Background
On 24 June 2022, HM Treasury published its “Review of the UK’s AML/CFT regulatory and supervisory regime” (the “Review”). This article will provide some initial observations from the Review, before delving into the some of the detail and extracting some
points of interest and key learning points, with a particular focus on new technologies.
The Review forms an integral part of the Government overall effort to combat economic crime. Taken together with the recent Economic Crime (Transparency and Enforcement) Act, which itself establishes reforms to Companies House (specifically the Register
of Overseas Entities Beneficial Ownership of UK Property) and measures such as the Unexplained Wealth Order, and the second economic crime plan it is hoped that the Review will play its part in effectively strengthening the UK’s response to economic crime.
Initial observations – improvements can be made but some positives
The Review initially notes that there are continued deficiencies in risk assessment and understanding, specifically inadequate due diligence or policies, controls and procedures being a common failure.
Turning to a more positive note, the Review observes some improvements in the supervision regime, with the FCA and HMRC strengthening their risk based approach. In addition, the Review also notes that the UK was found to be among the highest performing counties
in the world for technical compliance with the Financial Action Task Force’s (“FATF”) recommendations.
However, the Review also details some priority actions which FATF has advised, namely:
- Improving the quality of financial intelligence available to UK law enforcement.
- Improving suspicious transaction reviewing levels from legal and accounting sectors.
- Improving risk-based supervision.
- Addressing significant weaknesses in legal and accounting supervision.
Finally, the review notes that the FATF assess AML supervision and preventative measures by regulated firms to be only moderately effective.
The Review Structure
Generally, the Review focuses on improving regulation, risk-based controls and developing a world-class supervisory regime.
The Review is divided into four chapters, including Defining Effectiveness, Driving Effectiveness and AML/CFT Supervision These chapters are comprised of headings which include: Objectives of the MLRs, Measuring Effectiveness, High Value Activity, Strategic
National Priorities, Emerging Risks, Risk-based Approach, New Technologies, Supervisors Role, Gatekeeping Functions, Guidance, Enforcement, Supervisory Gaps and Supervisory Reform.
More specifically, the Review hones in on such aspects as the appropriate use of technology which is key to keeping up with the latest threats whilst also processing the increasing amount of data necessary for compliance. In another example, the Review emphasises
the need for improved guidance, key to ensuring that the increasingly complex regulations are understood and can be implemented.
On the enforcement side, respondent’s views are canvassed on whether the current enforcement powers are sufficient, used proportionately and dissuasively, and whether there is sufficient use of sanctions for the worst offences. Indeed, it will be seen that
respondents felt that there is some discrepancies in level of enforcement.
What can compliance professionals learn from the review?
New technologies
Beginning then with new technologies, with an appropriate nod to new technological developments, the Review notes how over recent years, a variety of new technologies have develop to assist with the prevention and detection of financial crime. These include
technologies to assist with customer identity verification.
However, the Review also notes that respondents raised a number of concerns regarding technologies which can be grouped under the following headings and summaries:
- Certainty – are new technologies sufficient to enable firms to meet their obligations and do the regulations keep pace with new technologies.
- Encourage innovation – respondents felt that in fact more work is still needed to encourage innovation.
- Digital identity – respondents queried whether in fact digital identify processes were compliant with AML regulations.
The Government’s response is that it will engage with stakeholders and also consider amending the Money Laundering Regulations (“MLR”s) to ensure greater clarity on how certified electronic identify processer support MLR requirements.
Enforcement
With regards to enforcement, the Review observes how it was felt by respondents that the powers of enforcement available to supervisors were sufficient. However, respondents noted the inconsistency in the application of enforcement powers across different
sectors and between Professional Body Supervisors for the legal and accountancy sectors. For example, respondents specifically noted that fines brought against the financial sector had been higher which had led to banks becoming more risk averse.
Risk based approach
Also of interest, is the fact that the Review notes that smaller firms without experience in AML (especially those newly bought into scope) are not able to pursue a risk-based approach due to knowledge and resources required. The Review describes how views
were expressed on having a separate list of mandatory requirement for these firms, however this was decided not to be viable as would not be in accordance with the risk based approach and would lead to a misalignment with FATF recommendations.
Mandatory requirements and mandatory Enhanced Due Diligence
The Review notes that respondents have identified a tension between mandatory provisions and the risk-based approach. As such, the Review confirms that the Government plans to maintain the mandatory requirements to perform Enhanced Due Diligence in the cases
of high-risk third countries, foreign politically exposed persons and corresponding relationships.
Simplified due diligence
The Review found that many respondent found that Simplified Due Diligence (“SDD”) required the same amount of resources as Ordinary Due Diligence and that it was not useful. However, the Review confirms that the Government does not plan to make changes
to the components of SDD.
SARs
Finally, with regards to SARs the Review notes how the regulated sector has expressed appetite for more specific feedback on and flexibility around the SAR they are required to submit, and/or more evidence on their preventative measures having and disruptive
effect.
Conclusion
Unsurprisingly the Review concludes that money laundering and terrorism financing continue to be significant threats to the UK. However, the identified key takeaways identified above will also be of specific interest to those involved in AML and CTF regulation
and compliance. Of particular interest is the recognition of how new technologies can assist with AML requirements, points of concern raised and how these are being addressed.
More positively, the overall conclusion which can be gleamed from the Review is that whilst some reform is needed to the supervision regime, the regulations are broadly on the right track and will continue to champion the FATF’s recommendations. Compliance
professionals can be reassured that they are doing a good job, although as always, there remains much work to be done.