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.