ASK MAT – Should regulatory guidance (e.g. AML) that carries legal weight in courts, providing a "safe harbour", be approved by the government?

ASK MAT – Should regulatory guidance (e.g. AML) that carries legal weight in courts, providing a "safe harbour", be approved by the government?

MAT SAYS:- Thank you for such a good question, and yes, I do think that there should be an independent arm’s length approval by a government and or a body such as the Attorney General's legal office in Jersey

Unfortunately, Jersey does not meet the high standards that the UK demonstrates.

• UK
• Under Regulation 76(8) of the MLR 2017, HM Treasury has the authority to approve guidance issued by supervisory authorities or appropriate industry bodies (e.g., JMLSG, which represents trade bodies across financial and professional sectors).
• Approved guidance is considered by courts when assessing whether a person or firm has complied with the MLR 2017 or committed an offence under those regulations.
• This approval enhances the guidance’s credibility and provides legal certainty for regulated entities that adhere to it.
• Government-approved safe harbour guidance in the context of Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) frameworks, such as under the UK's Money Laundering Regulations 2017 (MLR 2017), offers several key advantages.
• This guidance, often produced by industry bodies, such as the Joint Money Laundering Steering Group (JMLSG), or supervisory authorities, and then approved by a central government entity like HM Treasury, provides a recognised standard that firms can follow to demonstrate compliance. The UK process is described further below

This UK process is not the case in Jersey

• JERSEY
• However, this is not the case in Jersey, and this is a problem because guidance can be rushed through, as demonstrated when The JFSC's Guidelines on the Interpretation of Article 36 of the Proceeds of Crime (Jersey) Law 1999 (particularly in the context of the 2023 Schedule 2 recast) can be viewed as an example of guidance that has faced challenges and needs to be rewritten
• In January 2023, Schedule 2 was significantly overhauled to remove scope exemptions, align definitions with FATF standards, and expand Jersey's AML/CFT/CPF framework. This brought more entities (e.g., individual directors, family offices, lenders, and specific trust structures) into scope, requiring them to register with the JFSC and comply with AML obligations.
• The JFSC issued initial guidance, including the Article 36 interpretation guidelines, to help interpret what constitutes a "financial services business" under the recast Schedule 2. This guidance aimed to provide clarity on activities in scope, emphasising a broad approach to prevent money laundering risks.
• However, the guidance was perceived as "rushed" by some in the industry, as it was not a consultation, and it had to be in before the MONEYVAL visit
• This led to practical challenges: entities newly in scope struggled to understand the exact requirements, such as registration deadlines, customer due diligence (or carve outs), and whether specific operations (e.g., incidental lending or private trust activities) were covered.
• This ambiguity led to confusion, increased compliance burdens, and necessitated frequent clarifications through FAQs and updates.
• RE-WRITE GUIDANCE
• This matter was discussed today at a JFSC drop-in meeting

• Today's drop-in meeting highlights issues common in rapid regulatory changes, such as initial ambiguities and the need for iterative refinements.
• The question is, because there is no independent verification that the guidelines are effective safe harbour defences, will the guidance still create problems due to ambiguity, poor drafting and or lack of legal clarity
• Issues with regulators writing guidelines
• allowing a regulator or supervisory authority such as the Jersey Financial Services Commission (JFSC), which oversees financial services in Jersey and issues its own AML guidance, to self-approve their guidance for safe harbour status would be dangerous.
• While regulators like the JFSC or the UK's FCA are experts in their domains and often draft high-quality guidance, self-approval undermines key safeguards. Here's why this is risky, based on structural and practical considerations in AML frameworks:
• Conflict of Interest and Regulatory Capture:
• Regulators interact closely with the industries they supervise, which could lead to biased or lenient guidance if they approve it themselves. For instance, to maintain good relations or reduce supervisory burdens, a regulator might downplay certain risks or requirements, prioritising industry convenience over robust AML controls.
• This is known as "regulatory capture," where entities subject to supervision influence outcomes, potentially weakening the fight against money laundering.
• Central government approval (e.g., by HM Treasury in the UK) provides an independent check, ensuring guidance isn't watered down.
• Inconsistency and Fragmentation:
• Without central approval, different regulators could produce conflicting guidance, creating confusion and uneven enforcement across jurisdictions or sectors. For example, the JFSC's guidance may differ from that of the UK's FCA or HMRC, which can complicate compliance for cross-border firms and potentially allow criminals to exploit any gaps. Treasury approval ensures consistency, aligning all guidance with a unified national strategy and international standards, such as the FATF recommendations.
• Lack of Broader Policy Oversight:
• Governments set high-level AML policy through legislation (e.g., MLR 2017), while regulators implement it. Self-approval by regulators could disconnect guidance from evolving government priorities, such as post-Brexit reforms or responses to new threats like decentralised finance. Central approval ensures guidance supports national objectives, with Treasury acting as a gatekeeper for quality and relevance.
• Reduced Accountability and Scrutiny:
• Self-approval might limit external review, increasing the risk of inadequate risk management. AML risks are dynamic (e.g., involving reputational, operational, or concentration risks), and independent approval adds scrutiny to ensure guidance addresses them effectively. Without this, firms might follow subpar advice, exposing the financial system to greater vulnerabilities.
• Erosion of Public Trust and Effectiveness:
• In jurisdictions like the UK or Jersey, which aim for high AML standards to attract legitimate business, self-approval could signal weaker governance, damaging international credibility. Central approval reinforces trust by demonstrating impartiality and commitment to outcomes over mere technical compliance.
• In practice, even when regulators draft guidance (as the JFSC does for Jersey's regime), it's often subject to higher-level review similar to how UK supervisors submit to HM Treasury to mitigate these dangers. This layered approach maintains expertise while safeguarding integrity.

THE UK PROCESS

The HM Treasury's approval process for Anti-Money Laundering (AML) guidance, such as that produced by the Joint Money Laundering Steering Group (JMLSG), is a structured mechanism under the UK’s Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017).

This process ensures that guidance issued by certain bodies is recognised as "approved guidance," which carries legal weight in courts, providing a "safe harbour" for firms that follow it when demonstrating compliance with AML obligations. Below is an explanation of the process, based on available information:

1. Context and Legal Basis

• Under Regulation 76(8) of the MLR 2017, HM Treasury has the authority to approve guidance issued by supervisory authorities or appropriate industry bodies (e.g., JMLSG, which represents trade bodies across financial and professional sectors).
• Approved guidance is taken into account by courts when assessing whether a person or firm has complied with the MLR 2017 or committed an offence under those regulations.
• This approval enhances the guidance’s credibility and provides legal certainty for regulated entities that adhere to it.

2. Key Steps in the Approval Process

• While the exact procedural details may not be entirely public (as they involve internal government processes), the general framework for HM Treasury’s approval of AML guidance can be outlined as follows:

1. 1. Drafting of Guidance
      • Industry bodies like the JMLSG, or supervisory authorities (e.g., FCA, HMRC, or professional bodies like the Law Society), develop AML guidance tailored to their sector.
      • The guidance is typically drafted in consultation with stakeholders, including industry representatives, regulators, and sometimes law enforcement agencies (e.g., National Crime Agency), to ensure it reflects practical and legal requirements.
      • The JMLSG, for example, produces comprehensive guidance covering customer due diligence, risk assessments, and compliance with AML/CTF obligations, often incorporating feedback from its member organisations.
   2. Submission to HM Treasury
      • The body producing the guidance submits the draft to HM Treasury for review. This submission includes the full text of the proposed guidance, along with supporting documentation that explains its purpose, scope, and alignment with the MLR 2017.
      • For JMLSG guidance, the submission is typically made by the JMLSG Secretariat on behalf of its member trade associations.
   3. HM Treasury Review
      • HM Treasury evaluates the guidance to ensure it:
        • Accurately reflects the requirements of the MLR 2017 and other relevant legislation (e.g., Proceeds of Crime Act 2002, Terrorism Act 2000).
        • Provides clear, practical, and proportionate advice for firms to meet their AML/CTF obligations.
        • Is consistent with the UK’s broader AML/CTF framework, including international standards like those set by the Financial Action Task Force (FATF).
      • Treasury officials may consult with other government bodies, such as the Home Office, the Office for Professional Body Anti-Money Laundering Supervision (OPBAS), or supervisory authorities like the FCA or HMRC, to ensure the guidance aligns with regulatory expectations.
      • The review process may involve iterative feedback, where HM Treasury requests revisions or clarifications to ensure the guidance is robust and fit for purpose.
   4. Approval Decision
      • Once satisfied, HM Treasury formally approves the guidance. This approval is typically communicated to the submitting body and may be publicised, for example, through announcements on the JMLSG website or HM Treasury’s own publications.
      • The approval confirms that the guidance has the status of "approved guidance" under the MLR 2017, meaning courts must consider it when determining whether a firm has complied with its AML obligations.
   5. Publication and Implementation
      • After approval, the guidance is published by the issuing body (e.g., on the JMLSG website) and disseminated to relevant sectors.
      • Firms in the regulated sector (e.g., banks, law firms, accountants) are expected to have regard to this guidance in developing their AML policies and procedures. While following the advice is not mandatory, doing so provides a strong defence in case of regulatory scrutiny or legal proceedings, as it demonstrates adherence to an approved standard.

3. Role of Approved Guidance in Courts

• Approved guidance serves as a benchmark for compliance. Courts are required to take it into account when assessing whether a firm or individual has breached the MLR 2017 or committed a money laundering offence.
• If a firm can demonstrate it followed HM Treasury-approved guidance (e.g., JMLSG guidance), it is generally protected from liability, as this is seen as evidence of reasonable efforts to comply. This is often referred to as the "safe harbour" principle.
• However, firms are not legally required to follow approved guidance; they may adopt alternative approaches, but these must still meet the regulatory requirements, and firms may need to justify deviations from approved guidance if challenged.

4. Key Features of the Process

• Collaboration: The process is collaborative, involving input from industry, supervisors, and government to ensure the guidance is practical and effective.
• Proportionality: Guidance is expected to be proportionate, balancing the need to combat money laundering and terrorist financing with the burden on businesses, particularly smaller firms.
• Periodic Updates: Approved guidance is regularly reviewed and updated to reflect changes in legislation, emerging risks, or feedback from supervisory bodies. For example, JMLSG guidance is amended to align with updates to the MLR or FATF recommendations, with revisions submitted to HM Treasury for re-approval.

5. Role of Other Bodies

• HMRC: While HMRC is a supervisory authority for specific sectors (e.g., money service businesses, estate agents), it does not approve AML guidance. Instead, it may produce its own sector-specific guidance or rely on approved guidance, such as JMLSG’s. HMRC’s role is to enforce compliance, not to approve industry-wide guidance.
• Other Supervisors: Bodies like the FCA, Gambling Commission, or professional bodies (e.g., ICAEW, Law Society) may issue their own guidance, which must also be submitted to HM Treasury for approval if it is to carry the "safe harbour" status.
• OPBAS: The Office for Professional Body Anti-Money Laundering Supervision oversees professional body supervisors and ensures consistency in their AML guidance and practices, but it does not directly approve guidance.

6. Example: JMLSG Guidance

• The JMLSG guidance is a prominent example of HM Treasury-approved guidance. It is widely used across the financial services sector and by other regulated entities, such as law firms and accounting firms.
• The JMLSG submits its guidance (or revisions) to HM Treasury for approval, often after extensive consultation with its members and other stakeholders. Once approved, it is published and serves as a key reference for firms to develop their AML/CTF policies and procedures.

7. Challenges and Considerations

• Timeliness: The approval process can be time-consuming, as it involves detailed review and consultation, which may delay the issuance of updated guidance in response to new risks or legislative changes.
• Scope: Guidance must strike a balance between being comprehensive enough to cover diverse sectors while remaining practical for smaller firms with limited resources.
• International Alignment: HM Treasury ensures guidance aligns with international standards (e.g., FATF), which may require additional scrutiny during the approval process.

Conclusion

• HM Treasury’s AML guidance approval process is a critical component of the UK’s AML/CTF framework, ensuring that guidance produced by industry bodies like the JMLSG or supervisory authorities is robust, practical, and legally recognised.
• By approving guidance, HM Treasury provides firms with a clear framework to meet their obligations and a degree of legal protection when followed.
• The process involves submission, review, consultation, and formal approval, with courts required to consider approved guidance in compliance assessments.