HM Treasury’s call for information on the UK’s anti-money laundering (AML) supervisory regime

HM Treasury’s call for information on the UK’s anti-money laundering (AML) supervisory regime SUBMISSION FROM TRANSPARENCY INTERNATIONAL UK

Introduction In this submission, Transparency International UK provides a response to HM Treasury’s call for information on the UK’s anti-money laundering (AML) supervisory regime.

The UK’s supervisory system for AML compliance is currently not fit for purpose. A radical overhaul is needed to stem the flow of corrupt money moving through our financial system and prevent UK professionals from being unwitting or complicit facilitators of money laundering. This requires a number of major changes in order to ensure the system meets the standards of good regulation. To do this, the UK’s AML supervisory system needs to comply with the principles of:    

Consistency: it provides consistent advice and guidance, compliance monitoring and enforcement functions, and is free from conflicts of interest.

Proportionality: it can target its resources effectively and provide a credible deterrent against money laundering.

Transparency: it is open about its policies, actions and costs to allow external scrutiny of its performance.

Accountability: its performance is subject to independent external scrutiny.

As a minimum, we think there needs to be:   

Consolidation of the existing number of supervisors to make the system more coherent and consistent – relying on a patchwork of 27 AML supervisors is structurally unsound.

Separation of AML supervisory and industry lobbying functions to prevent conflicts of interests that could adversely affect supervisors’ performance.

Sufficient resources for AML supervisors to effectively monitor and ensure compliance with AML requirements. It is a false economy to continue to support a low cost supervisory model that is failing to deliver effective AML supervision.

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Background There are three reviews that have set the foundation for good regulatory practice in the UK: Clementi (2004): established the principle that organisations should not be both lobbyists and supervisors for a sector. This led to the creation of the Solicitors Regulation Authority, an independent arm of the Law Society responsible for regulating Solicitors in England and Wales. 1 Hampton (2005): set out the standards for more efficient and proportionate regulation that reduces unnecessary administrative burdens on businesses whilst improving outcomes. This included proposals to make better use of comprehensive risk-assessments, improve advice and guidance services, and provide better sanctions for persistent offenders to prevent, detect and deter non-compliance.2 Macrory (2006): set out the standards for effective, transparent and accountable enforcement. This included proposals for a new range of sanctions for civil regulators, a set of six principles on how to use those new sanctions and seven characteristics of how they should work in practice. 3 We have outlined below our analysis of how the current AML supervisory framework works in practice based on the four principles we have drawn from the Clementi, Hampton and Macrory reviews. Alongside our analysis we have included 10 specific solutions that could help make the current system align with these principles.

Consistency Philip Hampton’s review found that having multiple regulators working in the same area contributed towards overlaps in regulatory activity, poor coordination of activities, and a lack of clear regulatory objectives, which in turn could lead to inconsistent advice given to the regulated community. 4 Although the report considered it was undesirable to create a single regulatory body for all of the diverse areas it reviewed, it concluded that there was significant scope for consolidation around themes. 5 This could help create fewer regulatory interfaces for businesses, improve risk assessments and to reduce the amount of conflicting advice and information that businesses received.

Professor Richard Macrory’s enforcement principles (Annex 1) were intended to ensure that enforcement action by regulators was consistent across all sectors. 6 Sir David Clementi’s review of the regulatory framework for legal services in England and Wales concluded that organisations should not be both lobbyists and supervisors for their industry as this would present a clear conflict of interests that could affect the consistency of their decisions. 7

1 Sir

David Clementi, Review of the regulatory framework for legal services in England and Wales: Final report (2004) http://webarchive.nationalarchives.gov.uk/+/http://www.legal-services-review.org.uk/content/report/report-chap.pdf 2 Philip Hampton, Reducing administrative burdens: Effective inspection and enforcement (March 2005) http://webarchive.nationalarchives.gov.uk/20121212135622/http://www.bis.gov.uk/files/file22988.pdf 3 Professor Richard B. Macrory, Regulatory justice: Making sanctions effective (November 2006) http://webarchive.nationalarchives.gov.uk/20121212135622/http:/www.bis.gov.uk/files/file44593.pdf 4 Hampton, Reducing administrative burdens pp.58-61 5 Hampton, Reducing administrative burdens p.9 6 Macrory, Regulatory justice: Making sanctions effective p.27 7 Sir David Clementi, Review of the regulatory Framework for legal services in England and Wales: Final Report (December 2004) p.32 http://webarchive.nationalarchives.gov.uk/+/http://www.legal-services-review.org.uk/content/report/reportchap.pdf

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Current performance The UK has experimented with a low-cost model of supervision by outsourcing regulatory oversight responsibility to a wide range of private sector bodies. Overall there are currently 27 bodies who have been given AML supervisory responsibilities under the Money Laundering Regulations 2007 (MLR 2007) (see Annex 2). For accountancy alone, there are 14 bodies with regulatory responsibility for money laundering (HMRC and 13 private sector professional bodies).8 This approach, unique to the UK, has led to an environment where standards of supervision vary widely and, as mentioned above, there is a poor overall understanding of risk. The UK Government’s 2015 national risk assessment states that “the effectiveness of the supervisory regime in the UK is inconsistent. Some supervisors are highly effective in certain areas, but there is room for improvement across the board, including in understanding and applying a risk-based approach to supervision and in providing a credible deterrent.”9 Ineffective supervision, in turn, leads to inadequate compliance with the rules by firms within the sector, low reporting of suspicious activity and poor quality reporting. And the fragmented nature of the regime also leads to inconsistency in the resource dedicated to supervision and enforcement.

In 2013, HM Treasury asked AML supervisors to provide more information regarding their enforcement activity, including how they measure that their actions are proportionate, effective, dissuasive and adequately applied. The survey results demonstrated differing approaches by supervisors to sanctions. Of the 522 reported enforcement actions taken by private sector accountancy supervisors, 44 per cent were action plans or warning letters and four per cent were fines. In comparison, of the 1,381 reported enforcement actions taken by public sector supervisors (including the FCA and HMRC) 29 per cent were action plans or warning letters and 11 per cent were fines.10 HM Treasury’s 2014 report suggested that the accountancy sector has a relatively lenient enforcement regime. Only 12 per cent of enforcement action undertaken by private sector accountancy regulators resulted in expulsion or a fine compared to 88 per cent of action by public sector supervisors and 66 per cent of enforcement action in the legal sector. 11 Fifty fines were issued in total by the 13 (non-HMRC) accountancy sector supervisors during 2013 to 2014.12 However, there is no data on the value of fines that accountancy supervisors have issued or regarding which accountancy supervisors were responsible for the enforcement action. This lack of transparency on the part of those supervisors is, in itself, a direct breach of the Macrory principles for an effective sanctioning regime (see below).

As an additional example of the varying levels of seriousness that certain supervisors attach to their enforcement duties, five of them did not even submit a response to the HM Treasury annual review of AML supervisory performance for 2013 to 2014. These were the General Council of the Bar of Northern Ireland, The

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Association of Accounting Technicians (AAT); Association of Chartered Certified Accountants (ACCA); Association of International Accountants (AIA); Association of Taxation Technicians (ATT); Chartered Institute of Management Accountants (CIMA); Chartered Institute of Taxation (CIOT); Institute of Certified Bookkeepers (ICB); Institute of Chartered Accountants in England and Wales (ICAEW); Institute of Chartered Accountants in Ireland (ICAI); Institute of Chartered Accountants of Scotland (ICAS); Institute of Financial Accountants (IFA); International Association of Bookkeepers (IAB); Insolvency Practitioners Association (IPA); HMRC for firms and individuals not supervised by a professional body 9 HM Government, National Risk Assessment on Money Laundering and Terrorist Financing p.5 10 https://www.gov.uk/government/publications/anti-money-laundering-and-counter-terrorist-finance-supervisionreports/anti-money-laundering-and-counter-terrorist-finance-supervision-report-2012-13 [accessed 29 Jun 2015] 11 https://www.gov.uk/government/publications/anti-money-laundering-and-counter-terrorist-finance-supervisionreports/anti-money-laundering-and-counter-terrorist-finance-supervision-report-2013-14 [accessed 29 Jun 2015] 12 https://www.gov.uk/government/publications/anti-money-laundering-and-counter-terrorist-finance-supervisionreports/anti-money-laundering-and-counter-terrorist-finance-supervision-report-2013-14 [accessed 29 Jun 2015]

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Faculty Office of the Archbishop of Canterbury, the Department of Enterprise, Trade, and Investment Northern Ireland, the Insolvency Practitioners Association and the Institute of Financial Accountants. 13

Possible solutions There a number of options when it comes to consolidating the number of AML supervisors in the UK that would comply with the standards of consistency, proportionality, transparency and accountability (see Annex 3). These options draw on existing models for AML supervision from elsewhere.

In New Zealand, there are three statutory supervisors responsible for the AML supervision of firms: The Reserve Bank of New Zealand, the Financial Markets Authority and the Department of Internal Affairs. All three supervisors are active in publishing guidance and sector risk assessments.14 Canada, Australia and Spain all have a ‘super’ supervisor overseeing AML compliance.

The Financial Action Task Force (FATF) – the global standard setter on AML rules – has identified the benefits of having a consolidated supervisory approach. For example, it has concluded that the system for supervising AML compliance in Spain is “strong” due to its unitary AML supervisor, which is able to take a “sophisticated approach to risk analysis”.15 In all of our options below, HM Treasury would remain the department responsible for UK Government policy on AML supervision and approving guidance. However, in some of the options its operational responsibilities for monitoring AML supervisors’ performance are moved to new ‘super-supervisors’.

In all options, we propose that AML supervisors are organisationally completely independent from the lobbying arms of their industry. In options 1 and 2, sector-based supervisors would be new bodies unless there is an existing organisation that fits our principles, like the Financial Conduct Authority.

In all options, we propose that supervisory bodies (including any new ‘super-supervisors’) should be subject to scrutiny from the Treasury Select Committee (see the ‘Accountability’ section below). We also assume that all supervisors have sufficient resources to be able to carry out their functions effectively.

Proportionality Risk-based approach to regulation The Hampton report proposed that “[regulators], and the regulatory system as a whole, should use comprehensive risk assessment to concentrate resources on the areas that need them most.” 16 In this context, risk assessments would help AML supervisors identify firms that may need closer monitoring and support, and help firms to make more informed decisions about how to mitigate money laundering risks in their day-to-day business.

Current performance HM Treasury requires that AML supervisors have a good understanding of what it means to have a risk-based approach to regulation and that these are applied to how they undertake their supervisory functions. There has been a slight improvement on this in recent years, with the latest HM Treasury report stating “Almost universally, supervisors noted that the risks of money laundering and terrorist financing varied within their 13

https://www.gov.uk/government/publications/anti-money-laundering-and-counter-terrorist-finance-supervisionreports/anti-money-laundering-and-counter-terrorist-finance-supervision-report-2013-14#analysis [Accessed 29 June 2015] 14 http://www.fatf-gafi.org/media/fatf/documents/reports/mer/FUR-New-Zealand-2013.pdf [Accessed 20 May 2016] 15 http://www.fatf-gafi.org/media/fatf/documents/reports/mer4/Mutual-Evaluation-Report-Spain-2014.pdf [Accessed 20 May 2016] 16 Philip Hampton, Reducing administrative burdens p.7

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sector”.17 In the 2012 to 2013 supervision report by HM Treasury, over half of all supervisors reported that the money laundering and terrorist finance risks did not vary across firms. 18 Despite supervisors’ improved understanding of the importance of risk assessments, there is still a serious issue with how these are implemented in practice. In HMT Treasury’s 2013 to 2014 report on AML supervisors, it stated that where supervisors were able to identify risk, they had “difficulty explaining how their assessment of risk translates into the specific monitoring actions they undertook”.19 In HM Treasury’s 2014 to 2015 report, it stated again that “only 14 supervisors could explain how their assessment of risk determines the monitoring actions that they took during the year “. 20 This translation of theory into practice is essential in order for supervisors to be effective in their monitoring activities.

Even where risk assessments are established and implemented at the supervisory level, there are still issues with the regulated sector not applying them to their own AML activities, despite this being a mandatory requirement.21 For example, both the FCA and its predecessor, the FSA, have identified significant issues with the assessment of money laundering risks in firms through successive thematic reviews between 2011 and 2014.22 Elsewhere, there have been some positive initiatives to help improve business’ understanding of money laundering. The pilot Joint Money Laundering Intelligence Taskforce (JMLIT) for the financial sector has been an effective tool for enhancing sector-specific understanding of money laundering risks, and the UK Government’s recent announcement to establish it on a permanent footing is welcome. 23

Solutions There are a number of steps that could be taken to improve the adoption and application of risk assessments amongst AML supervisors and the regulated community.

Recommendation 1: Work collaboratively with relevant stakeholders to develop more sophisticated risk assessments for money laundering The UK Government, law enforcement authorities, AML supervisors, international authorities, civil society and research organisations should work together to develop more sophisticated risk assessments that could help identify money laundering involving the proceeds of corruption.

17 HM

Treasury, Anti-money laundering and counter terrorist finance supervision report 2014-15 (May 2016) p.18 https://www.gov.uk/government/publications/anti-money-laundering-and-counter-terrorist-finance-supervisionreports 18 https://www.gov.uk/government/publications/anti-money-laundering-and-counter-terrorist-finance-supervisionreports/anti-money-laundering-and-counter-terrorist-finance-supervision-report-2012-13 [Accessed 19 May 2015] 19 https://www.gov.uk/government/publications/anti-money-laundering-and-counter-terrorist-finance-supervisionreports/anti-money-laundering-and-counter-terrorist-finance-supervision-report-2013-14 [Accessed 19 May 2015] 20 HM Treasury, Anti-money laundering and counter terrorist finance supervision report 2014-15 p.17 21 Article 20(e), The Money Laundering Regulations 2007 http://www.legislation.gov.uk/uksi/2007/2157/regulation/20/made 22 See Financial Services Authority, Banks’ management of high money-laundering risk situations (June 2011) http://www.fsa.gov.uk/pubs/other/aml_final_report.pdf ; FCA, Anti-Money Laundering and Anti-Bribery and Corruption Systems and Controls: Asset Management and Platform Firms (October 2013) https://www.fca.org.uk/static/documents/thematic-reviews/tr13-09.pdf; FCA, How small banks manage money laundering and sanctions risk: Update (November 2014) https://www.fca.org.uk/static/fca/documents/thematicreviews/tr14-16.pdf 23 HM Government, Action Plan for anti-money laundering and counter-terrorist finance (April 2016) pp.15-16 https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/517992/6-2118-Action_Plan_for_AntiMoney_Laundering__web_.pdf

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Recommendation 2: Ensure the UK’s Overseas Territories and Crown Dependencies introduce centralised public registers of beneficial ownership Offshore corporate secrecy remains a major barrier to effective private sector due diligence, risk assessments and high standards of compliance with the MLR 2007. Although the UK Government has made significant steps to increase beneficial ownership transparency for companies operating in the UK, there still remains no public information about beneficial ownership for companies registered in the Overseas Territories and Crown Dependencies, which are widely known to be used to launder the proceeds of corruption. 24 The beneficial ownership standards in the UK’s Overseas Territories and Crown Dependencies should be brought in line with those in the UK: there should be central, public registers of beneficial ownership to allow investigations, public scrutiny and accountability for companies registered in these jurisdictions.

The UK Government should proactively assist with implementing these public registers as a matter of priority.

Recommendation 3: Require up-front public declarations of legitimate income by Tier 1 (Investor) visas At the moment, AML due diligence checks in the UK are heavily reliant on the private sector. We have previously identified the weaknesses of this approach in relation to the UK’s Tier 1 (Investor) visa system.25 The Home Office’s Tier 1 (Investor) visa scheme should contribute to a more effective AML system, instead of just relying on the private sector to identify risks.

Prior to issuing a Tier 1 (Investor) visa, applicants should be obliged to file a public declaration of their interests and assets, and provide assurance in the legitimacy of their income. The Home Office should maintain a public register of legitimate sources of wealth for Tier 1 (Investor) visas, which can then feed into private sector risk assessments. At the very least, these declarations should apply to PEPs and public officials who should expect to meet a high level of transparency, even after they have left office.

Recommendation 4: Establish a preventative visa denial list for high corruption risk individuals As well as working with key stakeholders on the design of AML risk assessments and providing more information to the private sector, which could inform them, the UK Government should also take steps to help reduce the initial money laundering risk.

The UK Government should maintain an anti-corruption visa denial list, in an intelligence-led and preventative framework. This list should be based on information provided by UK law enforcement authorities and security services that identifies individuals who are highly likely to be involved in systemic grand corruption, and against whom there is little immediate prospect of justice in their own country. Visa denial decisions should be subject to appeal and the process should comply with international humanitarian law. Within this framework, the UK Government should work with international partners to establish whether such a preventative visa denial list could be shared with other countries.

Credible deterrent The Macrory report identified six principles that should underpin the enforcement function of regulators (see Annex 1). In order to comply with these principles and provide a credible deterrent against money laundering, AML supervisors need to have a range of sanctions in their regulatory toolkit and use them when appropriate.

This includes civil and administrative sanctions, which are recommended by the Financial Action Task Force as

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Monserrat is in the process of introducing a register that will make this information available for a fee.

Transparency International UK, Gold Rush: Investment visas and corrupt capital flows into the UK (October 2015) http://www.transparency.org.uk/publications/gold-rush-investment-visas-and-corrupt-capital-flows-into-the-uk/

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a measure to help ensure AML supervisors’ enforcement actions are effective, proportionate and dissuasive. 26 Monetary penalties and powers of direction for AML supervisors are enshrined in the MLR 2007. 27

Current performance The level of enforcement and punitive fines by AML supervisors in the UK is generally low relative to the scale of money laundering passing through the UK, and is not likely to have a deterrent effect on money launderers.

According to law enforcement authorities, “hundreds of billions” of pounds are laundered through the UK every year.28 However, based on our analysis in 2015, the average annual level of AML monetary penalties in the banking sector – the industry identified by the UK Government as having the highest money laundering risk29 – has been approximately £8million.30 Compared to the overall scale of expected money laundering in the UK and the profits made by the financial services firms from this money, it remains questionable whether the level of fines levied currently has a sufficient deterrent effect.

In many sectors, it is difficult to assess the level of sanctions due to a lack of transparency about enforcement actions. For example, HMRC has refused to disclose the level of penalties issued in the various sectors it regulates, and has only released details on the total value of fines issued across all the sectors it supervises. In 2014-15, this amounted to £768,000.31 This figure is spread over a total of 677 penalties, equating to just over £1,100 per penalty. Considering HMRC is responsible for supervising seven different sectors, including estate agents where at least £180 million worth of property has been brought under criminal investigation as the suspected proceeds of corruption,32 it is unlikely this figure will have a deterrent effect. Recent evidence submitted to the Home Affairs Select Committee on the Proceeds of Crime Act 2002 also confirms that the deterrent for AML failings in the estate agent sector is currently “tiny”. 33 Alongside the apparently low use of civil monetary penalties, there is also a weak system of personal liability placed on regulated entities for AML failings. The UK’s Parliamentary Commission into Banking Standards concluded that a lack of personal consequences for individuals was a principal cause of repeated misconduct by financial institutions.34 Until recently, it was expected that the FCA would adopt a new ‘Senior Managers Regime’ with a presumption of responsibility on relevant senior managers. Under these proposals, if money laundering had taken place, senior managers allocated with AML responsibilities would have been required to prove that they had taken reasonable steps to prevent it from happening. 35 However, reportedly due to heavy

26 Financial Action

Task Force, International standards on combating money laundering and the financing of Terrorism & proliferation (February 2012) p.26 http://www.fatfgafi.org/media/fatf/documents/recommendations/pdfs/FATF_Recommendations.pdf 27 Part 5, The Money Laundering Regulations 2007 http://www.legislation.gov.uk/uksi/2007/2157/part/5/made 28 HM Government, National Risk Assessment on Money Laundering and Terrorist Financing (October 2015) https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/468210/UK_NRA_October_2015_final_ web.pdf 29 HM Government, National Risk Assessment p.32 30 Transparency International UK, Don’t Look, Won’t Find (November 2015) http://www.transparency.org.uk/publications/dont-look-wont-find-weaknesses-in-the-supervision-of-the-uks-antimoney-laundering-rules/ 31 http://www.parliament.uk/business/publications/written-questions-answers-statements/writtenquestion/Commons/2015-10-21/12787/ [Accessed 12 November 2015] 32 Transparency International UK, Corruption on Your Doorstep (March 2015) http://www.transparency.org.uk/publications/corruption-on-your-doorstep/ 33 Home Affairs Committee, Oral evidence: Proceeds of crime, HC 771 p.36 http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/home-affairscommittee/proceeds-of-crime/oral/32882.pdf 34 http://www.parliament.uk/business/committees/committees-a-z/joint-select/professional-standards-in-the-bankingindustry/news/changing-banking-for-good-report/ [Accessed 12 November 2015] 35 https://www.globalwitness.org/blog/uks-new-regime-hold-senior-bankers-accountable-helping-corrupt-could-begame-changer/ [Accessed 12 November 2015]

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lobbying by the banking sector, the UK Government removed the presumption of responsibility with the Bank of England and Financial Services Act 2016.36 The UK’s lack of credible enforcement deterrent allows businesses who fail to comply with the rules to gain an unfair advantage over businesses who have invested in systems and resources to address money laundering risks.

Solutions Recommendation 5: Establish an effective system of personal liability for money laundering failings The UK Government should consider the case for introducing individual as well as corporate liability for AML failings in firms. Senior managers who are responsible for AML checks should be subject to a ‘presumption of responsibility’. If a firm breaches the supervisor’s rules, the relevant senior manager should face a range of sanctions, including losing professional or ‘fit and proper’ accreditation and personal fines, unless they can satisfy the supervisor that they took reasonable steps to avoid the breach.

Recommendation 6: Provide adequate resources to AML supervisors Regardless of how the AML supervisory system is consolidated, supervisors need to have the necessary resources to effectively monitor and ensure compliance with AML requirements. It is a false economy to continue to support a low cost supervisory model that is failing to deliver effective AML supervision.

As a minimum, supervisors should have enough resources to:    

survey and understand the AML threat communicate with the firms they supervise adequately staff an effective whistleblowing regime meet the Macrory standards of effective and transparent sanctioning

Transparency Four of Macrory’s seven characteristics for an appropriate sanctioning regime included the need for information to be made publicly available. These recommendations were for regulators to:    

publish an enforcement policy justify their choice of enforcement actions year on year to stakeholders, Ministers and Parliament enforce in a transparent manner be transparent in the way in which they apply and determine administrative penalties

The explanation for this necessity was as follows:

“Transparency is something that the regulator must provide to external stakeholders, including both industry and the public, so they have an opportunity to be informed of their rights and responsibilities and of enforcement activity. However, it is also important for the regulator itself, to help ensure they use their sanctioning powers in a proportionate and risk based way.”37

36 http://uk.reuters.com/article/2015/10/15/uk-britain-banks-idUKKCN0S82V320151015 [Accessed 37 Macrory,

12 November 2015]

Regulatory justice: Making sanctions effective p.86

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This requirement for transparency is enshrined in law for a number of the UK’s largest regulators, for example, authorities given civil sanctions under the Regulatory Enforcement and Sanctions Act 2008 (“RES Act”) are under a legal obligation to publish an enforcement policy 38 and the details of their enforcement actions. 39

Current performance Since November 2011, HM Treasury has invested in cross-sector surveys of AML supervisors’ performance.

Whilst the surveys represent a welcome improvement on understanding across the 27 money laundering supervisors in the UK, the information and statistics within the public report are grouped together in such a way that makes it impossible to assess the activities of individual supervisors. 40 For example, it is not possible to ascertain the level of fines or other types of enforcement action that an individual supervisor has issued, or how many desk-based reviews or compliance visits they have carried out. To be able to evaluate individual supervisors, it is essential that information about supervisory activity be in the public domain.

TI-UK submitted a Freedom of Information request to HM Treasury in June 2015 requesting individual AML supervisors’ annual reports be released. After more than three months, we received a response but it provided no information on specific supervisory or enforcement activity. HM Treasury claimed that releasing the information would likely prejudice the ‘commercial interests’ of the supervisors and could assist money laundering.

In a UK Government review of national supervisors in 2015, HMRC, in its capacity as an AML supervisor, refused to release information on its budget for supervision, the number of staff responsible for regulatory activity, the number of entities regulated or details on regulatory activity. 41 HMRC has also refused to disclose information to Parliament on the level of penalties it has issued to the sectors it supervises.42

Solution Recommendation 7: Force supervisors to meet the Macrory standards of enforcement transparency The current position where supervisors can refuse information to stakeholders on the basis of ‘commercial sensitivity’ is a symptom of a dysfunctional system.

Regardless of any consolidation of the number of AML bodies with supervisory responsibilities, HM Treasury should direct supervisors to meet the Macrory standards of transparency by requiring them to:  

publish an enforcement policy outlining the powers and sanctions they have, how they intend to apply them in practice and the process for making appeals and representations against decisions publish the details of individual cases of enforcement

Accountability Current performance The lack of transparency about enforcement action and opacity about the resources dedicated to AML supervision significantly hinders the accountability of supervisors. In some instances, AML supervisors have

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Sections 63 and 64, RES Act http://www.legislation.gov.uk/ukpga/2008/13/part/3/crossheading/guidance 65, RES Act http://www.legislation.gov.uk/ukpga/2008/13/part/3/crossheading/guidance 40 https://www.gov.uk/government/publications/anti-money-laundering-and-counter-terrorist-finance-supervisionreports [Accessed 29 June 2015] 41 http://discuss.bis.gov.uk/focusonenforcement/regulator-data-201213/ [Accessed 12 November 2015] 42 http://www.parliament.uk/business/publications/written-questions-answers-statements/writtenquestion/Commons/2015-10-21/12787/ [Accessed 12 November 2015] 39 Section

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even failed to respond to HM Treasury’s request for information on their supervisory activity. 43 This is unacceptable and should not be tolerated.

There also needs to be a greater understanding of sector-specific risks and AML performance to show how supervisors’ activities are translated into action by those they regulate. The FCA and SRA have both conducted thematic reviews into AML compliance, which should be adopted by supervisors of other sectors, too.

Solutions Recommendation 8: Require supervisors to respond to the HM Treasury’s annual review of AML supervisory performance For the last annual AML supervision report, several UK supervisors did not even respond to HM Treasury’s annual request for information. Such a lack of reporting and accountability should not be tolerated.

The UK Government should require all supervisors to submit performance reports to HM Treasury on an annual basis.

Recommendation 9: Ensure there is Parliamentary oversight of AML supervision In order to ensure the AML supervisory regime is accountable, there needs to be Parliamentary scrutiny of the UK Government’s work in this area.

The Treasury Select Committee should scrutinise HM Treasury’s performance in overseeing AML supervisors with an annual hearing on the annual review of AML supervisory performance.

Recommendation 10: Encourage supervisors to undertake thematic reviews of AML risks within their sector Both the FCA and SRA have undertaken thematic reviews of their sectors, which have highlighted issues with AML performance within regulated firms.

AML supervisors across all sectors should undertake thematic reviews of AML risks to deepen their understanding of business practices and show how their performance is translating into action on the ground.

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HM Treasury, Anti-money laundering and counter terrorist finance supervision report 2014-15 pp.13-14

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About Transparency International UK Transparency International (TI) is the world’s leading non-governmental anti-corruption organisation. With more than 100 chapters worldwide, TI has extensive global expertise and understanding of corruption.

Transparency International UK (TI-UK) is the UK chapter of TI. We raise awareness about corruption; advocate legal and regulatory reform at national and international levels; design practical tools for institutions, individuals and companies wishing to combat corruption; and act as a leading centre of anti-corruption expertise in the UK. We work in the UK and overseas, challenging corruption within politics, public institutions, and the private sector, and campaign to prevent the UK acting as a safe haven for Corrupt Capital. On behalf of the global Transparency International movement, we work to reduce corruption in the high risk areas of Defence & Security and Pharmaceuticals & Healthcare.

We are independent, non-political, and base our advocacy on robust research.

Contact Steve Goodrich Senior Research Officer steve.goodrich@transparency.org.uk Rachel Davies Senior Advocacy Manager rachel.davies@transparency.org.uk www.transparency.org.uk

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Annex 1: Macrory principles and characteristics for regulatory enforcement Six Penalties Principles A sanction should: 1.

2.

3.

4.

5.

6.

aim to change the behaviour of the offender aim to eliminate any financial gain or benefit from non-compliance be responsive and consider what is appropriate for the particular offender and regulatory issue, which can include punishment and the public stigma that should be associated with a criminal conviction be proportionate to the nature of the offence and the harm caused aim to restore the harm caused by regulatory non-compliance, where appropriate aim to deter future non-compliance

Seven characteristics Regulators should: 1.

2.

3.

4.

5.

6.

7.

publish an enforcement policy measure outcomes not just outputs justify their choice of enforcement actions year on year to stakeholders, Ministers and Parliament follow-up enforcement actions where appropriate enforce in a transparent manner be transparent in the way in which they apply and determine administrative penalties avoid perverse incentives that might influence the choice of sanctioning response

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Annex 2: Full list of UK AML supervisors Association of Accounting Technicians (AAT) Association of Chartered Certified Accountants (ACCA) Association of International Accountants (AIA) Association of Taxation Technicians (ATT) Chartered Institute of Management Accountants (CIMA) Chartered Institute of Legal Executives (CILEX) Chartered Institute of Taxation (CIOT) Council for Licensed Conveyancers (CLC) Department of Enterprise, Trade, and Investment Northern Ireland (DETNI) Faculty of Advocates (Scottish Bar Association) (FoA) Faculty Office of the Archbishop of Canterbury (AoC) Financial Conduct Authority (FCA) Gambling Commission (GC) General Council of the Bar (England and Wales) (GCBEW) General Council of the Bar of Northern Ireland (GCBNI) HM Revenue & Customs (HMRC) Insolvency Practitioners Association (IPA) Insolvency Service (SoS) Institute of Certified Bookkeepers (ICB) Institute of Chartered Accountants in England and Wales (ICAEW) Institute of Chartered Accountants in Ireland (ICAI) Institute of Chartered Accountants of Scotland (ICAS) Institute of Financial Accountants (IFA) International Association of Book-keepers (IAB) Law Society of England and Wales (LSEW) Law Society of Northern Ireland (LSNI) Law Society of Scotland (LSS)

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Annex 3: Options for consolidation Option 1: consolidate into independent thematic supervisors This would involve consolidating the existing supervisory functions into thematic bodies that are separate from the lobbying arms of existing industry organisations. The themes could be based around the model outlined below.

Potential benefits:     

Improved consistency of AML advice and guidance within sectors Improved coordination of AML activities within sectors Improved pooling of AML expertise and resources that can be prioritised based on sector-specific risks Continued sector expertise in supervisory bodies Continued consistency checks on guidance from HM Treasury

Potential disadvantages:  

AML expertise is still fragmented across different supervisory bodies Continued reliance on the AML supervisors’ forum as the main coordinating body across sectors

Policy lead Approve guidance Monitor performance

Provide advice and guidance Monitor compliance Enforce

Scrutiny

HMT

Financial

Legal

Accountancy

Trust and Company Service Providers

Property

Luxury goods

Auction houses, arts and antiques

Treasury Select Committee 14

Option 2: Super-supervisor light This would involve consolidating the existing supervisory functions into thematic bodies and introducing a super-supervisor that would work with sector supervisors on an operational level, for example, in the development of risk assessments and guidance, and providing a forum for coordination and information sharing. The supersupervisor would need some powers of direction to ensure sector supervisors comply with the principles we have outlined above. For example, it may need to require them to submit annual performance reports in order for them to be accountable. HM Treasury would remain the departmental policy lead in government and continue to approve guidance.

Potential benefits:     

Improved consistency of AML advice and guidance across sectors Improved coordination of AML activities across sectors Improved pooling of AML expertise and resources that can be prioritised based on sector-specific risks Continued sector expertise in supervisory bodies Reduced HM Treasury resources needed for approving guidance

Potential disadvantages: 

AML expertise and resource cannot be prioritised based on cross-sector risks

Policy lead Approve guidance

HMT

Coordinate Monitor performance

Provide advice and guidance Monitor compliance Enforce

Scrutiny

Super-supervisor

Financial

Legal

Accountancy

Trust and Company Service Providers

Property

Luxury goods

Auction houses, arts and antiques

Treasury Select Committee 15

Option 3: Super-supervisor max This would involve consolidating the existing supervisory functions into one single AML supervisor that would contain both AML specialist and sector-specific expertise that leads on operational AML supervision, for example, the development of risk assessments and guidance. HM Treasury would remain the departmental policy lead in government and continue to approve guidance.

Potential benefits:     

Highest level of consistency of AML advice and guidance across sectors Highest level of coordination of AML activities across sectors Single point of contact for AML issues for any companies working across different sectors Pooled AML resources and expertise in one body that can be allocated based on cross-sector risks Reduced HM Treasury resources needed for approving guidance

Potential disadvantages: 

Potential to lose sector-specific expertise if it is not prioritised when setting-up the super-supervisor

Policy lead Approve guidance Monitor performance

Provide advice and guidance Monitor compliance Enforce

Scrutiny

HMT

Super-supervisor

Treasury Select Committee

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