UK AML regulations to be revised with changes to supervision regime

Monday, 27 June 2022
The UK government has published a forward-looking review of the anti-money laundering (AML) regulations.
Money laundering cogs

The report comes in response to the call for evidence in 2021, which sought views on the systemic effectiveness of the UK's AML and counter terrorist financing (CTF) regulatory and supervisory regimes. The aim was to assess their contribution to the overarching objective of countering economic crime and on the specific application and effectiveness of particular elements of the regimes. The supervisory role of the Office for Professional Body Anti-Money Laundering Supervision (OPBAS) regulations was also included in its scope. The government said it was 'keen to ensure that the UK’s anti-money laundering and counter terrorist financing regime effectively deters money laundering and terrorist financing activity, whilst being proportionate and managing burdens on businesses.'

Since that exercise took place, the issue of AML has risen high up the government's agenda, with the widespread imposition of sanctions on wealthy Russian individuals, companies and official bodies. That led to the rushing through of the Economic Crime (Transparency and Enforcement) Act 2022 in March 2022, with controls on foreign ownership of UK property and reforms to the unexplained wealth orders regime.

The report, released on 24 June 2022, is structured into three themes. The first is systemic effectiveness: developing an agreed definition of what effectiveness looks like and proposals on how it can be precisely measured. Second is regulatory effectiveness: ensuring that firms and individuals have a strong risk understanding and capability to implement effective risk-based controls in their businesses and target them at areas of highest risk. The third theme is supervisory effectiveness: continuing reform of the supervision regime.

A post-implementation review published on 24 June 2022 examining the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the MLRs) produced three key findings. First, there are continuing deficiencies in AML/CTF risk assessment and understanding across the regulated sector. Second, specific deficiencies remain in the application of risk mitigating measures by the private sector, with supervisors noting inadequate customer due-diligence or policies, controls and procedures as a common failing identified through their supervision. Third, despite some improvements in the supervision regime, the latest report from OPBAS suggests continuing issues with inconsistent supervision by professional body supervisors, with varying levels of effectiveness despite improvements in their technical compliance with the MLRs.

Alhough the report has identified areas where regulatory changes could improve the risk-based approach without weakening overall controls, its main conclusion is that significant reforms to the supervision regime are needed. The government is clear that reform is needed, but the best scale and type of reform to improve effectiveness and solve the problems that have been identified is not yet clear, it says.

'The UK's AML supervision regime will play a crucial role in the continued improvements to the UK’s defences against illicit finance, and therefore we must prioritise ensuring that the regime is best prepared to meet the challenges of the future', says the report. It acknowledges 'strong progress' in the supervision regime in recent years, under the Financial Conduct Authority (FCA), HMRC, the National Economic Crime Centre and OPBAS. However, there is more to be done, it says.

The review considers possible reforms to the fundamental structure of the supervision regime, aiming to ensure effective supervision across all sectors in the future. The report makes several suggestions, including an 'OPBAS+' organisation that would maintain the existing professional body supervisor (PBS) framework while creating additional powers for OPBAS to intervene where it identifies deficiencies in PBS supervision.

Another suggestion is the consolidation of the number of PBSs, putting supervised firms under fewer PBSs or, alternatively, a single statutory supervisor for professional services, allowing for a greater focus on the effectiveness of these high-risk enabling services. The new supervisor would be given similar statutory powers to those of the FCA and HMRC and would assume the role of default supervisor for the accountancy and trust and company service provider sectors from HMRC. It would also address the issue of a default supervisor for the legal sector.

The report’s other suggestion is a single AML supervisor authority, placing AML supervision across the regulated sector on an equal footing without competing organisational priorities and ensuring a consistent approach to supervision and enforcement. This model could take on new regulated sectors and could act beyond supervision to improve the UK's wider approach to tackling illicit finance.

The next step will be a formal consultation to better understand the implications and practicalities of each model, and test HM Treasury's understanding of the benefits and risks before deciding on any option. Any changes would take place over a period of years, particularly for major structural reform, the government has said.

Sources

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