Over the summer the government consulted on whether major reform was needed to the UK’s regime for supervising money laundering. On the table were some admirably ambitious proposals, including having a new statutory supervisor to supervise money laundering in the legal and accountancy professions – currently supervised by 22 different professional bodies.
The professions are fighting back. In November, accountancy trade bodies wrote to the Minister overseeing the consultation arguing that any ambitious reform would “at best see money laundering grow and at worst see the whole supervisory regime collapse.” Those bodies and legal sector trade bodies are calling for business as usual when it comes to supervision. But is business as usual working?
Who’s checking?
Since 2020 the Treasury has published self-reported data from Professional Body Supervisors (PBSs) from both the legal and accountancy sectors on activity undertaken across the UK’s anti-money laundering and counter-terrorism financing (AML/CTF) regime. Meanwhile, the Office for Professional Body Anti-Money Laundering Supervision (OPBAS) has published four reports assessing the performance of the 22 PBSs in tackling money laundering covering the years 2018 up to March 2023.
These reports have flagged persistent and ongoing issues with the consistency and effectiveness of the current supervisory framework for these sections – from patchy progress that we noted based on the latest Treasury data, to serial offenders on poor supervision, noted by OPBAS in its 2022/23 progress report. OPBAS found that:
- “A few PBSs” were “largely effective,” but highlighted that all PBSs needed “to be more ambitious and strive for full effectiveness,” especially “in the core areas of governance, supervision and the risk-based approach, enforcement and information and intelligence sharing.”
- Some PBSs “are outliers to their peers” which it deemed as “unacceptable”, urging them to “step up their efforts if they are effectively to fulfil their role as the first line of supervisory defence against AML threats.”
In light of these findings, OPBAS said it expected “material improvements in effectiveness in the coming round of PBS assessments” after it made revisions in January 2023 to its best practice manual for supervision.
This blog gives an early assessment of the 2022/23 AML reviews published by the accountancy sector supervisors this Autumn, and finds that across several key metrics many of them are failing to live up to OPBAS’ expectations.
1. Are professional bodies supervisors actually inspecting their members?
Echoing the findings made by the Treasury in 2022, OPBAS’ latest report identifies a “slight increase” in the number of desk-based reviews (DBRs) and onsite visits undertaken by all PBSs in 2021/22 compared to pre-pandemic levels. This increase, however, is mainly driven by the legal sector, but held back by the accountancy sector “where the overall number has declined”.
The latest round of supervision reports based on 2022/23 data show that inspections by accountancy sector supervisors are still declining, particularly among the largest in the sector:
- The Institute of Chartered Accountants of England & Wales (ICAEW) undertook 1,003 DBRs in 2018/19, but four years later this has dropped by 55% to 450 in 2022/23. This decrease in the number of DBRs it undertakes is not being offset by an upturn in on-site visits, which dropped by 32% from 1,001 in 2018/19 to 676 in 2022/23.
- The Association of Chartered Certified Accountants (ACCA) has increased the number of DBRs it undertook slightly (up from 317 in 2018/19 to 338 in 2022/23) but it hasn’t undertaken a single onsite visit since 2019/20, despite supervising 6,951 firms and sole practitioners in the UK.
- The Chartered Institute of Management Accountants (CIMA) undertook 205 DBRs in 2018/19 and 139 in 2019/20, but since then it has almost abandoned DBRs as a supervisory tool entirely, undertaking 0 in 2020/21, 3 in 2021/22 and 2 in 2022/23 despite supervising 1,691 members. The amount of on-site visits it undertakes has remained stable between 20 to 23 annually.
OPBAS also noted that “some PBSs were outliers to their peers in terms of the number of visits proportionate to the size of their population” which it concluded made it “difficult for them to evidence an effective risk-based approach to their supervision”. Results from the 2022/23 reports show there continue to be significant disparities in the proportion of members subject to reviews (both DBRs and on-site visits) across the different accountancy sector supervisors:
- Only 5 of the 13 accountancy sector supervisors subjected 10% or more of their populations to some form of AML review in 2022/23, the same number as in 2018/19.
- Only the Association of International Accountants (AIA) increased the percentage of firms subject to review to over 10% in 5 years, while the Chartered Institute of Management Accountants (CIMA) dropped substantially from 14% in 2018/19 to only 1.4% in 2022/23.
- The Chartered Institute of Taxation (CIT) and the Association of Taxation Technicians (ATT) did not disclose how many of the 1,450 firms under their supervision were subject to review in 2022/23, but 2021/22 figures suggest this was 5.5% and 4% respectively. Neither CIT or ATT have undertaken an on-site visit since 2019/20. The Institute of Accountants and Bookkeepers (IAB) has not yet published its 2023/23 AML report on its website despite the 1st November deadline.
2. Are compliance rates improving in the accountancy sector?
The latest round of accountancy sector reports continue to show high levels of non-compliance with AML rules amongst their respective supervised populations. It is not clear whether this is due to supervisors taking a more robust view of what compliance consists of, or whether it indicates a lack of concern for compliance in the sector.
We found that:
- 8 of the 11 accountancy sector PBSs (for which data is available) reported increases in rates of non-compliance with AML rules (comparing 2018/19 and 2022/23 data), including by the sector’s two largest supervisors (ICAEW and ACCA).
- Non-compliance across the sector has risen to nearly a third (31%) of the supervised accountancy population in 2022/23, compared to 19.4% in 2018/19.
- Rates of non-compliance have increased dramatically under certain supervisors – the Institute of Certified Bookkeepers (ICB), for example, identified that 6.4% of its 3,137 members were non-compliant in 2018/19, which rose substantially to 81% in 2022/23. ICB has noted that this rise is in part due to issues with its rating system.
3. Are current enforcement levels providing a credible deterrent to AML non-compliance?
As OPBAS notes, under the Money Laundering Regulations (MLRs) supervisors are required “to ensure that its supervised population is liable to effective, proportionate and dissuasive disciplinary action.” Despite “a significant overall increase in enforcement action taken by PBSs” – financial penalties for instance “nearly doubled” between 2019/20 and 2021/22 – OPBAS identified two primary concerns with enforcement:
- The average fine remains low (under £3,000), which according to OPBAS raises the question as to “whether it is a credible deterrent to AML non-compliance.”
- The use of suspensions or cancellations as an enforcement tool by supervisors remains low, especially “in proportion to the overall size of supervised populations.”
Financial penalties
Our analysis of accountancy sector PBSs’ 2022/23 reports finds that:
- Just three of the PBSs in the accountancy sector (ICAEW, ICAS and CAI) issued fines with an average of over £3,000 in 2022/23, and in the case of ICAS – this was because it issued a single fine for £4,000.
- ACCA’s average fine was just under £3,000 in 2022/23, although this had nudged up during 2021/22 to £4,666.
- Some supervisors – AIA and ICB – increased their average fine levels over this period (from £200 and £408 to £1,510 and £2,833 respectively) but still remained under £3,000.
- CIMA issued one £20,000 fine in 2019/20, but in all other years its average is below £1,000.
- Several supervisors (CIT, ATT, IFA and IPA) did not publish data on financial penalties imposed or the number of fines imposed during 2022/23.
Suspensions and cancellations
Use of suspensions and cancellations as an enforcement tool in the sector continues to be low although the number of supervisors using the tool has doubled.
In 2022/23, there were 21 suspensions or cancellations issued by accountancy supervisors – much lower than the 35 in 2021/22 identified by OPBAS – but slightly higher than in 2018/19 when 18 were issued.
Business as usual is not working
This year’s accountancy sector supervisory reports strongly suggest that consistency and effectiveness of supervision remain elusive. While some supervisors are moving in the right direction, other poorly performing ones are clearly still lagging behind.
As OPBAS said earlier this year, this lack of consistency and effectiveness is “making a stronger case for more material supervisory system reform.” Given OPBAS has now spent four years cajoling supervisors in the legal and accountancy sector to up their game, the case for more ambitious change is becoming increasingly overwhelming.
If the government wants to achieve its aim of the UK having effective anti-money laundering supervision across the board, it’s clear that slow, painful incremental improvements are no longer going to cut it. And time is running out to move the dial on AML supervision, as the UK’s progress will come under scrutiny when the world’s anti-money laundering watchdog FATF comes to visit the UK again in 2025/2026.
That’s why many outside the legal and accountancy sector are calling for wholesale reform and the creation of a new statutory supervisor for the non-financial sector. While this does entail risks that need to be carefully managed, the government should resist special pleading from sectors that have tested the patience of those who want the UK to stem dirty money flowing into and through our financial system to its very outer limits.
