On 9 January 2013, HM Treasury released its annual report (the "Report")2 on the performance of UK supervisors (e.g. the FSA, HMRC, OFT and professional bodies such as the Law Society) in monitoring the compliance of businesses in the UK with the Money Laundering Regulations 2007 (the "Regulations"). The Report provides some useful insights on the likely areas of focus for supervisors in the coming year3.

Highlights from the Report are summarised below. The full Report may be accessed by clicking here.

Overview of the Report

The Report identifies a number of key areas, as follows.

Supervisors’ Risk-Based Approach

It is no surprise that supervisors are expected to adopt the same risk-based approach to supervision as that applied by businesses in respect of anti-money-laundering procedures. However, the Report noted that some supervisors were unaware of emerging threats in their sectors, something that HM Treasury will work on with those supervisors.

Businesses can expect:

  • Increased contact with their supervisors as they seek additional information on which to assess the threats in their sector; and
  • Such contact to address operational risks of each business as well as those presented by the sector(s) in which the business operates.

Compliance Visits

While acknowledging that not all businesses require regular on-site inspections, the Report recommends compliance visits as a way for supervisors to check that businesses are complying with the Regulations. HM Treasury recommended that supervisors use their powers to request information ahead of compliance visits in order for supervisors to have as much information about the business as possible.

Businesses can expect:

  • More requests for management information ahead of compliance visits. There is also likely to be increased collaboration between supervisors and third parties who visit the businesses they supervise as supervisors attempt to act more efficiently; and
  • An increase in the number of visits, albeit focussed on areas and sectors of greatest perceived risk.

 

Enforcement Action

HM Treasury considered the enforcement approach in the UK during the reporting period as achieving the aims of levying proportionate penalties and encouraging enhanced future compliance. It noted the range of action taken by certain supervisors including the FSA (issuing penalties including the highest of £8.75 million for Principles and Rules breaches related to AML failings); the OFT (revoking consumer credit licenses; and issuing a fine of £500,000 for contravention of the Regulations) and HMRC (issuing financial penalties of up to £125,000 for non-compliant behaviour).

Businesses can expect:

  • More robust and a greater use of the range of penalties from supervisors as the AML/CTF regimes ‘bed in’ and businesses are expected to become more familiar with their obligations;
  • A greater focus on ensuring that enforcement improves compliance overall as supervisors are "expected to understand the extent to which enforcement action they are taking is reducing the prevalence of money laundering and terrorist financing activity in their sectors". In turn, this will focus the minds of businesses on the need, in any enforcement process, to be able to demonstrate effective remedial measures which have already been taken to address the problems under investigation..

Advice and Outreach

Effective communication is considered by HM Treasury to include informal advice (e.g., newsletters, e-magazines and law enforcement alerts) and formal advice (e.g., guidance notes). The Report acknowledges that supervisory communication with businesses is adequate but suggests that a targeted approach to such outreach activity is most effective. However, it recognises (in a ‘nod’ to economic realities) that such an approach should be taken where "resources allow". Ironically, praying such resource constraints in aid in enforcement discussions does not ordinarily receive a sympathetic regulatory ear.

Information Sharing

The Report stresses that there is already a high level of interaction between supervisors in the exchange of information concerning businesses. Supervisors are able to share information through a range of forums such as their respective affinity groups, the Anti-Money Laundering Supervisors Forum (AMLSF), which HM Treasury and the Serious Organised Crime Agency (SOCA) attend, and the Money Laundering Advisory Committee (MLAC). Such interaction enables supervisors to discuss issues, share best practice and ensure the consistency of the supervisory approach taken.

Businesses can expect:

  • A continuation of information sharing between supervisors which is likely to increase as supervisors take note of HM Treasury’s desire to reduce the risk of what it identifies as "regulatory arbitrage".
  • With the development of the HM Treasury-led national risk assessment programme, there is scope for further supervisory opportunities to share information on high level risks across sectors.

Conclusion

The Report does not contain any great surprises for businesses. However, as an End of Term Report for supervisors, it gives a good indication of where there is room for supervisory improvement and, therefore, where we can expect supervisors to look to improve their grades for the coming year.