HM Treasury Report Shows Shifting Supervisory Efforts, Few AML Penalties
02 Aug 2019

The UK’s HM Treasury recently (and belatedly) published its Anti-Money Laundering and Counterterrorist Financing Supervision Report for the year ended 31 March 2018. With publication of the findings coming some fifteen months after the end of the review period, regulators and supervisors have no excuses for failing to address the highlighted concerns. 

The report provides an overview of the the activities of the UK’s three statutory regulators—the Financial Conduct Authority, HM Revenue & Customs (HMRC) and the Gambling Commission—and the 22 professional body supervisors (PBSs) that police their members for anti-money laundering (AML) purposes. It also makes for interesting reading, particularly against the background of the extremely favourable FATF Mutual Evaluation Report (MER) issued in December 2018. 

Nevertheless, the MER noted that UK regulators, with the exception of the Gambling Commission, had significant weaknesses in their approach to risk-based supervision, as did all the professional body supervisors. Their shortcomings included a lack of dissuasive sanctioning across all sectors, but particularly within the accountancy and legal sectors. HM Treasury’s overview shows that the UK’s AML oversight is beginning to address such shortcomings, though supervisory efforts appear to remain uneven.

OPBAS finds supervisory gaps

Amongst the biggest changes noted by HM Treasury (HMT) was the creation of a new agency to oversee other UK supervisors. The Office for Professional Body Anti-Money Laundering Supervision (OPBAS) was launched in February 2018 with the aim of supervising the 22 PBSs and ensuring that firms under their remit are subject to a consistent level of oversight. Little more than a year later, the agency published a report outlining the scope of challenges for professional body supervisors. 

The head of OPBAS, Alison Barker, noted at the time that “the accountancy sector and many smaller professional bodies focus more on representing their members rather than robustly supervising standards. Partly because they don’t believe—or don’t want to believe—that there is any money laundering in their sector. Partly because they believe that their memberships will walk if they come under scrutiny.”

Alison Barker based her view on the following OPBAS analysis:

  • 80% of the PBSs lacked adequate governance arrangements, while 86% preferred supporting and guiding members rather than sanctioning them;
  • 91% of the PBSs did not fully apply a risk-based approach to supervision, including 23% that did not conduct any supervision activities at all, while 18% had not fully identified their supervised population;
  • The PBSs had an inconsistent approach to intelligence and information sharing. Some lacked adequate records and 80% lacked adequate staff training.

This damning assessment stands in marked contrast to the previous HMT Supervisory Report, which covered the period from 2015 to 2017  The earlier findings gave no indication of the serious issues revealed by OPBAS.  It may be possible that the issues only arose during the period covered by the latest review. Alternatively, it is equally possible that the creation of OPBAS by HMT was driven by concerns over what the FATF MER might reveal about the supervisory activities of the PBSs.

Evolving supervision

The report provides a wealth of information on oversight efforts, including “desk-based reviews” and onsite visits, and outlines various supervisory findings.

Amongst the Accountancy Affinity Group, which covers accountants, auditors and bookkeepers, the Institute of Chartered Accountants in England & Wales (ICAEW) was the most active supervisor. It conducted 1,737 reviews of firms, of which 188 (11%) were deemed to be “non-compliant”. Given the widespread concerns about professional firms facilitating money laundering, it is somewhat surprising to learn the institute’s total annual reviews fell by 12% from the 1,977 in the previous period, in which 123 (6%) firms were found to be “non-compliant”. No doubt, the ICAEW would argue that its evaluations have become more focussed and more risk-based, given that the percentage of non-compliant firms nearly doubled in the most recent review period.

Overall in the Accountancy Affinity Group, the PBSs conducted 3,383 reviews of firms during 2017/18, of which some 270 (8%) were adjudged to be non-compliant.

The Legal Affinity Group of supervisors covers solicitors, barristers, notaries, conveyancers and legal executives. The Solicitors Regulatory Authority, which regulates solicitors and their firms in England and Wales, conducted 186 reviews during 2017/18. Surprisingly, they failed to inform HMT of the extent to which the law firms were meeting their AML/CTF obligations. 

In contrast, the Law Societies of Scotland and Northern Ireland had no such difficulty. Interestingly, the report reveals that 106 (15%) of the 698 reviews of law firms in Northern Ireland were deemed to be “non-compliant”. Remarkably, it appears from data submitted to HMT that the supervisory bodies for barristers in England and Wales, Scotland and Northern Ireland did not conduct any reviews whatsoever of their practising members.

HMRC supervises some 27,566 businesses, principally estate agents, money services firms and trust and company service providers. It conducted 1,596 reviews, of which 294 (18%) cited compliance violations. A recent report of Parliament’s Treasury Select Committee expressed concern that HMRC, a tax compliance and enforcement agency, may not be sufficiently prioritizing its AML/CTF supervisory duties. HM Treasury, the governmental department that oversees HMRC, has agreed to publish a business plan on the matter by September.

The Financial Conduct Authority (FCA) regulates 19,620 firms for money laundering purposes. It monitors, on a continuous basis, the 14 largest retail and investment banks. Additionally, it reviews the next largest 150 firms over a 4-year cycle. Another 100 firms are reviewed on a risk-basis, while some 550 firms are interviewed by telephone about their AML/CTF controls. Based on a variety of intelligence sources, the FCA also conducted 70 reviews of firms. HMT reports that 14 (10%) firms covered by the 138 FCA reviews were assessed to be “non-compliant”.

The Gambling Commission cited compliance violations in 17 of the 32 evaluations it completed during the 12-month period—a rate of noncompliance that, at 53%, could indicate broader AML issues in the gambling sector.

KYC360 readers will not be surprised to learn that, across all firms, the most common failures cited by supervisors were the absence of client-risk assessments and inadequate customer due diligence controls. Less common weaknesses included failures to monitor customers on an ongoing basis, poor implementation of AML/CTF policies and procedures, and shortcomings related to record keeping and staff training.

Few enforcement actions

A key element to any supervisory programme is the sanctioning, in appropriate cases, of those entities that do not, for a variety reasons, fulfil their compliance obligations. HM Treasury notes, as did FATF, the low-level of enforcement actions among UK supervisors, particularly within the legal and accountancy sectors.

Of the 12 PBSs in the accountancy sector, six took no enforcement action against their members. The remaining PBSs took disciplinary action in the form of expulsion, withdrawal or suspension of membership as well as the fining of members. The most active accountancy PBS was the ICAEW, with 8 expulsions or withdrawals of membership and 11 firms being fined an average of £7,050 each. Where other accountancy PBSs levied financial penalties, such fines were generally low, with the Chartered Institute of Taxation fining 12 of its members an average of £120 each.

In the legal sector, four of the nine PBSs failed to take any enforcement action against their members during the review period. Across the sector, four members were expelled, whilst one was suspended. In England and Wales, seven solicitors were fined an average of £10,000, while two of their Scottish brethren were fined an average of £2,000 each. OPBAS is well placed to understand  the reasons of the diverse fining policies.

HMRC withdrew the registration of 798 firms and levied average fines of £3,350 each on 655 businesses.

The FCA launched 11 independent investigations during the period, usually conducted by an accounting firm or compliance consultancy, into the AML/CTF controls at firms. Such investigations may result in disciplinary action against the firm, but in all cases, the firm pays the investigator’s fees. The FCA reported that it has 60 such investigations open at present, some of which are being conducted on a dual criminal and civil basis.

To date, the FCA has yet to announce a criminal prosecution against an individual or a firm for any money-laundering related matter. Similarly, during the reporting period, the FCA did not take any enforcement action, though the report discusses the FCA’s £102 million fine against Standard Chartered Bank in April 2019. It would appear that a fine of this level did not disqualify the bank from membership of the UK’s Economic Crime Strategy Board, a public and private body partnership, which aims to set the UK’s economic crime strategy.

The Gambling Commission made 231 referrals to law enforcement for AML/CTF-related issues, which represents an increase of 197 referrals from the previous year. The only other enforcement action by the Gambling Commission was the imposition of a £6.4 million fine on a casino.

Looking forward

With a positive FATF MER in December 2018, it would be very easy for UK policymakers to become complacent. However, with official governmental estimates of money laundering exceeding £100 billion per annum, the need for effective and resolute action by regulators and supervisors remains constant. The failings of the PBSs has now been widely publicised. Some very large banks, such as HSBC and RBS, have announced that they are subject to UK regulatory investigations into their AML/CTF controls. It will be interesting to ascertain from HM Treasury’s next Supervisory Report whether the supervisors and regulators have effected a significant change in the UK’s defences against money laundering and terrorist financing.

Denis O’Connor is both a Fellow of the Institute of Chartered Accountants in England & Wales and the Chartered Institute of Securities and Investment. He was a member of the British Bankers’ Association Money Laundering Committee from 2003 -10; and a member of the JMLSG’s Board and Editorial Panel between 2010 and 2016.

He has been a frequent speaker at industry conferences on financial crime issues, both in the UK and abroad.

This article is expressing personal opinions and is meant for information purposes only. The article does not intend to replace professional or legal advice. It is recommended that readers seek independent professional or legal advice, or speak to authorised persons/organisations.

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