31 May 2019
Earlier this month, the UK government submitted its response to the latest House of Commons Treasury Select Committee (TSC) report on economic crime, agreeing in many cases to advance parliamentarian recommendations and, in one instance, pushing back on a key proposal. Taken as a whole, the response outlines a path of what’s to come for compliance professionals in the UK market.
But what exactly is the TSC report? In line with many other legislatures around the world, the directly-elected House of Commons has established a number of select committees to monitor the work and policies of each of the government departments or ministries.
A key feature of the system is that the committees hold inquiries, on a bipartisan basis, into the work of their respective government departments. Written contributions from a wide variety of sources are solicited for each inquiry. Various parties such as government ministers, senior civil servants, academics and civil society groups are often invited to present verbal evidence to lawmakers.
A unanimous report is published at the end of an inquiry with the a number of recommendations for the government. Although the government must issue a formal response to each committee’s report, it is under no obligation to accept and implement the recommendations.
The TSC is charged with monitoring the work of HM Treasury, the government department responsible for managing the UK economy and government finances.
Gauging economic crime
In its latest report, the TSC noted the absence of reliable statistics on the scale of economic crime and called on the government to devote more resources to quantify the problem. In response, UK officials acknowledged that this was a difficult problem to resolve and pointed to the creation of the National Economic Crime Centre, which is charged with addressing this issue. The Economic Crime Plan, due to be published later this year, will also attempt to gauge the scope of financial crime in the hopes that such data will be used to focus resources towards threat identification.
Given the approach of Brexit, the TSC also noted the role of the UK financial services industry in the global economy and advised the government to remain alert to the threat of economic crime and not comprise its mitigation measures as it seeks to develop new trading relationships around the world. The government believes that the strength of sector is due, in part, to the integrity of the UK’s economic crime controls, as demonstrated by the recent FATF evaluation. For such reasons, fighting economic crime will remain a priority in the post-Brexit era, the government said.
The TSC separately questioned whether the government’s “zeal” to prevent economic crime will outlast the UK’s pending FATF mutual evaluation report, which commenced in early 2018. In response, UK officials referred to the drafting of the government’s national risk assessment and the creation of the Economic Crime Strategy Board as steps that will drive additional mitigation. The UK is also due to report back to FATF in 2021 and 2023 on weaknesses identified by the intergovernmental organization and the remedial measures it has implemented to address them.
Old risks, new steps
The risks in the UK property sector are well known. The TSC recommended that HMRC ensure all estate agents are registered for AML purposes and they follow best practices to prevent money laundering. While HMRC recognises the need for estate agents to register, UK officials believe the larger threat stems from legal professionals involved in property transactions.
Analysis is being undertaken by HMRC to identify unregistered agents, whilst links to trade associations and other supervisors are generating referrals for further investigation, the government said. HMRC have run awareness campaigns for the industry, including a recent “week of action” that identified many unregistered agents.
The TSC concluded in its report that the UK company registry, Companies House, presents a weakness in the prevention of economic crime. Accordingly, it recommended that Companies House be empowered to verify the accuracy of data reported by companies. The government advised that there would be forthcoming consultation in accordance with the recommendation. Indeed, on 8 May, the government launched its consultation on strengthening the powers of Companies House.
UK supervisors must continue to focus on core financial services and maintain constant pressure, including through the use of penalties, the TSC said in its report. The government responded that AML is one of the key priorities of the Financial Conduct Authority (FCA) and noted its recent fine of £102 million against Standard Chartered Bank. The FCA is currently conducting over 70 investigations into financial crime issues, with a number being run on a dual civil and criminal basis.
Whilst the committee welcomed the creation of the Office of Professional Body Anti-Money Laundering Supervision (OPBAS) to monitor those professional bodies that supervise their members, it also expressed concern about how HM Treasury would react to a recommendation that such an organization have its supervisory licence withdrawn—i.e., that it’s a regulator that is too big to fail. The government undertook to publish, within six months, a plan as to how HM Treasury would deal with such an issue.
The TSC is separately concerned that HMRC’s AML supervision role may be seen as an “incidental” function, given its primary mission. The government stated it will report back to the TSC by September 2019 on HMRC’s role as an AML supervisor and its relationship with OPBAS. HMRC’s supervisory function will be addressed in the organisation’s business plan, whilst an increase in funding will allow greater work in this role. Key performance indicators will also be developed to demonstrate its effectiveness as a supervisor, the government said.
‘Weak’ SARs, slow progress
The TSC raised the topic of Brexit once more, later in the report, and in this case to question whether ongoing negotiations had “stalled” governmental efforts to reform corporate liability requirements. The committee argued that multinational companies are outside the scope of economic crime legislation, a situation it believes is both “wrong and potentially dangerous”. Accordingly, it recommended that a timetable is published for bringing forward legislation to enhance corporate liability. The government, rather tartly, stated that it will respond “shortly” to the recommendation.
The committee additionally highlighted the request by banks to permit a greater degree of information-sharing about suspicious customers. The request is complicated, lawmakers said, by the fact that such data transfers should be subject to legal safeguards and any transfers must not lead to the undue loss of access to financial services. The government in response pointed to the data-sharing provisions of the Criminal Finances Act 2017 and confirmed it will continue to work with banks on the matter.
The TSC also found that confidence in the suspicious activity report (SAR) regime appears to be “weak” outside of the core financial system and recommended that consideration be given to how payments can be delayed by authorities in an era of faster transactions. The government confirmed that it wants to reduce tick-box compliance and pointed to that the forthcoming SAR Reform programme, which will attempt to improve the use of the reports as an intelligence tool. A new IT system for SAR handling and processing will allow greater data analytics, the government advised.
The TSC found that progress on addressing derisking is “painfully slow” and requested that the government publish, within six months, a strategy document incorporating conclusions of the G20 taskforce on the issue. The government acknowledged that derisking may inhibit the promotion of financial inclusion, the support of international development and the reduction of economic crime, but added that the money services business (MSB) sector, which has been heavily impacted by the problem, remains vulnerable to money laundering. Efforts in various international bodies are being made to address derisking on a regional and global basis. Similarly, the government is working with banks and MSBs in the domestic sector to develop the proper assessment and management of risk.
UK officials sharply diverged with lawmakers on the topic of politically exposed persons (PEPs), however. Although the committee had recommended that the government produce a list of PEPs, in part to aid small firms that can’t afford to obtain such data from vendors, the government believes that the step would be inconsistent with the risk-based approach required of UK firms. Such a list, they opined, would prompt staff to focus merely on whether an individual is cited rather than on the risk that person poses. Furthermore, the government suggests that a central database of PEPs would be harder to update compared to each firm’s own PEP assessment, which in turn would lead to a less dynamic assessment of risk.
Whilst the TSC welcomed governmental acceptance of many of its recommendations, it was disappointed that the call for a PEP list was rejected, as this will make the fight against economic crime for smaller firms more difficult. Both the committee and financial crime practitioners will be looking forward to government’s proposals on the reform of corporate liability as well as the publication of the latest Economic Crime Plan.
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.
Count reading this article to your CPD minutes, by signing up to our CPD WalletFREE CPD Wallet