FATF Reviews the UK’s Anti-Money Laundering Measures

The Financial Action Task Force (FATF) has published a review of the UK’s anti-money laundering (AML) and counter-terrorist financing (CTF) measures following an on-site visit in March this year and a comprehensive assessment of the effectiveness of the UK’s measures and their level of compliance with the FATF Recommendations. This review includes key findings, priority actions and ratings of effectiveness and technical compliance with FATF 40 Recommendations 2012.

London is the largest financial services provider in the world, therefore it predictably faces a significant risk that some funds will have originated from the activities of crime and terrorism. This includes risks from overseas, in particular from other financial centres (including some of its Overseas Territories and Crown Dependencies). In particular, the UK is vulnerable and at risk of being used as a destination or transit location for criminal proceeds, and at significant risks from laundering the proceeds of foreign predicate crimes, including transnational organised crime and overseas corruption. The UK faces severe threats from international terrorism, however the majority of terrorist attack plots in the UK have been planned by British residents, with an increase in low complexity attacks by lone actor UK-based extremists. The UK also faces threats from Northern Ireland-related terrorism, which are rated severe in Northern Ireland and substantial in Great Britain. In FATF’s view, this picture is mitigated by the country’s strong understanding of these risks, as well as national AML/CTF policies, strategies, and proactive initiatives to address them. Furthermore, the UK has all of the key structural elements required for an effective AML/CTF system, such as political and institutional stability, governmental accountability, rule of law, and a professional and independent Bar and judiciary.

The UK routinely and aggressively pursues money laundering and terrorist financing investigations and prosecutions, prosecuting circa 2,300 persons, and securing about 1,400 convictions each year for money laundering standalone, or where money laundering is the principal offence. UK law enforcement authorities have powerful tools to obtain beneficial ownership and other information, including an effective public-private partnership.

The country is a global leader in promoting corporate transparency and it is using the results of its national risk assessment to further strengthen the reporting and registration of corporate structures. Strong features of the system include the outreach activities conducted by supervisors and the measures to prevent criminals or their associates from being professionally accredited or controlling a financial institution. Financial institutions and designated non-financial businesses and professions (also known as DNFBPs), such as lawyers, accountants, and real estate agents, are subject to comprehensive AML/CTF requirements and supervision. They also have to conduct customer due diligence and obtain and maintain beneficial ownership information in a manner that is generally in line with the FATF requirements. Beneficial information on trusts is available to the competent authorities through a registry of trusts with tax consequences in the UK.

A particularly positive feature of the system is the strong public-private collaboration on terrorist financing matters. The UK has been highly effective in investigating, prosecuting and convicting a range of terrorist financing activities and has taken a leading role in designating terrorists at the UN and EU level. The UK is also promoting global implementation of proliferation-related targeted financial sanctions, as well as achieving a high level of effectiveness in implementing targeted financial sanctions domestically.

However, “major improvements are needed to strengthen supervision and implementation of preventive measures and to ensure that financial intelligence is fully exploited.”

In terms of priority actions, the UK Financial Intelligence Unit (UKFIU) needs a substantial increase in its human and technical resources, and the suspicious activity reporting regime needs to be modernised and reformed. In April 2016, the government made a commitment in its Action Plan for Anti-Money Laundering and Counter-Terrorist Financing to reform the SARs regime, however this commitment remains unfulfilled so far.

Concerns were raised about the quality of suspicious activity report (SARs) filed, both by banks and other entities, and noted that some SARs are filed wherever there are unexplained or unusual transactions, without further analysis or investigation first being conducted. The banking sector plays a predominant role, with 85% of SARs filed by banks. FATF recommended that feedback on SARs be given to reporting entities to help them improve the quality of SARs filed.

It was noted that the UK has made a deliberate policy decision to limit the role of the UKFIU in undertaking operational and strategic analysis, which calls into question whether SAR data is being fully exploited in a systematic and holistic way and providing adequate support to investigators. Numerous cases demonstrate that financial intelligence and other relevant information are being used to successfully identify new targets (including money launderers and terrorist financiers), dismantle criminal networks, and trace assets. However, the SAR regime requires a significant overhaul to improve the quality of financial intelligence available to the competent authorities.

The FCA should consider how to ensure appropriate intensity of supervision for all the different categories of firms: of the 19,600 entities it supervises, from low risk to high risk only 170 firms are covered by its systematic and proactive supervision programs, with a significant number of firms undertaking high and medium risk activities falling outside its regular, cyclical supervisory attention. Currently the FCA conducts approximately 100 on- site AML/CTF inspections each year.

The UK is encouraged in continuing its effort to address the significant weaknesses in supervision of non-financial sectors (e.g. legal, accountancy, etc.), or in sectors such as casinos, high-value dealers, where understanding of money laundering and terrorist financing risks is much less developed.

Although the UK’s overall AML/CTF regime is effective in many respects, it needs to address certain areas of weakness, such as supervision and the reporting and investigation of suspicious transactions. However, the country has demonstrated a robust level of understanding of its risks, a range of proactive measures and initiatives to counter the significant risks identified and plays a leading role in promoting global effective implementation of AML/CTF measures.

This better than expected report comes after reasonable alarms about the City of London being afflicted with money laundering problems and about the government not doing much about that, because they do not wish to damage the general idea of London as being an easy place to do business. Experts from the industry said that a step to be taken should be the extension of the corporate criminal liability, the so-called failure to prevent offence, to all forms of financial crime, not only for bribery and tax evasion, as it is now.

Lisa Osofsky, soon after her appointment as the Serious Fraud Office (SFO) Director, confirmed that she intends to focus on money laundering offences in SFO investigations, to recover proceeds of crime, and to make sure the UK is a high risk place for criminals. Whilst the result of this review appears overall positive, the UK faces challenges associated with its political situation, which may undermine international cooperation, access to databases, and result in constrained funding and resources. The risk is that this situation could inevitably reduce the focus in fighting financial crime.