The United Kingdom’s departure from the European Union has prompted much legal reform and adaptation, and the regulated financial sector is no exception. Most recently, a consultation and call for evidence into current anti-money laundering and counterterrorist finance regulations has taken place in order to determine how the current regime can be adapted to effectively tackle money laundering and terrorist financing in the UK. The UK currently holds a reputation for enabling money laundering and kleptocracy to flourish, so the importance of continuing review and modification of the current regime is paramount to ensure the UK can adapt to new tactics undertaken by criminals. Regulatory boards, such as the Financial Action Task Force (FATF), have also raised concerns, encouraging improvement in the UK’s AML regulations. Some change has already taken place, such as the establishment of the Office for Professional Body AML/CTF Supervision (OPBAS) to supervise professional body AML supervisors, and the current consultation and legislative reform being proposed by HM Treasury is another step in the improvement of the current regime. HM Treasury has conducted a call for evidence into the effectiveness of the current regime, and a consultation proposing changes to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) to assist in these changes and engagement in legislative reforms has also been published. The submission dates for both have now closed and their results are due to be published in the coming months.
The call for evidence aims to review the current MLR regime, ensuring it is effective, proportionate and the supervisory and regulatory bodies operating within the regime are working effectively to tackle money laundering and terrorist financing in the UK. This has been categorised into three areas of focus; a systemic review, a regulatory review into enforcement, and a review into the specific supervisory bodies overseeing enforcement of the regime. The treasury will be assessing effectiveness through the regulated sector’s ability to identify, report and prevent suspicious transactions; a supervisory risk-based approach to monitoring compliance, collection of accurate and most recent beneficial ownership information in order to prevent the exploitation of legal personalities, and the regulation sector working with supervisors to encourage a better collective understanding of money laundering and terrorist financing.
In its systemic review, the Treasury has identified the most common criticism of the regime is that the regulated sector focuses too much on mandatory requirements, instead of focusing on other activities with a greater and more effective contribution to keeping criminals from entering the sector and preventing illicit trades taking place, such as effective communication between entities. One of the ways of achieving this suggested by the Treasury is to adapt current boundaries to adapt to the ever-changing market and encouraging discretion to manage and assess those falling under the scope of regulation. Current regulations have largely been dictated by international standards, however there has been some suggestion of changing boundaries of regulation to include limited exclusions for Account Information Service Providers, Payment Institution Service Providers, Bill Payment Service Providers and Telecom, Digital and IT Payment Service Providers, off-course betting shops and online betting, and antiquities in order to mitigate the risks presented in these areas more adequately. The reasonings for these exclusions vary, from the application of a regulation to an unintentional group against the legislative intention, to the absence of any recognisable BPSPs, which all commonly demonstrate a need for modification in order for the risk to be mitigated more effectively. Consideration for the latest changes in risk assessments presented by these areas is therefore reflected in these proposals and are covered more thoroughly in the MLR consultation paper, released alongside the call for evidence. In addition to changing boundaries, the Treasury has also proposed expanding a number of terms in the consultation paper. By expanding terms such as ‘Trust or Company Service Provider’ and ‘business relationship’, it ensures a greater level of due diligence is completed in a wider range of business contexts and increases the likelihood of discovering suspicious activity and customers. However, with expansion comes a greater workload and a greater need for resources to compensate. Given that weaknesses identified by FATF originate from the inefficiency of current supervisory bodies, this may present additional practical difficulties which ought to be taken into consideration.
The FATF imposes international standards to oversee national governments’ AML/CTF regimes and ensure they are effective and proportionate in their address of financial crime. On review of the UK’s regime in 2018 the FATF found weaknesses and inconsistencies among supervisory bodies. Both the FATF and MLRs require supervisory bodies to apply a risk-based approach to money laundering and terrorist financing, with the intention of monitoring suspicious activity and mitigating the risks in order to prevent financial crime taking place and criminals entering the sector. The current system allows different supervisory bodies to approach managing risks in their own unique way. While this promotes flexibility, it also enables exploitation through the creation of inconsistency, confusion for customers, discrepancies and inefficient communication strategies between supervisors. Current FATF recommendations require supervisors should have sufficient enforcement tools to ensure compliance with AML/CTF regulations. One of these tools is the use of Suspicious Activity Reports (SARs). However, the diversity in approaches by different supervisors has led to an inconsistent and unclear approach to a body’s right to view a SAR. HM Treasury proposes a clarification of this right and provision of a consistent power to supervisors while maintaining flexible and discretionary approaches to their supervisory regimes. Because these are still early proposals and reviews, it is unclear as to the form these proposals and changes may take. However, some suggestions are perhaps more idealistic than practical; it is unclear how discrepancies and inconsistencies can be corrected while still maintaining a system which continues to enable those same inconsistencies, confusion and discrepancies to appear. To remedy the current inconsistencies and discrepancies, the Treasury has proposed an ongoing obligation to report discrepancies in beneficial information, in order to be more compliant with FATF’s criteria for assessing a country’s AML regime and ensuring Companies House possesses the most recent information on beneficial owners. In addition, the Treasury is also proposing greater data sharing and disclosure strategy between supervisory bodies as well as clarify the provisions of data sharing to ensure the intention and extent of permitted sharing is clear and concise. The resulting effect would be a greater volume of communication and processing of contemporary information, ensuring greater efficiency in identifying suspicious activity and mitigating the risks posed by money laundering. The combination of more effective communication of the most recent beneficial information would be welcome changes alongside OPBAS, which has overseen AML professional body supervisors since 2018, however care will need to be taken in order to ensure compliance with data protection and processing regulations.
The regulatory review relates to specific aspects of the AML/CTF regulatory framework and how effective these aspects are in their endeavours in supporting the MLRs. The most important aspect is the adoption of a risk-based approach, as dictated by FATF. This approach offers flexibility for regulatory bodies and allows for a more efficient allocation of resources on an individual scale. However collectively, the Treasury has expressed concerns in its call for evidence about an insufficient understanding of risk, due to the variety of approaches adopted by regulators and supervisors, concerns about demonstrating compliance with the MLRs and implementation of specific aspects of the MLRs. The purpose of the call for evidence in this area is to ensure and clarify entities’ understanding of risk, supervisory expectations of a risk-based approach including a more discretionary approach allowing for a more flexible and adaptable framework, and clarification or possible simplification of due diligence levels including when to use each type of due diligence. The intended purpose is to prevent due diligence becoming a procedural hindrance to the framework. Another key part of the framework facing possible changes is the gatekeeping function of supervisory bodies. Currently, there are several tests adopted across supervisory bodies to identify suspicious clients, each requiring different information. Furthermore, clients may be subjected to multiple similar tests to satisfy AML regulations. Possible reforms to this area being proposed are consolidating the tests into a common test across the supervisory bodies, consideration of the information being gathered and whether this needs to be changed to better implement the MLRs requirements, creating a power for supervisors to reapply the tests as part of ongoing monitoring, and ensuring consistent penalties for non-compliance.
The proposals put forward in both the call for evidence and consultation paper are only early indicators of the Treasury’s possible intentions for reform, but they do show an awareness and trend towards improving the UK’s current regime. Some of the most important changes will likely be improving consistency and communication between supervisory bodies, expanding definitions to capture a greater range of circumstances, and improving gatekeeping regulations. Although positive steps are being taken, these are still the early stages of reform. Clarification can be expected when the Treasury releases the outcomes before 26 June 2022. Although these proposals may not be entirely transformative of the current AML/CTF regime at this stage, they do show a positive trend towards improving the regime.
Written by Charlotte Read