Primer: UK’s AML/CTF consultation
The latest edition of IFLR’s free-to-read explainer series addresses the key changes outlined in the EU’s anti-money laundering and combatting the financing of terrorism consultation
In July 2021, the UK government called for an open consultation to review its anti-money laundering (AML) and counter terrorist financing (CTF) regulations. The report on the consultation with the new statutory recommendations is set to be released in spring 2022.
The consultation aims to investigate three key themes: the overall effectiveness of the current regime; whether the current regime and supervisory bodies are operating as intended; and the effectiveness of Office for Professional Body Anti-Money Laundering Supervision (OPBAS).
How effective is the current regime?
There is consensus both in the public and private sector that the UK’s financial crime framework is not as effective as it might be. For example, tens of billions of pounds are estimated to be laundered through the UK annually, and only a small percentage of the proceeds of crime are recovered.
“The system has not been wholly effective as demonstrated by the volume of fraud offences reported and significant money laundering ‘scandals’ that have impacted the UK,” said Chris Bostock, director of Deloitte’s forum for tackling illicit finance.
One element that can be improved on is on suspicious activity reports (SARs). “There has been a significant uptick in SARs being made by financial institutions, while SARs from other professional bodies, such as accounting and law firms, have decreased,” said Sean Curran, partner at Arnold & Porter.
“The quality of the SARs being submitted are often of poor quality without any analysis being performed on them by those submitting them,” Curran continued. “This overburdens the system and potentially allows criminal transactions to slip through the net as a result.”
In April 2021, the Financial Conduct Authority (FCA) launched its first criminal prosecution for offences under the Money Laundering Regulations. It is alleged that NatWest accepted cash deposits of £264 million ($365 million) without adequately scrutinising suspicious transaction behaviours.
“Prosecution has come after a steady escalation in fines by regulators,” said Nicola O’Connor, legal director at Bird & Bird. “Over the last 12 months, we have seen a number of record fines imposed by the FCA and HMRC for non-compliance with money laundering regulations.”
One of the questions in the consultation paper is whether the current application of enforcement powers is proportionate to the breaches they are used against. “The reality is that the full extent of the enforcement powers are not regularly used,” O’Connor added. “The prosecution of NatWest Bank for breaches is likely to be a wakeup call for many businesses where AML is not taken seriously enough.”
Nick Price, a specialist in fintech regulation at Osborne Clarke agreed with O’Connor that regulatory oversight has had it shortcomings. "There are currently 25 supervisory bodies in the UK, each with their own guidance and priorities, which has led to uncertainty for some firms due to overlaps and inconsistencies,” he said.
See also: PRIMER: EU’s AML/CFT Action Plan
How will the AML/CTF regulation intersect with fintech and innovation?
AML/CTF has been a key concern that intersects with the rise of fintech and cryptocurrency. European Central Bank president Christine Lagarde called earlier this year for the adoption of a global regulation concerning bitcoin in order to prevent money laundering.
“The 5th Money Laundering Directive – which was brought into UK legislation through the Money Laundering Regulations 2019 – brought cryptocurrency activities within scope of money laundering supervision for the first time,” said O’Connor. “The FCA was appointed as the supervisor for UK-based cryptocurrency businesses and the authority responsible for accepting applications for cryptocurrencies AML registration.”
However, concerns have arisen from the FCA that over 100 businesses believed to be involved with crypto assets do not have the appropriate authorisation.
“The AML framework prescribes a risk based approach – this can be applied to cryptocurrency in the same way it can be applied to any other product or service,” said Bostock at Deloitte. “Clarity is key in driving innovation – if the UK government sets out a clear framework, it could actually encourage innovation and investment into the UK.”
The consultation is already tackling potential solutions to supervise AML within the cryptoasset sphere. “The consultation proposes extending the 'travel rule' to cryptoassets transfers, which would require firms to record information on both the originator and beneficiary,” said Price.
“This would be an important step in the recovery of fraudulently taken cryptoassets and is already being enforced by the English courts in private fraud proceedings,” he continued.
How does the UK’s AML regulations compare to the EU’s?
In May 2021, the EU announced its action plan for AML/CFT regulation. “At present the UK’s system is still fundamentally aligned to the EU’s – but there may be opportunities to diverge in positive ways in the future, for example, by being more proactive in encouraging information sharing,” said Bostock at Deloitte.
While the UK adopted a significant portion of the EU’s AML laws post-Brexit, there have been some key points of divergence. The UK opted out of the 6th Money Laundering Directive on the basis that most of the laws had already been adopted into national legislation.
“For example, the UK has designated ‘third country’ status to any country outside of the UK, rather than ‘outside the EEA’ as before, for the purposes of financial crime compliance with regards to commercial transactions,” said Curran. “What this means is that the regulatory landscape is slightly more complex for companies in the UK doing business in the EU, and vice versa.”
The EU has also proposed an arguably more onerous set of customer due diligence (CDD) rules compared to the UK. "The EU proposals also go further than the UK consultation paper by proposing more granular guidance on CDD measures and setting clearer requirements for different risk-levels,” said Price. “This would be a welcome approach in the UK regime to provide certainty to market participants."