On 8 March 2019, the Treasury Committee published its Report on Economic Crime – anti-money laundering supervision and sanctions implementation. Following their wide-ranging review of current AML supervision arrangements, it has made a number of recommendations for improvements including better measurement of the scale of economic crime; new powers for Companies House which is said to represent a ‘weak area’ in the UK’s AML arrangements; improved management of the fragmented AML supervisory system; and a renewed call for the implementation of a ‘failure to prevent economic crime’ offence.
The Committee’s recommendations fall into five categories:
1. Better information required
Failure to measure scale of economic crime: More must be done to measure the extent of economic crime and its impact on the UK economy. The Government should undertake an analysis to provide more precision on the size and scale of economic crime in the UK, including the vulnerabilities of different sectors to it.
More frequent public review of AML supervision: the Government should review the UK’s anti-money laundering supervision regime more frequently, and not wait for the 10-year FATF evaluation cycle to identify required improvements. There should be a more frequent system of public review of UK AML supervision and law enforcement, ensuring a ‘constant stimulus to improvement and reform’. The Economic Crime Strategic Board (ESCB) is already in place with a mandate to set priorities, direct resources and scrutinise performance against the economic crime threat and a mixture of public and private members sitting on the board. It may be that it has a role in the holistic scrutiny of the entire system, rather than be undertaken by each individual component supervisor or agency.
2. AML Supervision
Supervise the supervisors: The current anti-money laundering supervision system is considered to be highly fragmented. The UK has 22 accountancy and legal professional body AML supervisors (regulated by the Office for Professional Body AML Supervision (OPBAS) and three statutory AML supervisors (HMRC, the FCA and the Gambling Commission). It is unclear why OPBAS only supervises the professional body AML supervisors and not the statutory ones. To ensure consistency across all AML supervisors, the Government should create a supervisor of supervisors, and there is a compelling case that this should be OPBAS.
HMRC’s duties to be formalised: There is a concern that HMRC treats its supervisory responsibilities as a bolt-on activity to its revenue raising activities. If it is to retain its AML supervisory responsibilities, HMRC should have a departmental objective relating to this work.
Brexit risks and opportunities: Brexit is likley to bring an increase in trade with non-EU countries. This increases the likelihood that UK businesses will come into contact with markets with less mature AML standards than the UK. This presents an opportunity for the UK to be a ‘beacon in the world’ for an AML gold standard. So, when conducting trade negotiations, the Government must be clear about its intention to lead the fight against economic crime, and not compromise on standards in order to secure trade deals or to attract business. It is also essential that the Government ensures that the flow of information between the EU and UK’s enforcement agencies is retained or replicated post-Brexit.
Estate Agent Supervision: Estate agents have been roundly criticised for failing to protect the UK from proceeds of corruption being stashed in the property sector, and have been described as a ‘weak link’ in the AML regime by the Home Office. It was also suggested that more emphasis should be placed on solicitors as they will often assess the source of a customer’s funds. HMRC has further work to do to ensure all estate agents are registered with them for AML purposes, and to ensure that they are adhering to best practice.
‘Weak area’ Companies House should get new statutory duties: Companies house is described as a representing a ‘weak area’ in the UK’s systems for preventing economic crime. The Government must urgently consider reform of Companies House to give it statutory duties and powers to ensure that it plays no role in facilitating economic crime.
3. Legislative reform – corporate criminal liability
Corporate criminal liability framework must be reviewed: Current arrangements have created the anomalous situation arising where it is typically more difficult to identify which people are the directing mind and will of a larger company than a smaller one, potentially encouraging more exotic management structures to avoid prosecutions. The Government’s consultation on this issue has made no progress since it closed in March 2017 due to preparations for Brexit. The Committee’s view is clear that despite Brexit, the Government must progress domestic policies and that ‘it is wrong and potentially dangerous to not reform this area’. The Government should consider proposals for new legislation, including a proposal that a company would be guilty of the substantive criminal offence if a person associated with it commits a certain offence, and the introduction of a new offence of failing to prevent economic crime.
OFSI to be reviewed: HM Treasury’s Office for Financial Sanctions Implementation (OFSI) is responsible for the implementation of financial sanctions, which the FCA defines as an order prohibiting a firm from carrying out transactions with a person or organisation. The effectiveness of OFSI has been questioned for ‘lacking bite and not acting as a deterrent to UK based sanctions violations’. OFSI has a number of sanctions breaches under investigation, and whilst it is right that all breaches are investigated thoroughly, public examples of enforcement will be necessary if OFSI is to be recognised as an effective deterrent. Its first monetary penalty is a step towards that. The Government should review the effectiveness of OFSI this year, two years after its formation.
Russian focus should not obscure ML trends: The Committee’s view was that there has been, without a doubt, ‘a malign influence on the UK financial system from certain elements of Russian money’. However, the UK must achieve a balance and not create a risk that other criminals slip by while attention is focussed on individuals with a specific nationality.
5. PEPS and SARs
Centralised database of PEPs required: Politically exposed persons (PEPs) are individuals whose prominent position in public life may make them vulnerable to corruption. Regulations require enhanced due diligence on PEPs, yet defining and identifying who may fall into this category remains difficult for institutions. The Government should create a centralised database of PEPs for the use of those registered by AML supervisors.
More SARs from the regulated sector: A Suspicious Activity Report (SAR) is made in order to alert law enforcement to certain client/customer activity which is suspicious and might indicate money laundering or terrorist financing. Those outside the core of the financial system – so-called enablers – including those involved in property and company formation, should be encouraged to submit more SARs. The system should be as robust and simple to use as possible, ensuring that SARs are high in quality and quantity, especially as modern data analytics may be able to make good use of the information.
Whilst the drive towards formalisation and enhancement of AML supervision arrangements is to be applauded, these extensive recommendations touch on a number of areas for reform which are not new subjects to the informed reader. The Law Commission’s review of the current SARs system is hotly anticipated, and although the drive towards encouraging more SARs from the non-financial institution contingent of the regulated sector is a noble objective, many would take the view that an uptick in SARs (currently sitting at in excess of 400,000 p.a.) would be unlikely to meet with an effective response from an already overloaded system. Some of the recommendations mirror provisions envisaged by recent European directives, the Fifth Money Laundering Directive(5MLD) and the so called Sixth Money Laundering Directive (6MLD). It is interesting to note that whilst 5MLD requires a centralised database of PEP ‘roles’ it does not go as far as to require a database of the PEPs themselves. It’s not clear whether this is what the Committee intended, but if so it remains to be seen how this would operate in practice, who would be responsible for maintaining such a database and, crucially, updating it, given the huge number of PEP persons (past and recently present) that would need to be registered. Similarly, 6MLD foreshadows the implementation of a ‘failure to prevent’ economic crime offence, but with current Brexit arrangements up in the air, we will have to wait and see whether 6MLD ever makes its way on to the UK statute book.