by Matt Rizzo
July 21, 2022
Last year, the UK government carried out an exercise to collect feedback on the effectiveness of the county’s Anti-Money Laundering (AML) regime. This Call for Evidence sought opinions from the industry, law enforcement, supervisors, broader public and civic society. The responses have helped shape the recently published review of the UK’s AML/CFT regulatory and supervisory regime. The report provides a snapshot of the current AML landscape within the UK but more importantly it sheds light on what’s in store in the near future. What changes to the UK’s AML regime should we expect in the near future? And what will remain as is?
This is the first of two articles that lists the key takeaways that are highly relevant for individuals working in industries such as accountancy, audit, legal, tax advisory, trusts and company service provides (TCSPs). This article focuses on general concepts whilst the second article will deal with the government’s position in terms of specific regulations.
In his forward, John Glen, Economic Secretary to the Treasury at the time, puts a very strong and clear message about the commitment of the UK government to fight economic crime and for the country to retain high and robust standards in maintaining this objective. All threats to the integrity of the UK economy will be fully speedily dealt with.
There is an understandable sense of pride that the UK is a global leader in the fight against money laundering. Reference is made to the fact that AML efforts managed to stop £172 million being funnelled into accounts owned by suspected criminals in the twelve months preceding March 2020.
On the other hand, the government acknowledges that the country’s attractive economy attracts criminals from around the world and that there is always room for improvement. The report points out the various reforms targeted at addressing money laundering and economic crimes such as the Economic Crime (Transparency and Enforcement) Act 2022, introducing the Register of Oversees Entities, which was fast-tracked by the government in response to Russia’s invasion of Ukraine.
One last piece of evidence on the UK’s commitment to combat money laundering is the report itself, which analysis the current AML landscape, identifies potential gaps in regulation and supervision and suggests ways of addressing shortcomings.
Given, the amount of effort the government is putting into AML, there is an expectation that firms and individuals at the frontline of this fight (accountants, auditors, law firms, TCSPs, etc…) give it their utmost importance.
The report references the UK’s most recent evaluation by the FATF, an international organisation that sets the global standards for anti-money laundering. The evaluation makes a distinction between the technical compliance (i.e. how well the laws and regulations align with the standards the FATF recommends) and the effectiveness in implementing them to reduce money laundering. On the technical front the UK is a world-leader. There is, however, room for improvement on the effectiveness front.
In fact, the report makes minimal proposals in terms of changes to legislation itself. The word “effectiveness” is however mentioned constantly and it is clear that the government’s focus is ensuring that the AML regulations and guidelines put in place are adhered to and deliver results.
A key element that is of interest to the accountancy and legal sectors is that the UK acknowledges the FATF’s evaluation of significant weaknesses in legal and accountancy supervision and reporting of suspicious transactions.
With the focus of the government firmly grounded in effectiveness rather than legislation, we should not expect drastic changes to the rulebook itself. However, as per the conclusion for the previous point, firms will be expected to step up their AML game and become more effective.
The feedback received via the Call for Evidence included requests to relax some anti-money laundering regulations. The criteria used by the government in determining whether such changes to the regulation are acceptable is based on two key points.
The first point is around whether the proposed alterations increase the risk of criminal activity going undetected. Since most clients are genuine, some AML checks may sometimes be deemed excessive. However, these checks are there to make sure nothing slips through the cracks. Even if a regulation addresses a scenario that is rarely likely to lead to a suspicion of money laundering, it nevertheless needs to be kept in place to prevent the introduction of weak links in AML processes.
The second point deals with whether the regulation is derived directly from FATF guidelines. The report notes that the UK is a founding member of the FATF and is committed to abide by the international standards it sets. As a result, the government will not compromise on any regulation that can be directly traced back to the FATF guidelines. There are scenarios, however, where the EU’s Anti-Money Laundering Directives (AMLD), especially the fourth and fifth AMLD, are considered to have gone beyond FATF requirements. In such cases the government has shown willingness to relax some regulations which were put in place as part of the transposition of the EU’s 4th and 5th AMLD into UK laws in 2017 and 2020. One such example is the treatment of domestic PEPs, which we will discuss in our next article.
There might be a few changes to regulations, but most of the rules are going to remain the same.
A couple of paragraphs in the report are dedicated to small firms or those that have only recently become subject to AML regulations. Responses to the Call for Evidence highlight the unique challenges such firms may have. For starters, such organisations may have limited knowledge of AML concepts and regulations. Moreover, they may not have the right set up and resources to take on the onerous obligations that such regulations entail. Some respondents requested the government to make exempt such organisations from implementing a Risk-Based Approach (RBA) and provide them with a list of mandatory requirements to follow.
This idea was shot down by the government for two reasons. The first is that it is not viable to have two sets of requirements that apply to the same sector based on whether the firm is new or not. Secondly, creating an exception to follow a risk-based approach is not compatible with FATF recommendations. The RBA is in fact the foundation of most FATF requirements and empowers any entity that deals with AML, including firms, to allocate more resources to high-risk scenarios as opposed to those posing a lower risk. It is no surprise therefore that while the government is keen to identify ways to support small and new firms with their AML obligations, it cannot make such an exception and all firms are expected to apply an RBA, irrespective of size or maturity.
Small and new firms are obliged to understand regulations and allocate enough resources to enable them to follow a risk-based approach to AML.
One of the three main sections of the report deals with supervision. Within the UK’s AML regime, supervisors are organisations that are responsible for ensuring that firms that fall within their remit are adhering to AML regulations, engage in ongoing monitoring of such firms and issue sector-specific guidance.
The large number of AML supervisory bodies in the UK may be of concern. Supervision of the legal and accountancy sector, for example, is spread across 22 Professional Body Supervisors (PBS). In theory, having a large number of supervisors could be positive since it allows these bodies to specialise and adapt to the various nuances of a sector or geography. For example, the Institute of Chartered Accountants of Scotland would be expected to be more in tune with accountants in Scotland as opposed to a generic supervisory board.
This does create a few issues though. For starters, the report references recent studies that show that not all supervisors are as effective as they should be. Other issues include the fact that standards across different supervisors will vary and there are cases of “supervisory gaps” – for example legal practitioners may be offering a service that falls under the scope of AML regulations even though they are not members of a PBS.
The above may be one of the reasons why the financial services sector has lamented about the discrepancy between the AML standards within its industry when compared to those within other sectors such as accountancy and legal. This is corroborated by the criticism made by the FATF when assessing the UK in 2018 and also reiterated in the latest National Risk Assessment (NRA).
The government has acknowledged that these issues need to be addressed and is studying various ways in which the supervisory regime is overhauled. One option is to empower OPBAS (the body responsible for supervising the PBSs) to be more effective. Other options include establishing a single AML supervisor or reducing the number of supervisors by either consolidating multiple PBSs or establishing a Single Professional Services Supervisor.
The report reiterates the government’s reluctance to make much regulatory changes in the near future. This stands in stark contrast to the section of the report considering major supervisory reform. While changes will not happen overnight, it is important to note that reforms may be on the way. A few years from now, you may have the same AML obligations, but the supervisory structure may be totally different.
As highlighted in our key points above, the report confirms the high standard of AML technical compliance level within the UK. In fact, the government does not seem to anticipate major regulatory changes. The only exceptions are some minor tweaks, mostly related to the fact that the UK does not need to conform to EU guidelines anymore.
On the other hand, the goal is to improve effectiveness of the current AML regime. The fact that the report makes it clear that small and new firms still need to follow a risk-based approach to AML is in line with the push to improve effectiveness. The government also acknowledges that supervision may need to be stepped up, particularly in the accountancy and legal space.
Part two of this article deals with elements related to particular regulations. We look at the government’s view on the current mandatory requirements that trigger enhanced due diligence and how these can co-exist with applying a risk-based approach when carrying out customer risk assessments. In particular, we analyse the government’s position on the treatment of PEPs, transaction size and complexity, high risk jurisdictions, reliance as well as simplified and due diligence.
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