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The UK’s original 2015 National Risk Assessment on Money Laundering and Terrorist Financing (NRA) presented an honest, if somewhat broad and superficial, picture of the ML and TF risks in the UK, in an attempt to ‘inform the efficient allocation of resources and mitigate those risks’.
This revealed intelligence gaps, a weak response to money laundering by law enforcement ‘for an extended period of time’ and vulnerabilities in supervision. These findings have shaped a range of responses, including an Action Plan for anti-money laundering and counterterrorist finance (AML/CTF) and an AML supervisory review. Further attempts to reform the UK’s Suspicious Activity Reports regime have also been underway.
Behind much of this activity is the unseen hand of the Financial Action Task Force (FATF), the global standard-setter for AML/CTF, which will evaluate both the technical compliance and effective implementation of the UK over the next six months before publishing its assessment late next year.
With this in mind, the British government last month published an updated NRA that sets out how the key ML and TF risks for the UK have changed since the previous edition, and the action taken since 2015 to address these risks.
While displaying some welcome learning (for example the sectoral adjustment of charities from ‘medium-high’ to ‘low’; the inclusion of capital markets ML risks; and the inclusion of the TF threat from Northern Ireland-related terrorism) and showcasing some notable legislative developments (in particular the Criminal Finances Act 2017 and the Money Laundering Regulations 2017), the NRA still overlooks some fundamental risks, in particular the ability of law enforcement to respond to the identified threats.
It is not clear, and indeed insufficiently delineated in the NRA itself, how this nuanced view of risks – that some services, in some circumstances, pose a high risk – can be put into practice
The 2017 NRA has made a welcome attempt to focus more on activity that presents risks of money laundering, rather than taking a strict sectoral approach. In contrast to the 2015 NRA, the new document has chapters dealing with accountancy, legal, and property/estate agency services, rather than the associated sectors (such as accountancy services providers in 2015).
It also recognises that higher risks may arise where these professional services coincide and that different sectors can essentially offer the same services (such as company formation or use of client accounts).
A distinction is drawn between abuse of property itself and the provision of estate agency services. However, the NRA stops short of examining these higher risk environments in detail. It thus seems inevitable that the risk ratings allocated to certain services – for example, accountancy services rated overall ‘high’ for money laundering – will be plugged into customer risk models as a sectoral risk.
It is not clear, and indeed insufficiently delineated in the NRA itself, how this nuanced view of risks – that some services, in some circumstances, pose a high risk – can be put into practice.
One striking element of this assessment is the downgrading of estate agents from medium to low risk given the sector has demonstrated poor awareness and compliance and is now responsible for due diligence on both sellers and buyers. The vulnerability posed by this sector is compounded by the difficulties HM Revenue and Customs (HMRC) face in supervising such a diverse sector. This regrading will seem obtuse to many and may reverse the efforts made to enforce greater compliance with ML regulations over recent years.
Money service businesses (MSBs) stand out from the NRA: in form, because MSBs are not discussed with other financial services, but tucked between cash and non-profit organisations; and in substance, because the ML risks associated with the MSB sector have been re-evaluated from medium to high.
The reasons for this adjustment include challenges for the sector’s effective supervision by HMRC; and several cases corroborating the view of law enforcement agencies that complicit MSBs are ‘a favoured and readily available money laundering vehicle for [organised crime groups]’.
The government will be judged mainly by FATF on whether it is able to strengthen the MSB sector’s supervision in the UK in such a way as to restore banks’ confidence in the sector
Crucially, the NRA recognises MSBs’ growing difficulties accessing banking services have further reduced the transparency of the sector composition and operations.
The NRA refers to some of the government’s responses to these findings, including at the international level. However, the government will be judged mainly by FATF on whether it is able to strengthen the MSB sector’s supervision in the UK in such a way as to restore banks’ confidence in the sector. Ultimately, this will reduce the risk mitigation costs incurred by banks that provide services to MSBs.
A recurrent theme throughout both NRAs is the importance and challenge of effective supervision. One development since the 2015 NRA, which identified several vulnerabilities in the UK’s supervisory regime, has been the creation of the Office for Professional Body AML Supervision (OPBAS).
This recognises the fact that 22 of the UK’s 27 watchdogs are professional body supervisors (rather than statutory bodies such as the Financial Conduct Agency and HMRC) that display an inconsistence – and at times ineffective – approach.
Expected to be up and running by the end of 2017, OPBAS will oversee ‘the adequacy of the AML/CTF supervisory arrangements of professional body supervisors in the UK.’
Digital currencies remain a ‘low risk’ for both ML and TF, reflecting the continued lack of significant evidence of their greater use by organised criminals and terrorists
Greater supervisory rigour and consistency is clearly required, yet as both the MSB and estate agency cases suggest, it is not merely professional body supervisors that need to display greater commitment to creating an effective deterrent to maintain the integrity of the system.
As a forthcoming RUSI CFCS report will reveal, issues within the UK supervisory regime require a considerably more radical response.
The NRA singles out e-money, digital currencies and crowdfunding as products that are most ‘relevant from the perspective of ML and TF’. TF risk for e-money increases from ‘low’ to ‘medium’ in response to growing evidence of terrorists’ intent to exploit pre-paid cards to transfer funds across borders undetected.
Digital currencies remain a ‘low risk’ for both ML and TF, reflecting the continued lack of significant evidence of their greater use by organised criminals and terrorists, notwithstanding the increasing link between cyber-enabled crime and digital currencies. However, the absence of evidence thus far does not diminish the need for close monitoring of risk developments.
A welcome addition is the recognition of the potential for FinTech to mitigate financial crime. This is positive, and reflects the important work undertaken through the FCA’s regulatory ‘sandbox’ that has allowed companies to test products in an unencumbered environment. These opportunities, particularly in the regulatory technology (RegTech) space are likely to increase, thus an acknowledgement in the NRA is timely.
Although new laws and initiatives such as the Joint Money Laundering Intelligence Taskforce feature prominently, there is a striking omission from the NRA. Risk assessments should not only identify the risks at hand, but also the extent to which they can be mitigated (the control measures). The 2017 NRA has, perhaps intentionally, side-stepped commenting on the latter given it is here the UK is found wanting.
The NRA 2015 noted that ‘the law enforcement response to money laundering has been weak for an extended period of time’. The extent to which this weakness has been addressed is left open in the latest Risk Assessment, with comments on ‘enhancing the law enforcement response’ confined primarily to updates on legislation.
With police budgets slashed by 20% since 2010 at the same time as law enforcement is being asked to respond to a greater array of strategic threats, the levels of resource left to investigate complex (or even simplistic) money laundering cases are dwindling.
Ultimately, a successful AML/CTF regime is about delivering results. The jury is out and will return with its verdict a year from now.
The views expressed in this Commentary are the authors’, and do not reflect those of RUSI or any other institution.