Speed read: Anita Clifford puts in to context the Anti Money Laundering and sanctions inquiry announced by the Treasury Committee, a lower house parliamentary committee, on 29 March 2018.
Today (29 March 2018), the Treasury Committee announced a full-scale inquiry into the money laundering regime and the impact of economic crime on consumers in the United Kingdom. The announcement comes amidst growing concern over the effectiveness of the United Kingdom’s Anti-Money Laundering (AML) framework in Part 7 of the Proceeds of Crime Act 2002 and the money laundering regulations which operate in parallel. A Sanctions and AML Bill is currently before Parliament for consideration and the Law Commission is currently conducting its own full scale 9-month review of Part 7 as part of its Thirteenth Programme of Law Reform. Real estate has been earmarked as a focus of the new Inquiry. Announcing the Inquiry, Committee Chair Nicky Morgan MP, noted: “It has been claimed that the UK, particularly the London property market, is becoming a destination of choice to launder the proceeds of overseas crime and corruption – so-called ‘dirty money’”.
Call for evidence
As a first step, the Inquiry has called for evidence from the public on AML and economic crime weaknesses. Submissions are due by 8 May 2018. In relation to AML, evidence is sought on several matters including the weaknesses in the current legislative and regulatory landscape and its impact on and unintended consequences of the regime for individuals, firms and the wider economy, and the effectiveness of the Treasury and its bodies in supporting and supervising the regimes.
Similar issues are flagged for consideration in relation to the second arm of the Inquiry which focuses on economic crime and its effect on consumers. Pertinently, however, the Inquiry has also called for evidence on the potential for technology and innovation to assist those committing and combatting economic crime and the security of consumers’ data.
The Inquiry’s interest in the regulatory aspect of the AML regime, alongside its other focus areas, is to be welcomed.
Since 2003, duties to undertake appropriate client identification and develop and implement AML controls and systems have applied to the financial sector. Over time, adherence to these duties has become crucial to the fight against illicit money flowing into the United Kingdom. In 2007, the duties were expanded and extended to more business activities identified as vulnerable to exploitation by money launderers such as legal professionals. Most recently, they have been refined so as to compel regulated persons to adopt an individualised risk-based approach under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 and independently audit for AML compliance. The 2017 Regulations implement the EU’s Fourth AML Directive (4MLD).
The AML requirements, imposed on persons such as banks, estate agents, legal professionals and high value dealers, have been backed by criminal sanction since 2003. Fifteen years on, prosecutions are rare. Although there have been successful prosecutions of the principal money laundering offences, contrary to sections 327 – 329 of POCA, very few prosecutions for breach of the money laundering regulatory requirements have been instituted. Similarly, there have been very few prosecutions of the failure to disclose a suspicion of money laundering offence under section 330 of POCA, applicable to regulated persons, even though concern about the United Kingdom’s attractiveness to money launderers has not diminished.
Difficult to square
Under the current regulatory framework, a person – which includes firms and corporates – who fails to discharge a duty is liable to two years’ imprisonment or to a fine (section 86). As distilled, the provisions capture a range of serious AML breaches, such as the failure to undertake appropriate Customer Due Diligence (CDD) prior to the start of the customer relationship, assess a matter for money laundering and terrorist-financing risk, conduct ongoing monitoring of a business relationship, identify a Politically Exposed Person (PEP), train employees in AML and develop and implement robust AML controls.
Falling short of the regulatory provisions presents a grave money laundering risk. The absence of prosecutions, however, calls in to question the deterrent value of the offence provisions. Relatedly, the lack of prosecutions for failure to adhere to the legal requirements may be difficult for responsible firms who do adhere – and spend considerable time and resources doing so – to square.
The pattern to date has been to use non-criminal enforcement powers to hold persons accountable for AML failures. Serious AML deficiencies have attracted non-criminal enforcement action by authorities which possess both civil enforcement and criminal prosecution powers yet choose not to use the latter. In 2017, the FCA fined Deutsche Bank AG in excess of £163 million for failing to maintain an adequate AML control framework. In January 2018, Business Insider reported that although it was not publicly known, HMRC had enhanced its investigation of estate agencies and issued a greater number of financial penalties for AML deficiencies.
In its 2017/18 Business Plan, published on 18 April 2017, the FCA indicated an intention to start using its criminal powers:
"[w]here firms have poor AML controls, we will use our enforcement powers to impose business restrictions to limit the level of risk, provide deterrence messages to industry, or both. We will generally use our civil powers, but if failings are particularly serious or repeated we may use our criminal powers to prosecute firms or individuals."
A change in the approach has already been foreshadowed by at least one authority but just when a failing is ‘particularly serious’ is open-textured.
Against this background, one matter likely to attract consideration by the Treasury Committee is the discernible tension between the civil and criminal routes towards AML accountability. Non-criminal enforcement action can result in early resolution by firms wishing to continue business and avoid further reputational harm. High fines may be put towards future investigations. In contrast, the criminal route requires gathering sufficient evidence of AML weaknesses to a higher standard with no certainty of result in a criminal court. The fines ordered to be paid by a criminal court are unlikely to match the civil penalties imposed for the same underlying conduct. This tension is likely to attract the scrutiny of the Treasury Committee.