Anti-Money Laundering Supervision: Is it working?

24th November 2020

Author: Tom Robinson

The primary legal basis for this supervision is through the Money Laundering Regulations, introduced in 2007 and updated in 2017, which bring the UK’s detection and prevention of money-laundering in line with EU standards.

The regulations adopt a “risk based approach”, where businesses and individuals will need to show they are adopting AML procedures that are commensurate with the level of money-laundering risk.

There are five supervisory sectors who oversee their respective “population” to ensure compliance with MLR 2017: The FCA, the Legal Public Body Supervisors (PBS), the Accountancy PBS, HMRC (covers estate agents and high value dealers) and the Gambling Commission.

The Legal PBS incorporates nine regulators, and Accountancy PBS thirteen.

The FCA is also able to bring enforcement action under the Financial Services and Markets Act 2000. Both the FCA and HMRC are additionally able to bring prosecutions under the Proceeds of Crime Act 2002. 

Population in this sense refers to the businesses/firms and sole practitioners who work in these sectors and are subject to MLR.

(Supervisors can bring AML action under other rules, the focus of this briefing however is soley on MLR because ??)

All graphs in this briefing are interactive. Hover or click on them for additional information. If the user can interact with them to change the data they are viewing (to compare over time for instance), then this is marked.

The bodies set out in the pie chart are all supervisors.

Supervisors have two broad roles: firstly to supervise their population and ensure compliance with MLR and secondly, to take enforcement action where breaches of the MLR are found. action. Enforcement action is typically in the form of a fine, or if the supervisor has “members”, such as Legal and Accountancy PBS, they can cancel or suspend membership.

In this briefing, we focus on regulatory enforcement action brought by the supervisors. Only the FCA and HMRC can bring criminal enforcement actions, whilst the other supervisors must refer cases they believe should be dealt with under criminal law to law enforcement.

It is contextually important when reviewing our findings to be aware of the levels of risk each sector faces from money laundering.

The FATF report risk evaluation matches the 2017 National Risk Assessment in all but one area: there is no “highest risk” category. Therefore, the banking sector is in the same categoy as accountants, money service business etc.

Trust and Company Service Providers are supervised by either Legal PBS, Accountancy PBS, the FCA or HMRC, depending on which sector they provide services.

The 2017 National Risk Assessment states that “while trust and company services pose a relatively high risk, the risks are assessed to be greatest when provided in conjunction with other financial, legal or accountancy services, and the use of TCSPs outside these sectors continues to be assessed asmediumrisk for money laundering.”

Supervision

The next graph shows the number of supervisory investigations (desk based reviews & onsite visits) undertaken by the supervisors over the past two reporting periods.

Since supervisors oversee populations of significantly divergent sizes, we have calculated as if each supervisor oversaw a population of exactly 100 to allow a meaningful comparison.

The Gambling Commission is undertaking a significantly greater quantity of investigations than any other supervisor.

In 2018-2019, per 100 population, the Gambling Commission brought 31.25 investigations. The Legal and Accountancy PBSs brought roughly a third of that, whilst the FCA, which supervises the highest risk population, only brought 0.56 investigations per 100.

Regulatory Fines

Regulatory fines are a useful metric to compare the strength of enforcement action brought by the supervisors. They are a relatively simple yet powerful method of ensuring compliance with MLR and all supervisors issue them.

The graph below explores the value of total fines issued by the supervisors as well as the number of fines issued per 100 population by the supervisors. Size of the bubble represents the value of fines issued.

This graph reveals the striking difference in value of regulatory fines issued by the supervisors.

The FCA, with the highest risk population, has issued the highest value of fines over the time period, with three fines issued in 2018-2019 with a total value of £103 million.

The Gambling Commission, with a “low risk” population, again outperforms the “high risk” Accountancy and Legal PBSs.

In 2018-2019 the Gambling Commission brought, comparatively, three and a half times the number of fines of Accountancy PBS, and issued total fines 150 times the value of those imposed by  Accountancy PBS.Compared to the Legal PBS meanwhile, the Gambling Commission brought over 20 times the number of fines, and issued total fines worth almost 50 times more.

The next graph breaks down the number (adjusted for population) and value of total fines issued by the regulators within both the Legal PBS and Accountancy PBS.

The crosses represent the entire Legal/Accountancy PBS. (The sum of fines and average fines per 100)

The graph below shows the total number of regulatory fines issued from 2015-2019. Total fines have more than halved over this time period, driven by HMRC.

Population figures are not available after 2017-2018, therefore this graph has not been adjusted for population. However, what this graph does show is a significant drop in fines issued by HMRC. 

Despite HMRC issuing fewer fines, their total value has remained steady. In the three years for which data is available, HMRC issued £1.1 million worth of fines in 2016-2017, £2.2m in 2017-2018 and £1.2m in 2018 – 2019. As such, HMRC is issuing fewer fines, but of a respectively higher value.

Other enforcement measures

Legal and Accountancy PBSs have “members”, which they can cancel or suspend. For instance, for the SRA a cancellation of membership is effectively a ‘strike off’ for a solicitor. 

In addition to cancelled memberships, the Legal PBS suspended one membership in each of the years covered and Accountancy PBS suspended two memberships each year. 

Law enforcement referrals and prosecutions

The FCA and HMRC are the only two bodies that can prosecute cases.

The FCA in 2018 – 2019 had 65 AML cases open, under the MLR of 2017 and 2007 as well as the FSMA. Despite this, it has never brought a criminal prosecution in an AML case. 

HMRC, meanwhile, prosecuted one individual under MLR in 2017-2018, and two individuals in 2018-2019. HMRC has also prosecuted seven individuals for money laundering under the Proceeds of Crime Act in 2017/2018.

As the other supervisors do not have powers of prosecution, they must refer potential criminal breaches to law enforcement. Under Regulation 46 of the MLR, PBSs must report suspicions or knowledge of money laundering to the NCA. The number of law enforcement referrals is therefore a key indicator of whether PBSs are proactively referring intelligence they come across.

Our findings show that the Gambling Commission continues to outperform it’s “high risk” peers in this category as well. It is of particular concern that the Accountancy PBS have never referred a single case under MLR to law enforcement.

(The Commission changed its methodology in 2018 – 2019 to only record referrals made directly from their intelligence database).

Suspicious Activity Reports (SAR)

As has long been the case, the finance sector is by far the most proactive in submitting SARs. 

The lack of SARs from other sectors has long been noted as a cause for concern. The gaming sector (which includes gambling) has seen a significant rise in SAR reporting. It is now submitting almost as many SARs as the Accountancy and Tax Adviser sector, which in turn has only slightly increased its reporting. 

Estate Agents have also improved, submitting five times as many SARs in 2019-2020 than it did in 2013-2014.  

Concerningly, the Legal as well as the Trust/Company Service Providers sector are issuing less suspicious activity reports now, than they were seven years ago.

Note – SARs are recorded by sector, not supervisor. Gaming includes gambling as well.

The reporting period changed in 2016.