The surge of activity in the UK’s anti-money laundering (AML) regime between 2015 and 2018 was notable, with a huge range of new strategies, initiatives and AML architecture being created largely, a cynic might say, in preparation for the decennial Financial Action Task Force (FATF) evaluation of the UK, which reported its findings in December 2018. In PR terms at least, the government’s efforts seem to have paid off, with the UK receiving the highest aggregate scorings under the revised FATF evaluation methodology to date.
The chapters in this Whitehall Report examine specific elements of the UK’s AML response and seek to challenge the intimation that the UK AML regime can be judged largely effective in real terms as the 2018 mutual evaluation report (MER) appears to suggest. On this basis, the report aims to focus post-evaluation efforts by making a series of recommendations for the government’s AML efforts in the post-MER policy cycle.
Chapter I examines the evolving AML strategic landscape and suggests that priority should be given to refreshing the UK’s AML and Asset Recovery Action Plans, and ensuring that progress is properly monitored through Parliament and/or an Independent Commissioner for Economic Crime. In terms of new structural innovations, it makes the case for giving political support to the Office for Professional Body Anti-Money Laundering Supervision (OPBAS), adequate technical and human resourcing to the National Economic Crime Centre (NECC), and reinvesting in the depleted law enforcement response.
Chapter II examines the gap between the UK’s high aggregate scorings under the FATF ‘effectiveness’ methodology and the reality on the ground, which recognises the UK’s implication in various global money-laundering scandals. The chapter poses the question as to whether the UK’s place at the top of an invented ‘league table’ equates to an effective system overall and concludes that perhaps not all of the Immediate Outcomes (IOs) from the FATF’s evaluation methodology are created equal. It argues that the areas of identified weakness within the UK system – IO3 (supervision) and IO6 (use of financial intelligence) – best demonstrate the ‘wicked’ nature of the money-laundering problem; poor scorings in these areas drag down overall systemic effectiveness in a way that others do not. It calls on the UK government to focus on these areas to achieve effectiveness in real rather than abstract terms.
Chapter III examines the issue of AML supervision of the UK’s non-financial regulated sectors, in particular those supervised by their own professional bodies, noting that this has been a perennial weak spot. The chapter notes the creation of new architecture, in the form of OPBAS, which was created to raise standards in professional body supervision, but missed an opportunity to include Her Majesty’s Revenue and Customs (HMRC), a statutory supervisor of accountants and estate agents, in its remit. As OPBAS readies itself to release its first annual report, the chapter asks whether it is time to consider an independent review of HMRC’s role alongside OPBAS’s work to ensure a level playing field.
Chapter IV looks at the innovations in the sphere of public–private information exchange since the inception of the Joint Money Laundering Intelligence Taskforce (JMLIT) in 2015. While JMLIT is a welcome innovation, the chapter cautions against complacency and calls for developments which expand the two-way information flow to the wider regulated sector (albeit in a fit-for-purpose form, rather than simple JMLIT expansion); firm the legal foundations for the partnership; extend existing bank-to-bank information-sharing provisions; and champion the conversation at the global level on the balance to be had between data privacy and financial crime objectives.
Chapter V looks at the need for the AML regime to evolve to tackle the challenges posed by new technologies. It discusses the next frontier for AML regulation – ‘the virtual asset economy’ – noting that the government will need to decide on the parameters of the regulation necessary to contain potential threats. It also discusses the need to consider regulation not only of fiat-to-virtual currency exchanges, but also of virtual-to-virtual exchanges. The chapter encourages the government to develop responses which are fit for purpose, rather than simply extending existing rules.
Chapter VI examines the UK’s place as the destination of choice for the proceeds of grand corruption and explores whether political commitments, including new anti-corruption and transparency legislation, are being actioned in practice. It welcomes the new Unexplained Wealth Order (UWO) established in 2017, but notes that without law enforcement and prosecutorial resourcing, its impact will be largely symbolic; it notes that the new People with Significant Control register is good in theory, but has problems with accuracy in practice; and it notes the need to push forward with whistle-blower reforms to generate much-needed intelligence.
Finally, chapter VII looks at the UK’s track record on the use of financial intelligence and finds cause to both agree and disagree with the 2018 MER’s findings in this regard. The chapter strongly agrees with the 2018 MER’s conclusion that the UK Financial Intelligence Unit (UKFIU) is in need of considerable reform and suggests that the government bolsters human and technological resources and reforms the ‘devolved analysis’ operating model. The chapter disagrees with the finding that ‘LEAs [law enforcement agencies] at the national, regional and local levels integrate the use of SARs and other financial intelligence into their standard practice’, and recommends regional resources to improve SAR exploitation.
In conclusion, this report notes that the recent FATF evaluation served one of its purposes well – that of focusing attention on the area of AML and broader financial crime – but urges the government to continue its reform programme to ensure it achieves systemic effectiveness in practice, rather than on paper.
12 Recommendations for Policymakers
Policy and Coordination: ‘Policy, coordination and cooperation mitigate the money laundering and financing of terrorism risks’ – FATF Intermediate Outcome 1
Recommendation 1: Refresh and publish the AML and Asset Recovery Action Plans and provide annual reports to Parliament setting out progress.
Recommendation 2: Appoint an Independent Commissioner for Economic Crime to drive progress across government.
Recommendation 3: Prioritise funding of human and technological intelligence capabilities within the NECC.
Recommendation 4: Prioritise addressing deficiencies in the AML supervisory regime and use of financial intelligence over the next three years to improve systemic effectiveness overall.
Prevention and Detection: ‘Proceeds of crime and funds in support of terrorism are prevented from entering the financial and other sectors or are detected and reported by these sectors’ – FATF Intermediate Outcome 2
Recommendation 5: Provide an independent assessment of HMRC’s AML supervisory activities, alongside work OPBAS is undertaking in relation to professional body supervisors.
Recommendation 6: Review the legislative information-sharing pathways between JMLIT members and consider building fit-for-purpose gateways to support the operating model.
Recommendation 7: Support FATF efforts to champion a conversation, at the global level, regarding the balance to be had between data privacy and financial crime policy objectives.
Recommendation 8: On bringing the virtual asset economy under the purview of the AML regime, ensure that provisions are tailored to the new regime, rather than simply extending existing provisions.
Disruption: ‘Money laundering threats are detected and disrupted, and criminals are sanctioned and deprived of illicit proceeds. Terrorist financing threats are detected and disrupted, terrorists are deprived of resources, and those who finance terrorism are sanctioned, thereby contributing to the prevention of terrorist acts’ – FATF Intermediate Outcome 3
Recommendation 9: Provide training to prosecutors and financial investigators on the use of Part 5 (civil confiscation) Proceeds of Crime Act (POCA) powers in furtherance of their objective to expand use of UWOs.
Recommendation 10: Increase UKFIU headcount to 200 as promised during the 2007 FATF evaluation.
Recommendation 11: Expedite plans to update or replace the ELMER database.
Recommendation 12: Establish proactive SARs data-mining capabilities within the Regional Organised Crime Unit (ROCU) network.