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Survival of the Fittest: The UK’s Anti-Money Laundering Supervisory Regime

Helena Wood
Commentary, 27 April 2020
UK Counter-terrorism, AML/CTF, UK, Law and Ethics
The Office for Professional Body Anti-Money Laundering Supervision second annual report demonstrates an improved landscape, but highlights the need for the use of more robust powers.

As we all adapt to seismic changes to our ways of doing business, spare a thought for the UK’s Office for Professional Body Anti-Money Laundering Supervision (OPBAS), an organisation whose sole purpose is to effect change. OPBAS, housed within the Financial Conduct Authority (FCA), was established in 2018 to drive improvements in the quality of anti-money laundering (AML) supervision carried out by non-state professional body supervisors (PBS) in the accountancy and legal sectors.

The launch of the OPBAS second annual report in March was unlikely, even in less turbulent times, to make ripples in all but the most specialised media outlets. However, the significance of its findings to the UK’s AML efforts should not be underestimated.

The First Line of Defence

As noted in the author’s March 2019 commentary following the launch of OPBAS’s first annual report, ‘an effective anti-money laundering (AML) regime relies on all participants – both public and private – collectively pulling their weight’. As the first line of defence in the AML regime, we rely on the so-called ‘regulated sector’ of financial, legal, accountancy and other professionals covered by the UK’s Money Laundering Regulations (MLRs) to both prevent bad actors from accessing the financial system in the first place and, if they do access it, to alert authorities via the suspicious activity reporting regime.

Commercial entities, by and large, require some pretty persuasive incentives to induce them to both turn away business and put in place often costly AML compliance functions to detect suspicious activity. It is here where the role of the AML supervisor comes into play. By establishing a system of oversight and enforcement, an effective AML supervisor provides this incentive to comply.

In the case of the UK’s historically dysfunctional regime of 25 different state and professional body-led AML supervisors, effective is the operative word. Parliamentarians and civil society actors alike, including the author, have long highlighted concerns regarding the efficacy of the UK’s approach, particularly within the legal and accountancy sectors, two sectors which the UK government has identified as being at ‘high risk’ of enabling money-laundering.

However, it was the 2018 evaluation of the UK’s AML and Counter-Terrorist Finance system by the international standard setter, the Financial Action Task Force, that (arguably) catalysed the creation of OPBAS in January that year and gave it a mandate to raise standards in legal and accountancy AML supervision.

From a Low Base

During its inaugural year, OPBAS set about assessing the extent of the problem. Despite identifying pockets of best practice, in March 2019 the first annual report laid bare the scale of the challenge. Among its findings, the report revealed that the majority of accountancy and legal supervisors preferred to offer guidance and support rather than issue penalties (86%), a high number of accountancy supervisors (92%) were concerned that issuing fines would reduce their membership and, perhaps most worryingly, 23% of relevant supervisors undertook no supervisory activity at all. In response to the situation, OPBAS required all PBS to enact relevant strategies to improve their response.

One year on, the launch of the OPBAS second annual report makes heartening reading in many respects. For example, all PBS now have clear accountability to ensure their supervisory functions are operating independently of their advocacy roles, 86% have a proper risk assessments in place to drive their supervisory approach, the vast majority are using on-site visits as a supervisory tool, the majority now have intelligence handling processes in place and there has been a significant increase in the number of enforcement actions taken.

Mission Accomplished?

However, despite the considerable gain in ground in the past year, the mission is not yet complete. As recognised by OPBAS itself, ‘some have responded positively and implemented changes quickly. Others have been less proactive in their approach’. Indeed, OPBAS has had to resort to using one of its more coercive tools available under the OPBAS Regulations 2017 – the issuing of a ‘direction’ requiring information or documents to be provided – against three supervisors.

The report also highlights the continuing reluctance of many supervisors to use enforcement tools, rather than guidance, to coax their supervised populations into compliance: in the reporting period to April 2019, 41% of supervisors did not take any kind of enforcement action for non-compliance. This is particularly the case with regard to the issuing of financial penalties in the legal sector; a tool which has arguably been effective in changing compliance cultures in the financial sector.

Finally, a cornerstone of any effective AML system – the systemic sharing of intelligence – remains an Achilles heel for professional body supervision: 28% of PBS continue to lack a secure system for storing intelligence and 16% either lack a whistleblowing policy or the one in place does not offer adequate protections.

Undue Restraint?

Despite the evident challenges remaining for OPBAS, its dogged efforts over the past two years should be applauded – there is no doubt in the author’s mind that such progress would not have been achieved in its absence.

However, OPBAS’s virtue of patience could soon become a vice. Despite noting that ‘some PBS are now outliers compared to their peers’, OPBAS remains tight-lipped regarding the identity of those not meeting its standards. Two years on from the commencement of its mission, perhaps it is time for OPBAS to take a more robust stance and use its official powers of censure under the OPBAS regulations to publicly name those not meeting the required regulatory standards.

The Ultimate Sanction

However OPBAS has an even more powerful tool in its armoury – the power to recommend to HM Treasury that a supervisor is removed from the list of supervisory bodies in Schedule 1 of the Money Laundering Regulations 2019. In response to the Treasury Select Committee’s 2019 report on AML supervision, HM Treasury set out what would happen in the event of OPBAS doing so; namely, if Minister’s find the recommendation to be founded, the supervised population will be moved under the purview of another supervisory body.

Though this sounds easy in theory, it is likely to be more difficult in practice and may require a greater proportion of the regulated sector to come under state-led supervision. OPBAS should however leave the consideration of these practicalities to others however and use all the powers at its disposal at the appropriate time. Whilst OPBAS’s firm but fair approach has been enough to shift the dial so far, it is clear the anonymous ‘outliers’ require a more uncompromising approach.

The views expressed in this Commentary are the author's, and do not represent those of RUSI or any other institution.

BANNER IMAGE: A composition of legal tender. Courtesy of GoSimpleTax /Flickr

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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