ECSH45030 - The fit and proper test

The fit and proper test (F&P) is applied to money aervice businesses (MSBs) and trust or company service providers (TCPSs) and the beneficial owners, officers and managers (BOOMs) of those businesses. Agents of MSBs and the agent’s BOOMs are also subject to the fit and proper test – although the principals have a responsibility to ensure their agents would pass the F&P test HMRC can (and does) rely on their assessments (in accordance with regulation 58(5) of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017)).

The F&P test is HMRC’s ‘gatekeeper’ function. HMRC must refuse to register an applicant/business if we are satisfied that each BOOM of a MSB, its agents (and BOOMs of its agents) and 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 F&P failure, we 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.

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.

Businesses wishing to provide MSB or TCSP services must have their application (including determination of F&P tests) approved before offering such services.  This also applies to businesses already registered for supervision within HMRC who wish to provide MSB or TCSP services – e.g. an accountant who wishes to provide TCSP services cannot do so until the business has notified HMRC of the intended change.

Being F&P is an ongoing requirement. This means that F&P determination can be reviewed by HMRC at any time.  Similarly, principals should keep their agents under review, with a particular focus on whether there has been any change that might affect their fit and proper determination.

F&P is not a status or a licence. It is non-transferable and applies only in the context of the business that the application is made. This means that an individual that has passed the F&P test as part of one business cannot carry their test over to another. If a BOOM changes their role within a business, or moves to a different one, this is a material change which should be notified to HMRC by the business in accordance with regulation 57(4) MLR 2017.  Before they can carry out their new role, the BOOM will need to undergo the F&P test again if they move to a new business and may need to undergo the F&P test if they move to a new role in the same business.  A new test will incur an additional F&P test fee.

A comprehensive presentation on the F&P test within the context of Money Service Businesses is available on the Learning Zone here.

 

Who has to take the test?

For HMRC-supervised MSBs and TCSPs, the F&P test is taken as part of the process when considering the application for registration by the business. BOOMs of the business, as well as agents of MSBs and their BOOMs are also subject to the fit and proper test, further detail is provider later in this guidance.

 

BOOMs

‘Beneficial owners’ and ‘officers’ are defined in regulation 3 MLR 2017.

‘Managers’ are individuals who:

  • Make decisions affecting compliance and are responsible for regulated activities.
  • Are employed by the principal to oversee or manage the screening and propriety of their money service business agents.

This includes, but is not restricted to, those managers involved in the development and monitoring of anti-money laundering and counter terrorist financing policies, controls and procedures. The test also applies to staff who carry out any regulated activity, or where their activity touches on anti-money laundering or counter terrorist financing policies, controls, and procedures.

The test does not apply to other managers who are not routinely involved in the anti-money laundering and counter terrorist financing activities of the business.

The nominated officer of a business is subject to the F&P test, and depending on the person, will either be covered by the definition of ‘officer’ or ‘manager’.

The F&P test also applies to agents of MSBs and their BOOMs. Further guidance on F&P of MSB Agents is detailed later in this guidance.

 

How the test is applied

HMRC may contact applicants and BOOMs for further information once an initial application has been submitted. HMRC may also contact applicants directly by email, or by post.

An applicant must disclose to HMRC any issues as to why it may not be F&P and will be given the opportunity to make representations as to why the person should be considered F&P in the context of the application in which they are applying.

Regulation 88 MLR 2017 provides that knowingly or recklessly providing false or misleading material information is a criminal offence and could result in criminal prosecution.

The F&P test will apply to businesses and BOOMs that are already registered to provide other services, such as Accountancy Service Providers if they wish to begin offering MSB or TCSP services. Businesses wishing to offer MSB or TCSP services must report a material change to vary their registration.

 

Cryptoassets

Businesses offering cryptoasset services must register for anti-money laundering supervision with Financial Conduct Authority (FCA) and will be subject to the F&P test. If you are dealing with a business that offers cryptoasset services, please contact EC-S policy.

F&P Test Fees

Full details of the fees payable in relation to the F&P test and registration can be found in ECSH44525.

 

Conducting the F&P test

The F&P Test is made up of 3 parts:

  • Part 1 - HMRC will check if a business or BOOM has an unspent conviction for a criminal offence listed in Schedule 3 MLR 2017 (or their overseas equivalents). These are known as relevant offences and include any offences with a deception or dishonesty element, such as theft or fraud. If they do, then they will automatically fail the F&P test.  Further detail on convictions can be found below in “Convictions & Decision Making”.
  • Part 2 - HMRC will consider if there has been a consistent failure by the business to comply with the MLR 2017, 2001 Regulations, 2003 Regulations or 2007 Regulations and whether there is a risk that the business may be used for money laundering or terrorist financing. This does not mean there needs to be a long history of non-compliance with any of the regulations. A single period of non-compliance could be considered to be a consistent failure to comply if there has been a failure to comply with a range of requirements under the regulations during that period which presents a risk to money laundering or terrorist financing.
  • 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 occurred over): there has been breaches 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.
  • Part 3 - HMRC will look more widely at whether the business and any of its BOOMs has adequate skills and experience and has acted and may be expected to act with probity. These aspects are further broken down into three topics:

Honesty and integrity – see ECSH45811.

Competence and capability – see ECSH45812.

Financial soundness – see ECSH45813.

These aspects of the test are subjective. This means there is no threshold of failure, and the presence of one of the factors below will not mean a business or its BOOMs will automatically fail the test. F&P decisions will be made on a case-by-case basis.

In determining whether a business or BOOM is fit and proper, you must consider all relevant matters and set out your reasoning in any decision made in relation to these factors.


Fit & Proper Testing & Schedule 3 Convictions


Convictions & decision making
HMRC can be considered a judicial authority when taking into account a spent conviction when determining F&P applications.

As detailed above, if a business or any of its BOOMs have an unspent conviction for a Schedule 3 offence they will automatically fail the F&P test under Part 1.  HMRC can still consider a conviction that is spent as per the Rehabilitation of Offenders Act 1974 as part of its decision-making process when considering parts 2 and 3 of the test.

Please refer to ECSH45845 for a breakdown of relevant offences in relation to: 

  • Paragraph 29, Schedule 3 MLR 2017 - An offence under the law of any part of the United Kingdom consisting of being knowingly concerned in, or in taking steps with a view to, the fraudulent evasion of tax. 

  • Paragraph 30, Schedule 3 MLR 2017 - Any offence which involves deception or dishonesty as one of its components. 


This means that a BOOM with a spent conviction of a serious nature or relevant offences such as fraud, dishonesty or money laundering can fail the F&P Test under Regulation 58(4)(b) and (c) due to the risk the business may be used for money laundering, and that the BOOM has not acted with probity, and may not act with probity in the future..

Further guidance on convictions is detailed in ECSH45025.

Decision-makers should discuss this on a case-by-case basis with their team leaders.

 

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For further guidance see ECSH45840.

MSBs, TCSPs and their BOOMs, must remain F&P throughout the duration of their appointment in their roles. If HMRC receives or establishes information requiring a review of whether a business or BOOM is F&P, consideration may be given to the suspension or cancellation of that business’s registration, depending on the nature of the information and circumstances of the case.

 

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Fit & Proper Test Failures

F&P roper decision are not in themselves a sanction however they are decisions which are appealable (with the exception of a F&P decision being as a result of an unspent schedule 3). F&P decisions can then lead to sanctions (i.e. suspension or cancellation of registration or prohibition on management).

All BOOMs included in an MSB or TCSP application must pass the F&P test and must continually be able to pass the test throughout their appointment in these roles.

For new applications, a business must not act as a MSB or a TCSP until it, and all BOOMs included in the application have passed the F&P test and its application has been approved.  If an individual or the business does not pass the F&P test at the point of application, HMRC must refuse to register the business.

If, after registration a BOOM is no longer F&P, the business must remove the BOOM from their role. If the BOOM continues to act in their role that requires F&P, HMRC may cancel or suspend the business’ registration.

When a new BOOM joins a business (or is appointed within the business to the role of a BOOM) after it has been registered, the business must amend its registration through their Government Gateway account, and the BOOM must apply and pay for a fit and proper test within 30 days of the BOOM taking up their role (or 14 days for a nominated officer). If the new BOOM fails the F&P test, they must be removed from their position within the business and must not continue to act as a BOOM in that business. If a BOOM continues act in their role having failed the F&P test HMRC may suspend or cancel the business’s registration and may also consult with the Insolvency Service to apply for director disqualification.

 

MSB Agents

A business operating as an agent for another MSB must be included in the registration information of that MSB (the principal). The agent may also operate as an independent MSB in its own right, and have control of its own business, and its Risk Assessment and Policies, controls and procedures, and, if so, should also register with HMRC for supervision.

MSB agents and their BOOMs are subject to the F&P test.  Principals are responsible for ensuring that their agents:

  • Are included as agents under its own registration.
  • Are F&P at the time of onboarding; and
  • Remain F&P for the duration of the business relationship with the principal.

This will be monitored by HMRC.

It is possible for a business to operate as an MSB agent for multiple principals. Each principal must include the agent in its own registration information. Where an MSB agent has more than one principal, each principal must satisfy itself that the agent is F&P. An agent being included in one principal’s registration does not automatically mean they would be appropriate to act on behalf of another. This means agents must pass the F&P test with every principal they register with. Principals must apply the full F&P test, simply checking for criminal convictions is not robust enough of a test.

HMRC can contact MSB agents that are included in a principal’s registration to conduct compliance and registration checks as agents are relevant persons for the purposes of MLR 2017.  HMRC can also utilise regulation 66 MLR 2017 to require a MSB agent to provide any information that is reasonably required for assessing whether the agent or its BOOMs are F&P.

Any notice to provide information issued to an MSB agent under regulation 66 MLR 2017 must be as specific as possible and set out why the information or documents requested are considered relevant and necessary to conduct or apply the F&P test.

 

Professional Body Supervised TCSPs and F&P determinations

Where a TCSP is supervised by a professional body (PB) listed in Schedule 1 MLR 2017, this information is maintained by HMRC on a register (the ‘TCSP Register’) of all PB-supervised TCSPs. Regulation 58 MLR 2017 requires HMRC to consult the supervising PB and can (and does) rely on the PB’s determination as to whether or not that TCSP business and its BOOMs are F&P persons. Further information on the TCSP Register is available in ECSH52075 Professional Body Supervision of Trust or Company Service Providers (TCSP). 

 

External guidance

External guidance for the F&P test can be found here: The F&P test - GOV.UK (www.gov.uk)