The UK’s Anti-Money Laundering framework is on the cusp of a facelift – are you ready for it?

March 14, 2019

Summary

The current UK Anti Money Laundering (“AML”) framework is struggling to prevent and respond adequately to the sheer volume of money laundered through the country each year. This lamentable position threatens to undermine London’s status as a pre-eminent, global financial centre. A recent report by the Treasury Committee on the implementation of effective AML supervision and sanctions has put pressure on the UK Government to review the legislative structure intended to prevent and punish economic crime. Coupled with the wide-spread criticism of the UK’s corporate liability regime, changes seem inevitable.

With the UK on the brink potentially of exiting the EU and business certainty at an all-time low, the Government faces enormous pressure to ensure that the UK remains an attractive place to do business. One very significant factor in London retaining its prime position in the provision of financial services is ensuring the City is a bastion for anti-corruption and the antithesis to a safe harbour for economic crime. Furthermore, the trading relationships that will emerge as a result of Brexit will provide a new playground for those wishing to undertake economic crime in the UK. This, together with the pressure the Government is coming under to reform the UK’s criminal corporate liability framework, regardless of the outcome of Brexit, suggests that companies must brace themselves for new and demanding legislation.

Why is change necessary?

Given the nature of economic crime, it is difficult to calculate the exact amount of illegal money passing through the UK annually. Nonetheless, Transparency International estimates that £48 billion is laundered through the UK each year.  Donald Toon, Director of Prosperity (Economic Crime and Cyber-crime) at the NCA estimates that a realistic figure is in fact in the region of hundreds of billions of pounds. The problem is well-known: 71% of UK citizens consider corruption a major problem in the UK.

Corporations must do all they can to build public trust in the financial sector, safeguard their own reputations, and root out the bad apples both internally and externally. The Government must ensure they are encouraging companies in this direction by reforming both the preventative framework and the methods of enforcement deployed to tackle money laundering in the UK.

Prevention

The Office of Professional Body Anti-Money Laundering Supervisors (“OPBAS”) (launched in January 2018 as a unit in the FCA), the FCA, the SRA, HMRC, and the Gambling Commission, along with 21 other professional body supervisors, all play a part in preventing economic crime in the UK. The absence of a central office to coordinate the prevention and sanctioning of UK money laundering increases the chances of economic crime slipping through the system’s cracks. Unsurprisingly, the Treasury Committee’s recent report entitled ‘Economic Crime – Anti-money laundering supervision and sanctions implementationspublished on 8 March 2019 described the UK’s approach to AML supervision as “fragmented”.

The Committee’s report also identifies Companies House, the record-keeper for every company in the country, as a particularly weak link in the AML framework. Owing to the lack of rigorous checks involved in the registration process, Companies House has been labelled by some as a facilitator for, rather than a barrier to, economic crime. It is indeed surprising that, despite its central role in company formation and the related information it holds, Companies House is not obliged to carry out AML checks and has no authority to refuse registration except for non-compliance with the procedural registration requirements. In light of this, the Committee has singled it for an overhaul with the aim of transforming it into a highly effective cog in the UK’s AML armoury.

Enforcement

Even greater concerns have been raised regarding the lack of any effective criminal sanctions for economic crimes committed by corporates and the impunity to which this gives rise. On 6 March 2019, the co-chairs of the all-party Parliamentary group on Fair Business Banking (along with other notable signatories) wrote to the Prime Minister reminding her that three years have passed since the Government announced its intention to address the shortcomings within the UK’s criminal corporate liability framework and urged her to ensure that large organisations are made accountable for facilitating crime.

The SFO has clarified that much of the problem stems from criminal prosecutors having to rely on the common law doctrine of the Identification Principle. Under this principle a company can only be convicted of a criminal offence if it is established that a person who embodied the “directing mind and will” of the company carried out criminal acts with the necessary mental state at the relevant time. Owing to their size, enforcement against SMEs is relatively simple. However, the bigger the company, the greater the ambiguity as to where the “directing mind and will” exists. The delegation of day-to-day management of large businesses clouds the identity of those facilitating economic crime. Consequently, successful enforcement against large companies is extremely challenging. Combined with a lack of meaningful incentives for large organisations proactively to tackle AML issues, a passive corporate culture with little fear of prosecution is scarcely discouraged.

What might change look like?

Prevention

The Committee recommended that the Government establish OPBAS as the “supervisor of supervisors” to ensure consistency of supervision across all AML supervisors. It also encouraged the Government to move HMRC’s AML duties to OPBAS to ensure money laundering is prioritised and given the attention necessary to make a meaningful impact. This would relieve HMRC of the burden of tackling AML issues in addition to its main priority – tax – and result in a more rigorous, focused approach to money laundering by OPBAS. It would also alleviate concerns that HMRC’s “approach to its supervisory responsibilities may be unduly influenced by its role as a tax authority”.

The Committee’s report has also called on the Government to outline plans to rectify the lacunae in the AML framework caused by Companies House, demanding evidence of upcoming legislative change by the summer of 2019. The suggested reforms would impose statutory powers and duties on Companies House to help uproot economic crime both at home and abroad. This sharp deadline serves as a warning that before long companies will face greater scrutiny when it comes to registration and incorporation.

Enforcement

The Committee has also endorsed amendments to legislation proposed to it by the SFO, such that:

  • the identification principle be replaced by statute rendering a company guilty if an associated person commits an offence intending:
    • to obtain or retain business for the company;
    • to obtain or retain a business advantage for the company; or
    • otherwise to financially benefit the company; and
  • an offence for failing to prevent economic crime is introduced.

The amendments closely mirror the wording of section 7 of the Bribery Act 2010, which, since July 2011 has strongly encouraged companies to adopt suitable procedures to minimise the risk of bribery and corruption; section 7 affords a defence to commercial organisations that can prove adequate procedures were in place to prevent any such conduct by their associated persons. Adopting a similar legislative approach to tackle economic crime is logical.

 It is worth noting that the approach taken by the US, whereby vicarious criminal liability renders the corporate responsible for the actions of the individual, has not hampered a flourishing free market economy. This should be encouraging to Parliament considering such reforms.

 Separately, the evidence suggests that industry regulators are beginning to use the powers already conferred on them more effectively. The NCA’s coordinated use of unexplained wealth orders (UWOs) and ancillary freezing orders in February serve as a strong warning to companies. Applicants for UWOs need only demonstrate reasonable suspicion – a low threshold which empowers regulators to gather more evidence than they otherwise could. In the increasingly likely event that Parliament passes new legislation equivalent to section 7 of the Bribery Act 2010, as the SFO suggest, large corporations will undoubtedly come under greater scrutiny and face increasing prosecutions. With this new lease of life breathed into the AML legislative framework, companies should be strengthening their AML policies and ensuring money laundering sits high on their list of priorities.

Conclusion

With the Treasury Committee urging the Government to release a timetable for introducing the amendments to its statutory structure, the corporate criminal liability regime should be a priority for the Government. Companies must prepare for the inevitable changes to current legislation which will demand more from them. As with the Bribery Act 2010, AML policies will need to be strengthened in order to withstand scrutiny from prosecutors far better equipped to tackle money laundering and other economic crimes.