ceases to be a member of the European Union.
I reiterate that the Government have listened carefully to concerns raised by the Delegated Powers and Regulatory Reform Committee and by noble Lords in Committee. I hope that the House will be satisfied with the additional requirements to this end contained in Amendments 77 to 89, 91, and 93 to 97.
The DPRRC expressed concern at the scope of the powers taken through the Bill. As an example, the committee mentioned the power to require persons to put in place prescribed controls and procedures. I assure noble Lords that the Government intend to use this power in line with the duties on regulated firms and payment service providers in the MLRs. In practice
this will limit the scope of this element of the power to businesses whose activities are particularly likely to be used for the purposes of money laundering, terrorist financing or other activities that threaten the integrity of the international financial system. This aligns with the FATF standards and long-standing policy in this area, so the Government have tabled an amendment confirming that businesses will be brought within the scope of anti-money laundering/counterterrorist financing regulation under paragraph 3 of Schedule 2 only where such risks exist. To address points made by the committee, further amendments have been tabled making it clear that only businesses of this type can be required to carry out customer due diligence measures under paragraph 4 of the schedule, supervised for the purposes of paragraph 7, or registered for the purposes of paragraph 9.
Concerns have been raised over provisions for the creation of offences. It is important that any requirements relating to anti-money laundering or counterterrorist financing are subject to appropriate penalties so as to provide a deterrent to persons who might otherwise breach such requirements. In light of concerns expressed by the DPRRC and noble Lords, the Government are therefore putting forward amendments providing that any future criminal offences established under Clause 41 can be established only if regulations provide that such offences have either a mental element necessary for their commission or a defence to it, or both. This will maintain the existing policy position under the money laundering regulations 2017 and preserve the deterrent effect established by criminalising breaches of anti-money laundering and counterterrorist financing regulations. Additional amendments are being put forward providing that only the Financial Conduct Authority and HMRC will be able to impose civil monetary penalties for future regulations made under Clause 41.
I am nearly there. In order to further ensure the proportionate application of such offences, the Government are also tabling an amendment providing that a person cannot be liable for a civil monetary penalty through regulations established under Clause 41 when they have already been convicted of a criminal offence in relation to the same act or omission established through such regulations.
Between the Committee and Report stages there have been extensive discussions and debates about various parts of this grouping.