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With the UK government increasingly professing its willingness to clamp down on dirty money, one of its priorities is to ensure that UK-based professional services providers – sometimes known rather pejoratively as ‘professional enablers’ – do not facilitate money laundering. Although it is perhaps better known as Britain’s tax collection agency, Her Majesty’s Revenue and Customs (HMRC) carries key functions in this effort.
Quite apart from its taxation role, HMRC is one of no fewer than 25 different anti-money laundering (AML) supervisors, which are responsible for ensuring that regulated firms in the UK comply with their AML obligations, such as performing due diligence on their customers or submitting suspicious activity reports. The majority of these AML supervisors are professional associations, such as the Institute of Chartered Accountants in England and Wales or the Law Society of England and Wales, who supervise their members. The Financial Conduct Authority (FCA) and the Gambling Commission are the AML supervisors for their regulated firms. This mix of statutory supervisors and self-regulatory bodies is a striking feature of the UK’s AML regime.
HMRC’s AML supervision role is crucial – and complex. It supervises money service businesses, which make up part of the financial industry; the fraction of accountants that are not supervised by a professional body; all ’standalone’ trust and company service providers, although such services are also offered by financial and legal firms, who are not supervised by HMRC; all real estate agents; and all high-value dealers. It could almost be seen as the supervisor of last resort, allocated to those sectors that do not naturally fit elsewhere.
For a long time, HMRC’s AML supervisory and enforcement activity has been less transparent than one would hope given its prominence in the UK regulatory framework and its responsibility for professional services that have been found to be high risk in the UK’s 2017 National Risk Assessment carried out by HM Treasury. In particular, HMRC had declined a freedom of information request from our Institute, seeking to reveal statistics into the levels of enforcement across the various sectors HMRC supervises, on the grounds that disclosing this information would somehow damage the effectiveness of its supervision.
This is now changing. At the start of this month, HMRC published its first-ever Report on Tackling Financial Crime in the Supervised Sectors 2015 to 2017. This is a giant leap for a public authority steeped in a culture of confidentiality, but a small step toward genuine transparency of the UK’s AML supervision. Hence while HMRC’s efforts are commendable, more outreach should follow, as highlighted in a recent RUSI paper on high-end money laundering in the UK.
Among the highlights of HMRC’s report is the increased amount of monetary penalties levied for regulatory breaches, £1,171,679 in 2016–17 versus £558,432 in 2015–16, although the number of fines has declined slightly. But for HMRC’s enforcement to be a truly credible deterrent, it should publish a detailed breakdown demonstrating that serious breaches will attract appropriate penalties. So far, the public can only deduce that the average penalty amounts to £1,309, which seems surprisingly low even for the small or micro-enterprises it supervises. No doubt, some of the banks who have been fined many millions, or even hundreds of millions of pounds by the FCA will look at that figure with envy – think of Barclays’ £72 million fine in November 2015 or Deutsche Bank’s £163 million fine in January 2017.
Another issue that merits further attention is the apparent failure by some businesses to comply with their legal obligation to register with HMRC for AML supervision at all. It is highly likely that such businesses are equally forgetful of other AML obligations; bringing them into the fold should be a priority. HMRC’s report notes increasing registration rates over the timespan of six years and references its outreach to estate agents. But RUSI’s research suggests that the issue persists across HMRC-supervised sectors, not least because defining and identifying those who should be registered is challenging. HMRC should explicitly acknowledge and address this gap by publishing statistics on the penalties levied against firms specifically for failing to register.
In the area of trust and company service providers, which have come to the fore due to the role of UK-registered companies and limited liability partnerships in scandals such as the Russian ‘laundromat’, HMRC should cooperate with Companies House, the UK companies’ registrar. Only those trust and company service providers that are registered for AML supervision in the UK or other jurisdictions with appropriate supervisory standards should be allowed to register companies in the UK.
Finally, in view of the complexity of the AML supervisory landscape in the UK, HMRC has a crucial role to play in supporting AML-related activities of those professional bodies that do not have the law enforcement and intelligence-gathering expertise that HMRC, itself also a law enforcement agency, has accumulated. This includes sharing information whenever appropriate – something that requires the clarification of appropriate information-sharing pathways in view of the confidentiality restrictions that bind HMRC.
Earlier this year, HM Treasury – Britain’s finance ministry – set up a new body at the FCA, the Office for Professional Body Anti-Money Laundering Supervision (OPBAS), to act as a ‘supervisor of supervisors’ for the non-statutory AML supervisors, with the objective of raising the standards of AML supervision among the professional bodies. Given the connections and crossovers between much of the HMRC supervised population and the professional bodies, a more open approach from HMRC to sharing information can only make the task of OPBAS easier, but may require even more culture change.
In short, HMRC’s communication of its achievements and priorities is a welcome development. HMRC should build on this first step to ensure that it sets the tone for effective and visible AML supervision. The themes of greater transparency and cooperation should guide its approach to becoming a credible deterrent to wrongdoing, as well as sharing appropriate information with other supervisory bodies and its own supervised population.
BANNER IMAGE: Over £200,000 in cash found in a black bin bag during an HMRC AML investigation. Courtesy of Wikimedia
The views expressed in this Commentary are the author’s, and do not necessarily reflect those of RUSI or any other institution.