Sweeping Changes to UK AML and Sanctions Regimes

Gavin Irwin considers two significant recent reports on economic crime in the United Kingdom.  The first, published on 8 March 2019, is the report of the Treasury Committee Inquiry into Economic Crime: Anti-money laundering and the sanctions regime[1].  (A further Report relating to consumers and economic crime will follow later in 2019.)  The second, also published last week, is the Corruption Watch report on the ‘Corporate Crime Gap: How the UK Lags the US in Policing Corporate Financial Crime’[2].

The Corruption Watch Report

The Corruption Watch (‘CW’) report does not pull any punches.

“The UK has a serious problem holding its companies to account. If you’re a big multinational company and you’re caught engaging in serious economic crime such as financial fraud or money laundering in the UK, there’s a very good chance that you won’t be found criminally liable. If you’re unlucky, you might be let off with a relatively small fine.”

  The report states that CW conducted an in-depth analysis of the enforcement of major financial crime and money laundering cases in New York and London over the past decade.  They have concluded that a company committing an economic crime in the US is far more likely to be hit with heavy criminal, civil and regulatory penalties than one in the UK.  The evidence for that bold statement?  The US has managed to bring in £22 billion more in penalties for financial crime committed by banks and financial institutions than the UK has, and nearly half (£10 billion) of that was from UK financial institutions.

Why?  Firstly, the UK’s corporate liability laws for economic crime are antiquated and ineffective.  Secondly, UK regulators do not impose sufficient penalties to deter economic crime.

CW maintains that the UK is effectively outsourcing its criminal enforcement of financial institutions to the US and, as a result, is failing to effectively police the integrity of its own markets. The US Treasury is the main beneficiary of this – receiving billions in fines from UK financial institutions which, if the UK ensured it had the right legal and regulatory framework, proactively enforced, could be going to the UK Treasury.

Consequently, CW is calling for:

1. the UK government to fulfil its commitment to introduce new legislation that would make companies criminally liable where they fail to prevent economic crime such as fraud and money laundering, and to ensure that the Law Commission does a full review of the antiquated corporate liability laws in the UK; and,
2. for an independent review into whether its regulatory regime is imposing sufficient sanctions that provide real deterrence against corporate financial crime, and whether its regulatory and criminal regimes are coordinated in an effective way.

The Treasury Committee Inquiry Report

In March 2018, the Treasury Committee began its Inquiry into Economic Crime.  The Committee set its sights high.  The range of issues explored by the Inquiry is vast and the Report is holistic.  Given the insights provided by Corruption Watch, it may be that the Committee’s report is also timely.

When the Committee asked Mark Thompson, then interim director of the Serious Fraud Office, to describe the scale of the threat from economic crime, and whether it could be quantified, he responded “the short answers would be ‘big’ and ‘no’”.  He went on to say “it is extremely difficult to quantify in practical terms … the UK is a major financial centre. Therefore, plainly, whatever percentage of transactions might be tainted in some way, it is a large number.”  Others were less reluctant.  Donald Toon of the National Crime Agency said that “it would be realistic to say that hundreds of billions are laundered through the UK annually.”

With Brexit in mind, the Committee is seeking to (re)establish certain core principles, stating that, “A ‘clean’ City is important … The UK’s departure from the European Union will inevitably result in a change in international trading relationships. Such new trading relationships may also provide opportunities to those wishing to undertake economic crime in countries that are more vulnerable to corruption. The UK must remain alert to that risk, including when it conducts trade negotiations. The Government must be consistently clear about its intention to lead in the fight against economic crime, and not compromise that in an effort to swiftly secure new trading relationships.”

The Committee has made a series of far reaching recommendations that, if adopted, will give rise to significant changes in the AML landscape for businesses and practitioners.

The Committee’s Recommendations

1. That the Government undertakes more analysis to try and provide both more precision on the potential estimate of the size and scale of economic-related crime in the UK, as well as the exposure of different sectors to it.
2. That the Government retains, or replicates, the arrangements with the EU to maintain the flow of information to UK law enforcement agencies on economic crime and urges the Government to work to develop strong relationships with other countries and strengthen mutual information sharing and law enforcement powers.
3. That the Government institutes a more frequent system of public review of the UK’s AML supervision, and law enforcement, that will ensure a constant stimulus to improvement and reform. (At present, FATF mutual evaluation reviews take place only once a decade.). This review should take an holistic view of the entire system, rather than be undertaken by each individual component supervisor or agency. There may be a role for the recently announced Economic Crime Strategic Board in this work.
4. That HMRC carries out further work to ensure estate agents are registered with them and following best anti-money laundering practice.

The Committee added that, “[t]he property sector poses a risk from an [AML] perspective. Yet the AML supervisory regime around property transactions is complicated. Banks are supervised by the Financial Conduct Authority, solicitors by their relevant professional body, and estate agents by HMRC” … [w]hile there may be debate over which part of the transaction chain bears most responsibility from an AML perspective, each part has a role in reporting, or preventing, a transaction that may be used for money laundering”.

5. That the Government urgently considers reform of Companies House to ensure it has the statutory duties and powers to ensure it plays no role in helping those undertaking economic crime, whether here or abroad. The Government was enjoined to move quickly and publish detail of this reform by summer 2019.

The Committee added that, “[t]here is a clearly identified risk that company formation may be used in money laundering … More worryingly, there appears to be a number of unsupervised entities engaged in company formation. These should be identified by HMRC and dealt with as a matter of urgency … The UK cannot extol the virtue of a public register of beneficial ownership and yet not carry out the necessary rigorous checks of the information on that register”.

6. That there should be a sharp focus on the supervision of the core financial services, as opposed to ‘enablers’ and/or ‘facilitators’. To the extent that this risk is not ameliorated by supervision, the FCA needs to ensure that they keep up a constant pressure on the core financial services businesses and take appropriate enforcement action against them.

7. That the Government steps up efforts to educate facilitators, to ensure they have all information about their role, recouping any additional costs through fees. Once this has been completed, it should be followed with an enforcement campaign to ensure compliance.

8. That the role of The Office of Professional Body Anti-Money Laundering Supervision (OPBAS), while lauded, should be reviewed given “the inherent conflict in a membership organisation also monitoring its own members”.

9. That the Government should create ‘a supervisor of supervisors’. The aim of this institution would be to ensure that there is consistency of supervision across all the AML supervisors, whether statutory or professional body.

The Committee added that “[t]here is a strong case for this to be OPBAS, given it already has a role in the coordination of the professional body AML supervisors, and a role in information sharing”.

10. That OPBAS should be placed on a firmer statutory footing, more akin to the Financial Ombudsman Service, in having its own distinct identity protected under primary legislation.

11. That the role of HMRC as an AML supervisor should be reviewed, not only to support HMRC concentrating on its core tasks but also to address concerns expressed to the Committee about HMRC’s work as an AML supervisor, and whether its approach to its supervisory responsibilities may be unduly influenced by its role as a tax authority.

12. That the Government should then also consider moving the supervisory responsibilities of HMRC to OPBAS. The Treasury must send the Committee a report on this consideration well ahead of the Spending Review.

13. If HMRC is to retain its AML supervisory responsibilities, HMRC should:

• include within its departmental objectives a single stand-alone objective related to its anti-money laundering supervisory work; and
• keep a clear reporting line between its AML supervisory work and its work investigating tax crime and associated money laundering offences. HMRC should have a separate strategy for its AML supervisory work which would include key performance indicators on which HMRC can report.

14. That the Government reviews the scope of information flows at the bank level, with a view to increasing them, and report back to this Committee within six months.

The Committee added that, “[b]anks have asked for additional powers to share information between each other. Such a move would require significant consideration of the privacy impact on consumers of financial services. At the very least, there should be a number of safeguards to protect both consumers’ information, and to ensure that as a consequence of such information sharing no consumers unfairly lose their access to financial services”.

15. That the National Economic Crime Centre publishes, or provides to the Committee, annual updates of the measures of its success.

16. That the Suspicious Activity Report (SAR) regime be made simpler and more robust and refocused on increasing the number of SARs by those outside the core financial system, the so-called ‘enablers’. (Without, of course, reducing the quality of SARs.)

17. That the Government creates a centralised database of Politically Exposed Persons (‘PEPs’).

18. That the Government publishes a strategy on how to address ‘disproportionate de-risking strategies’ within six months. Since de-risking (where financial institutions cease customer relationships with certain ‘high risk’ customers) can have a significant impact on both individuals and businesses and can also move illicit flows of money underground, the strategy must include how it will take the conclusions of the G20 taskforce forward.

19. That the Government sets out a timetable for bringing forward legislation to improve the enforcement of corporate liability for economic crime. Given that, “the Government’s proposals on reforming the law on corporate liability around economic crime have stalled, multi-national firms appear beyond the scope of legislation designed to counter economic crime. That is manifestly unfair and weakens the deterrent effect a more stringent corporate liability regime may bring”. The Serious Fraud Office’s suggested reforms should be considered as part of those proposals.

20. That the Government responds to the evidence submitted in response to the 2017 ‘Corporate Liability for Economic Crime: Call for Evidence’ and undertake further consultation on proposals for legislation by the next Queen’s speech.

21. That the Government reviews the effectiveness of the Office of Financial Sanctions Implementation two years after its formation (it was established 18 months’ ago). “Public examples of enforcement will be necessary if OFSI is to be recognised as an effective deterrent.” (OFSI imposed its first, and so far only, Civil Monetary Penalty on 21 February 2019.)

22. That, post-Brexit, the Government ensures that it is ready to introduce any new powers it believes are necessary to operate the UK’s sanctions regime as flexibly as possible (having consulted appropriately).

23. That, given the failure of the sanctions regime to block the EN+ listing, the Government considers proposals to block listing on ‘national security grounds’. Since this would create a new focussed power outside the current sanctions regime, the Government needs to set out very clearly when such a power would be used, what effect it might have on UK listings and financial services, and most importantly, why it would be needed, (especially when sanctions are in the full control of the UK post-Brexit). The Committee “would expect full, wide and timely consultation on such a power to inform its scope and design”.

Conclusion

As previously stated, the Committee’s Report is encyclopaedic and holistic.  Part Two will follow soon.  Plainly, there is a lot to digest, however, it is worthy of note that two of the Treasury Committee’s recommendations are as follows:

• That the private sector provides more and better support to the public sector, either through direct payments or through undertaking tasks one might expect Government to undertake, on AML resources to combat economic crime.
• That the Government allocate more resources to effectively marshal private sector resources to achieve a ‘hostile environment’. An assessment should be made and any potential funding shortfalls must be rectified.

Whilst there is plainly a common thread joining the Corruption Watch Report to that of the Treasury Committee – better laws, better systems and better enforcement in relation to economic crime – are those two provisions yet another example of the outsourcing of criminal enforcement that Corruption Watch was warning against?  As ever, time will tell.

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[1] https://publications.parliament.uk/pa/cm201719/cmselect/cmtreasy/2010/201002.htm

[2] https://docs.wixstatic.com/ugd/54261c_0c851a40156e4b17adc44c9bee2fda66.pdf

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