Patchy progress towards effective AML supervision highlights the urgency of reform

17 January, 2023 | 5 minute read

In the dying days of 2022, HM Treasury released two years of covid-backlogged data on Anti-Money Laundering (AML) supervision in the UK. This 2020-2022 report yields no clear picture of uniform progress, while any marginal gains are easily outstripped by the scale of emerging challenges. Russia’s renewed invasion of Ukraine has turned scrutiny towards the professional enablers of Londongrad, while the IMF has warned of rapidly increasing financial flows into the UK from the top five high-risk jurisdictions for money laundering.

With debate on the Economic Crime and Corporate Transparency Bill underway, the government is under pressure from Parliament to plug the holes in our AML regime that have allowed dirty money to flow into our financial and business sectors. There are urgent fixes that must be done, but the patchy progress reflected in HM Treasury’s latest report supports the growing consensus that more radical reform of our fragmented AML supervisory regime is needed.

1. Post-pandemic, supervisors face greater workload on limited resources

HM Treasury reports that covid-19 disruptions caused a decline in the overall number of supervisory actions during the reporting period (April 2020 – April 2022), but leaves open the more pressing question of whether this reduced oversight might have allowed bad behaviour to thrive. At the same time, there has been a striking drop in the proportion of the regulated sector that is considered high risk. This may not be as positive as it first appears, however, because as also noted by the Legal Services Board, it suggests that stretched supervisors are recalibrating their risk assessments to cope with limited resources and a growing regulated population.

In addition to prioritising the highest-risk activity in the regulated sector, some supervisors are targeting actors avoiding AML supervision altogether. But the fragmented supervisory regime means this opens up further discrepancies across sectors. For example, HMRC’s “policing the perimeter” investigations have picked out firms operating in the regulated sector without being registered. By contrast, the absence of a default supervisor for the legal sector means that lawyers who provide high-risk legal services but are not members of a Professional Body Supervisor (PBS) will slip through the cracks of our fragmented AML system.

2. Urgent fixes are needed along the road to more radical supervisory reforms

With 22 legal and accountancy PBSs and three statutory supervisors, the overall picture that emerges from the HM Treasury report is that supervisory performance remains variable and progress is uneven. This not only makes comparison between supervisors difficult, but also means that the effectiveness of the UK’s overall defences against money laundering is being undermined by poorly performing supervisors.

Parliament must secure some quick fixes through the Economic Crime and Corporate Transparency Bill to target these weak links in our AML supervisory regime. This means Parliament should hold its nerve in the face of grumbling from the legal community about the government’s plans to expressly require legal sector supervisors to combat economic crime, and to allow the Solicitors Regulation Authority (SRA) to impose unlimited AML fines while also empowering it to demand information from solicitors and firms regarding economic crime more generally.

But it also means the problem of patchy performance must be tackled more immediately through amendments that give the Office for Professional Body Anti-Money Laundering Supervision (OPBAS) real “teeth”. New tweaks to the OPBAS Sourcebook published last week will not be enough to bring under-performing supervisors in line. Instead, OPBAS needs new powers and duties to impose – and publicise – financial penalties on PBSs failing to carry out their supervisory responsibilities.

3. Weak enforcement means the UK’s AML regime fails to deter dirty money

Without the threat of robust enforcement and sufficiently dissuasive sanctions for AML breaches, even the strongest rules will remain ineffective. Yet HM Treasury’s latest report shows that weak enforcement remains the Achilles’ heel of the UK’s AML regime. Inconsistencies in approach abound, with many legal and accountancy PBSs continuing to prefer informal enforcement action while their stronger tools – particularly expulsion or withdrawals of membership – remain underutilised.

More promising, however, is the overall increase in the number and value of fines across the 25 supervisors. This data is skewed to some extent by outliers like the £264 million fine following the Financial Conduct Authority’s prosecution of NatWest and the SRA’s £232,500 fine of Mishcon de Reya. But the latest available figures suggest this uptick in fines may track a broader trend. Fines issued by the FCA more than doubled in 2022 – with significant AML fines against Santander, Al Rayan Bank, Guaranty Trust Bank in the last month alone sending a strong message that the regulator is ramping up enforcement.

One critical gap in the AML armoury is the lack of criminal enforcement which ironically means the most serious AML breaches may escape appropriate sanction. AML referrals to law enforcement – let alone prosecutions – remain low, even for statutory supervisors like HMRC, which made only three referrals over the last two years. Meanwhile, the threat of criminal prosecution for professional enablers like lawyers and accountants is vanishingly small. With PBSs lacking criminal enforcement powers, we need a specialist “enablers cell” in the National Crime Agency to ensure serious AML breaches in the legal and accountancy sectors face a realistic prospect of criminal investigation.

No progress without a clear plan

HM Treasury’s two-year report is data-dense but offers little evaluation of how the AML system is performing as a whole. This is partly a function of the fragmented supervisory landscape, which leaves one trying to weigh up apples and pears. The report is littered with caveats about the difficulties of comparing supervisors and sectors, compounded by the fact that the way supervisors have collected data means it can be “difficult to carry out year-on-year comparisons”.

This analysis paralysis must be broken with a clear timeline from HM Treasury to consult on the ambitious options for reform that it set out in June 2022. While the Economic Crime and Corporate Transparency Bill should not be missed as an opportunity to make some quick fixes, these stop-gap measures only underscore the urgency of more ambitious and comprehensive reforms to provide effective defences against the flow of dirty money into the UK.

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