The UK government has issued its much anticipated response to the call for evidence on the UK’s AML/ CTF regulatory and supervisory regime. It’s well considered, detailed … and perhaps a little safe.
Does it provide ground breaking changes? No.
Is it moving us forward? Slowly.
But realistically, this was never going to offer speedy and simple solutions. What it does do is recognise the importance of the fight against economic crime, and the vulnerabilities that exist, both at board level and on the streets. The report mostly serves to tell readers to ‘watch this space’, as this is “only the start of [the] reform agenda”, with further legislative measures to come this year via the second Economic Crime Bill and Companies House reform.
The foreword by Economic Secretary to the Treasury John Glen, highlights the need to continue to enhance efforts at home while working with the international community to influence and shape global standards. The report also recognises that in order to make a difference globally, the UK needs to strengthen and “harness the capabilities, expertise and information of both public and private sectors”.
This review is seen as only one part of the UK’s efforts. Along with the Economic Crime Plan Part II and reforms to Companies House, the UK is seeking to go beyond tick box compliance and “build a thorough and dynamic system of controls which responds to the real risks we face”.
The review has been structured around 3 key themes:
Systematic Effectiveness – what effectiveness looks like and how to measure it
Regulatory Effectiveness – equipping firms with a strong risk understanding and effective risk-based controls targeting areas of highest risk
Supervisory Effectiveness – reform of the supervision regime
The report builds on the work under the parallel updates to the Money Laundering Regulations (MLRs) and sets out the intention to develop an improved range of metrics to measure and evaluate the effectiveness of the MLRs in future.
The highlights:
The National Risk Assessment (NRA) and existing public-private dialogue will be used to assess emerging risks and potential future changes to the MLRs.
Post-Brexit, some areas of regulatory changes to support a risk-based approach have been identified, but other areas such as Suspicious Activity Reporting (SARs) and gatekeeping show limited need for regulatory change.
The use of new technology and improving the AML guidance regime are potential areas for the government to support the private sector. Incremental improvements in collaboration with partners is the favoured approach
Possible reforms of supervisory structure are considered with the aim of ensuring effective and consistent supervision across all sectors.
So how does this translate into action and what are the next steps? Below we summarise some of the key aspects of the review.
Defining Effectiveness
a. Objectives of the MLRs
The government has decided to refine the objectives for the MLRs, linked to the FATF methodology, by amending the following areas:
Explicitly including the ‘provision of valuable intelligence’, aligning with the principle that effective prevention is more than just technical compliance
Clarification of supervision - monitoring and enforcing compliance as part of a risk-based approach
Collation of accurate information on beneficial ownership is not a primary objective but a means to identify and report suspicious activity.
b. Measuring Effectiveness
Many respondents questioned whether the specific requirements in the MLRs are having a direct impact on the scale and nature of disrupting ML/TF. The government will set out ‘outcomes focused’ metrics as part of the Economic Crime Plan to provide direct and clear feedback on the effectiveness of the MLRs.
c. High/low impact activity
Unsurprisingly, the regulated sector is in favour of reducing the number of mandatory requirements in the MLRs. Themes raised included:
‘High impact’ activity - consistent compliance with due diligence requirements and good quality suspicious activity reporting
A disproportionate burden on ‘low impact’ areas of routine due diligence and transaction monitoring driven by mandatory requirements, and the inability to move resource to ‘higher impact’ areas
The government view is that firms have some discretion when adopting a risk-based approach, but resources and policies must be in place to meet the objectives of the MLRs. While there is scope to “dial down” less impactful activity, there is “insufficient evidence” to overhaul the MLRs.
d. Strategic national priorities
The UK will not publish standalone National Priorities such as exist in the US - the focus will be on developing the upcoming Economic Crime Plan and NRA to provide more strategic direction.
Regulated firms demanded more granular sharing of public-private intelligence, including in response to live threats and emerging risks. The government will explore how law enforcement agencies can provide more coordinated and timely communications. The NRA will be the primary vehicle for assessing emerging risks and identifying changes needed to the MLRs going forward.
Driving Effectiveness
a. Risk-based approach
Respondents felt that the MLRs contain too many prescriptive requirements, which goes against the premise of a risk-based approach. The government will not fundamentally shift the balance of mandatory requirements, but will consider the following factors:
Small / new firms: Supervisors and the Office for Professional Body Anti-Money Laundering Supervision (OPBAS) will assess the support that can be offered to these firms to fulfill their obligations under a risk-based approach
Guidance / information sharing: Law enforcement and supervisors will assess how information is currently shared and enhancements that could be made
Supervisory approach: Supervisors will review how to ensure a risk-based approach is incorporated into supervision
Enhanced due diligence (EDD): There are no plans to amend the mandatory requirement to perform EDD as listed in Regulation 33. However further work will be done on assessing the risk profile of domestic PEPs, removing the list of required checks for high-risk third countries, changing the wording of ‘complex or unusually large transactions’, and evaluating the effectiveness of EDD.
Simplified Due Diligence (SDD): respondents highlighted that the time and effort to conduct SDD is the same as standard CDD, thus it is not useful. However, the government does not plan to change the components or description of SDD, with the exception of Pooled Client Accounts, where the government will consult on options to allow easier application.
b. New technologies
The government believes that inefficiencies and resource-intensive compliance processes are partly driven by failures to maximise the use of technology. Three workstreams will be established to find solutions and explore more effective models of engagement. As the MLRs are intended to be technology neutral, no specific changes will be made except for digital identity products., where the government is considering amendments to ensure greater clarity on electronic identity processes.
c. Supervisors’ role in SARs regime
Focus in this area should be on improvements to SAR technology and IT, an increased feedback loop, and better information and intelligence sharing. With a number of initiatives already underway, the government will keep a watching brief.
d. Gatekeeping function
There was broad agreement about the effectiveness of the gatekeeping function of supervisors surrounding the ‘approvals’ and ‘fit and proper’ test, with some consensus about enhancing this in higher-risk sectors such as crypto assets. The government will uphold the status quo and consult on specific feedback.
e. Guidance
Sector specific feedback is crucial, but it is too long, complex and inconsistent. Striking the right balance is difficult - there needs to be room for a risk-based approach. The result is we won’t see radical overhauls, but reform along the lines of three key principles:
Sector specific guidance drafted by experts, including industry
Improved approval process to streamline and speed up updates
Improved quality control to ensure consistency, clarity and conciseness
AML/CFT supervision
The UK has 25 supervisors: three statutory supervisors (the Financial Conduct Authority (FCA), HMRC and the Gambling Commission) and 22 legal and accountancy Professional Body Supervisors (PBSs) who supervise the legal and accountancy sectors. This section considered potential structural reforms.
a. Enforcement
Respondents highlighted inconsistencies across different sectors. They noted the level of fines brought against financial institutions is higher than other sectors, which has led to high levels of AML investment but has made banks risk-averse. There is a call for greater transparency and consistency of approach.
b. Supervisory gaps
Some supervisory gaps exist in the legal sector where practitioners are not members of one of the legal Professional Body Supervisors (PBSs) with a general consensus on creating a default supervisor for the sector.
c. Supervisory reform
With FATF identifying major deficiencies in the UK regime in its last evaluation report, it’s not surprising this is an area of focus. And it is still a work in progress. With some high-profile enforcement actions and steps taken to improve a risk-based approach, there is room for further reform.
The shortlisted options for reform include additional powers for OPBAS, consolidating and reducing the number of PBSs, or establishing a single supervisory body for professional services. A formal consultation will be issued to further understand the pros and cons of each.
So what next?
Well, the review has provided greater understanding on the barriers to effectiveness but some of the solutions are unclear, meaning further work and engagement is needed. The key areas of focus for the next phase of development of the MLRs and wider AML regime are:
Potential supervisory reform
Further evidence and understanding needed on MLRs
New objectives to the MLRs with measurable metrics
A focus through tools such as the NRA to improve risk understanding
Further engagement on new technologies
Case by case updates to guidance
So as we said at the start, watch this space - the second Economic Crime Plan is now the next much anticipated document!
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