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HM Treasury (HMT) has committed to financial crime reforms, suggesting that legislation so far has been unable to solve money laundering failures for businesses and regulators alike.
“We must go beyond mere tick-box compliance and build a thorough and dynamic system of controls which respond to the real risks that we face,” John Glen, Treasury minister, wrote in the forward for the government’s new anti-money laundering/counter-terrorist financing (AML/CTF) review.
The review was spurred by the government’s 2021 consultation on AML/CTF.
It sets out what the government wants to do to improve accountability and outcomes, including setting out wider “outcomes-focused” metrics as part of the updated Economic Crime Plan later this year and developing a revised set of priority metrics, which could include additional data being collected.
“This review forms an integral part of the government's overall effort to combat economic crime,” commented Thomas Cattee, head of white-collar crime at Gherson Solicitors.
Taken together with the recent Economic Crime (Transparency and Enforcement) Act, reforms to Companies House and the second economic crime plan, this review will certainly play its part in effectively strengthening the UK’s response to economic crime, Cattee added.
The review generally focuses on improving regulation, improving risk-based controls and the development of a better supervisory regime. “The review rightly emphasises both the appropriate use of technology, key to keeping up with the latest threats whilst also processing the increasing amount of data necessary for compliance, while also improving guidance, key to ensuring that the increasingly complex regulations are understood and can be implemented.”
On the enforcement side, meanwhile, views are being 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.
“This will be critical to ensuring that the UK keeps up with the current threat and remains a global leader in the right against economic crime,” said Cattee.
Kathryn Westmore, senior research fellow at the Centre for Financial Crime and Security Studies, was tentative about just how ambitious the outcomes from the review are. "There are some interesting nuggets of information in the review, but nothing is earth-shatteringly significant.
“The most interesting areas are where the government makes the point of how there is not any evidence to make any changes to the regulations and suggests that nobody really knows what is and isn't working well in the current system."
Yet, others are more welcoming of the government’s approach. “I think the government’s response has shown a measured, pragmatic approach to amending the Money Laundering Regulations and I do feel industry feedback has been taken on board,” said Kayne Osbourne, head of compliance at fintech firm Chip.
“Feedback from the industry was broadly supportive of the proposals, but where feedback was negative, the government shifted accordingly,” he said. “Take for example the proposal to remove Bill Payment Service Providers (BPSPs) and Telecoms, Digital and IT Payment Service Providers (TDITPSPs) from the regulated sector. Responses indicated this could increase the risk of fraud, so the government decided not to go ahead with it.”
One of the areas where more proposals were expected was around AML supervision, suggested Westmore. “It was acknowledged in the report that AML supervision is, at best, inconsistent, but rather than coming up with further provisions, the government instead looks here to publish another consultation.”
A lack of more concrete proposals is disappointing, she said. “Another consultation draws out the process of much-needed reform. We know that the current model isn't working well."
What does the review conclude?
Among the changes outlined by the government is a refining of the Money Laundering Regulations (MLRs). This includes putting more onus on the “provision of valuable information” as a priority in the MLRs.
This is to embed the notion that compliance should be more than just a tick-box exercise.
Due diligence for domestic politically exposed persons (PEPs) looks set to be an area that the government will roll back compliance requirements on, stating that they can be a burden instead of a way of reducing financial crime.
“The government is committed to doing further work to better understand the risk profile of domestic PEPs,” HMT says. If said risks around domestic PEPs are found to be sufficiently low, the government will consider changing current regulations, such as enhanced due diligence on domestic PEPs.
This would mean that enhanced requirements are only triggered when other high-risk factors are also present.
The Treasury said that the government is aware of the problems caused when domestic PEPs face unnecessarily intrusive checks, and this potential amendment would allow for scaling back of the enhanced measures currently applied to UK PEPs and their families and close associates, reducing disproportionate burdens.
"Change in areas such as the requirements on when enhanced due diligence is required, for example in relation to domestic PEPs will be welcomed,” commented Westmore. “There are some examples of conflicting guidance which means that regulated institutions are not always clear as to the requirements.”
This change should bring clarity, and being more flexible and risk-based in these situations is a good thing, said Westmore. “I do query how significant it will be, as the decision as to when to perform more enhanced due diligence in some higher-risk situations will be left up to the institution, and as a note of caution is that the review also goes on to talk about how institutions don't understand the money laundering and terrorist financing risks well.
“So, while additional flexibility is a good thing, the difficulties the report highlights in assessing and understanding risk may mean the government eventually decides that this is not the right way forward."
Pooled client accounts (PCAs), a type of bank account opened by customers such as legal services or letting agents to administer funds that belong to their clients, are another area set for reform.
Here, the government plans to consult on options aiming to address the difficulties in accessing PCAs, including the option of broadening the range of low-risk circumstances in which PCAs may be provided without checks being required on the clients whose funds are held in the account.
The government has also committed to supporting smaller and newly regulated firms with their AML/CTF compliance, stating that a very common response to the consultation suggested that small firms or firms without experience in AML, especially those newly brought into the scope of the regulations, struggle with developing a risk-based approach due to the knowledge and resources required.
Here, the government has said that it will work with supervisors and professional bodies to “understand how small and newly regulated firms are currently supported to fulfil their obligations and whether there is any additional support that could be offered”.
Moreover, the review has suggested that more guidance and information sharing needs to be undertaken to improve compliance, with HMT stating that it will work with supervisors and law enforcement agencies to better understand how to do this, as well as how current methods could be enhanced.
A majority of changes are likely to be encompassed in the UK’s upcoming Economic Crime Bill, which was hurried along by the need to take action following Russia’s invasion of Ukraine.
The new legislation is due to make crypto-asset seizures easier while reforming Companies House and giving businesses more confidence in sharing information related to suspected money laundering.
