Analysis: U.K. has fallen behind with best practice in the fight against money laundering
By Nick Kochan
The UK has fallen behind with best practice in the fight against money laundering. It now urgently needs to make up lost ground, and is doing so with an energy that few expected.
The issue now is whether the implementation matches the promise. The UK government is under considerable pressure to get its anti-money laundering (AML) house in order. First, it is in the spotlight as it takes the lead on combating international corruption. Secondly, the UK will host the reporters from the Financial Action Task Force next year, and it cannot afford a poor review. Thirdly, the national risk assessment has provided a withering and highly embarrassing attack on the UK money laundering regime.
New drive on anti-money laundering
The government's response has been to encourage the private sector to work more closely with the National Crime Agency (NCA). It has called for a major push on removing red tape from the suspicious activity reports (SARs) process, greater intelligence-gathering skills for the police to improve AML performance and a relaxation of the restraints on asset recovery.
This new drive has been set out in the recently published "Action Plan for anti-money laundering and counter-terrorist financing".
The action plan's main proposals are:
The government would like to improve private/public partnerships in information-sharing by removing some of the bureaucracy currently imposed on financial institutions. The action plan represents a continuation of the Cabinet Office's Cutting Red Tape review (The Cutting Red Tape programme allows Business to tell Government how it can cut red tape and reduce bureauctratic barriers to growth and productivity within their sector),
The issue now is whether the implementation matches the promise. The UK government is under considerable pressure to get its anti-money laundering (AML) house in order. First, it is in the spotlight as it takes the lead on combating international corruption. Secondly, the UK will host the reporters from the Financial Action Task Force next year, and it cannot afford a poor review. Thirdly, the national risk assessment has provided a withering and highly embarrassing attack on the UK money laundering regime.
New drive on anti-money laundering
The government's response has been to encourage the private sector to work more closely with the National Crime Agency (NCA). It has called for a major push on removing red tape from the suspicious activity reports (SARs) process, greater intelligence-gathering skills for the police to improve AML performance and a relaxation of the restraints on asset recovery.
This new drive has been set out in the recently published "Action Plan for anti-money laundering and counter-terrorist financing".
The action plan's main proposals are:
- the need for a stronger relationship between the public and private sectors;
- a revised regime for the submission of suspicious activity reports;
- plans to strengthen the Joint Money Laundering Intelligence Taskforce (JMLIT); and
- the possibility of a new law on financial crime.
The government would like to improve private/public partnerships in information-sharing by removing some of the bureaucracy currently imposed on financial institutions. The action plan represents a continuation of the Cabinet Office's Cutting Red Tape review (The Cutting Red Tape programme allows Business to tell Government how it can cut red tape and reduce bureauctratic barriers to growth and productivity within their sector),
The government has acknowledged that the existing regime does not work as well as it might, and has said it would like to focus resources on serious crime more effectively. The action plan has pointed out that although "the private sector collectively spends billions a year on financial crime compliance", this was not always an "effective first line of defence" against money laundering.
The SARs regime needs to be revamped so that it focuses on individuals and organisations that pose the "highest money laundering and financing-of- terrorism risks", rather than on specific transactions, the report said. "We have long known there were problems with the SARs regime. The system was overwhelmed with defensive reports. This proposal represents an important step forward," said David Kirk, partner at McGuire Woods.
The plan has proposed the removal of the consent regime, which the Home Office acknowledges is inefficient, and its replacement with what has been termed an "intelligence-led approach", working through the JMLIT. The report has made it clear that the immunity afforded to reporters by the Proceeds of Crime Act 2002 will be maintained, so that banks are not liable to prosecution for maintaining accounts with suspect customers, so as not to trigger their suspicions.
IT upgrade long overdue
The IT systems used by the UK's financial intelligence unit, which operates within the NCA, to handle SARs are set to be upgraded, in response to industry criticism. The action plan has, however, warned the private sector that it will have to carry part of the cost, saying somewhat elliptically, "The government considers that those who will benefit from the new IT system should share the costs for developing it."
The value of SARs as an investigative tool will be enhanced with a system that is better able to analyse and interpret their content. "The FIU's computing system is a matter of great concern and criticism. The upgrade is long overdue," said Michael Ruck of Pinsent Masons.
Information sharing
Private sector resources will be harnessed through the JMLIT, the organisation, which brings together banks, law enforcement, the British Bankers' Association and HM Revenue & Customs. The JMLIT has now been made permanent, following a year-long trial, and the action plan said more banks were expected to join its panel of participants. Banks will also be encouraged to make analytical competence and intelligence available to JMLIT.
The greater sharing of information between the public and private sectors will not straightforward, however. "There are all sorts of restrictions or gateways that prevent information being exchanged. That is frustrating but when you want it to happen, it happens. When there are suspicions of criminal activity or terrorism financing, they find a way. The Terrorism Act 2001 opened the way for the passing of information between the private and public sectors," a former senior SFO official quoted in the report said.
The action plan said that, during the past year, the JMLIT had enabled law enforcement to make 11 arrests, restraining £558,144 worth of criminal funds in the process. Criminals have been linked to 1,700 bank accounts, of which 260 have been closed and 517 subjected to heightened monitoring.
"JMLIT is a very personal project of Donald Toon, the head of the Economic Crime Command at the NCA. It has undoubtedly been highly effective and its increasing role indicates his growing influence in the NCA," the former senior SFO official said.
"Upskilling" law enforcement agencies
Law enforcement needs to be "up-skilled" and the action plan said a programme was underway to boost money laundering intelligence by recruiting "analytical, investigative and legal staff to take on complex money laundering cases". This has been seen as a response to criticism in the National Risk Assessment, which found the UK's response to money laundering, bribery and corruption inadequate.
"There are significant intelligence gaps, in particular in relation to 'high-end' money laundering. This type of laundering is particularly relevant to major frauds and serious corruption, where the proceeds are often held in bank accounts, real estate or other investments, rather than in cash," the NRA said.
The former senior SFO official said it was an issue of financial resources. "Increasing the capacity of the NCA is a key issue. To be up-to-speed with the most sophisticated enablers in the legal, accounting and banking community they need the help of the private sector, but private sector experts don't come cheap. Building up the capacity of the Economic Crime Command is a really good idea, but it will require serious money which the government won't provide. The Home Office has no idea how expensive the private sector expertise is. That is a particular problem."
Unexplained wealth orders
In a move designed to facilitate the seizure of criminal assets, the action plan has proposed the introduction of unexplained wealth orders (UWO), which put the burden on the individual whose wealth is suspect to prove that it was gained honestly. "There is a need for greater collaboration between banks, law enforcement and government bodies. Recent plans to establish new laws to force suspected money launderers to declare their wealth by imposing unexplained wealth orders, is a step in the right direction," said Dean Curtis, chief executive of LexisNexis Risk Solutions.
Unexplained wealth orders might be accompanied by an offence of illicit enrichment, according to Oliver Stolpe, an expert at the United Nations Office on Drugs and Crime (UNODC) in Vienna. "The United Nations Convention against Corruption [UNCAC] requires a country's law to include an offence of illicit enrichment. This provision in the law would put the UK in the vanguard of best practice. The inclusion of the provision would also raise the UK's standing with the Financial Action Task Force, which is set to report on UK AML law and practice next year," Stolpe said.
Consultation on new financial crime legislation
The final piece of the jigsaw proposed by the action plan is the possibility of making extensive amendments to existing legislation, or even the passing of new financial crime legislation. The government has launched a consultation process to look at the revision of the SARs regime which might, for example:
While some may argue that the UK government has been slow to respond to criticism of its AML enforcement systems, this new action plan has clearly demonstrated energy and a strong focus. The issue now is less the good intentions but rather their implementation. On that, the jury is still out.
The SARs regime needs to be revamped so that it focuses on individuals and organisations that pose the "highest money laundering and financing-of- terrorism risks", rather than on specific transactions, the report said. "We have long known there were problems with the SARs regime. The system was overwhelmed with defensive reports. This proposal represents an important step forward," said David Kirk, partner at McGuire Woods.
The plan has proposed the removal of the consent regime, which the Home Office acknowledges is inefficient, and its replacement with what has been termed an "intelligence-led approach", working through the JMLIT. The report has made it clear that the immunity afforded to reporters by the Proceeds of Crime Act 2002 will be maintained, so that banks are not liable to prosecution for maintaining accounts with suspect customers, so as not to trigger their suspicions.
IT upgrade long overdue
The IT systems used by the UK's financial intelligence unit, which operates within the NCA, to handle SARs are set to be upgraded, in response to industry criticism. The action plan has, however, warned the private sector that it will have to carry part of the cost, saying somewhat elliptically, "The government considers that those who will benefit from the new IT system should share the costs for developing it."
The value of SARs as an investigative tool will be enhanced with a system that is better able to analyse and interpret their content. "The FIU's computing system is a matter of great concern and criticism. The upgrade is long overdue," said Michael Ruck of Pinsent Masons.
Information sharing
Private sector resources will be harnessed through the JMLIT, the organisation, which brings together banks, law enforcement, the British Bankers' Association and HM Revenue & Customs. The JMLIT has now been made permanent, following a year-long trial, and the action plan said more banks were expected to join its panel of participants. Banks will also be encouraged to make analytical competence and intelligence available to JMLIT.
The greater sharing of information between the public and private sectors will not straightforward, however. "There are all sorts of restrictions or gateways that prevent information being exchanged. That is frustrating but when you want it to happen, it happens. When there are suspicions of criminal activity or terrorism financing, they find a way. The Terrorism Act 2001 opened the way for the passing of information between the private and public sectors," a former senior SFO official quoted in the report said.
The action plan said that, during the past year, the JMLIT had enabled law enforcement to make 11 arrests, restraining £558,144 worth of criminal funds in the process. Criminals have been linked to 1,700 bank accounts, of which 260 have been closed and 517 subjected to heightened monitoring.
"JMLIT is a very personal project of Donald Toon, the head of the Economic Crime Command at the NCA. It has undoubtedly been highly effective and its increasing role indicates his growing influence in the NCA," the former senior SFO official said.
"Upskilling" law enforcement agencies
Law enforcement needs to be "up-skilled" and the action plan said a programme was underway to boost money laundering intelligence by recruiting "analytical, investigative and legal staff to take on complex money laundering cases". This has been seen as a response to criticism in the National Risk Assessment, which found the UK's response to money laundering, bribery and corruption inadequate.
"There are significant intelligence gaps, in particular in relation to 'high-end' money laundering. This type of laundering is particularly relevant to major frauds and serious corruption, where the proceeds are often held in bank accounts, real estate or other investments, rather than in cash," the NRA said.
The former senior SFO official said it was an issue of financial resources. "Increasing the capacity of the NCA is a key issue. To be up-to-speed with the most sophisticated enablers in the legal, accounting and banking community they need the help of the private sector, but private sector experts don't come cheap. Building up the capacity of the Economic Crime Command is a really good idea, but it will require serious money which the government won't provide. The Home Office has no idea how expensive the private sector expertise is. That is a particular problem."
Unexplained wealth orders
In a move designed to facilitate the seizure of criminal assets, the action plan has proposed the introduction of unexplained wealth orders (UWO), which put the burden on the individual whose wealth is suspect to prove that it was gained honestly. "There is a need for greater collaboration between banks, law enforcement and government bodies. Recent plans to establish new laws to force suspected money launderers to declare their wealth by imposing unexplained wealth orders, is a step in the right direction," said Dean Curtis, chief executive of LexisNexis Risk Solutions.
Unexplained wealth orders might be accompanied by an offence of illicit enrichment, according to Oliver Stolpe, an expert at the United Nations Office on Drugs and Crime (UNODC) in Vienna. "The United Nations Convention against Corruption [UNCAC] requires a country's law to include an offence of illicit enrichment. This provision in the law would put the UK in the vanguard of best practice. The inclusion of the provision would also raise the UK's standing with the Financial Action Task Force, which is set to report on UK AML law and practice next year," Stolpe said.
Consultation on new financial crime legislation
The final piece of the jigsaw proposed by the action plan is the possibility of making extensive amendments to existing legislation, or even the passing of new financial crime legislation. The government has launched a consultation process to look at the revision of the SARs regime which might, for example:
- remove the current consent regime;
- introduce greater data sharing between public and private organisations;
- introduce stronger powers to force individuals to declare the source of their wealth;
- create powers to designate an entity "a money laundering concern"; and
- introduce enhanced powers to seize suspected criminal wealth.
While some may argue that the UK government has been slow to respond to criticism of its AML enforcement systems, this new action plan has clearly demonstrated energy and a strong focus. The issue now is less the good intentions but rather their implementation. On that, the jury is still out.
- Nick Kochan is a contributing editor to Thomson Reuters Regulatory Intelligence. He is the author of 'The Washing Machine', a book about money laundering and 'Corruption: The New Corporate Challenge'. Kochan writes widely about compliance and economic crime.