The outcome of a wide-ranging consultation on the UK’s anti-money laundering (AML) regulatory regime suggests the UK’s regulations are in good shape; they just need to be properly enforced.
The UK’s status as one of the premier destinations for the proceeds of crime has been much documented, with London often earning the unwelcome title of ‘money laundering capital of the world’. Russia’s invasion of Ukraine has shone an even brighter light on the UK’s role in sequestering the wealth of organised criminals and kleptocrats. At the same time, fraud in the UK has reached unprecedented levels. In short, despite a three-year focus on the issue under the UK’s Economic Crime Plan (2019–2022), there’s still an awful lot of dirty money flowing through the UK’s economy.
Against this backdrop, HM Treasury has recently published the results from its public consultation on the UK’s AML regulatory and supervisory framework. This consultation was one of the government’s commitments under the aforementioned Plan and aimed to understand the ‘systemic effectiveness’ of the UK’s regulatory and supervisory regimes. In the year since the call for evidence was issued, the landscape has changed significantly, with new legislation enacted (and more promised) to deal with some of the loopholes in the system. While the consultation was concluded prior to the war in Ukraine, the events of the last few months and the true human cost of dirty money loom large over the review.
Nothing to See Here
Anyone calling for a radical overhaul of the UK’s AML regulations will be immediately disappointed with the conclusions of the review. There is, it claims, ‘insufficient evidence at the current time for a fundamental overhaul’ of the money laundering regulations. Ultimately, ‘increasing consistency of compliance with the current requirements’ should be the main objective. This is perhaps unsurprising. The UK scored strongly on ‘technical compliance’ in its most recent mutual evaluation by the international AML standard-setter, the Financial Action Task Force (FATF), and – with a few notable exceptions – the UK’s laws in this area are fairly sound. When it comes to enforcing those laws and regulations, however, it’s always been a different story.
The UK’s AML supervisory regime has come in for frequent and sustained criticism from politicians and civil society alike.
Driving the lack of any significant changes to the regulations is the ‘difficulty in measuring the extent to which specific requirements … are having a tangible impact on the overall scale and nature’ of money laundering in the UK. In other words, nobody really knows what is and isn’t working. That is not to say that there won’t be some tweaks around the edges; many respondents felt that the UK’s current rules were too prescriptive and should be more flexible and risk-based. There will likely be some minor changes to when enhanced due diligence will be required. Delivering outcomes-based metrics to measure effectiveness will be one of the aims of the government’s second Economic Crime Plan, due to be released later this year, although it’s clearly going to be a challenge.
How Can You Implement a Risk-based Approach When You Don’t Understand Your Risks?
Running through the consultation is the theme of ‘continuing deficiencies’ in the assessment and understanding of risk across the regulated sector. Again, this is perhaps not a surprise. AML risk assessments are, generally, pretty poor across the board, whether at the national level or the institutional level. Research has shown that the lack of ability of regulated entities to articulate the risks they face undermines trust between them and their AML supervisors.
Despite – or maybe because of – this, it is clear that there’s a lot of importance attached to the UK’s National Risk Assessment (NRA), due to be updated in 2023. The NRA will be the main vehicle for assessing emerging money laundering risks and identifying changes needed to regulations to mitigate those risks. It is notable that the government has decided against establishing a framework of national priorities, despite the influential Wolfsberg Group stating that there is an ‘urgent need’ for one. This reflects the views of most respondents who did not see the need for national priorities but instead felt that efforts should be focused on more effective use of existing vehicles, such as the NRA, and more granular sharing of real-time information about risks.
Decisive Indecision on AML Supervision
The UK’s AML supervisory regime has come in for frequent and sustained criticism from politicians and civil society alike, largely due to its fragmented nature. Improving the quality of AML supervision, particularly as regards the 22 professional body supervisors (PBS) overseeing compliance in the legal and accountancy sectors, has therefore been a core aim of the UK’s Economic Crime Plan. On this basis, this part of the consultation was perhaps one of the most eagerly anticipated areas of reform, with strong calls from the many critics of the system for a radical overhaul.
Although the consultation decisively ruled out maintaining the status quo, it is there that the decisiveness appears to have run its course
But despite nearly a year under consideration, HM Treasury has failed to identify a clear frontrunner for a future model for AML supervision in the UK, instead putting forward a range of potential contenders.
If one were to be generous to HM Treasury, AML supervision reform is a polarising issue, with strongly divergent views on the relative strengths and weaknesses of the PBS model. On the one hand, outsourcing this role to those with a true understanding of their sectors and the risks facing them has an intuitive merit. On the other hand, entrusting a public function to those with roles of both advocating for and overseeing compliance is perhaps an exercise in extreme conflict of interest management.
In the end, although the consultation decisively ruled out maintaining the status quo, it is there that the decisiveness appears to have run its course. The consultation dodged the bullets potentially flying from both camps by presenting a shortlist of four options ranging from maintaining the current system – albeit with an expanded role for the so-called ‘Supervisor of Supervisors’, the Office of Professional Body AML Supervision – to the creation of a single AML supervisor. HM Treasury will issue another formal consultation to consider all of these options in due course, thus kicking the AML supervision can further down the road.
So, What Next?
While the consultation hasn’t revealed anything earth-shattering about the UK’s AML regulatory regime, it does give an indication of the direction of travel in the next few years on the post-Brexit moulding of the regulations: a slightly more flexible approach to the application of some of the obligations of the money laundering regulations and more engagement to understand some of the barriers to assessing risk. Where it will eventually come out on the issue of AML supervision remains to be seen; whatever option is decided will inevitably upset the apple cart in one camp. However, this review is not an end in and of itself; the output will hopefully feed into the second iteration of the government’s Economic Crime Plan, the planned economic crime-related legislative agenda, and the next update of the NRA. How bold each of these measures are and the rigour with which they are implemented will be the real test of how committed the government is to improving the UK’s defences against dirty money.
The views expressed in this Commentary are the authors’, and do not represent those of RUSI or any other institution.
July 5, 2022 Published by The Rusi.org