15 May 2016
In April 2016, the United Kingdom’s Home Office and Her Majesty’s Treasury (HMT) issued an Action Plan for anti-money laundering (AML) and counter-terrorist finance (CTF).
The Action Plan, which represents a potentially significant change to the UK’s anti-money laundering/counter-terrorist finance (AML/CTF) regime, calls for both the government and the private sector to work together better to build a regime to effectively and efficiently combat money laundering and terrorist financing (ML/TF) threats. Integral to the Action Plan’s success is the sharing of information among law enforcement agencies, supervisors and the private sector. The aim is to allow UK businesses to better focus their resources to detect, assess and address serious financial crimes.
Reforming the current suspicious activity reports (SARs) regime and building on the success of the government’s Joint Money Laundering Intelligence Taskforce (JMLIT) pilot will be central to the foundation of a new and more collaborative public-private partnership. This initiative, to be jointly led by the Home Office and the National Crime Agency (NCA), is due to be completed by October 2018.
What do private sector firms need to do now?
The Home Office is calling for responses to the proposed changes to the UK’s existing AML/CTF regime, which will involve potential changes to legislation. Similarly, HMT is calling for information on the proposed AML supervisory regime. The closing date for both responses is 2 June 2016. Highlights from the Action Plan are summarised below.
Three Priorities of the Action Plan
The ministerial foreword to the paper highlights the Action Plan’s three priorities. First is the need for the UK to ensure a more robust law enforcement response to current threats, which means “creating aggressive new legal powers and building new capabilities in our law enforcement agencies to enable the relentless disruption of criminals and terrorists”.* The second priority is to reform the supervisory regime for AML/CTF and take a more risk-based approach to tackling ML and TF. Finally, the Action Plan is focused on ensuring that the government and firms work more closely with international groups, such as the G20 and Financial Action Task Force, to tackle ML and TF threats from overseas.
The United Kingdom’s Strategic Approach
One of the key priorities is for the supervisory regime to take a more risk-based approach to combating ML and TF. The government therefore intends to borrow from its already-established and proven counter-terrorist framework, which focuses on four main elements: pursue, prevent, protect and prepare.
Central to the success of the Action Plan is a stronger partnership between the public and private sectors to make the United Kingdom a more hostile place to move, hide or use proceeds of crime or corruption. This is planned to be achieved by:
- Partnering of law enforcement agencies, supervisors and the private sector to target resources at individuals and entities with the highest ML and TF risks
- Sharing of information between the public and private sectors
- Adopting a collaborative approach to prevent individuals’ involvement in ML
The Action Plan, which contains 19 key actions grouped into four categories aligned with the main priorities, centres on three core themes:
1. Suspicious Activity Reports (SARs) Regime
The Action Plan includes radical reform of the suspicious activity reports (SARs) regime, the government’s response to improving the perceived inefficiencies in the current regime following a major review of SARs conducted in February and March 2015. (A summary of the main criticisms with the regime is provided in Annex B of the Action Plan document.)
The main changes to the existing rules include removal of the SARs consent regime, a focus on accounts rather than transactions and a move to improve information sharing. Banks have long complained that no action is taken when they report SARs, which are often gathered at great cost to them. The proposed changes, summarised below, appear to be a step in the right direction.
“It is welcome that the NCA will look at improving how it deals with SARs and the focus on higher-risk clients,” says Bernadine Reese, a Protiviti managing director, although she warns that “a lot of practicalities will need to be worked through, which may require changes to the law to allow such disclosure.”
The main changes are summarised in more detail below:
Reforming the consent regime
The Action Plan suggests that the current SARs consent regime should be replaced with an intelligence-led approach, supported by information sharing through the JMLIT. Many in the reporting sector see the consent regime as problematic, as it causes delays and difficulties with customers, and some also view it as incompatible with their business.
The creation of a tiered SAR reporting approach (based on the degree of suspicion) has been proposed, which requires the NCA to review transactions when a bank has evidence of criminality prior to action being taken. There is no indication of what the tiers are other than the suggestion that they should be based on the degree of suspicion (currently undefined). The government also states that it would create powers to enable reporting institutions to be granted immunity for taking specified courses of action (e.g., maintaining a customer relationship when to terminate it would alert the subject to the existence of a law enforcement investigation).
Reduced focus on transactions
The aim of the revised regime is to detect potential criminal activity rather than investigating individual SARs at a transaction level, which can often be high in volume and of low quality. Rather than targeting transactions, the Action Plan calls for the SARs regime to refocus public and private sector efforts on tackling entities, such as individuals and organisations, which pose the highest risks of money laundering and financing of terrorism.
Improved information sharing
The current legislation is perceived to restrict the public and private sectors’ ability to share information, in addition to concerns about the wider issues of data protection. A suggested solution includes a statutory protection for those sharing information in this area and a definition of when it is acceptable to refer to the fact of a SAR being raised.
Upgrading the capabilities of the United Kingdom’s Financial Intelligence Unit
The NCA is tasked with overseeing the upgrade to the capabilities of the UK’s Financial Intelligence Unit, including a replacement for the SARs IT system, which is nearing the end of its working life. The new system will automatically check SARs against law enforcement data and other information to assess whether a SAR should be prioritised for further investigation or other action by law enforcement agencies, supervisors or the reporting institution. The proposal states that “the government considers that those who will benefit from the new IT system should share the costs for developing it”. This means that the private sector will likely share the costs of developing the new system, although it is not yet defined how those costs would be shared.
2. AML/CTF Supervisory Regime
A key finding of the National Risk Assessment (NRA) in October 2015 indicated that the effectiveness of the AML/CTF supervisory regime in the UK is inconsistent. Suggested improvements include understanding and applying a risk-based approach to supervision and providing a credible deterrent while also ensuring that data is shared more freely between supervisors and that inconsistencies of approach are eliminated.
HMT has issued a call for information on the current AML/CTF supervisory regime, focusing on the system of appointing supervisors, the powers of supervisors to incentivise compliance, adoption of the risk-based approach and how they interact with supervised businesses. This knowledge will enable the government to examine options to improve the supervisory regime and address inconsistencies, ensuring that the United Kingdom’s regime is effective and proportionate and meets the standards set down by the intergovernmental Financial Action Task Force. Once the government has this fuller picture of the benefits and risks, it says, it will then take an informed decision on what changes are needed.
Topical options to improve the AML/CTF supervisory regime include:
- Identification of risks – The government recognises that the first step in taking a risk-based approach to combatting ML and TF is having a robust methodology for identifying and assessing risks. This is hampered, however, by the fact that various supervisors have independently developed their own risk assessment methodologies, which are not always directly comparable. The paper calls for suggestions about how a single methodology, with appropriate sector-specific modifications, could be created.
The NRA also found that some supervisors had difficulty explaining how their risk assessment translates into specific monitoring activities. The paper calls for information on how the government can better monitor risks identified by supervisors and how communication of individual monitoring decisions could be improved.
- Supervisors’ accountability – Because of the variety of supervisory models, the government does not have the same influence over each supervisor. The paper suggests that a clear and transparent method for supervising the supervisors is needed to create a well-understood mechanism for holding them to account and to give supervisors support and clarity on what is expected of them. The government has asked for views on whether such a mechanism is required and, if so, what it might look like.
- Penalties and enforcement – There is no common approach across all supervisors to using enforcement tools to deter AML/CTF noncompliance. Also, no common approach is employed for the use of sanctions or in setting the level of penalties applicable, which could give rise to inconsistencies. There are also variations in how the discipline/enforcement committees of supervisors are constituted. Different supervisors also have different powers to investigate their supervised populations. The paper asks whether the approach to penalties and powers should be harmonised.
The paper also calls for suggestions to ensure high standards in supervised populations, the role of professional bodies in AML/CTF supervision, the number of supervisors, the effectiveness of the FCA, guidance, transparency and information sharing.
3. Taking a Risk-Based Approach
The Action Plan aims to ensure that a risk-based approach to ML/CTF supervision is fully embedded, beginning with the understanding of specific risks and the spotting of criminal activity, rather than a focus on tick-box compliance.
- A key element of the risk-based approach is the identification and assessment of risks by supervisors and businesses. To aid a more consistent approach, one suggestion is for the government to work with supervisors to develop a common risk assessment methodology (suitably tailored for individual sectors) that allows risks to be identified and assessed in a comparable way.
- The Action Plan and the European Union’s Fourth AML Directive, due to be transposed into local law by June 2017, will require private sector firms to align their existing AML/CTF regimes and resources to address the most significant ML and TF threats identified through the National Risk Assessment.
- Significant threats identified in the paper include high-end ML of criminal funds linked to grand corruption and major fraud; professionals in the financial, legal and accountancy and related service sectors, such as trust and company service providers; and international controllers.
- Significant TF threats highlighted in the paper include money services businesses, cash couriering and charities.
- The proposals also intend to bring digital currency exchange firms into AML regulation for the first time as part of its risk-based approach. The government, however, does not intend to extend the perimeter of AML regulations beyond digital currency exchange firms to wallet providers, for example, since the paper states that such a move “would not deliver any benefits in terms of mitigating money laundering and terrorist finance risk, and would place significant burdens on firms in this innovative and embryonic sector”.
Firms should provide a response to the Home Office on the proposals, including the reform of the SARs regime contained within the Action Plan, by 2 June 2016. (Refer to Annex A and B of the Action Plan.) Responses to HMT on proposed enhancements to the AML supervisory regime are required to be submitted by 2 June 2016. (Refer to Annex C of the Action Plan.)
A summary of the 19 items in the Action Plan and proposed timelines is set out on the following pages.
Summary of Actions
(Excerpt from the Action Plan, with a Link to the United Kingdom’s Strategic Approach)