On 6 August 2025, HM Treasury published its long-awaited response to the 2024 consultation on the Money Laundering Regulations (MLRs). The proposed amendments aim to streamline AML compliance, reduce unnecessary regulatory burdens, and enhance the overall effectiveness of the UK’s AML framework [1].
For small law firms and sole practitioners, these changes are particularly relevant. They offer greater flexibility in applying a risk-based approach, clarify obligations around source of funds checks, and introduce new considerations around digital identity and company formation services.
This blog post breaks down the key changes and explores what they mean for your firm’s AML policies, procedures, and day-to-day compliance.
Key Proposed Changes to the MLRs
1. Enhanced Due Diligence (EDD) Trigger Refined
Previously, EDD was required when a transaction was “complex or unusually large.” The revised wording now specifies “unusually complex or unusually large”, allowing firms to assess what is usual or unusual based on their own client base and transaction types[1].
Implication for small firms: You can now apply EDD more proportionately. For example, a £500,000 property transaction may be routine for some firms but unusual for others. This change supports a risk-based AML approach tailored to your practice.
Action point: Update your AML manual and training materials to reflect the new EDD trigger. Include examples of what constitutes “unusual” in your firm’s context.
2. High-Risk Third Countries Limited to FATF Black List
Mandatory EDD measures will now apply only to countries on the FATF’s call to action list—commonly referred to as the black list. As of June 2025, this includes:
- Iran
- Myanmar
- North Korea [2]
Previously, firms had to apply EDD to all countries listed as high-risk under various frameworks. This change simplifies compliance and aligns UK regulations with FATF guidance.
Implication for small firms: You can now assess other jurisdictions using the risk factors in Regulation 33, rather than applying blanket EDD.
Action point: Review your client onboarding procedures and remove automatic EDD triggers for countries not on the FATF black list. Ensure your risk assessments consider jurisdictional risk using a nuanced approach.
3. Clarifying Source of Funds Checks
The consultation response proposes clearer guidance on when source of funds checks are required—specifically, “where necessary”. HM Treasury is exploring the inclusion of illustrative examples, such as:
- A client’s funds not matching their known financial profile
- Unexplained third-party contributions
- Transactions involving offshore entities
Implication for small firms: You’ll have more clarity on when to conduct source of funds checks, reducing unnecessary burdens while maintaining compliance.
Action point: Update your AML procedures to include examples of when source of funds checks are triggered. Train staff to identify red flags and document their rationale for conducting—or not conducting—checks.
4. Currency References Changed to Pounds Sterling
All references to Euros in the MLRs will be replaced with Pounds Sterling on a 1:1 basis. This change simplifies compliance for UK-based firms and removes the need for currency conversion when applying thresholds.
Implication for small firms: Easier application of financial thresholds in AML procedures.
Action point: Update your AML documentation and client onboarding forms to reflect the new currency references.
5. Digital Identity Guidance in Development
HM Treasury will work with other departments to produce guidance on digital identity, recognising its growing role in AML compliance[3]. This includes:
- Defining what constitutes a trusted digital identity
- Aligning with the UK digital identity trust framework
- Clarifying how digital identity can be used in customer due diligence (CDD)
Implication for small firms: You’ll soon have clearer rules on using digital identity tools for AML checks, potentially reducing onboarding time and improving client experience.
Action point: Monitor developments in digital identity guidance. If you use electronic verification tools, ensure they meet the standards set out in the forthcoming framework.
6. Off-the-Shelf Companies Included in TCSP Definition
Sales of off-the-shelf companies will now fall under the definition of Trust or Company Service Providers (TCSPs). This means firms involved in such sales must comply with TCSP-specific AML obligations.
Implication for small firms: If your firm facilitates company formation, you may now be subject to additional AML requirements.
Action point: Review your services to determine if TCSP obligations apply. If so, update your AML policies and register with the appropriate supervisory authority.
Implications for Law Firms
Simplified Compliance
The proposed changes aim to reduce unnecessary AML burdens, especially for firms with limited resources. By narrowing EDD triggers and focusing on FATF-designated high-risk countries, firms can allocate compliance efforts more efficiently.
Greater Flexibility
The emphasis on a risk-based approach empowers firms to make informed decisions based on their client base and transaction types. This is particularly beneficial for sole practitioners and small practices with niche specialisms.
Enhanced Clarity
The move toward illustrative guidance and clearer definitions (e.g. digital identity, TCSPs) helps firms understand their obligations and avoid over-compliance or under-compliance.
What Happens Next?
HM Treasury will publish a draft statutory instrument in the coming months, with the aim of laying it before Parliament before the end of 2025 [1]. The Solicitors Regulation Authority (SRA) will work with other AML supervisors to update the LSAG guidance in line with the changes and seek HM Treasury approval.
Action point: Subscribe to SRA updates and monitor the publication of the statutory instrument. Once released, review the changes and update your AML framework accordingly.
Practical Steps for Small Firms and Sole practitioners
- Review Your AML Manual
Ensure it reflects the revised EDD trigger, FATF country list, and source of funds guidance. - Update Risk Assessments
Tailor your PWRA and matter-level assessments to incorporate the new jurisdictional and transactional risk factors. - Train Your Team
Provide training on the updated MLRs, including practical examples of when EDD and source of funds checks are required. - Audit Your Digital Identity Tools
If you use electronic verification, ensure they align with the forthcoming trust framework. - Check Your TCSP Status
If you sell off-the-shelf companies, confirm whether TCSP obligations apply and register if necessary.
Final Thoughts
The August 2025 MLRs consultation response marks a significant step toward simplifying AML compliance for the legal sector. For small law firms and sole practitioners, the changes offer greater clarity, flexibility, and proportionality—allowing you to focus on genuine risks without being bogged down by unnecessary procedures.
By staying informed, updating your policies, and training your team, you can ensure your firm remains compliant, efficient, and well-prepared for the evolving AML landscape.
References
[1] Improving the effectiveness of the Money Laundering Regulations
[2] High-Risk Jurisdictions subject to a Call for Action – 21 February 2025
[3] Trusted digital identities in financial services: new MLR guidance …