This alert looks at the Government's recently announced Anti-Money Laundering and Counter-Terrorist Finance Action Plan. It also considers some of the other current issues in this area.
Money laundering continues to be a priority issue for governments and regulators. The FCA's Annual Report lists Financial Crime and Anti-Money Laundering as one of its priorities for 2016/17. Both the UK Government and the FCA note that the UK's success as a global financial centre also poses a threat as it makes the UK an attractive destination for the laundering of funds. Of course, much of the political focus on this issue has related to the proceeds of unlawful tax evasion but policy concerns also extend to other predicate offences including the proceeds of "grand corruption". On 12 May 2016 the UK Government will host an Anti-Corruption Summit to address these and other concerns.
The Panama Papers episode has renewed focus on the use of vehicles located in offshore jurisdictions. Clearly, there is a distinction between legitimate tax avoidance and unlawful tax evasion and simply setting up an offshore company does not imply that the beneficial owner of that company will use it for an unlawful purpose. There may be entirely legitimate reasons for seeking confidentiality. However, the Papers have attracted considerable interest from regulators, law enforcement and tax authorities. In the UK, the Government has set up a cross-departmental taskforce to investigate 700 leads on possible tax evasion and US criminal authorities are reported to be investigating matters to which the Panama Papers are relevant. Obligations under the Money Laundering Regulations to monitor relationships and under the Proceeds of Crime Act 2002 ("POCA") to report where there are objectively reasonable grounds to suspect money laundering mean that firms must give consideration to the review of potentially relevant and publicly available material such as the Panama Papers. From a regulatory perspective firms may need to review the information made available pursuant to their obligations to have appropriate financial crime controls. The FCA's expectation of certain banks has been that they will review available data. However, the very large quantity of information that has just been made available means that firms conducting reviews will need to adopt a risk based approach given the impracticality of reviewing all of the disclosed data. All firms should consider the potential relevance of the disclosed data in light of their business models to determine whether there is any need to perform a review.
London is the largest global centre for cross-border banking and the London property market remains vulnerable to use in the integration stage of the money laundering process. The UK's National Crime Agency acknowledged in its National Strategic Assessment of Serious Organised Crime (June 2015) that substantial sums from crimes committed overseas are laundered through the UK, which implies that the current framework is not sufficiently robust. According to Transparency International, 36,000 properties in London are owned by overseas shell companies. BVI companies are estimated to own £3.8 bn worth of property in the UK.
Adequacy of the UK Framework
The UK has long had a developed AML framework, but the UK Government's own research and research carried out by other parties has identified potential weaknesses. The Home Affairs Committee is, for example, carrying on its own review into the effectiveness of POCA. From outside the Government, in its report "Don't Look, Won't Find", Transparency International concluded that the UK's AML framework is failing and proposed a "radical overhaul of the UK's anti-money laundering system".Transparency International in particular criticised what it considered to be a weak and fragmented structure for the supervision of businesses within the AML regulated sector. The Report said that the "patchwork" of 22 different supervisors, being mostly private sector organisations, is "structurally unsound".
Overview of the Action Plan
It is against this backdrop that in April 2016 The Home Office and HM Treasury jointly published an Action Plan for Anti-Money Laundering and Counter-Terrorist Finance (the "Action Plan"). The Action Plan sets out a broad range of proposals for the overhaul of the UK's anti-money laundering ("AML") and counter-terrorist finance ("CTF") framework. The proposed reforms, when implemented, will bring about the biggest changes in this area for over a decade. It is expected that the Queen’s Speech in May will contain an announcement on a new Bill which would give effect to some of these proposals.
The Action Plan focuses in particular on money laundering as an enabler of serious organised crime, grand corruption and terrorism. The Action Plan addresses four policy priorities, which are to create a stronger partnership with the private sector, to strengthen law enforcement responses to AML and CTF threats, to reform the supervisory regime and to increase the UK's international reach to tackle money laundering and terrorist financing.
We summarise below some of the key issues arising from the Action Plan.
Radical Changes to the SARs Regime
The Home Office initiated a review of the SARs regime in February 2015 and the Action Plan builds on the work done as part of the review.
A criticism of the current regime is that too much resource is devoted to dealing reactively with relatively low risk transactions. In 2014/15 there were 381,882 SARs filed with the NCA. This volume of SARs runs the risk of overwhelming law enforcement agencies and diverting attention from higher risk reports.
The Action Plan makes 2 key proposals for changes to the SARs regime:
- Re-focus the regime on the highest risk entities.
The volume and speed of transactions make the current transaction-focussed regime less effective than it should be. The proposed new regime will focus on tackling high risk entities rather than transactions. Reporters will still need to report any suspicious transactions but the focus will be shifted to reviewing transactions involving high risk entities, rather than devoting resources to low risk transactions. The Government intends to establish new information sharing gateways for the regulated sector so that more effective SARs can be submitted in cases of strong suspicions of money laundering. It is intended that improved official guidance will also be issued.
While the focus on higher risk entities and cases of strong suspicions is welcomed, it appears that regulated sector firms will not be relieved from the obligation to submit reports in relation to suspicions of minor criminal activity. The processing of SARs and the burden on the regulated sector could be improved through the introduction of a de minimis threshold for reporting.
- Remove the current consent regime
The Action Plan proposes removing the statutory defence provided by the current consent regime. Reporters would no longer, therefore, be able to file a consent SAR seeking consent to proceed with a transaction. Concerns have been expressed that the current consent regime has been abused with reporters abrogating responsibility as to what action to take in response to suspicions about money laundering and even seeking consent on the basis of deliberately incomplete information provided to the NCA.
The Action Plan states that POCA will be amended to ensure that reporters who fulfil their legal and regulatory responsibilities will not be criminalised. The Government intend to legislate to enable reporters to be granted immunity for taking specified courses of action (e.g., to maintain a customer relationship when to terminate it would alert the subject of a report to an investigation) and to provide a power for the NCA to oblige reporters to provide further information in relation to matters being reported should this be required.
The changes to the consent regime proposed will result in a significant change from the current system. Under section 335 of POCA a party seeking a consent has a deemed consent at the expiry of a moratorium period unless a law enforcement agency is prepared to go to Court to restrain the relevant conduct. The compressed time periods involved mean that law enforcement is often unable to collate evidence in time to obtain a restraint order from the Court. The onus will in the future be on the reporter to ensure that it does not engage in conduct that amounts to a breach of law or regulation since the protection of a consent will not be available. This may mean not proceeding with transactions whereas under the current regime a consent could be obtained to proceed. Any immunity that might be granted is likely to be on a much more restricted basis than a consent.
The proposed changes to the SARs regime are not expected to be completed until October 2018. The changes set out in the action plan will mark a significant shift away from the current SARs regime and are likely to lead to the change in reporting policies and procedures for businesses.
These changes will be supplemented by upgrades to the SARs IT system, developments in the analysis of SARs to focus on identifying the typologies of money laundering and legislation to permit data sharing in the reporting sector.
New Powers - Enhancing the law enforcement response
The Government's plans to enhance law enforcement responses are centred around improving intelligence collection capabilities and creating new legislative powers to tackle money laundering.
- A key proposal included in the Action Plan is the introduction of Unexplained Wealth Orders ("UWOs"). UWOs are intended to facilitate and expedite the recovery of assets without, for example, needing to rely on a conviction for a predicate offence in an overseas jurisdiction or assistance from other jurisdictions which might be reluctant or unable to assist a UK investigation.
- UWOs, which would allow the courts to require individuals to explain the origin of assets are intended to assist UK investigations since they may lead to the disclosure of evidence that could be utilised. The Government is also exploring the introduction of new forfeiture powers, enabling the forfeiture of assets for which a satisfactory explanation is not given to the courts following a UWO, and also an illicit enrichment offence of possessing assets which cannot be accounted for by way of lawful income.
- The Government is also exploring the designation of entities as being of money laundering concern, similar to designations of this nature under the US Patriot Act and would require the regulated sector to take special measures when dealing with them. These requirements may lead to more onerous requirements for regulated sector businesses when dealing with higher risk clients.
Other proposals include fortifying forfeiture powers, introducing powers to seize funds in bank accounts, increasing the available penalties for breaches of financial sanctions prohibitions from 2 years imprisonment to 7 and introducing deferred prosecution agreements, serious crime prevention orders and monetary penalties to ensure effective and proportionate enforcement action can be taken.
A new public-private partnership
Based on joint-working and the sharing of information the Government plans to move the Joint Money Laundering Intelligence Taskforce ("JMLIT") to a more permanent footing from July 2016. In addition, the Government plans to expand its membership and create a register of bank's business specialisms to ensure relevant expertise are brought into JMLIT work to raise awareness amongst professionals and consumers of money-laundering risks.
Improving the effectiveness of the supervisory regime
Following criticism in the UK's National Risk Assessment and evidence submitted to the Government in the Cutting Red Tape Review, the Action Plan is committed to improving the supervisory regime which is presently highly fragmented. The Government wants supervisors to take a more risk based approach, focussing on more serious crimes. The Government also intends to assess whether the present structure with the large number of supervisors is appropriate or whether this gives rise to inconsistencies of approach. The criticism levelled by Transparency International is that private sector supervision is not sufficiently robust so that certain sectors such as the accountancy sector are not being appropriately monitored or enforced against.
The action plan sets out a number of considerations the Government intends to take into account when reviewing and assessing the regime. These include how to ensure supervisors are supported to adopt a risk-based approach and how effective guidance can be provided to businesses by supervisors.
A call for information to inform the Government's review is included in the Action Plan. The deadline for responses is 2 June 2016.
Increasing the UK's international reach
The final Action Plan priority is increasing the international reach to develop multilateral approaches of the UK anti-money laundering and counter terrorist finance regime.
Proposed actions include:
- creating new NCA International Liaison Officer posts in important jurisdictions;
- developing a new approach for cross-border information sharing between private sector and Government entities; and
- delivering training to and sharing expertise with, key overseas partners to help them build their capacity and capability to investigate and combat the financing of terrorism.
Concluding, the proposals set out in the Action Plan are likely to bring about genuine change to the UK's AML framework. Given that research demonstrates that money laundering remains a real issue in the UK, it is hard to argue with the Government's intention to bring about radical change.