Despite a regulatory environment perceived by many as stringent, the UK has a reputation as a global hub for money-laundering. Over the next two years, the UK Government will prepare itself for an assessment of its anti money-laundering and counter terrorist-financing efforts.
Whether based on hard fact or supposition, there is no ignoring the growing and unwelcome reputation of London as a global capital of money-laundering. Regardless of whether this is an effect of ‘circular reporting’ or the efforts of individual investigative journalists, there are repeated calls for the UK to clean up ‘the City’ and tackle ‘gatekeepers’, such as lawyers, accountants and trust and company service providers. With even the Director General of the UK’s National Crime Agency (NCA) stating on several occasions that ‘many hundreds of billions of pounds of criminal money is almost certainly laundered through UK banks and their subsidiaries each year,’ this view is an affront to the UK’s reputation as a fair place to do business, which the government cannot afford to leave unchallenged.
The current incumbents of numbers 10 and 11 Downing Street, partially elected on a ticket economic growth and the continued promotion of Britain's markets for global business, have plenty of financial issues to grapple with. One significant item pending in the Chancellor's inbox that will pervade these goals means that the anti money-laundering agenda will rise up the order of priority over the next two years. The impending Financial Action Task Force (FATF) evaluation of the UK’s AML and CTF frameworks during 2017 and 2018 dictates that a global spotlight will be placed on the UK’s efforts in this field over the course of this Parliament.*
The UK’s Road to the FATF Assessment
FATF, an independent inter-governmental body that ‘develops and promotes policies to protect the global financial system against money laundering, terrorist financing and the financing of proliferation of weapons of mass destruction’, rates the compliance of its member countries with a globally applied set of forty recommendations through a peer group evaluation system.
These recommendations cover all aspects of legislation, regulation and law enforcement efforts to combat illicit finance transiting the globe. FATF is planning to assess the UK against these standards in 2017 with a report to the FATF plenary in 2018. This review system will publicly compare the UK to its peers over the course of the fourth round of evaluations of FATF members.
Juxtaposed with the prevailing media view – when FATF last reviewed the UK’s frameworks in 2007 – the ensuing report was in the majority of areas, broadly positive. Far from denouncing the UK’s as a system beholden to global criminal finance, FATF broadly echoed what the ‘regulated sector’ often complained of: that the UK’s AML and CTF legislation is one of the most comprehensive in the world, albeit with some gaps in key areas, such as beneficial ownership provisions and regulation of estate agents and trust and company service providers (many of these regulatory gaps have since been addressed).
These diametrically opposing views may not be as irreconcilable as they first seem. At the time of the last evaluation, the FATF ‘methodology’ for assessing compliance with the global standards could considered as ‘technocratic’, focused on having legislative and regulatory frameworks in place (regardless of whether these were delivering results). Since then there has been a significant paradigm shift in the FATF mind-set.
In 2012 the FATF updated its recommendations and over-hauled its assessment methodology. As well as introducing some new recommendations to assess responses to new and emerging threats (new technologies and counter proliferation finance), a key step-change has been the introduction of measures of effectiveness under the new ‘eleven immediate outcomes’. Gone are the days when countries could implement technical legislation and receive a ‘compliant’ rating from FATF – they will now need to demonstrate real-world impact.
Opportunities and Challenges
This presents both an opportunity and a challenge for Treasury officials in demonstrating compliance. In terms of opportunity, where the UK fell down on strict technical compliance in some areas at the last evaluation, the government now has a further opportunity to prove compliance via effectiveness. However, seen through the prism of continuing austerity, this shift may be seen as an ominous challenge – for example the continuing reduction in numbers of law enforcement officers may have a direct impact on results in the run up to 2018.
This was recognised by the National Crime Agency in both its 2013 and 2014 Suspicious Activity Reports (SARs) Annual Reports noting in its 2013 report that ‘throughout the year there were concerns around staffing within the UKFIU and its ability to meet SOCA’s mandated regime responsibilities…”’ and that despite staffing numbers improving in 2014, “there is a gap in experience which will take some time to replace.”’
Despite these challenges, there have been a number of positive developments in the UK’s approach to AML/CTF since 2007, most notably the Money Laundering Regulations 2007, which closed a number of regulatory gaps identified by the FATF’s evaluation. Furthermore, as regards effectiveness, the UK is at the forefront of some innovative measures in the field of public-private partnerships, such as the recently launched Joint Money-Laundering Intelligence Taskforce (JMLIT), a new 12-month pilot project between the government and the financial sector aimed at improving intelligence sharing between public and private sectors.
In sum, the next two years will offer the UK a significant opportunity to demonstrate that, whether fairly applied or not, the UK’s reputation as a facilitator of global money-laundering is leading the government to take meaningful steps to boost both AML/CTF technical compliance as well as effectiveness.
Over the coming two years, the Centre for Financial Crime and Security Studies will be examining the UK’s anti money-laundering and counter terrorist-financing frameworks to assess the challenges facing the UK government during the upcoming Financial Action Task Force evaluation process.
Helena Wood is an Associate Fellow assigned to the Centre for Financial Crime & Security Studies at RUSI
*Thsis paragraph was edited on 23 June 2015.
 The UK’s Money Laundering Regulations set out which businesses are covered for the purposes of anti-money laundering activity. The ‘regulated sector’ includes financial institutions, accountants, legal professionals, trust and company service providers and estate agents.
 HM Treasury hold the HM Government policy lead on anti-money laundering and FATF engagement.