ECSH64005 - Regulation 58 - Fit and proper test

Category Heading	Description
The Law	https://www.legislation.gov.uk/uksi/2017/692/regulation/58
What it means	The Fit and Proper Test is HMRC’s ‘gatekeeper’ function. HMRC must refuse to register an applicant/business if we are satisfied that each BOOM (beneficial owner, officer, manager) of a Money Service Business (MSB), its agents (and BOOMs of its agents) and Trust or Company Service Providers (TCSP) are not fit & proper persons. HMRC must also be satisfied that the business/applicant (the MSB or TCSP) is itself a fit and proper ‘person’. Although HMRC must refuse to register an applicant if there is a fit and proper failure, HMRC may also cancel or suspend the registration of an already registered business if it is satisfied that the business, or any BOOMs of the business (or BOOMs of an MSB’s agent) are not fit and proper (see Reg 60). HMRC will determine whether or not we are satisfied that the MSB and its BOOMs are fit and proper or not. Although we can also determine if an agent or its BOOMs are fit and proper or not (and have done so before), we put the responsibility onto the registered MSB Principal of the agent to ensure its agents and BOOMs of its agents are fit and proper. HMRC will determine if both the MSB Principal and its BOOMs are fit and proper.
Purpose	Fundamentally, the F&P regime is about ensuring MSBs, their agents, and TCSP businesses are not able to register or trade (or continue to trade) if they are owned, directed or managed by individuals who are unfit or improper, or if the business itself is not fit and proper.
Time Line	This was a requirement under MLR 2007 (Regulation 28) which applied to the applicant (the business), beneficial owners, directors, nominated officer and persons who effectively direct or will effectively direct the business. Regulation 58 of MLR2017 now extends the test to managers, agents of an MSB, and the BOOM’s of those agents also. The MLR2017 (amendments 2019) further extended this Regulation by adding the provisions of Regulation 58(4)(c); where we can assess whether the BOOMs have adequate skills and experience and have acted or may be expected to act with probity. This brings the regulations in line with the Fit and Proper Test and HMRC Approval Technical Guidance (appendix 1 in particular) on gov.uk - where we assess competency and capability and acting with honesty and integrity.
What to establish	Who the Fit and Proper Test applies to: • MSBs and TCSPs – The businesses/applicant themselves, including individuals who are running the business either on their own (sole trade) or in a partnership • All BOOMs of an MSB or TCSP – Including beneficial owners, officers, individuals who are effectively directing or managing the business, nominated officer (sometimes referred to as a Money Laundering Reporting Officer (MLRO)) and senior managers who are engaged directly in the provision of regulated activity • Agents of an MSB and the BOOMs of these agents
	Fit and Proper decision are not in themselves a sanction however they are decisions which are appealable (with the exception of an unspent schedule 3 in point 1 below). Fit and Proper decisions can then lead to sanctions (i.e. suspension or cancellation of registration or prohibition on management).
	The Fit and Proper Test is divided into two main parts as follows:
	Part 1 - The first part of the test is to check for any unspent convictions that are listed under Schedule 3 of MLR2017. If a person has an unspent conviction for an offence listed in Schedule 3 of the Regulations in accordance with Regulation 58(3). A person cannot be considered as Fit & Proper if convicted of a Schedule 3 offence which remains unspent. The offences listed under Schedule 3 can be found here in the further reading section below. Due to this being an absolute failure of fit and proper – the regulations specify this is a non-appealable decision. Please see best practice below.
	Part 2 - If Regulation 58(3) does not apply (there is no unspent schedule 3 offence), we must consider the second part of the Fit and Proper test (Regulation 58(4)). The second part of the test is a subjective test where the decision-making element comes in to take into account a much broader range of information and risks. These decisions are all appealable and are divided into three stages as follows:
	i. Whether the Business has consistently failed to comply with the requirements of the Regulations (or any previous MLR’s) in accordance with Regulation 58(4)(a). This stage of the test could apply to either the business itself or to the BOOMs of the business. When looking at what constitutes ‘consistent’ non-compliance, we can consider the ‘depth’ of the non-compliance or the ‘breadth’ of the non-compliance: • Depth (how long a period of time the breaches have occured over): there has been breaches of the regulations which evidence show as not being ‘one-off’ and have happened for a period of time. This could be the business only breaching a single regulation however the breach has happened consistently for a period of time. • Breadth (Number of breaches): the business has breached multiple areas of the regulations; even if only over a short period of time. This would still fall under ‘consistent’ failure to comply due to there being a number of regulations breached. As with all ‘subjective' elements of the Fit and Proper test, the ‘consistent’ non-compliance is a judgement call of the caseworker with considerations such as duration, severity, number of breaches, repeated breaches and compliance as a whole. You must set out your reasoning of your decision as to why you believe the non-compliance has been consistent.
	ii. The risk that the Business may be used for money laundering or terrorist financing (MLTF) in accordance with Regulation 58(4)(b). This stage of the test could apply to either the business itself or to the BOOMs of the business. This can take into account any risk that could relate to the business being used for MLTF. This could include but is not limited to the following: • Non-compliance with the regulations (including consistent non-compliance as above) resulting in the increased risk of the business being used for MLTF. • Reviewing the risk profile of the business – do they have a high-risk business model such as cash only or transferring money only to high-risk jurisdictions? And do they have adequate Polices, controls and procedures/ Risk Assessment in place to manage and mitigate the risk of MLTF –see reg 18/19 • Are any BOOMs of the business or BOOMs of an MSB agent not fit and proper? • Cash/assets seizures believed to be derived from the proceeds of crime from the business, its agents or the BOOMs (or BOOMS of agents) • Arrests made by the police or other enforcement agencies in relation to suspected money laundering or terrorist financing etc. An arrest or seizure does not automatically result in a fit and proper failure. All circumstances must be fully reviewed and considered. • Any other disclosable intelligence received that could show there is a risk of MLTF. In some cases where intelligence is not disclosable, or if further information is needed, HMRC can request a witness statement from the source (such as the police).
	iii. Whether the BOOMs have adequate skills and experience and have acted or may be expected to act with probity in accordance with Regulation 58(4)(c). This last stage would only apply to the BOOMs when reviewing fit and proper. This is another broad test which factors in multiple considerations. The factors to consider in this stage include: • Competence and Capability (adequate skills and experience) • Honesty and Integrity (Probity) • Financial Soundness Examples of considerations under each part of this section and further information/ guidance can be found in the [Archived] Fit and Proper Technical Guidance -Appendix 1 (see further reading below).
	58(5) states that for an MSB, when determining the question in Regulation 58(1) (if the applicant, BOOMs, agent or BOOMs of agents are fit and proper), HMRC can take into account the business’s opinion on whether its agents, and BOOMs of its agents are fit and proper persons This allows HMRC to delegate the responsibility to Principal MSBs to ensure their agents and the BOOMs of those agents are fit and proper. As the principal has responsibility to ensure their agents and BOOMs of their agents are fit and proper, and as the agents are not undertaking MSB activity in their own right (as it is done through the principal), agents of MSBs do not need to independently register with HMRC. However, MSB principals must declare all of its agents to HMRC as part of its registration. It would be unlikely for new MSBs to have an agent network as they won't yet be trading however, they have the ongoing obligation to declare the details of any agents and keep this updated with HMRC.
	If an applicant is registered under another supervisory authority, Reg 58(6) allows HMRC to consult with other supervisory authorities (such as the FCA for an MSB or if a TCSP is supervised under another body) to take their opinion on whether the applicant is a fit and proper person and use/rely on this in our determination.
How to test compliance and Evidence to obtain	In determining whether you are satisfied if a person (or business) is fit and proper, further information can be obtained in the following way: New applications- For BOOMs on a new application, a ‘Request for Information’ letter can be issued which explains what information we need and why we need the information in relation to the fit and proper test. It is worth noting that for new applications, this is not a power to require information and is a request. However, the letter should clearly detail that failure to provide the information requested may result in the determination that the individual is not fit and proper without the evidence to show otherwise. If no response is received, the individual cannot then be deemed fit and proper. If requiring information from the business itself, this is done under a Regulation 57(3) Notice. Existing registrations- Regulation 66 gives us the power to issue a Notice to Require Information/Documents from an individual as well as a business (or a person who was at one point a connected person to the business). A Reg 66 Notice can be sent to the BOOM in a similar fashion as above- explain what information/ documents are required and why we need this in relation to the fit and proper test. Failure to provide this required information could then be treated as a breach of regulation 66, as well as determining that the individual is not fit and proper.
	For new fit and proper applications, the authorisations admin team issue a bespoke Notice under Reg 57(3) to provide Information as well as a Request for Information letter to any BOOMs on the new application. This gathers initial information on the business and BOOMs for the decision maker to review and consider. If further information is needed after this, it can be required/requested as stated in the previous point.
	The information/documents that can be requested/ required can include evidence/details of training, experience, bank statements, details of household income/expenditure, or any other risks identified. The documents/information required/requested has to help inform the fit and proper decision so we need to state why we are asking for it.
	Record all attempts to contact the applicant/officer etc. and note response or lack thereof. This should include all types of contact including telephone call(s) and email(s).
	Check publicly available records to gain further information regarding the applicant or BOOMs.
	Take into account actions taken by other Law Enforcement Agencies such as seizures of potential proceeds of crime/criminal property
Scenario	AUTHORISATIONS/NEW APPLICATIONS: An MSB applies to register for supervision with HMRC. Authorisations teams issue a “data capture” letter to all beneficial owners, officers and mangers (BOOMS) to gather information relating to their experience, skills, compliance history and financial soundness. During the risking checks, PNC results confirm that there are no unspent criminal convictions listed in schedule 3 of the regulations. As such, the factors under regulation 58(4) requires consideration. Taking into account the information provided by the BOOM, the sole director of the business previously worked as a self-employed taxi driver for the past 7 years. He also worked for a local restaurant where he got paid cash in hand. He has said this is his first venture into running an MSB, however, worked on a voluntary basis in his uncles MSB doing admin work which he gained his experience. The caseworker determined that the BOOM is not a fit and proper person under regulation 58(4)(c), in that he does not have the experience or adequate skills to be the sole director of an MSB. Due to not having the required experience or adequate skills, there is a high risk of the BOOM being unable to put in place the correct controls and procedures to mitigate the risk of money laundering or terrorist financing (MLTF). Therefore, the BOOM is also determined not to be fit and proper under regulation 58(4)(b). According to our HMRC systems, no income has been declared on PAYE or self-assessment shows underdeclared income. The caseworker also finds the BOOM to not be fit and proper under regulation 58(4)(c) as he also has not acted with probity (in that he has been dishonest and non-compliant with his tax affairs). Due to the director being not fit and proper, HMRC must refuse to register the business under regulation 58(1). COMPLIANCE / POST-REGISTRATION: Following a compliance review of an MSB (including a review of transaction over a 3 year period), six fundamental breaches of the regulations including: • Regulation 18(1) –Failure to take appropriate steps to identify and assess the risks of MLTF • Regulation 19(1) – Failure to establish and maintain policies, controls and procedures (PCPs) to mitigate and manage effectively the risks of MLTF • Regulation 28(2), 28(11) and 28(16) – Customer Due Diligence Failures • Regulation 33(1) – Failure to apply enhanced customer due diligence and enhanced ongoing monitoring • Regulation 35(1) – Failure to have appropriate risk-management systems and procedures to determine whether a customer is a politically exposed person • Regulation 57(4) – Failure to provide details of a material change to HMRC within 30 days of the change occurring The caseworker was satisfied that the breaches identified were systemic throughout the full business and also had been committed over the full review period and across multiple areas of the legislation making it a consistent failure both in the length of time as well as number of sustained breaches. The caseworker determined that the business was not fit and proper for the purposes of regulation 58(4)(a), as it had consistently failed to comply with the requirements of the regulation. The caseworker also determined that the sole director, who has ultimate responsibility for the business’ compliance, was responsible for the breaches identified. The director shows a lack of adequate skills and ability to put in place appropriate risk assessments and effective policies controls and procedures which resulted in the non-compliance. Therefore, the caseworker also determined that the director was also not a fit and proper person under regulation 58(4)(c) as he did not have adequate skills. With the director not being fit and proper, the caseworker considers cancelling the business’ registration under reg 60.
Best Practice	When writing to the business to advise their registration has been refused or cancelled due to a fit and proper failure of one or more of the BOOMs, you cannot disclose the details of an F&P failure of an individual to the business (unless such an F&P failure related to the work done at that business) - we would simply state that the individual is not fit and proper and the details of this have been sent to the individual under separate cover.
	Where severe breaches are identified other sanctions may apply; you need to look at the breaches and decide what sanction or combination of sanctions will have the most impact and have the desired effect. I.e. when considering a Fit and Proper failure, if the BOOMs have been knowingly involved in any breaches of the regulations, a prohibition of management should also be considered - See Reg 78.
	If you are satisfied that a BOOM of the business is not fit and proper due to the consistent non-compliance of a business, your fit and proper determination letter must clearly set out your reasoning surrounding their roles and responsibilities and why that individual is directly responsible for the business failing to comply with the requirements of the regulations. For example, were any of the BOOMs responsible for putting in place RAs and PCPs that were inadequate and caused the breaches of the regulations to happen? Did a BOOM enable or allow the business to be non-compliant and are they therefore culpable for the business consistently failing to comply?
AMP	Not F&P tested. Approval check as per regulation 26 is undertaken
ASP	Not F&P tested. Approval check as per regulation 26 is undertaken
EAB	Not F&P tested. Approval check as per regulation 26 is undertaken
LAB	Not F&P tested. Approval check as per regulation 26 is undertaken
HVD	Not F&P tested. Enhanced approval check as per regulation 26 is undertaken, more closely aligned with F&P. Unlike F&P this check is focused on the business as a whole and not the individual RPs.
MSB	If a BOOM has previous experience at an MSB, take into account the type of services they offered - remember that being fit and proper and having experience at a currency exchange is different than a money transmitter, as the risks are higher. Therefore, it may be the case that a person could be fit and proper for one business but not another.
	Consider all previous employers and linked MSBs, as there is an increasing amount of potential 'clean-skin' BOOMs, and phoenixism.
	If an agent of an MSB also offers other MSB services in its own right, it would need to register with HMRC for the MSB activity not covered by the principal. For example, if a business is an agent for money transmission under a principal but also offers currency exchange, it must be registered in its own right and apply for F&P for the currency exchange activities.
TCSP	No additional Best Practice
Further Reading	Fit & Proper Guidance - GOV
	Fit and Proper ARCHIVED Technical Guidance
	Deregistration SWI Edinburgh - 31 01 2019.docx
	SCHEDULE 3 - Relevant Offences
	Money Laundering and Terrorist Financing (High-Risk Countries) Regulations 2021
	National Risk Assessment Dec 2020
	Prohibitions and approvals - Regulation 26 Duty to maintain registers of certain relevant persons - Regulation 54 Power to maintain registers - Regulation 55 Requirement to be registered - Regulation 56 Applications for registration in a register maintained under regulation 54 or 55 - Regulation 57 Determination of applications for registration under regulations 54 and 55 - Regulation 59 Cancellation and suspension of registration in a register under regulation 54 or 55 - Regulation 60 Power to require information - Regulation 66
FAQs	What do I do if during a compliance intervention I establish evidence/consider that a business/BOOM can no longer be considered F&P? You may want to consider a suspension or cancellation of the business’ registration (See Reg 60) or other possible sanctions.
	Can a business ask for a review/appeal against a cancellation or refusal of its registration that was the result of one of its BOOMs having an unspent schedule 3 conviction? Where the F&P decision (of an individual being not fit and proper due to an unspent offence listed under Schedule 3) leads to a sanction against the business, the business can request a review or appeal against a refusal or cancellation- this may give them the opportunity to remove the BOOM with the schedule 3 offence, to continue trading.
	If an individual is determined to be not fit and proper due to an unspent schedule 3, as well as other reasons under the fit and proper test, can they ask for a review/appeal? If a BOOM is determined to be not fit and proper due to an unspent schedule 3 conviction as well as other factors under the fit and proper test, although the individual cannot appeal against the schedule 3, they can still appeal against any other parts of the fit and proper decision (although they still cannot be considered fit and proper due to the schedule 3).