Anti-Money Laundering Supervision of the Professions in the UK: Four Key Challenges and How to Address Them

Introduction

In 2022, two influential All Party Parliamentary Groups (APPGs) claimed that ‘[i]neffective regulation in different sectors of the economy has meant that Britain has become a safe haven for dirty money’, and called for ‘a radical overhaul of anti-money laundering supervision’.

There has long been concern that the ‘professions’, notably lawyers and accountants, are not meeting their legal obligations in relation to preventing and detecting money laundering. Likewise, the bodies tasked with monitoring their compliance, the anti-money laundering (AML) supervisors, are criticised for not being effective, and for allowing bad behaviour to go unchecked. These weaknesses, it is claimed, make professional services more vulnerable to exploitation and abuse by organised criminals, kleptocrats and oligarchs.

While such criticisms may be valid, it should also be acknowledged that the UK is far advanced when it comes to imposing AML obligations on the legal and accountancy sectors compared to some of its peers. In contrast to other countries, such as the US and Australia, the question that the UK is grappling with is not how to bring lawyers and accountants into the scope of AML regulations, but how to make AML supervision more effective. 1

Despite improvements in the AML supervision of the legal and accountancy sectors over the last few years, it is clear that there is still much work to be done to improve the basic level of compliance within both sectors. A review of recent fines shows that some firms are getting the basics wrong – from thinking that the rules did not apply to them because they only dealt with small clients, to risk assessments that fail to consider the highest-risk areas of the practice. In the second half of 2022, HM Revenue and Customs (HMRC) issued nearly 90 fines to accounting service providers (ASPs) for failing to register for AML supervision.

In June 2023, the UK government published a consultation on potential reform of AML supervision in the UK, including how lawyers and accountants should be supervised for AML purposes. This consultation is likely to lead to the most significant reforms to AML supervision in the UK for nearly 15 years.

It is, however, naive to assume that these reforms alone will be sufficient to create a step change in the way that lawyers and accountants meet their AML obligations. This Policy Brief seeks to identify the challenges of AML supervision of the legal and accountancy sectors, and to set out how the AML regime within which they operate could be enhanced. It draws on the findings of a literature review carried out in December 2022 and a series of virtual roundtable discussions facilitated by RUSI between March and May 2023. The literature review aimed to identify information in the public domain about professional initiatives related to financial crime, undertaken both in partnership with the public sector, and within the professions themselves. The review also included academic and policy documents. The findings of the review informed the agenda for the roundtable discussions, which brought together participants from across the professions, regulators, academia and civil society.

This Policy Brief first briefly summarises the structure of AML supervision in the UK, before identifying four challenges to effective AML supervision of the professions.

The Structure of AML Supervision of the Professions in the UK

The UK currently has 25 AML 2 supervisors in the UK. Of these, three are statutory supervisors (the Financial Conduct Authority (FCA), the Gambling Commission and HMRC), and the remaining 22 are known as Professional Body Supervisors (PBSs). PBSs are private bodies that are responsible for AML supervision of lawyers and accountants across the UK. There are nine PBSs for the legal sector and 13 for the accountancy sector. There are dedicated PBSs for the professions in England and Wales, Northern Ireland and Scotland, as well as separate PBSs for different types of lawyers and accountants (for example, solicitors or barristers, chartered accountants or taxation technicians). In 2018, the Office for Professional Body Anti-Money Laundering Supervision (OPBAS) was created to bring consistency and improve standards across the 22 supervisors in the accountancy and legal sectors. Some accountancy professionals who are not members of a PBS are supervised for AML purposes by HMRC.

The Challenges to Effective AML Supervision of the Professions

In June 2023, the government issued a consultation on reforming AML supervision in the UK, presenting a number of options, from maintaining the existing number of supervisors through varying degrees of consolidation including, ultimately, the creation of one single AML supervisor. This paper does not seek to answer the question of what the most effective structure for AML supervision might be but seeks to set out some of the areas that policymakers, and indeed supervisors, need to address to improve standards of compliance across the legal and accounting sectors, regardless of any future structural changes to how these sectors are supervised.

During the research for this paper, four challenges to effective AML supervision of the professions were identified:

1. The scope and application of the Money Laundering Regulations (MLRs) to the legal and accountancy sectors.
2. The types of firms that are subject to AML supervision by the PBSs and, in the case of some accountancy providers, by HMRC.
3. The relationship between AML supervisors (including OPBAS), law enforcement and supervised firms.
4. Incentives for compliance within the legal and accountancy sectors.

The Scope and Application of the Money Laundering Regulations (MLRs) to the Legal and Accountancy Sectors

Taking a step back, the AML obligations that regulated firms must comply with are derived from the Recommendations set by the Financial Action Task Force (FATF), the international standard setter. The FATF’s Recommendations are transposed into UK law via the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (as amended in 2019), otherwise known as the MLRs. While the scope of the FATF’s Recommendations has changed over the years, the Recommendations were originally designed to tackle the proceeds of drug trafficking and to improve the defences of the global financial system against criminal abuse. Derived as they are from various EU money laundering directives pre-Brexit and, ultimately, from the FATF Recommendations, applying the MLRs to the legal and accountancy sectors has always been more challenging than their application to the financial sector for which they were originally designed.

Firstly, while the MLRs apply to all credit and financial institutions carrying on business in the UK, only certain types of legal services are considered within scope of the MLRs. 3 This often presents challenges to firms when determining whether their activities require them to comply with the MLRs. When a firm provides some services that are in scope of the MLRs and some services that are not, it can become even more complex. To make an already confusing picture even more so, firms that are not in scope of the MLRs will still have obligations under the Proceeds of Crime Act 2002 (POCA) in relation to the principal offences of money laundering and the requirement to report knowledge or suspicion of money laundering. 4 While all accountancy services are within scope of the MLRs, many large professional services firms offer a mix of traditional accountancy services and consulting and advisory services. These latter services are not within the scope of the MLRs, although the firm will have obligations under POCA when delivering them.

Although this may seem a technical point, a widespread lack of understanding of the scope of the MLRs and the difference between the MLRs and the POCA regime often results in more robust compliance with and supervision of the MLRs being incorrectly portrayed as the answer to all the ills of the professions. 5 While commentators may, rightly, lament the standards of morals in the legal and accountancy professions, such issues are often outside the scope of the AML regime, and must be addressed by other means. 6

Secondly, some of the requirements of the MLRs that may be relevant for, say, a retail bank that sees hundreds of thousands of customer transactions on a daily basis, are difficult to put into practice in a professional services context. How the obligation under the MLRs to carry out ‘ongoing monitoring’ of a business relationship should translate to the legal and accountancy sectors was consistently raised by practitioners in discussions as an area of confusion and difficulty. Much of the guidance provided relates to the ongoing monitoring of a customer’s financial transactions, which, while applicable in a financial services context, is less relevant in circumstances where a client may only be making sporadic financial transactions with a legal or accountancy firm. Likewise, the level and extent of enhanced due diligence, required for higher-risk customers or clients, may be very different in the relationship-driven context of professional services than it is in the more transactional nature of traditional financial services.

Thirdly, an individual or firm’s AML obligations can sit uneasily alongside other professional obligations. This is particularly the case in the legal sector, when there can sometimes be a tension between obligation to report where there is knowledge or suspicion of money laundering and the concept of professional privilege. 7 There is substantial guidance available to steer individuals through the process of understanding the circumstances in which privilege does and does not apply, but it still remains ‘the most complicated aspect of the money laundering regulations’.

None of the above points are an excuse for a lack of compliance with the MLRs, however, the imperfect system in which lawyers and accountants are operating must be considered, particularly when designing supervisory interventions.

Recommendation 1: While consistency of outcomes is an absolutely crucial element of AML supervision, expecting the PBSs (or any replacements for the PBSs) to supervise different types of activities within the legal and accountancy sectors in exactly the same way that, say, the Gambling Commission supervises gambling firms, will not lead to the best outcomes. As the Treasury considers the future of AML supervision in the UK, policymakers should ensure that structures, tools and outcomes are tailored to the different parts of the regulated sector and the different activities that occur within each part of it.

The Types of Firms that are Subject to AML Supervision by PBSs and HMRC

The relative sizes of the regulated populations in 2021–22 are set out in Table 1.

Taking the total number of accountancy firms supervised by HMRC and the number of firms supervised by the PBSs in the accountancy sector, there are more than 50,000 supervised accountancy providers in the UK. Beyond the ‘Big 4’ accountancy firms and the cohort of mid-tier firms that sit beneath, the vast majority of accountancy firms are small firms or sole practitioners. While there are fewer supervised firms in the legal sector, a similar dynamic applies, whereby there is a small number of large firms and a large number of small firms.

The huge variety in size and risk profile of firms operating within both sectors presents significant challenges both to implementation of the MLRs and to AML supervision. While size of firm does not necessarily correlate with the risk of the services that it operates, the nature of the money laundering risks that a ‘magic circle’ law firm 8 is exposed to will be very different to the risks that a small high street solicitor is exposed to. The same is true in the accountancy sector; the nature and risk profile of the clients, the nature of the services being provided, and the amount of money involved will all be very different. Similarly, small firms or sole practitioners may lack the resources or expertise to implement a comprehensive AML compliance programme, even if they are carrying out higher-risk work.

There appears to be a lack of depth of understanding of the money laundering risks across the legal and accountancy sectors. The current iteration of the UK’s National Risk Assessment of Money Laundering and Terrorist Financing considers both the legal and accountancy sectors to be at a high risk of being abused, and identifies specific services that are higher risk, such as conveyancing and company formation services. It does not, however, distinguish between how the money laundering risks associated with those services may differ depending on the nature and size of the firm and, importantly, the types of clients that a firm may service. This lack of consistent understanding of risk can be seen in the work that OPBAS has done in relation to Trust and Company Service Providers (TCSPs) 9 which found that there were significant differences in the understanding and assessment of the money laundering risks across AML supervisors, in particular between the PBSs and HMRC.

Recommendation 2: A more granular and consistent understanding of the way in which money laundering risks crystallise in different parts of the legal and accountancy sectors would be very beneficial in identifying and articulating where the threat is, and which parts of the sectors need to be the focus of supervisory activity. The government should seek to engage with the professions, the PBSs and law enforcement to obtain this granular understanding to feed into the next iteration of the UK’s National Risk Assessment. When considering options for reform of AML supervision, the government should also ensure that any new model prioritises the maintenance of sector-specific knowledge.

The Relationship Between AML Supervisors, Law Enforcement and Supervised Firms

In 2018, it was identified that there was a ‘trust deficit between many players within the system’, particularly in relation to intelligence sharing between law enforcement and the PBSs. Five years on, it does not seem that this trust deficit has reduced significantly. Throughout discussions for this Policy Brief, the lack of trust across the system was a consistent theme. As a result, there is limited sense of collaboration between different parts of the ecosystem, and interactions between firms and PBSs are often adversarial in nature. There is no sense that everyone is ‘on the same side’ or has common objectives.

There is a perception among firms that supervisors do not have the necessary experience of the sector and are overly focused on minor breaches of regulations (such as whether a firm collected all the required documents), without any appreciation of whether the breach exposed the firm to any risks. This does not create an atmosphere in which firms are encouraged to do anything more than meet the basic levels of compliance to avoid being ‘caught out’ by a supervisor. Issues still remain in relation to the sharing of intelligence by law enforcement; while law enforcement may or may not be justified in their lack of trust in the PBSs, the lack of intelligence means that it is harder both for firms and supervisors to gain a real understanding of where the money laundering risks lie.

Recommendation 3: There is an urgent need for more openness and trust throughout the ecosystem, including with law enforcement. In its planned reforms to AML supervision in the UK, the government must address this as a priority. As part of this, there must be a clearer and more specific articulation of what ‘good’ looks like, to drive consistency of outcomes, both across firms and across supervisors.

Incentives for Compliance Within the Legal and Accountancy Sectors

At the heart of any discussions about how to improve AML compliance within the professions is the question of how best to incentivise firms and individuals to meet their obligations in a more thorough and robust way, including how to ensure that senior management is sufficiently engaged. A study of Swedish lawyers found that ‘front-line work was directed towards being compliant enough’ with AML obligations, and that a proactive approach to preventing and detecting money laundering was a secondary concern.

While there has been criticism of the PBSs for over-reliance on informal methods of supervision, the system is still ultimately built on deterrence, through the threat of fines and disciplinary action. There is clearly a place for enforcement action and, where appropriate, substantial fines, particularly in the more egregious cases, or where there have been repeated incidences of poor performance. The risk of a fine or – in the case of individual practitioners – the loss of their ability to practice tends to focus the mind.

But a system which relies on the threat of the ‘stick’ can result in the infamous and undesired ‘tick box’ approach to compliance. The aim of an AML compliance programme becomes to minimise the risk of being found to have deficient controls, rather than putting in place the most effective and efficient controls. There remains little incentive for firms to, for example, invest in technology solutions to improve their effectiveness if they do not feel that they will get any credit for their efforts.

Recommendation 4: There is no clear answer yet as to what incentives might motivate the professions to improve compliance with their AML obligations. While this problem is not unique to the legal and accountancy sectors, supervisors must ensure that they use a wide range of supervisory tools to challenge poor behaviour. In this regard, the FCA’s skilled person reviews may prove a useful model to follow, particularly in focusing the attention of a firm’s senior management on issues of compliance. Legal and accountancy firms must also be more proactive in identifying incentives at a firm/sector level, and embedding these within their own structures and reward frameworks.

Conclusion

While the global AML system continues to grapple with the question of what effective AML regulation of lawyers and accountants looks like, the UK is somewhat more advanced in considering its response than many of its peers. The UK has the opportunity to make significant change in the AML supervisory landscape. The legal and accounting sectors must be more engaged and empowered; the current system does not facilitate this. Structural changes alone will not solve this, but by addressing some of the challenges identified in this brief, there is the potential to create a more effective system.

Acknowledgements

The author would like to thank Matthew Redhead for his invaluable contribution to the research for this Policy Brief and to the peer reviewers who provided immensely helpful feedback. Thanks must also go, as ever, to the RUSI Publications team for their support and guidance. This project is supported by the Joffe Trust.