UK’s ongoing weak link in the fight against dirty money – the supervision of lawyers and accountants

Author: Spotlight On Corruption

The 2021 review of how the UK’s 22 different legal and accountancy supervisors (known as Professional Body Supervisors or PBS), are performing in terms of combating dirty money was released this week by their oversight body, the Office for Professional Body Anti-Money Laundering Supervision (OPBAS). 

Three years on from a scathing assessment by global money laundering watchdog, the Financial Action Task Force (FATF), that weaknesses in these sectors’ supervision posed “a significant issue for the UK”, the latest OPBAS review reveals ongoing serious and alarming inadequacies. These include that:

  • the vast majority of supervisors in this sector (81%) do not have an effective risk-based approach to supervising their members;
  • 85% of supervisors are not effective in using predictable and proportionate supervisory action;
  • 50% of supervisors do not ensure members take timely action to correct gaps in their AML controls;
  • 68% of supervisors do not have effective enforcement frameworks – with 74% failing to use enforcement tools available to them effectively;
  • a third (33%) of supervisors have still not effectively separated their regulatory and advocacy roles posing real conflict of interest issues and reducing effective supervision.

In its Economic Crime Plan 2019-2022, the government committed to strengthen the consistency of supervision in the accountancy and legal sectors by March 2021. These figures show that this has clearly not happened, and an urgent rethink is needed. The lack of effective supervision of the legal and accountancy sectors, both high risk for money laundering, poses a real gap in the UK’s defences against illicit finance.

Spotlight on Corruption is calling for OPBAS to urgently get a lot tougher to bring legal and accountancy supervisors into line in light of these findings, and for the government to adopt ambitious reform in consolidating the UK’s fragmented anti-money laundering (AML) supervisory framework. 

 

New methodology, new results 

OPBAS, housed within the Financial Conduct Authority (FCA), oversees a panoply of 22 different legal and accountancy PBSs. It was established in 2018 to address the weaknesses in these sectors identified by the 2018 FATF report as well as by the UK’s own 2015 and 2017 National Risk Assessments. Each year it has produced a progress report on supervision in these sectors.

In this year’s report, OPBAS adopted a new methodology – mirroring the FATF approach – which assesses how effective the legal and accountancy supervisors are in real-terms. This approach should be lauded as it paints a more representative picture of AML supervision. 

This new approach has significantly changed the picture of how much progress OPBAS is making on getting these supervisors into shape. In last year’s report, OPBAS found that the number of supervisors adopting a risk-based approach to supervision had gone from just 9% in 2018 to 86% in 2019. Likewise, the number of supervisors undertaking proactive supervision went from just 10% in 2018 to 86% in 2019. With this new ‘effectiveness’ methodology, the number of supervisors taking an effective risk-based approach has sunk to 19%, while the number of supervisors providing proactive and reactive supervision has slipped to 52%. 

The new methodology, with its focus on effectiveness shows that there is a substantial gulf between following the rules and having a functioning AML regime. It has also shown glaring inconsistencies and weaknesses in supervision. 

 

Ongoing failure to separate supervisory and advocacy functions

Of particular concern from the OPBAS review is that a third of supervisors still haven’t separated their advocacy and regulatory functions. This is in direct contravention of Regulation 49 of the Money Laundering Regulations (MLR), which requires these supervisors to exercise supervisory functions independently of other functions. OPBAS found that this failure to separate the two roles is resulting directly in “some reluctance in taking robust supervisory and enforcement actions.” 

Back in 2004, the Clementi Review established the principle that organisations should not be both lobbyists and supervisors. It is therefore disappointing that OPBAS has not firstly named and shamed those supervisors that have failed to separate their functions, and secondly, given a clear deadline by which they must do so. If a supervisor is clearly in breach of its duties under the (MLR) there are real questions as to whether it should retain its role as a supervisor. 

 

Weak enforcement remains an ongoing concern

Under the MLR, legal and accountancy sector supervisors must ensure that members who breach requirements under the Regulations are subject to “effective, proportionate and dissuasive disciplinary measures.” 

Three years ago, OPBAS wrote that: “86% of relevant PBSs preferred to offer support and guidance to members to improve their AML compliance over an extended period rather than issue penalties.

In last year’s review, as well as the one before that, OPBAS identified enforcement as a key area for improvement for these supervisors, with 41% of PBSs not having taken any enforcement action of any kind.

It is therefore alarming that in this year’s review, OPBAS finds that only around a quarter (26%) of these supervisors are using enforcement tools available to them effectively.

On the plus side, fines issued by the supervisors during the reporting period for contraventions of the money laundering regulations have risen (from 11 to 19 in the legal sector, and from 226 to 259 in the accountancy sector). The legal sector is significantly lagging the accountancy sector still in both the number of fines imposed and formal supervisory actions taken (65 formal supervisory actions following onsite and desk reviews by the legal sector compared to 380 in the accountancy sector). Legal sector fines tend to be higher and concentrated in one supervisor, with one just one PBS responsible for 16 out of the 19 fines, and six legal sector PBSs failing to issue any fines. 

Both sectors are clearly preferring ‘informal’ actions to ‘formal’ actions against members after undertaking desk or onsite supervisory reviews. OPBAS itself notes “overuse of follow up visits to address AML non-compliance and a reluctance to use other enforcement tools such as a reprimand or regulatory fines.” It also notes inconsistencies in fine levels with “some PBSs issuing lower fines which would not be seen as a credible deterrent to money laundering.

 

Ongoing reluctance to share intelligence

Regulation 50 of the MLR imposes a duty on supervisors to cooperate and coordinate activities with other supervisors, HM Treasury and law enforcement.

Given that professional body supervisors do not have the same investigation and prosecution powers that the statutory supervisors such as HMRC and the FCA have, both intelligence sharing and proactive referral to law enforcement are critical to ensuring consistency of supervision and enforcement across all sectors. 

The OPBAS review states that 68% of supervisors in the legal and accountancy sectors have effective intelligence and information sharing arrangements in place. Confusingly, however, the review goes on to say that OPBAS found that “most PBSs did not have adequate intelligence and information sharing policies in place and found inconsistencies in their approach to sharing.” It also finds that many of the supervisors are avoiding uploading intelligence flags to the central intelligence databases, such as Shared Intelligence Service, or the Financial Crime Information Network, particularly when it comes to active misconduct investigations that they are undertaking. 

 

Is OPBAS baring its teeth enough?

Given such alarming figures about how many of the supervisors are actually providing inadequate AML supervision, it is both surprising and concerning that OPBAS remains reluctant to use its enforcement powers to bring underperforming PBSs into line. Since its formation in 2018, OPBAS has never used its powers to publicly censure a PBS nor recommended to HM Treasury that a PBS is removed from the list of supervisory bodies in Schedule 1 of the Money Laundering Regulations. 

Furthermore, it has only used its Regulation 14 power of direction – whereby it orders a PBS to take a certain action to remedy or prevent a failure to comply with a supervision requirement – against four PBSs since 2018. OPBAS states that if a supervisor “significantly fails to deliver its obligations under the MLRs, we will not hesitate to take robust enforcement action.” Yet its approach seems overwhelmingly to be one of engagement. OPBAS notes that “ineffective [supervisors] tended to disproportionately focus on educating members rather than taking dissuasive enforcement action.” The question is whether OPBAS is applying this logic effectively to itself.

However, there are more fundamental problems than whether OPBAS is playing its role as the ‘supervisor of supervisors’ as robustly as is needed. The patchwork of 22 supervisory bodies (made up of 9 legal PBSs and 13 accountancy PBSs) supervise populations ranging from 17 (Chartered Institute of Legal Executives Regulation) members to almost 11,000 (Institute of Chartered Accountants of England & Wales). Such a scattered approach to AML supervision inevitably leads to inconsistencies. Unsurprisingly, the larger supervisors in the sector with more resources at their disposal perform better across the board, creating gaps in the supervisory landscape for criminals to exploit. 

Such a regulatory landscape means it will always be difficult to ensure consistent levels of AML supervision. OPBAS has been handed a poisoned chalice in this regard. 

 

Time for some bold thinking

On 22nd July 2021, HM Treasury announced a Call for Evidence on the UK’s AML/CFT regulatory and supervisory regime. 

The review is looking at the overall effectiveness of the regimes, whether key elements of the current regulations are operating as intended and the structure of the supervisory regime including the work of OPBAS to improve effectiveness and consistency of PBS supervision.

Given the issues highlighted in the recent OPBAS report, it is clearly time to look at solutions outside the box and take bold action to standardise and raise the standards of AML supervision. 

The government’s Call for Evidence has some very welcome ‘big picture’ thinking about what the supervisory regime should look like, and frank assessment of the current weaknesses in the UK’s approach, including that it “creates an uneven playing field for business while also increasing the risk that criminals could exploit the UK’s financial system.” 

Among the boldest of its proposals are that OPBAS’ powers could be extended to drive consistency across all supervisors, including the HMRC and FCA, and that the supervisory regime should be consolidated “towards a model with fewer, very few or even a single supervisor.” 

There is no doubt that consolidation is essential and that the UK’s current patchwork of supervisors is not currently containing the illicit finance threat. While there are arguments on both sides for creating a single supervisor that covers all AML activity, an absolute minimum would be to create single sectoral AML supervisors for the legal and accountancy sectors. These supervisors would need to be supervised by OPBAS, working preferably on an expanded basis as the supervisor of all the supervisors. However, for that to work OPBAS would need to show it has the willingness to exercise its powers more robustly. Real consideration would also need to be given as to whether single sectoral supervisors should have investigative and criminal sanction powers so that they operate on an equal footing to other supervisors.

What is clear is that the UK’s rhetoric about getting tough on professional enablers is going to sound ever hollower unless urgent action is taken to make sure that key high-risk professions such as lawyers and accountants are being properly supervised for money laundering. In light of OPBAS’ latest figures, fudging supervisory reform is not an option.