Transparency International: the UK should consider replacing the existing patchwork and inconsistent structure of multiple AML supervisors with a single, well-resourced supervisor

Transparency International have published a document entitled Don’t look, won’t find: Weaknesses in the supervision of the UK’s anti-money laundering rules.

The document is very stark. It makes the following points:

  • The system intended to prevent dirty money from entering the UK is failing.
  • Billions of pounds of corrupt funds are pouring into the country every year.
  • A radical overhaul of the UK’s anti-money laundering system is needed.
  • According to the Government’s own risk assessment, only a very small proportion of the corrupt money entering the UK is being detected and investigated by the authorities.
  • The current regulatory system for these sectors relies on a patchwork of 22 different supervisors – mostly private sector institutions – to ensure that firms abide by the rules.
  • Ineffective supervision leads to inadequate compliance with the rules by firms within the sector, low reporting of suspicions and poor quality reporting. The vast majority of sectors are performing very badly in terms of identifying and reporting money laundering.
  • Out of the 22 supervisors, only the Financial Conduct Authority has above a low or unreported level of enforcement of the rules. No sector supervisor in the UK is providing a proportionate and credible deterrent to those who engage in complicit or wilful money laundering.
  • Major concerns have been identified by law enforcement authorities over the quality, as well as the quantity, of reports coming out of the legal, accountancy and estate agency sectors.
  • In the public sector, HMRC appears to be particularly hampered by an institutional tendency towards secrecy.
  • A lack of transparency and inadequate evaluation of risk at the supervisor level can leave regulated businesses in the dark about what risk-based preventative action they should take to protect themselves from corrupt money in their sector.

Transparency International  identify distinct vulnerabilities in each key sector, including:

  • In financial services, around a third of banks dismissed serious allegations of money laundering regarding their customers without adequate review.
  • In legal services, 42 per cent of the most serious reports of suspicious activity were assessed to be poor quality or incomplete.
  • In the art and auction house sectors, only 15 reports of suspicious activity were submitted (0.004 per cent of the total), despite money laundering risks being recognised in this sector.
  • In the accountancy sector, at least 14 different supervisors take some responsibility for supervision, leading to widespread variations and inconsistency in enforcement.
  • In property, the entire estate agency sector only submitted 179 reports of suspicious activity in 2013/14, which is only 0.05 per cent of all reports submitted.

The report made the following recommendations:

  • Overhaul the way anti-money laundering standards are overseen to achieve consistency, integrity and accountability in the supervisory system.
  • Ensure adequate levels of enforcement against money laundering.
  • Provide better information about money laundering risks to the private sector.
  • The UK Government should consider replacing the existing patchwork and inconsistent structure of multiple supervisors with a single, well-resourced “super” supervisor.

The TI report follows on from a number of recent money laundering publications, including the HM Treasury national risk assessment. We can expect more reports, including those from individual supervisors, in the near future as the UK prepares for the fourth directive to be implemented into law, and the forthcoming mutual evaluation by the Financial Action Task Force.

The Government will no doubt be embarrassed by the findings, which suggest both the overall system and individual regulators are effectively not fit for purpose. It however seems unlikely that a proposed “well resourced single supervisor” will emerge, or indeed whether it would be effective considering the multitude of separate industries it will need to understand.

The report was of course focused on the supervision, rather than the enforcement. One other factor to consider is the very low number of prosecutions for those within the regulated sector under the Proceeds of Crime Act 2002, or the Money Laundering Regulations 2007. Having been the subject of personal criticism, it is possible some of the supervisory bodies may seek to make greater use of existing enforcement powers. Perhaps 2016 will see an increase in investigations of those failing to adequately report their suspicions, and failing to have in place adequate supervisory measures.

For more information on money laundering offences, see practice note, Money laundering offences in the UK: overview

For more information on the Money Laundering Regulations 2007, see practice note, Money laundering: offences under the Money Laundering Regulations 2007

Practical Law David Bacon

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