Economic Crime – Anti-money laundering supervision and sanctions implementation.
Scale of the Problem
The scale of economic crime in the UK is very uncertain, with estimates ranging from the tens of billions of pounds to the hundreds of billions. The Government should provide a more precise estimate so that the response can be tailored to the problem.
The Financial Action Task Force (FATF) has completed its review of the UK’s anti-money laundering (AML) and counter-terrorist financing systems, over a decade since the previous full review. To maintain a ‘clean’ City, the Government should institute a more frequent system of public review of the UK’s AML supervision and law enforcement that will ensure a constant stimulus to improvement and reform. This may be a role for the newly-announced Economic Crime Strategic Board, jointly chaired by the Chancellor of the Exchequer and the Home Secretary.
Organising the Defence
The anti-money laundering supervision system is highly fragmented. The UK has 22 accountancy and legal professional body AML supervisors (regulated by the Office for Professional Body AML Supervision (OPBAS)) and three statutory AML supervisors (HMRC, the FCA and the Gambling Commission). It is unclear why OPBAS only supervises the professional body AML supervisors and not the statutory ones. To ensure consistency across all AML supervisors, the Government should create a supervisor of supervisors, and there is a strong case for this to be OPBAS.
Concerns have been raised that HMRC treats its supervisory responsibilities as a bolt-on activity to its revenue raising activities. If it is to retain its AML supervisory responsibilities, HMRC should have a departmental objective relating to this work.
Brexit will provide both risks and opportunities in terms of economic crime. The increase in trade with non-EU counties will increase the likelihood that UK businesses will come into contact with markets with lower AML standards than the UK, but there will also be an opportunity for the UK to be a beacon in the world for the high standards to which we aspire. When conducting trade negotiations, the Government must be clear about its intention to lead the fight against economic crime, and not compromise by shifting to a more buccaneering role in an effort to secure trade deals. The Government must also ensure that the flow of information between the EU and UK’s enforcement agencies is retained or replicated post-Brexit.
Two sectors of particular concern in the UK’s fragmented AML supervision are property and company formation:
Estate agents have been roundly criticised for failing to protect the UK from proceeds of corruption being stashed in the property sector. Indeed, the Security Minister at the Home Office called them a “weak link” in the AML regime. It was also suggested that more emphasis should be placed on solicitors as they will often assess the source of a customer’s funds. HMRC should ensure that estate agents are registered with it for AML-purposes and ensure that they are following best practice.
Another area of concern is company formation, specifically the role of Companies House, which is not required to carry out any AML checks. This makes it a weakness in the UK’s system for preventing economic crime. The Government should urgently consider giving it the powers to ensure that it plays no role in helping those undertaking economic crime.
The UK’s corporate criminal liability framework for economic crime has been described as not fit for purpose. It is typically more difficult to identify which people are the directing mind and will of a larger company than a smaller one, potentially encouraging more exotic management structures to avoid prosecutions. The Government’s consultation on this issue has made no progress since it closed in March 2017 due to preparations for Brexit. Despite Brexit, the Government must progress domestic policies. It is wrong and potentially dangerous to not reform this area. The Government should consider proposals for new legislation, including a proposal that a company would be guilty of the substantive criminal offence if a person associated with it commits a certain offence, and the introduction of a new offence of failing to prevent economic crime.
HM Treasury’s Office for Financial Sanctions Implementation (OFSI) is responsible for the implementation of financial sanctions, which the FCA defines as an order prohibiting a firm from carrying out transactions with a person or organisation. The effectiveness of OFSI has been questioned for lacking bite and not acting as a deterrent to UK based sanctions violations. OFSI has a number of sanctions breaches under investigation, and whilst it is right that all breaches are investigated thoroughly, public examples of enforcement will be necessary if OFSI is to be recognised as an effective deterrent. Its first monetary penalty is a step towards that. The Government should review the effectiveness of OFSI this year, two years after its formation.
There has been, without a doubt, a malign influence on the UK financial system from certain elements of Russian money. However, the UK must achieve a balance and not create a risk that other criminals slip by while attention is focussed on individuals with a specific nationality.
Politically exposed persons (PEPs) are individuals whose prominent position in public life may make them vulnerable to corruption. Regulations require enhanced due diligence on PEPs, yet defining and identifying who may fall into this category remains difficult for institutions. The Government should create a centralised database of PEPs for the use of those registered by AML supervisors.
A Suspicious Activity Report (SAR) is a piece of information which alerts law enforcement that certain client/customer activity is suspicious and might indicate money laundering or terrorist financing. Those outside the core of the financial system – so-called enablers – including those involved in property and company formation, should be encouraged to submit more SARs. The system should be as robust and simple to use as possible, ensuring that SARs are high in quality and quantity, especially as modern data analytics may be able to make good use of the information.