With money laundering and terrorism financing continuing to pose a significant threat to the UK, Thomas Cattee, head of white-collar crim at Gherson Solicitors LL, outlines the key points from HM Treasury’s latest AML/CFT review
On June 24, 2022, HM Treasury published its ‘Review of the UK’s AML/CFT regulatory and supervisory regime’ (the Review). This article will perform a high-level examination of the Review, before delving into the some of the detail and extracting some points of interest and key takeaways.
To begin, and to set some context, this Review forms an integral part of the UK government’s overall effort to combat economic crime. Taken together with the recent Economic Crime (Transparency and Enforcement) Act, which itself establishes reforms to Companies House (specifically the Register of Overseas Entities Beneficial Ownership of UK Property) and measures such as the Unexplained Wealth Order, and the second economic crime plan, the Review will certainly play its part in effectively strengthening the UK’s response to economic crime.
Generally, the Review focuses on improving regulation, improving risk-based controls, and developing a world-class supervisory regime.
The Review is divided into four chapters, including Defining Effectiveness, Driving Effectiveness and AML/CFT Supervision. These chapters are comprised of headings which include: Objectives of the MLRs, Measuring Effectiveness, High Value Activity, Strategic National Priorities, Emerging Risks, Risk-based Approach, New Technologies, Supervisors Role, Gatekeeping Functions, Guidance, Enforcement, Supervisory Gaps and Supervisory Reform.
More specifically, the Review hones in on such aspects as the appropriate use of technology which is key to keeping up with the latest threats whilst also processing the increasing amount of data necessary for compliance. In another example, the Review emphasises the need for improved guidance, key to ensuring that the increasingly complex regulations are understood and can be implemented.
On the enforcement side, respondents’ views are canvassed on whether the current enforcement powers are sufficient, used proportionately and dissuasively, and whether there is sufficient use of sanctions for the worst offences. Indeed, it will be seen that respondents felt that there are some discrepancies in the level of enforcement.
Overall, it goes without saying that the Review is critical in ensuring that the UK keeps up with the current threat and remains a global leader in the fight against economic crime.
The Review initially notes that there are continued deficiencies in risk assessment and understanding, specifically inadequate due diligence or policies, controls and procedures being a common failure. On a slightly more positive note, the Review observes some improvements in the supervision regime, with the Financial Conduct Authority (FCA) and HMRC strengthening their risk-based approach.
Continuing in the positive vein, the Review also notes that the UK was found to be among the highest performing counties in the world for technical compliance with the Financial Action Task Force’s (FATF) recommendations.
However, the Review also details some priority actions which FATF has advised, namely:
Finally, the review notes that the FATF assess AML supervision and preventative measures by regulated firms to be only moderately effective.
The Review notes how the regulated sector has expressed appetite for more specific feedback on and flexibility around the SAR they are required to submit, and/or more evidence on their preventative measures having and disruptive effect.
Also of interest, is the fact that the Review notes that smaller firms without experience in AML (especially those newly bought into scope) are not able to pursue a risk-based approach due to the knowledge and resources required.
The Review describes how views were expressed on having a separate list of mandatory requirements for these firms, however, this was decided not to be viable as would not be in accordance with the risk-based approach and would lead to a misalignment with FATF recommendations.
The Review notes that respondents have identified a tension between mandatory provisions and the risk-based approach. As such, the Review confirms that the Government plans to maintain the mandatory requirements to perform Enhanced Due Diligence in the cases of high-risk third countries, foreign politically exposed persons and corresponding relationships.
The Review found that many respondents found that Simplified Due Diligence (SDD) required the same amount of resources as Ordinary Due Diligence and that it was not useful.
However, the Review confirms that the Government does not plan to make changes to the components of SDD.
The Review notes how over recent years, a variety of new technologies have develop to assist with the prevention and detection of financial crime. These include technologies to assist with customer identity verification.
However, the Review notes that respondents raised a number of concerns regarding technologies which can be grouped under the following headings and summaries:
The government’s response is that it will engage with stakeholders and also consider amending the Money Laundering Regulations (MLRs) to ensure greater clarity on how certified electronic identify processers support MLR requirements.
Finally, turning to enforcement, the Review observes how it was felt by respondents that the powers of enforcement available to supervisors were sufficient.
However, respondents noted the inconsistency in the application of enforcement powers across different sectors and between Professional Body Supervisors for the legal and accountancy sectors. For example, respondents specifically noted that fines brought against the financial sector had been higher, leading to banks becoming more risk-averse.
It is perhaps not surprising that the Review concludes that money laundering and terrorism financing continue to be significant threats to the UK.
However, the overall conclusion which can be gleaned from the Review is that whilst some reform is needed to the supervision regime, the regulations are broadly on the right track and will continue to champion the FATF’s recommendations.
In addition, the identified key takeaways identified above will also be of specific interest to those involved in AML and CTF regulation and compliance.
