HM Treasury has announced steps to beef up Britain's anti-money-laundering and anti-terrorist-financing regimes.

HM Government – in the shape of the Treasury and the Home Office – has published an assessment of money-laundering and terrorist-financing risks and will, sometime in the future, publish an action plan with which it hopes to tackle them. The National Risk Assessment, which is the first of its kind in the United Kingdom, has found that more can be done to strengthen the UK’s anti-money laundering and anti-terrorist-financing (AML/TF) regime. Its authors believe that financial sector firms and their compliance officers do not have a good enough understanding of certain types of money laundering, and particularly of what the report calls "high-end" money laundering, where the proceeds are often held in bank accounts, real estate or other investments, rather than in cash.

The assessment found there was also room for improvement in the consistency of the UK’s supervisory regime, with priority given to combating money laundering by law enforcement agencies and the effectiveness of their response. An oblique reference was made to the Joint Money Laundering Intelligence Taskforce (JMLIT), a 12-month pilot project launched in February by the Home Office, the National Crime Agency (Britain's answer to the US Federal Bureau of Investigation), the City of London Police, the British Bankers’ Association and various financial institutions. Its aim is to improve whatever intelligence-sharing arrangements there may be at the moment to fight money-laundering, although it would be a shame if it did not set up new ones.

The Government's suggestions

As a result of these findings, the government has embedded several major but vague priorities in its action plan, including:

• the closing-up of (to borrow an American phrase from the Cold War) "intelligence gaps," particularly those associated with "high-end" money-laundering through the financial and professional sectors;
• a better effort from law enforcers;
• an ironing-out of the inconsistencies in "the supervisory regime"; and
• work between HM Government and "supervisors" to boost people's awareness of money-laundering and terrorist-financing risks.

The Better Regulation Executive, a government agency that looks at regulatory reform, is leading a "red tape review" of what the Government calls "the AML regime." Its language on this subject is murky, but it makes it clear that the action plan has not yet achieved its final form and that the results of this additional review will alter it when they come out.

The report's writers believe that British law enforcement agencies, supervisors and private-sector firms do not have an advanced enough “collective knowledge” of money-laundering and terrorist-financing risks. The Government passed some 'gateway' legislation in 2012 to let AML regulators share their suspicions about anyone they like without fear of libel action, but the take-up appears to be underwhelming.

Discrepancies between regulators

Some regulators or 'supervisors,' the report says, are highly aware of their duty to take a risk-based approach to their supervision of ML/TF controls and of its importance, but the way they do so varies, as does the sophistication of their "risk-based models." Indeed, some are still not taking a risk-based approach to AML/TF supervision. The majority of supervisors also have difficulty in explaining how their assessment of risk translates into the specific monitoring actions they undertake, therefore laying themselves open to the charge that they are not scrutinising the right firms. The Government fears that this "could lead to vulnerabilities in the sectors," which is a peculiar way of saying that most dirty money passes through the British financial system unmolested.

One interesting proposal is left out of the report entirely - there is never any suggestion that every reporting institution across the board should be vetted for 'fitness and propriety' in a consistent way across the board. Indeed, the Government backs away from any suggestion that this should happen even in every sector, for instance writing about the trust and company service provider sector: "ensuring an appropriate and proportionate application of the fit and proper regime, and/or professional requirement certification, across the sector has been raised by supervisors and NGOs such as Transparency International, as challenging."

Goods dealers and casinos

High-value goods dealers – who are of immense interest to high-net-worth consumers and therefore to their banks that authorise payments to them – submitted 331 STRs in 2013/14, which represents less than a tenth of 1% of all the STRs sent off in that fiscal year. It is also a reduction of nearly 10% on the figure for 2012/13. This fall may be accounted for by their customers moving away from the use of cash for so-called “high-value” (actually medium-value) purchases, but the National Crime Agency does not have enough information to back this up. Here the report contains a typical 'snarl' that many financial intelligence units (FIUs) around the world make: an assertion that the figures are too low with no evidence to back it up. It is impossible for FIUs to know the true extent of money-laundering in any sector, and they usually base their 'feelings' about the right level of disclosure on pure conjecture. They are sometimes on firmer ground when they compare the level of reporting in one area with that in another, as investigatory experience can then be brought to bear. They are also on firmer ground if they know that they are looking at an area whose firms have not all registered as reporting institutions, as appears to be the case here.

The Gambling Commission, the anti-money laundering supervisor under the Money Laundering Regulations 2007 for remote and non-remote casinos, has published the results of a number of cases that indicate weaknesses in the industry’s ability to recognise the “lifestyle spend of criminally derived funds.” This stems from what the regulator describes as insufficient curiosity by operators about the source of funds and a tendency for any attempts at 'due diligence' to be satisfied too easily. In its glossary, the Government defines its arcane term “criminal spend” as “the spending of the proceeds of a criminal lifestyle (on goods including property, cars, jewellery etc.)” – an almost exact description of the HNW lifestyle.

MSBs

Money service businesses – an American term unknown in Britain until 2002 – are cheque-cashers, money-transmitters and bureaux de change. They have declined by a staggering 21% in the last year. Her Majesty's Revenue & Customs, which supervises them for AML/TF purposes, has noticed changes in the structure of the MSB remittance sector recently, with a reduction in the number of principal business registrations and an increase in the number of those businesses registering as agents of larger (and expanding) remittance network organisations. These changes may be a result of the trend of banks - including private banks - withdrawing services from the MSB remittance sector, a particularly acute manifestation of the broader ‘de-risking’ trend, which has made it increasingly difficult for retail MSBs to secure banking facilities.

Private and wealth management

Private and wealth management, unlike other sectors of the money-laundering universe, is based on the principle of face-to-face contact and constant contact with the customer. It offers complex services and products and has an embedded culture of confidentiality. All of this can attract highly risky customers. The report identifies tax evasion (especially offshore tax evasion) and capital flight arising from political corruption as major risks here.

Nonetheless, the Government is encouraged by the results of last year's FCA thematic review, which found that private banks based in the UK were generally operating to a higher standard than others in the sample of firms visited. Despite this, in two AML reports from 2013 and 2014, the FCA said that the following areas were a source of worry:

• inadequate governance structures and oversight of AML/TF controls;
• inadequate risk assessment processes;
• inadequate or poorly calibrated IT systems;
• poor management of alerts from sanctions screening and transaction monitoring;
• poor identification of source of wealth and source of funds;
• inadequate risk management of foreign PEPs;
• inadequate checks on correspondent banks; and, as a catch-all,
• questionable judgments leading to some firms accepting higher levels of money laundering risk.

Usually banks conduct two types of risk assessment: 'client' and 'enterprise-wide.' The report's writers believe that more can be done on both counts. They note that, during its thematic reviews, the FCA has found the quality of banks’ client risk assessments to be particularly weak. Many of the banks found with weak risk assessments in both categories were also found to have little or no understanding of the usefulness of their products, services and distribution lines to money-launderers and terrorist financiers. They based their opinions on two reports: “How small banks manage money laundering and sanctions risk: Update” (FCA, November 2014) and “Anti-money laundering annual report 2013/14” (FCA, July 2014).

Politically Exposed Persons (PEPs)

An analysis of recent investigations by the Serious Fraud Office and Metropolitan Police Proceeds of Corruption Unit, some of them still underway, shows that banks have facilitated payments linked to cases of international corruption and specifically to corrupt PEPs. The complexity of these cases varies from transfers of illicit funds into personal bank accounts to more complex laundering processes using corporate vehicles, to conceal beneficial ownership information, which involve overseas jurisdictions. The report goes on: “There is evidence that banks are leaving themselves vulnerable when it comes to identifying, assessing and mitigating the risks associated with PEPs.”

In 2011, the FSA published a thematic review of banks' handling of highly risky situations which included a look at the way banks handled PEPs. The regulator found that around three-quarters of banks in its sample, including the majority of major banks, were not always managing high-risk customers and PEP relationships effectively. The FSA found it likely that some banks were handling the proceeds of corruption or other financial crime. Firms have improved their identification of PEPs since then but concerns persist.