Anti-money laundering supervisory regime SUBMISSION FROM TRANSPARENCY INTERNATIONAL UK Introduction In this submission, Transparency International UK (TI-UK) provides a response to HM Treasury’s call for information on the UK’s anti-money laundering (AML) supervision 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.
TI-UK response to HM Treasury’s proposals TI-UK welcomes the UK Government’s acknowledgement that the system for AML supervision is flawed, which is undermining the effectiveness of the UK’s defences against illicit wealth entering the economy. In particular, TI-UK welcomes HM Treasury’s recognition that there are issues with the consistency of AML supervision, the application of risk based approaches to supervision, and the robustness of enforcement action by some AML supervisors. Despite this, TI-UK has concerns that the proposed reforms may not sufficiently address all of the issues it has previously identified with the current regime.
Structure and scope of the reforms In TI-UK’s June 2016 response to HM Treasury’s call for information on the UK’s anti-money laundering supervisory regime, three distinct models were identified on how the AML supervision system could be consolidated.1 HM Treasury’s proposals would constitute a partial implementation of Option 2 from the models TI-UK proposed in its June 2016 submission. The Office for Professional Body AML Supervision (OPBAS) is a “super-supervisor light” that could bring greater oversight and consistency to the supervision of the accountancy and legal sectors. However, the proposals would create an inconsistent framework for assessing the performance of AML supervision. OPBAS only has the responsibility for monitoring and ensuring greater consistency across professional body supervisors, which does not include HMRC, the Financial Conduct Authority (FCA) or the Gambling
1
Transparency International UK, HM Treasury’s call for information on the UK’s anti-money laundering (AML) supervisory regime (June 2016) http://www.transparency.org.uk/publications/hm-treasurys-call-for-information-on-the-uks-antimoney-laundering-aml-supervisory-regime/
Commission. This would lead to a two-tier approach with professional body supervisors overseen by OPBAS, whilst statutory supervisors would be subject to direct oversight from HM Treasury. It is unclear from the current proposals how OPBAS’ responsibility for overseeing professional bodies relates to HM Treasury’s oversight role, and how there would be a consistent assessment of performance across all supervisors. The Financial Action Task Force (FATF) emphasises the need for consistency in supervision processes to ‘provide legal certainty to the supervised entities’.2 It is not clear that the current proposals would provide this in practice. TI-UK has raised numerous issues with regards to the supervisory performance of HMRC.3 The solution put forward by the UK Government would do little to address this as OPBAS would have no powers in relation to HMRC. In addition, the guidance produced by OPBAS would not be binding, meaning all 13 professional body supervisors for accountancy and nine legal sector supervisors could operate using different sets of guidance, with different sanctions and different policies on transparency. TI-UK recommends that HM Treasury revises its proposals to ensure that consistent standards of supervision is provided for across all sectors.
Consolidation of the UK supervisory regime TI-UK notes that the UK Government has not acted to proactively consolidate the system of supervision, but acknowledges its proposals include a mechanism for consolidating them through the recommendationmaking power that would be provided to OPBAS. As stated in TI-UK’s previous consultation responses and reports, the consolidation of supervisors would help increase the consistency of the UK’s AML regime.4 Under the current proposals, there would still be 14 different supervisors for the accountancy sector alone, which will inevitably result in inconsistencies in practice, despite OPBAS’ efforts. Therefore, TI-UK thinks there is further scope for consolidating the number of professional body supervisors. Under the current proposals, OPBAS will be funded by supervisors. Due to the small size of some of these organisations, there is a possibility that many could be at risk of having insufficient resources to perform their roles effectively. It is unclear whether this has been taken into account from the current proposals. We expect this will be considered in the FCA’s consultation on this issue in due course. Where consolidation does happen, the proposed system for removing a professional body’s role as a supervisor lacks clarity. Under the current proposals, it states that “if a professional body no longer wishes to fulfil the role of an AML supervisor, or OPBAS recommends one be removed, the Treasury stands ready to amend the list of AML supervisors in the regulations accordingly”.5 There is no clarity about how its responsibilities would be handed over to another AML supervisor and what implications this may have for continuity of service for AML supervision. For example, how would an AML supervisor hand over information or data they have on the regulated community to the new supervisor? Clear procedures and mechanisms need to be in place to ensure that consolidating AML supervisors under these arrangements does not have a material impact on operational capabilities.
2
http://www.fatf-gafi.org/media/fatf/documents/reports/RBA-Effective-supervision-and-enforcement.pdf [Accessed 5 April 2017] 3 See Transparency International UK, Don’t Look, Won’t Find: Weaknesses in the supervision of the UK’s anti-money laundering rules (November 2015) http://www.transparency.org.uk/publications/dont-look-wont-find-weaknesses-inthe-supervision-of-the-uks-anti-money-laundering-rules/ 4 https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/600340/Anti-Money-LaunderingSupervisory-Regime-response-call-for-further-information.pdf [Accessed 5 April 2017] 5 https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/600340/Anti-Money-LaunderingSupervisory-Regime-response-call-for-further-information.pdf [Accessed 24 April 2017]
Estate Agents TI-UK notes in the consultation on the draft Money Laundering Regulations 2017 (MLR 2017) that the UK Government is considering giving professional bodies responsibility for the supervision of estate agents. At present, HMRC is responsible for supervising this sector. Despite its current performance issues, passing on this role to a new organisation would further fragment the existing patchwork of disparate supervisory bodies. This would be contrary to the need to consolidate the number of supervisors and could lead to further inconsistencies in the UK’s AML system.
Powers and Responsibilities of OPBAS TI-UK notes the powers given to OPBAS, with which it is expected to increase the consistency and quality of AML supervision, could undermine its effectiveness. OPBAS is not empowered to compel supervisors to adopt certain standards, only having the power to “encourage” them to do so. Similarly, the guidelines released by OPBAS are not binding and therefore cannot guarantee consistency. Whilst OPBAS has certain powers that would allow it to monitor supervisors’ compliance with their responsibilities, it does not currently have powers to directly interview those from the regulated sector. This means that OPBAS may miss out on different insights into the performance of supervisors provided by the regulated sector, which could weaken OPBAS’ guidance to supervisors. There is also a lack of clarity around how OPBAS will use its powers, which could provide supervisors with uncertainty about how their performance will be judged and any sanctions imposed. As with AML supervisors, OPBAS should be clear about its enforcement policy. To improve the performance of OPBAS, it should receive access to alerts from the Joint Money Laundering Intelligence Taskforce (JMLIT), which could then be passed on to supervisors. The UK Government appears to be committed to putting JMLIT onto a more permanent footing, with a view to creating more informed risk assessments.6 Consideration should also be given to OPBAS’ wider relationship with JMLIT.
Enforcement powers and a consistent credible deterrent We note that the proposed reforms to the AML system does little to create a consistent approach to enforcement amongst supervisors, even within the same sector. For example, only the FCA and HMRC continue to have civil penalties provided for under the MLR 2017 and are the only bodies who are required to publish the details of the use of these powers. Similarly, the UK Government has not sought to standardise the sanctions other supervisors would have at their disposal, despite industry supporting such a measure to improve legal certainty.7 This inconsistent approach to enforcement leaves the UK’s AML system in danger of being exploited. Criminals can ‘supervisor shop’ and target regulated communities which are at less risk of serious sanctioning as businesses within these communities may be more willing to take risks. It also 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.
6
http://www.nationalcrimeagency.gov.uk/about-us/what-we-do/economic-crime/joint-money-laundering-intelligencetaskforce-jmlit [Accessed 24 April 2017] 7 https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/600340/Anti-Money-LaunderingSupervisory-Regime-response-call-for-further-information.pdf [Accessed 12 April 2017]
TI-UK recommends that the UK Government should review the enforcement tools for tackling money laundering in the UK and ensure that all AML supervisors have the necessary sanctions to provide a credible deterrent to money launderers.
Transparent Enforcement TI-UK has previously highlighted the lack of transparency around AML enforcement as a significant issue in the UK’s AML supervisory regime. Providing information about what sanctions are imposed for noncompliance is a key element of providing a credible deterrent against future non-compliance by others. It is also essential that supervisors are clear about how they use these sanctions through having publicly available enforcement policies. We welcome the increased levels of transparency over enforcement actions required of HMRC in the new MLR 2017, and the new requirement for supervisors to submit to HM Treasury’s annual supervision report, which will help provide a better aggregate view of AML compliance and enforcement. This represents progress and would take HMRC closer to achieving the Macrory standards of enforcement. The danger still remains, however, that an inconsistent approach to publishing enforcement information will leave the UK’s AML supervision ineffective. Under the proposed MLR 2017, only the FCA and HMRC are legally obliged to publish information about the sanctions they have imposed. Other supervisors ‘may’ make this information public, but there is no requirement to do so. This situation will lead to an incomplete picture of supervisory enforcement against money laundering breaches, as well as contribute to a lack of credible deterrent for sectors where supervisors do not publish this information. TI-UK strongly disagrees with the view that publishing enforcement activity “could lead the public to draw incorrect conclusions about specific supervisors and their populations”.8 There is more danger of misinformation due to opacity of enforcement action.9 These are not novel requirements, with similar provisions 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 policy10 and the details of their enforcement actions.11 By neither requiring supervisors to publish enforcement policies or the details of sanctions they impose, the UK Government is allowing professional body supervisors to fail to meet three of the seven key characteristics identified by Macrory in his review of effective regulatory enforcement standards.12 TI-UK recommends it should be made a requirement under the MLR 2017 for professional body 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
Control and mitigation of conflicts of interest within professional body supervisors We note that the UK Government partially recognises that there is a potential conflict of interest for a professional body supervisor being both the regulatory body and a promotional body for their respective regulated communities. In the draft MLR 2017 it states that “Self-regulatory organisations [professional body supervisors] must make arrangements to ensure that— (a) their supervisory functions are exercised 8
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/600340/Anti-Money-LaunderingSupervisory-Regime-response-call-for-further-information.pdf p.8 [Accessed 11 April 2017]
10
Sections 63 and 64, RES Act http://www.legislation.gov.uk/ukpga/2008/13/part/3/crossheading/guidance [Accessed 12 April 2017] 11 Section 65, RES Act http://www.legislation.gov.uk/ukpga/2008/13/part/3/crossheading/guidance [Accessed 12 April 2017] 12 http://webarchive.nationalarchives.gov.uk/+/http:/www.bis.gov.uk/policies/better-regulation/reviewingregulation/improving-compliance-among-businesses [Accessed 12 April 2017]
independently of any of their other functions which do not relate to disciplinary matters”.13 However, TI-UK thinks this leaves uncertainty as to how this should be implemented in practice. Where this has been implemented elsewhere, for example, the separation of the Solicitors Regulation Authority from the Law Society in England and Wales, there is an oversight body – the Legal Services Board – that is required to make sure the governance arrangements for the sector’s supervisors control for conflicts of interest. There is no similar arrangement under the MLRs 2017 as currently drafted, which appears to allow for the professional body supervisors to determine themselves what is appropriate. This would leave the possibility for professional body supervisors to have institutionally combined promotional and supervisory responsibilities, which would fail to comply with the Clementi principle. To remove conflicts of interests within the new proposed AML supervisory regime, TI-UK recommends that professional body supervisors should be institutionally separate from their promotional and commercial activities.
Fit and proper tests An area which has not been addressed in the draft MLR 2017 or the consultation on the creation of OPBAS is the use of ‘fit and proper’ tests on the owners of regulated businesses. These help ensure regulated businesses act with honesty and integrity and are able to fulfil their AML obligations. Currently there is an inconsistent approach to fit and proper tests across regulated sectors. Estate agents and High Value Dealers are not required to take them as HMRC are not empowered under Money Laundering Regulations 2007 to carry these out on businesses. Professional bodies in the legal and accountancy sectors require their members to pass fit and proper tests; however, HM Treasury’s money laundering risk assessment has questioned the adequacy of professional body fit and proper tests.14 HMRC also registers Trust and Company Service Providers (TCSPs) on the basis of a fit and proper test, although this demands no more of an applicant than compliance with a list of negative criteria.15 Under this test, there are no requirements in respect of qualifications, experience or competence. It is, therefore, extremely doubtful that this system can be effective in preventing complicit TCSPs facilitate money laundering. TI-UK recommends that HM Treasury carry out further work to evaluate the effectiveness of fit and proper tests across all sectors and ensure they are applied to promote honesty and protect the integrity of regulated businesses.
13https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/599835/Money_Laundering_Regulation
s_2017_-_FINAL_CONSULTATION_DRAFT_FINAL.pdf [Accessed 24 April 2017] https://www.gov.uk/government/publications/uk-national-risk-assessment-of-money-laundering-and-terroristfinancing [Accessed 19 April 2017] 15 The applicant must not have been convicted of certain offences. 14
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 Research Manager steve.goodrich@transparency.org.uk Ben Cowdock Research Officer ben.cowdock@transparency.org.uk
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