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Cutting Red Tape: Striking the Balance between Regulatory Burden and Financial Integrity

Helena Wood
Commentary, 16 September 2015
Centre for Financial Crime and Security Studies, UK, Organised Crime, Europe
The announced review of the UK’s anti-money laundering and counter-terrorist finance regime under the Cutting Red Tape programme sends mixed policy messages at a sensitive time. The focus on increasing supervisory effectiveness is the right one, but must be delicately balanced with the need to strengthen the UK’s illicit finance defences.

Governments from all sides have struggled to turn ‘joined-up government’ into a reality. The announcement by the chancellor in the Summer Budget of a review of the ‘effectiveness’ of the UK’s anti-money laundering (AML) and counter-terrorist financing (CTF) regime is a case in point. On the face of it, this review would seem to complement the Government’s increased rhetoric in this field, following on from the prime minister’s announcement in Singapore that ‘London is not a place to stash your dodgy cash’. Yet closer inspection reveals a potentially damaging disconnect between this review and the UK’s wider AML/CTF policy if it is not handled in a coordinated fashion.

Mixed Messages

It is striking that the review is being led by neither the Treasury (the appointer of AML supervisors) nor the Home Office (the Government’s domestic AML policy lead) but by the Better Regulation Executive, a Government body charged with seeking ways of reducing the burden of regulation on business through their Cutting Red Tape initiative. Although the call for information states that ‘the Government will not abrogate its international commitments and EU obligations as a result of the review’[1], the choice of review lead is curious and arguably calls into question the direction of the Government’s AML/CTF policy.

The aims of the review are clear: to seek evidence of the impact on business of the current AML/CTF regime, and to specifically explore the role of supervisors in order to identify areas which are ‘unnecessary’ or confusing. Yet despite referencing the wider aim of the UK’s AML/CTF policy to protect the integrity of the UK financial system, nowhere in the terms of reference does the review state an explicit aim of limiting the ability of global illicit finance to access the licit economy. This would seem an oversight given that the Government gives the impression that this is a key policy objective.

Setting up a review on these terms may create unrealistic expectations for businesses operating within the AML/CTF regime’s purview and has been picked up by the media as a sign that the UK will be seeking a ‘relaxing’ of the rules. This is unlikely to be the case: the UK’s international obligations as a Financial Action Task Force (FATF)[2] member and the supranational legislative requirements set out at the EU level[3] mean that the ability of the UK to de-regulate in this field is highly restricted. Some requirements viewed by business as burdensome, such as customer due diligence[4], are here to stay.

An Opportunity for Coherence

This is not to say that the review is not welcome – effective business regulation and AML/CTF are not mutually exclusive concepts. The review’s clear focus on improving the efficiency and effectiveness of the regime and on how AML/CTF regulations are implemented in practice is the right one. The review rightly notes that ‘inconsistency and confusion over how rules to stamp out money laundering are applied leads to a less effective regime’[5]. In 2018, the AML/CTF international standard-setter, the FATF[6] will review the UK’s AML/CTF regime, and effectiveness will be a critical evaluation criterion. Thus the Government’s focus on effectiveness is welcome and timely.

Furthermore, this review is right to focus on the UK’s supervisory regime for AML/CTF. This system, whilst technically compliant with international standards[7], could be criticised for its fragmented and patchwork mix of government, statutory and self-regulating bodies, of which there were twenty-seven at the last count[8]. Although it could be argued that this merely reflects the size and scale of the UK regulated sector[9], inconsistencies are perhaps inevitable when complex regulation is interpreted by such a broad and diverse range of players. Perhaps the review will conclude that a more unitary and streamlined approach to supervision would provide benefits in both business and AML/CTF terms. Such an approach is likely to be welcomed by FATF assessors on the basis of their evaluations thus far of countries such as Spain[10].

In sum, whilst the terms on which the review has been set raises questions about the direction and coordination of UK AML/CTF policy, the effect of the review may be positive for both the agendas of economic prosperity and AML/CTF effectiveness, by bringing cohesion to a supervisory regime that has grown organically rather than systematically and strategically. However, the desire to cut red tape must be delicately balanced with the need to strengthen the UK’s illicit finance defences and avoid the damaging reputational effects of being seen to de-regulate in a field where the UK’s reputation is already often questioned.

[1] https://cutting-red-tape.cabinetoffice.gov.uk/anti-money-laundering/

[2] FATF is the international standard setter on AML/CFT.

[3] Such as the requirements set out in the EU Fourth Money-Laundering Directive. http://europa.eu/rapid/press-release_IP-15-5001_en.htm

[4] https://www.gov.uk/guidance/money-laundering-regulations-your-responsibilities

[5] https://www.gov.uk/government/news/financial-red-tape-targeted-in-new-review

[6] FATF sets the global standards for AML/CFT and reviews country’s implementation of these standards on a rolling basis through its Mutual Evaluation process. For more information see: http://www.fatf-gafi.org/pages/aboutus/

[7] As set out by FATF – see footnote 3.

[8] https://www.gov.uk/government/publications/anti-money-laundering-and-counter-terrorist-finance-supervision-reports/anti-money-laundering-and-counter-terrorist-finance-supervision-report-2013-14#annex-a-anti-money-launderingcountering-the-financing-of-terrorism-supervisors

[9] As defined by the Money Laundering Regulations 2007, covering financial institutions, lawyers, accounts, estate agents and various others.

[10] The FATF assessors commended Spain for its unitary approach in 2014.

*Header image courtesy of the Department for Communities and Local Government (this image has been cropped)

Author

Helena Wood
Associate Fellow

Helena Wood’s areas of research will focus on the efficacy of Proceeds of Crime Act (POCA) powers in the fight against organised crime... read more

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