Shape Up or Ship Out: Time for Wider Reform of the UK AML Supervisory Regime

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The third annual report of the UK’s ‘supervisor of supervisors’ raises questions about the need for more fundamental reforms of the UK’s AML supervision regime.

The UK’s Office for Professional Body Anti-Money Laundering Supervision (OPBAS) was established in 2018 to respond to the fragmented and ineffective supervision of lawyers and accountants for anti-money laundering (AML) compliance. Housed within the Financial Conduct Authority, OPBAS received a mandate to improve the consistency and effectiveness of the 22 professional body supervisors (PBSs) in the accountancy and legal sectors.

In its second annual report, published in March 2020, while it was evident that OPBAS was far from completing its mission, it was clear that steady progress was being made – albeit from a low base. Now, in its third annual report, the ‘supervisor of supervisors’ – using a new methodology based on ‘effectiveness’ rather than ‘compliance’ – demonstrates the extent to which challenges remain.

A Mountain to Climb

The report highlights that a high proportion of PBSs do not have effective governance structures in place, with a third not having effective separation between their advocacy and regulatory activities. Often poorly staffed, two-thirds of PBSs struggle to recruit and retain staff with relevant expertise. Furthermore, despite guidance from the Financial Action Task Force (FATF) on the implementation of risk-based supervision published in March 2021, only 19% of PBSs had implemented an effective risk-based approach, and only 33% of them had developed adequate risk profiles and recorded these in writing. Perhaps most worryingly, only 26% of relevant supervisors were using their enforcement powers efficiently.

Meanwhile, intelligence and information-sharing arrangements, a cornerstone in every AML system, showed a slight increase in quality and quantity: 68% of PBSs had effective arrangements in place. However, reluctance to actively share intelligence and information, particularly involving ongoing misconduct investigations, indicates that OPBAS’s guidance on this issue can only take the sector so far.

The View from Above

Following this latest report, OPBAS has received criticism for not making more of its coercive tools to encourage PBSs to come up to standard. Such criticism may be merited – OPBAS has yet to use its ultimate sanction of recommending to HM Treasury that a PBS be removed from its duties. However, this report is a useful inflection point and an opportunity to view the supervisor in its wider context.

The quality and effectiveness of professional body AML supervision is at best inconsistent, and at worst inadequate

First, despite the clear scale of the challenges ahead, it is a useful thought experiment to consider what the state of play might be in the absence of OPBAS. Without it, we would not have seen the progress in compliance by PBSs with the requirements set out in the Money Laundering Regulations 2017. Nor would we have seen the improvements in information-sharing through the establishment of the sectoral Information-Sharing Expert Working Groups. Importantly – and perhaps the biggest achievement – we would not have a full understanding of the sheer scale of the challenge at hand.

Second, it is important to view the OPBAS report in its international context. As demonstrated by successive rounds of FATF mutual evaluations, only around 10% of countries assessed under the FATF effectiveness methodology achieved a ‘substantially effective’ rating and no country has achieved top marks. In summary, AML supervision, particularly that of non-financial sectors, continues to be an area of weakness globally.

Climbing a Mountain in Flip Flops

However, the fact remains that the quality and effectiveness of professional body AML supervision is at best inconsistent, and at worst inadequate. This therefore raises some wider questions about whether more broad-based reforms to the UK’s AML supervision regime are required.

The first question – one being asked in HM Treasury’s review of AML supervision, which closes this month – is whether OPBAS, as currently constituted, is suitably equipped for the road ahead. Given the scale of the problem, should we ever have expected an organisation of approximately 15 staff with a limited set of powers to be able to achieve ‘a robust and consistently high standard of supervision by the professional body AML supervisors’?

The second question – in many ways a more fundamental one – regards the role of self-regulatory bodies (SRBs) like PBSs in AML supervision overall. While the FATF standards allow for a range of models, it is becoming clear that meeting these standards will be difficult for SRBs. FATF stops short of excluding SRB supervision, but in its March 2021 guidance notes that ‘this arrangement needs to consider the jurisdictional context and may not be optimal for all jurisdictions. In general, SRBs may lack the power and the tools of government supervisory agencies […] In addition, many SRBs […] are not adequately focused on, or adequately trained/experienced in relation to AML/CFT issues’. When viewing this guidance through the lens of OPBAS’s most recent report, these comments seem prescient.

A Fork in the Path

OPBAS’s third annual report is a stark reminder of the weaknesses in the UK’s AML supervision of two key sectors – lawyers and accountants. These continue to be at high risk of being abused for money laundering, as noted in the National Risk Assessment 2020. This latest report comes at a useful inflection point in the UK’s journey, with HM Treasury’s review starting to ask some fundamental questions about the road ahead on AML supervision.

Two courses of action remain: bringing AML supervision of lawyers and accountants into the public sector, or expanding OPBAS’s role and remit

This review seems to keep all options on the table. The one clearly ruled out by the latest OPBAS report is that of maintaining the status quo. Therefore, two other courses of action remain: bringing AML supervision of lawyers and accountants into the public sector, or expanding OPBAS’s role and remit.

Although intuitively the first option is tempting, HMRC’s supervision of other non-financial sectors shows that statutory supervision, while improving, does not necessarily equate to effective supervision. Conversely, the second option would build on OPBAS’s strengths, by expanding its remit to include a greater role in driving up enforcement standards, a new information and intelligence analysis function, and more direct power to remove underperforming supervisors.

Neither option would be without an element of cost or disruption. However, it is clear that it is time for underperforming PBSs to either shape up or ship out.

The views expressed in this Commentary are the authors’, and do not represent those of RUSI or any other institution.

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Dr Maria Nizzero

Research Fellow

Centre for Finance and Security

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Helena Wood

Associate Fellow; Head of Public Policy at Cifas

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