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An effective anti-money laundering (AML) regime relies on all participants – both public and private – collectively pulling their weight. Law enforcers cannot operate in a vacuum. They rely, in part, on good quality intelligence leads from those operating on the ‘coalface’: the bankers; lawyers; accountants; estate agents; and the wider ‘regulated sector’ who are required by the UK’s money-laundering regulations to put in place controls to enable them to identify suspected money-laundering and report this to the UK’s financial intelligence unit (FIU) in the form of ‘suspicious activity reports’ (SARs).
History tells us that ensuring adherence to the regulations cannot be simply left to chance. Culture change in the financial sector, where we have seen exponential increases in both investment in financial crime functions and subsequent increases in SAR reporting, has arguably been driven not by a sense of ‘doing the right thing’, but through a series of high-profile fines and regulatory actions over the past decade by AML supervisors in the UK and abroad.
The same cannot always be said for the non-financial sectors where, despite pockets of good practice, compliance is, in parts, patchy and reporting, according to the government, is at lower levels than desired. The reasons behind this are, of course, complex, but one factor stands out above others – the failure of some approaches to non-financial sector AML supervision to provide the ‘credible deterrent’ needed to drive widespread compliance with AML regulations.
As the 2018 evaluation of the UK by the international AML standard-setter, the Financial Action Taskforce (FATF), came ever closer, the UK government was forced to acknowledge that, in particular, its supervisory regime for accountants and lawyers, led by 22 different ‘professional body supervisors’ of vastly varying size and capability, was perhaps less than fit for purpose.
The Creation of Office for Professional Body Anti-Money Laundering Supervision
To demonstrate its commitment to improving standards in AML supervision, in January 2018 the UK government created the Office for Professional Body Anti-Money Laundering Supervision (OPBAS), based within the Financial Conduct Authority (FCA). The overarching aim of OPBAS – known colloquially as ‘the supervisor of supervisors’ – is to ‘improve consistency of professional body AML supervision in the accountancy and legal sectors’ and to facilitate better information and intelligence exchange between 22 professional body supervisors on the one side and the three statutory supervisors – the Financial Conduct Authority, HM Revenue and Customs (HMRC) and the Gambling Commission – on the other. Among the powers available to OPBAS, under its enabling regulations, are powers to give an ‘official direction’, to publicly censure a professional body supervisor and, ultimately, to recommend to HM Treasury that they consider removing the supervisor’s AML role.
The launch of OPBAS’s first Annual Report at RUSI earlier this month set out clearly what standards OPBAS expects these 22 bodies to uphold. We were told that:
[R]obust supervision means knowing which lawyers or accountants do riskier types of business or have riskier clients … means having a supervisory programme that focuses on the riskier members … means taking tough enforcement action against members who don’t meet these standards … means sharing intelligence with other supervisors or law enforcement … means professional body supervisors educating their members to ask the right questions and be alert to possible criminal activity.
The detail revealed in the first OPBAS Annual Report starkly set out the challenge facing OPBAS as it enters its second year. Among the findings were that 80% of professional body supervisors lacked adequate governance arrangements and 92% lacked adequate ‘whistleblowing’ channels. Furthermore, 92% of accountancy professional body supervisors expressed concerns that taking robust AML enforcement action could damage their ability to attract membership, and 28% did not have adequate resources and systems to handle sensitive intelligence. More worryingly still, the review found that 23% of professional body supervisors undertook no AML supervision whatsoever. The report offered one glimmer of hope of one supervisor which had ‘a well-advanced risk-based approach and could evidence their use of artificial intelligence and data analytics’; this was notable mainly by its deviation from the norm.
Shape up, or Ship Out
So what comes next? The report notes that OPBAS has ‘asked all PBSs to develop a suitable strategy to address our findings through individual plans. We will be monitoring how these strategies are implemented over the coming months’ – or in other words, shape up, or ship out. However, reaching the necessary standards set by OPBAS will not be easy, particularly for some of the smaller bodies which lack the requisite skills and resources needed, in particular, to professionalise their use of intelligence in their overall approach. OPBAS’s findings also suggest that many in the accountancy sector, even if able, may not be willing to take the risk of repelling members through the imposition of a more robust enforcement response on AML. In short, we may find that, even before OPBAS’s patience runs out, some supervisors simply choose to relinquish their role rather than go through the pain of substantial reform.
But would this be a bad thing? The UK is, to some extent, unusual in having such a multiplicity of players involved in AML supervision. Whereas there is a strength in AML supervision being led by bodies which truly understand the business of their supervised populations (as professional bodies do), it is undeniable that sharing intelligence among such a diffuse group is challenging. In terms of FATF’s position, it is clear that it neither advocates for a unitary approach to AML supervision nor a universally state-led one. However, the need to demonstrate adequate understanding of risk, perform sophisticated compliance assessments and take an intelligence-led approach would seem to favour larger supervisors with more resources within their grasp.
It is not clear whether the government’s underlying intention with the creation of OPBAS was to encourage some players to simply relinquish their roles and, by proxy, give a greater lead to the state in AML supervision; this is certainly not the official line. However, this is not the only unanswered question. The government has also not revealed its plan (if indeed it has one) for what happens if OPBAS advises the Treasury to consider removal of a supervisor or indeed a supervisor decides to walk away. Where does the supervised population go? Is the state willing, at this time of considerable budgetary pressure, to find resources within its apparatus to cover this role?
It may be that ‘Plan B’ is to move newly unsupervised populations under the purview of HMRC’s AML supervision arm, an arm which currently, through default rather than design, covers a hotchpotch of estate agents, trust and company service providers and unregulated accountants. Such a move, however, may not solve the inherent problem OPBAS is trying to solve (that of weak AML supervision) – HMRC itself is frequently criticised for its weaknesses in its AML supervision, including in the 2018 FATF ‘Mutual Evaluation Report’.
Thus, while OPBAS’s first year of operation and seemingly bold approach offers hope of a positive step forward for UK AML supervision, with these questions unanswered and with no clear plan for an independent review of HMRC’s AML supervisory function (advocated for in our recent report), the author remains only cautiously optimistic.
Helena Wood is an Associate Fellow at RUSI.
The views expressed in this Commentary are the author's, and do not necessarily reflect those of RUSI or any other institution.