UK Reform on AML/CTF Supervision and the Risk-Based Approach

On June 30, 2023, HM Treasury launched a consultation on reform of the anti-money laundering and counter-terrorism financing (AML/CTF) supervisory system in the country. This regulatory analysis will focus on the current AML/CTF supervision framework, proposed alternatives presented in the consultation and some of the potential implications, focusing in particular on the risk-based approach.

Current Regime

The current UK AML/CTF supervisory regime provides three statutory supervisors and 22 legal and accountancy professional body supervisors (PBSs) across the legal and accountancy sectors.

The three statutory supervisors are:

• Financial Conduct Authority (FCA).
• HM Revenue & Customs (HMRC).
• Gambling Commission (GC).

HM Treasury is responsible for ensuring the supervisory regime is effective and engages with supervisors on a regular basis.

In 2017, the OPBAS Regulations 2017 created the Office for Professional Body AML Supervision (OPBAS) within the FCA, which is tasked with the oversight of the PBSs and facilitation of information and intelligence sharing between PBSs and relevant authorities.

The Financial Action Task Force’s (FATF) 2018 mutual evaluation report (MER) rated the effectiveness of the UK’s AML supervision regime as “moderate”. FATF identified “significant weaknesses” in the risk-based approach to supervision among all supervisors other than the GC. According to FATF: “Adopting a risk-based approach implies the adoption of a risk management process for dealing with money laundering and terrorist financing. This process encompasses recognising the existence of the risk(s), undertaking an assessment of the risk(s) and developing strategies to manage and mitigate the identified risks.”

The recommendations of FATF’s MER were included in the actions of the first Economic Crime Plan, 2019-2022. In particular, Strategic Priority Five – Risk-Based Supervision and Risk Management (Actions 33-41) of the plan outlines the following:

• Review The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) and The Oversight of Professional Body Anti-Money Laundering and Counter Terrorist Financing Supervision Regulations 2017 (OPBAS regulations) (Action 33).
• Enhance FCA supervision and engagement (Action 34).
• Enhance HMRC supervision (Action 35).
• Strengthen the consistency of professional body AML/CTF supervision (Action 36).
• Enhance firms’ holistic response to economic crime (Action 39).
• Education and awareness-raising on economic crime threats and the recovery of criminal assets (Action 41).

In May 2022, the statement of progress was released, specifying that in a March 2020 report OPBAS identified the PBSs had made “strong improvements in applying a risk-based approach” to their supervision. However, not all of the PBSs were progressing as expected.

In June 2021, to implement Action 33, HM Treasury issued a Call for Evidence: Review of the UK’s AML/CTF Regulatory and Supervisory Regime, which included a review of the OPBAS Regulations 2017. In June 2022, it was followed by the Review of the UK’s AML/CFT Regulatory and Supervisory Regime, which stated: “PBSs have made significant improvement in their technical compliance with the requirements of the MLRs, aided by the OPBAS Sourcebook and ongoing engagement with PBSs. However, the third OPBAS report found significant deficiencies remain in the effectiveness of PBS supervision.”

The review set out the four possible models for a future AML/CTF supervisory system detailed in the sections below.

In March 2023, the government released its second Economic Crime Plan, 2023-26 to tackle economic crime. It builds on the first plan and includes the UK’s regulatory and supervisory regime under its scope, stating the government “will continue to work with supervisors to ensure that shorter-term improvements to effectiveness are still achieved while longer-term reform options are developed”. The plan aims to establish the following actions:

• Strengthen HM Treasury’s and OPBAS’ existing oversight, alongside wider commitments from the 2022 review, which was aimed at improving the effectiveness of the existing AML/CTF supervisory regime (Action 4).
• Strengthen supervision across the current AML/CTF regime (Action 5).
• Consult and then deliver an agreed package of changes, to reform the UK’s AML/CTF supervisory regime and improve the effectiveness of the MLRs (Action 6).

Scope of Consultation

The consultation aims to gather feedback on design, benefits and risks of each of the four possible models for AML/CTF supervisory system provided by the June 2022 review, assessing them against three proposed objectives:

• Increased supervisory effectiveness: implementing a risk-based approach to achieve a “consistent and proportionate compliance” with the regulations across the AML/CTF-regulated entities and enhanced effectiveness of preventative measures.
• Improved system coordination: establishing a more effective collaboration and accountability across the AML/CTF framework, including between different authorities and agencies.
• Feasibility: making sure that appropriate resources are available and that a suitable governance structure and achievable deadlines are in place to implement the approved model.

The consultation does not intend to suggest any preference for the proposed models and seeks views regarding the potential advantages and disadvantages of each option. Furthermore, it aims to gather comments on whether to expand requirements on supervisors and their supervised entities in connection with sanctions compliance.

Four Models

• Office for Professional Body AML Supervision (OPBAS)+

The model would improve OPBAS’ ability to perform its current role, with no changes to the current supervisor structure. OPBAS currently has two enforcement powers provided by 16 and 17 of the OPBAS Regulations: Public Censure (Regulation 16); and Recommendation for Removal of a PSB from Schedule 1 to the MLRs (Regulation 17).

Pros

This model would keep the existing PBS framework and extend OPBAS’ powers, enabling it to publicise enforcement actions, apply graduated sanctions and restrict supervised business activities and permissions, as well as fining power. Among its benefits, the model would maintain the progress made in recent years and some benefits of PBSs, such as “a deep understanding of the sector, close relationships with industry and benefits of integration with broader supervision”.

Cons

This model would not allow for the necessary structural changes highlighted by the review, such as the inadequate enforcement powers available to PBSs. Inconsistencies and disadvantages tied to a large number of supervisors would remain, such as difficulties in sharing information across law enforcement and AML/CTF supervisors.

Risk-based approach impact

In its fourth report, issued in April 2023, OPBAS stated that although “PBSs tended to adopt a risk-based approach to supervising high-risk supervised populations … many lacked adequate processes to monitor their medium to low-risk population”. Despite the steps taken by OPBAS and the progress made, according to the government, this model would not make significant changes to the risk-based approach of PBSs.

• PBS Consolidation

This model would reduce the number of PBSs that supervise the AML/CTF population from 22 to either one of the following options:

• Two supervisors, one PBS in the legal sector and one PBS in the accountancy sector.
• Six supervisors, one PBS in the legal sector and one PBS in the accountancy sector for each of the three jurisdictions: England and Wales; Scotland; and Northern Ireland.

Pros

The reduced number of PBSs could potentially improve supervisory effectiveness and system coordination, decreasing inconsistency across the PBS regime. It could also simplify the sharing of information between law enforcement and the AML/CTF supervisors.

Scotland and Northern Ireland both have different regulatory and legal systems and the presence of six PSBs specialised by region would help address this complexity, supporting supervisory effectiveness.

Cons

One possible disadvantage of this model is less funding to the supervision of small or low-risk firms, due to the expanse of the supervised population; however, this risk could be mitigated by dip-sampling — randomly selecting firms on which to conduct compliance checks.

Risk-based approach impact

According to the government, this model is expected to enhance the supervisors’ risk-based approach. The supervision would be facilitated by the limited number of PBSs, making it easier to promptly respond to new risks.

• Single Professional Services Supervisor (SPSS)

This model, among other things, provides for the replacement of all PBSs with one organisation, a single professional services supervisor (SPSS). If this SPSS is a public body, public bodies would conduct all supervisory activities — a key difference to the PBS consolidation model. Furthermore, the supervised entities would remain unchanged. The new SPSS would have statutory powers for AML similar to those provided by the MLRs to the FCA and HMRC.

Pros

One of the advantages of this model may be a potential simplification of information and intelligence sharing with other supervisors, government and law enforcement, similar to the PBS consolidation model. The supervised population under the SPSS’ remit could be expanded, including sectors that may be subject to money laundering/terrorism financing risk.

Cons

The information sharing between professional bodies that would keep supervising members in the non-AML/CTF sector and the SPSS may “be proportionately more difficult”, as firms would need to share information multiple times. However, this could be mitigated via information sharing gateways between professional bodies and the SPSS.

Among other things, the implementation of this regime “would be intensive and take several years to complete”, which may cause inadequate supervision standards of the high-risk sectors in the transition period. Plus current personnel of the OPBAS may not be able to apply for positions within the new entity; therefore, expertise and experience could be “lost” during the transition period.

Risk-based approach impact

The existence of an SPSS would encourage the application of a more consistent risk-based approach to the supervision of legal and accountancy firms as one single entity would be supervising both of the sectors, streamlining the process.

• Single AML Supervisor (SAS)

This model provides the following:

• One body for AML/CTF supervision, including the tasks currently performed by the FCA, the GC and HMRC, and the PBSs.
• The FCA and the GC would continue to regulate financial services firms and casinos, respectively, but not for AML/CTF rules.
• OPBAS would be wound up. PBSs would no longer supervise entities for AML/CTF purposes but would keep performing other tasks where applicable, such as conduct supervision.

Pros

The single anti-money laundering supervisor (SAS) would help to ensure a consistent approach to supervision and enforcement, with the focus on AML/CTF, rather than multiple entities being involved in the process. “Similar to SPSS, it should also simplify sharing across sectors, as well as sharing between the new supervisor and other organisations, including law enforcement agencies”.

According to the government: “Many of the benefits of an SAS in terms of information-sharing would be similar to those of an SPSS.”

Cons

Similar to an SPSS, during the transition period, expertise and experience might be negatively affected. The risk may be higher as the consolidation would occur across the whole of the regulated sector; in this case, a phased transition might be needed.

A single AML supervisor would need to have suitable oversight to ensure it prioritises resources and targets risks across the entire supervised sector.

Risk-based approach impact

This model is expected to improve risk understanding and monitoring as interconnections between different sectors are expected to improve. Furthermore, the application of a risk-based approach when allocating resources would allow them to be used in a way that is proportionate to the risk presented by the sector, i.e., the higher the risk, the more resources would be allocated. According to the government, these advantages are expected to be higher than the ones brought about by a SPSS model, in consideration of the extended scope of sectors within an SAS.

However, HM Treasury notes that “a risk-based approach across a wider population could risk certain low-risk sectors or businesses receiving less supervisory attention”.

Conclusion

Reviews of the UK AML/CTF supervisory regime, including FATF’s latest MER, have identified weaknesses in the risk-based approach adopted by the UK authorities. Since the release of the report, the UK government has been assessing the oversight framework and exploring possible solutions. HM Treasury’s consultation looks in more detail at the four options provided by the Review of the UK’s AML/CFT Regulatory and Supervisory Regime.

All four options present benefits and downsides, which have been highlighted with a particular focus on the risk-based approach. For example, the potential advantages of an OPBAS+ model include ensuring continuity and minimising disruptions, while PBS consolidation, or the introduction of an SPSS or SAS, would enhance information sharing, among other things. With regard to disadvantages, would the OPBAS+ model go far enough as it would not require any significant structural changes or major changes in relation to the risk-based approach. However, PBS consolidation may lead to a lack of adequate supervision of small firms due to the extension of the supervised population, and an SPSS may require firms to send the same information more than once, in consideration of it being supervised by more than one authority. Similarly, for an SPSS or an SAS, expertise and knowledge could be lost during the transition period, and an SAS may require its activities to be controlled.

Next Steps

The consultation will close on September 30, 2023. Responses should be sent via the survey, available here: https://www.smartsurvey.co.uk/s/S2S0O1/.

Alternatively, responses can be sent by email to: Anti-MoneyLaunderingBranch@hmtreasury.gov.uk.