Regime reform: UK government proposes new AML/CTF models

November 2023  |  FEATURE | FRAUD & CORRUPTION

Financier Worldwide Magazine

November 2023 Issue

As part of its Economic Crime Plan 2023-26, the UK government is consulting on proposed reforms to the country’s anti-money laundering (AML) and counter-terrorism financing (CTF) supervisory system.

HM Treasury is considering structural reforms for the way AML and CTF requirements placed on firms are supervised and enforced. But it has not confirmed that it is consulting on changes to the AML and CTF requirements themselves at this stage. A separate consultation on changes to the Money Laundering Regulations is expected in late 2023.

Scale of the problem

The consultation and potential reforms come against a backdrop of heightened focus on money laundering and financial misconduct – not just in the UK but globally. These concerns have been magnified in recent years amid significant growth in the FinTech space. Technological developments such as online banking, cryptocurrencies and non-fungible tokens (NFT) offer new channels for money laundering.

Illicit finance is a growing problem. Around the world, the total annual amount laundered is estimated at about 3 percent of global gross domestic product (GDP), or £1.8 trillion, according to Credas.

When taking the GDP of each nation into account, the US comes first in the table of global money laundering hotspots. While its money laundering activity only accounts for 1.4 percent of the nation’s GDP, this total comes to £216.5bn annually.

In second place is the UK. Its 4.3 percent of GDP equates to £87.9bn of money being laundered every year in the country.

Proposed models

In the UK, HM Treasury’s consultation, which closed on 30 September 2023, focuses on the 2022 review of the regime, which suggested structural reform to address “some weaknesses in supervision”. Four models have been proposed and the government is now seeking views on them, asking for “potential benefits and disbenefits of each potential reform model”.

The consultation will consider what structural reforms may be needed to address previously identified issues in the current framework. Under the existing regime, there are three statutory supervisors: HM Revenue and Customs (HMRC), the Financial Conduct Authority (FCA) and the Gambling Commission (GC), as well as 22 professional body supervisors which oversee the legal and accountancy sectors.

Any financial organisations that want to operate in the UK are required by the FCA to conduct AML checks. Failure to meet standards may prohibit a firm from being authorised by the financial watchdog.

The first proposed model does not involve significant structural regime change. Instead, the Office for Professional Body Anti-Money Laundering Supervision (OPBAS) would be granted a range of new powers aimed at enhancing the effectiveness of professional body supervisors (PBSs). According to the government, this model would be “the most immediately feasible”.

The second model proposes that either two or six of the current 22 PBSs would retain responsibility for AML/CTF supervision. This would account for two accountancy and legal sector supervisors, either UK-wide or in each of the jurisdictions of England, Wales, Scotland and Northern Ireland. This model would retain the current system but “reduce inconsistency and complexity by ensuring only the highest performing supervisors remained”, the government says.

The third model would establish a single AML/CTF supervisory body for all legal and accountancy sector firms. This would likely take the form of an operationally independent public body with broad enforcement powers. “While the existing professional body supervisors would no longer be responsible for AML and CTF supervision, they could continue to supervise firms for other purposes,” according to the consultation document. “It would be important to mitigate the impact of this dual regulation on firms.”

Finally, the fourth proposed model would see the introduction of a single supervisory body for all AML and CTF supervision in the UK. Under this model, the FCA, the GC and the PBSs would continue to supervise firms for general regulatory conduct within their respective remits. Again, the government notes that dual regulation impact would need to be mitigated.

Sanctions supervision

The consultation also raised the question of whether some reform of sanctions supervision may be required. This reflects the increased number and complexity of UK sanctions following the Russian invasion of Ukraine.

Under existing money laundering regulations, AML/CTF supervisors do not have the power to review firms’ sanctions systems and controls other than in relation to asset-freezing provisions. In taking forward one of the AML/CTF supervisory models proposed by the consultation, the Treasury suggests that the government should consider what enhancements to sanctions supervisory powers are necessary.

Crackdown

Given the increasing scale of the money laundering problem, it is unsurprising that the UK government is taking steps to crack down on it. But legislative and regulatory measures are unlikely to be enough on their own.

“We continue to make good progress, but economic crime cannot be fought by government alone,” said John Glen, the economic secretary to the Treasury, on the launch of the proposals. “We rely on businesses, up and down the country, to be meticulous in their understanding of risk and the application of the regulations. I am grateful for all that the private sector does to prevent and detect economic crime, but it is apparent that there is more work to be done.”

With a policy statement expected in the second quarter of 2024, it would appear that changes to the UK’s AML/CTF regime are on the way. The only question is how significant they will be.

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Richard Summerfield