FATF assesses the UK’s anti-money laundering and counter-terrorist financing measures
February 2019 | SPECIAL REPORT: CORPORATE FRAUD & CORRUPTION
Financier Worldwide Magazine
February 2019 Issue
Recent months and years have seen repeated criticism of the UK’s often central role in money-laundering scandals, ranging from the Panama Papers to the Azerbaijani Laundromat. In early December 2018, the Financial Action Task Force (FATF) published its most recent mutual evaluation of the UK’s anti-money laundering (AML) and counter-terrorist financing (CTF) regime.
Periodically, FATF analyses the extent to which each member territory complies with its recommendations on money laundering and terrorist financing. In this latest round of evaluations, FATF has also assessed each territory’s AML/CTF regime against what it calls “immediate outcomes”, which are essentially measures of how effectively a regime is operating in practice.
In summary, the short conclusion of the FATF report is that the UK has a well-developed and robust AML/CTF regime to effectively combat money laundering and terrorist financing. That is a conclusion that may surprise some commentators and practitioners in this area. The report identified the following features as particular strengths of the UK’s regime.
Strategy. The UK government has a clear understanding of the money laundering and terrorist financing risks it faces, as reflected in its National Risk Assessments (NRAs). Therefore, national AML/CTF policies, strategies and activities appropriately seek to address the risks identified in the NRAs.
Liaison. National coordination and cooperation on AML/CTF issues at the policy and operational levels has improved significantly since the last FATF evaluation in 2007, particularly in relation to operational level coordination among law enforcement agencies (LEAs) across the UK.
Regulatory coverage. All entities in the UK falling within the FATF’s definition of “financial institution”, as well as all designated non-financial businesses and professions (DNFBPs), are subject to supervision and comprehensive AML/CTF requirements. However, the report does note that the quality of supervision is uneven across the UK’s various (25 separate) AML/CFT supervisors.
Enforcement. The UK routinely and aggressively pursues and prioritises money laundering investigations and prosecutions. Sentences are effective, proportionate and dissuasive. Where prosecution is not possible, the UK uses alternative measurers to disrupt offenders such as pursuing the predicate offence, seeking civil recovery, taking action for tax offences or obtaining serious crime prevention orders.
CTF. The UK proactively investigates and prosecutes terrorist financing as a distinct criminal activity. CTF investigations are well integrated into broader counter-terrorism strategies, including as to disruption of financing operations. The FATF report highlighted the strong, and we submit only recently improved, partnership between CTF authorities and the private sector. In particular, the relatively new Joint Money Laundering Intelligence Task Force, which facilitates information sharing between the public and private sectors, was held out as an example of best practice.
Sanctions/CTF interplay. The UK has played a leading role in designating terrorists at the UN and EU levels and in promoting the global implementation of proliferation-related financial sanctions. The UK implements targeted financial sanctions without delay and has successfully taken freezing action against terrorist-related assets. It also has a robust confiscation regime through which it applies both criminal and civil measures to deprive terrorists of their assets.
Intelligence. Financial intelligence is regularly used by a wide range of authorities in the UK to identify risks, trace assets, support investigation of money laundering and terrorist financing and to enforce confiscation orders. However, the report recommended that further steps be taken to improve the Financial Intelligence Unit’s (UKFIU) ability to conduct its own financial analysis.
Corporate transparency. The UK is a global leader in promoting corporate transparency and has a good understanding of the money laundering and terrorist financing risks posed by the misuse of legal persons and structures. The establishment of a fully public People with Significant Control (PSC) register and a register of trusts with UK tax consequences was cited by the report as positive developments. However, the report also expressed concerns regarding the accuracy of information contained in the PSC register.
International liaison. The UK engages in a good level of information sharing with other countries.
Alongside these positive findings, the FATF report also identifies a number of areas where the UK should improve. These concerns fall into three key categories: (i) the supervision of financial institutions and DNFBPs; (ii) the use of financial intelligence; and (iii) the quality of information within the PSC register. Again, for those familiar with this practice area, these findings are not particularly surprising.
The FCA and HMRC did not demonstrate the ability to develop an accurate picture of AML/CTF risks at a firm-specific level. This contrasts with the quality of their analysis regarding sector level risks.
While the FCA supervises 19,600 persons, only 170 firms were subjected to a systematic and proactive supervision programme (the 170 entities consisted of the 14 largest retail and investment banks plus 156 smaller firms assessed by the FCA as higher risk). FATF noted that a significant number of FCA-supervised firms engaged in high and medium risks activities were not subject to regular, cyclical supervisory attention.
HMRC is responsible for supervision of several types of business under the Money Laundering Regulations 2017. However, FATF noted that HMRC does not undertake regular inspection cycles where it routinely visits firms to conduct inspections. HMRC has recently introduced ‘risk rules’ used to assign firms individual risk scores, which may improve its understanding of risk across the firms it supervises. However, the FATF report notes that most of those rules are aligned to compliance risk and tax compliance risk, as opposed to inherent money laundering and terrorist financing risk factors.
In respect of the other AML/CFT supervisors in the legal and accountancy sectors, the report noted significant weaknesses in supervision and sanctions. In particular, that there was an uneven level of understanding of money laundering and terrorist financing risks among some of these supervisors, particularly smaller ones. Moreover, their approach to supervision tended to focus disproportionately on the largest firms by gross income in their respective supervisory pools. Such an approach is not in line with the findings of the 2017 NRA that smaller firms providing a range of services are at a high risk of money laundering and terrorist financing.
The FATF report questioned the UK’s decision to limit the role of the UKFIU in undertaking its own operational and strategic analysis of the suspicious activity reports (SARs) it receives. Under the UK model, all LEAs and supervisory authorities have direct access to the SARs filed with the UKFIU and apply their own resources to analysing the SARs in line with their specific operational needs. However, FATF was not convinced that the gaps in the UKFIU’s analytical capability were adequately filled by the individual LEAs.
It was noted that the UKFIU suffers from a lack of available human and IT resources and is therefore unable to identify criminal activity that might otherwise be missed by LEAs. The limited role of the UKFIU also undercuts its ability to effectively share information with foreign FIUs.
The report recommended that the UK substantially increase the HR and IT capacity available to the UKFIU to ensure financial intelligence is fully exploited and it is better able to cooperate with foreign FIUs.
Although the full range of financial institutions and DNFBPs are required to file SARs, banks submit 85 percent of all SARs. There remains an underreporting of suspicious transactions by higher risk professions such as trust and company service providers, lawyers and accountants. Non-bank private sector representatives consistently noted that the SAR regime was not fit for purpose.
Further, LEAs interviewed for the report expressed concerns about the large number of poor-quality SARs being filed across all reporting sectors. This is consistent with longstanding concerns regarding the substantive details in SARs, which firms appear to often file defensively and without sufficient information.
The FATF report recommended that the UK prioritise reform of the SAR regime, including by modernising reporting mechanisms so they are fit for purpose for the whole range of reporting entities, and by making the online SAR form more user-friendly and providing more in-depth feedback on SARs, particularly to smaller reporting entities.
Although the information submitted to the PSC register is subject to basic checks, it remains largely unverified. Individuals and entities are not screened against targeted financial sanctions lists when registering companies. This causes concern regarding the accuracy of information on the register. However, from January 2020, it will become compulsory for financial institutions and DNFBPs to report inaccuracies on the register.
The FATF report recommended that the UK improve the quality of information available on the PSC register, including: (i) screening the information filed against sanctions lists and sharing the findings from such checks as appropriate; (ii) ensuring that any inaccuracies are reported to Companies House; (iii) clearly flagging any discrepancies reported by financial institutions, DNFBPs or LEAs; and (iv) enhancing the register’s functionality.
Overall, the report has provided some positive assessments of the UK’s improved, and improving, approach to money laundering deterrence and detection. Nonetheless, it also makes clear that several significant gaps remain for the foreseeable future. In light of this, and the various FATF recommendations for improvement, businesses can expect to see continued UK government interest in this issue. Combined with the lingering policy debates as to further expansion of corporate criminal liability in the UK, this suggests only an upward trend in enforcement against businesses caught up in money laundering cases.
Anupreet Amole is counsel and Hui Ying Chee is an associate at Brown Rudnick LLP. Mr Amole can be contacted on +44 (0)20 7851 6118 or by email: email@example.com. Ms Ying Chee can be contacted on +44 (0)20 7851 6021 or by email: firstname.lastname@example.org.
© Financier Worldwide
Anupreet Amole and Hui Ying Chee
Brown Rudnick LLP