Money laundering is rarely out of the spotlight these days. During the past year or so, Common - wealth Bank of Australia, Danske Bank and Morgan Stanley all made the headlines with their anti money laundering (AML) shortcomings, while Malta’s Pilatus Bank was shut down. New initiatives and legislation tightening practice and regulation to combat money laundering and terrorist financing have emerged in jurisdictions across the globe; and more are on the horizon, such as the fifth European Union (EU) AML directive. In the UK, economic crime is high on the political agenda.
“Criminals who seek to use this country as a place to launder money should be in no doubt that they have nowhere to hide,” says Ben Wallace, MP and minister for National Security and Economic Crime, who highlights the insidious nature of money laundering.
“Those with dirty cash to clean don’t just sit on it – they reinvest it in serious organised crime, from drug importation to child sexual exploitation, human trafficking and terrorism.” Since 2017 the UK government has implemented the fourth European Union (EU) AML directive in the Money Laundering Regulations 2017; introduced the Criminal Finances Act and tools such as Account Freezing Orders and Unexplained Wealth Orders; consulted on a draft Registration of Overseas Entities bill; and during 2018 it extended the Flag It Up campaign (which already targets solicitors and accountants), to encourage the property sector to submit more suspicious activity reports (SARs).
The recently published 2018 National Crime Agency (NCA) annual report on SARs notes an increase in the number received, by around 10% (to 463,938) and a 20% increase in the proportion of these which are defence against money-laundering SARs. Donald Toon, NCA prosperity director, has emphasised the value of the intelligence in SARs and the need to make the reporting regime more effective.
The Home Office is leading a SARs Reform Programme. “This aims to improve the SARs regime, including by underpinning it with modern IT,” says Toon. In 2017 the Home Office asked the Law Commission to review the Proceeds of Crime Act 2002 and the Terrorism Act 2000, to consider disclosure offences and make the aspect of UK AML law known as ‘the consent regime’ more effective, and in 2018 the Commission consulted on its proposals.
“The reporting scheme isn’t working as well as it should,” notes Professor David Omerod QC, law commissioner for criminal law at the Law Commission, where he is a board member. “Enforcement agencies are struggling with a significant number of low-quality reports and criminals could be slipping through the net. We’re determined to make the law work for everyone and find a balance which will tackle money laundering more effectively.”
Law Commission proposals, designed to help banks and businesses provide better information to law enforcement agencies and refocus attention on the most suspicious activity, include: statutory guidance on what to look out for and a set format for SARs; new analysis tools and powers; and various ways to cut back on low quality reports and defence reporting, such as providing detail on what amounts to a defence of ‘reasonable excuse’ for not making a SAR.
Improving quality and efficiency
ICAEW’s consultation response (117/18) suggests various ways to improve the quality of SARs and make the regime more efficient. Like the Law Commission, ICAEW is keen to see more guidance for reporters on what to look out for. “It would be helpful for accountants in smaller firms to have examples of fact patterns that should raise their suspicions and prompt them to look more closely,” says Sophie Falcon, integrity and law manager, ICAEW.
It can be difficult for accountants in small practices to relate the day-today accountancy and tax work that many of them do to red flag examples involving big international banks. Making the reporting system more sector-specific could also improve its effectiveness.
“Forms that ask the right kinds of questions for the accountancy sector would make it easier for accountants to share their concerns,” suggests Falcon. The current SARs regime (and its forms) is predominantly designed for financial institutions. Reducing the volume of duplicate reporting could also make the regime more efficient and hence more effective. Currently, if a member reports something suspicious and the same facts are seen by ICAEW as a money-laundering supervisor, it also has to submit a SAR.
Falcon says: “There doesn’t seem to be any practical reason for this – or obvious benefit.” Instead of leaving people wondering, a feedback mechanism from the NCA could educate reporters on its priorities and the value of their SARs.
Thwarting the criminals
The accountancy profession has invested significantly in supporting the AML regime, but a lot of time and effort may be going into confirming that decent and sensible businesses are just that. “We need to keep on confirming what it is we are looking for,” says Paul Simkins, director of quality assurance, ICAEW.
“It is a big challenge for the UK to make its AML system more targeted on the criminals.” Smarter information and intelligence sharing between law enforcement, other government agencies, and AML supervisory bodies such as ICAEW could be a key enabler.
“We are all trying to prevent and reduce money laundering, but the left hand is not showing the right hand what it is looking for,” he says. In some scenarios, when law enforcement knows who is involved in serious crime or laundering money, but can’t meet criminal law evidence levels, then ICAEW could act. If ICAEW can be given evidence of inappropriate or unethical behaviour, it has the facilities to undertake monitoring, follow up and discipline members (based on civil not criminal law levels of evidence).
“We have tools to handle this which are not available to law enforcement agencies,” notes Simkins. But ICAEW has to be aware of issues involving members. “We could work together more but rather than being seen as part of the solution, we are almost seen as part of the problem,” he says.
Beneficial ownership of trusts
The fourth EU AML directive increased the transparency of beneficial ownership for trusts, by requiring central registers of beneficial ownership, and in 2017 the UK launched a new online registration system.
Currently, details of the trusts are only accessible by tax and law enforcement authorities, but the fifth AML directive (adopted by the EU in April 2018) introduces limited public access where there is legitimate public interest. If, when and how the fifth AML directive is transposed into UK law remains to be seen; member states must comply by January 2020.
Many European jurisdictions don’t have trusts, but they are used in all sorts of areas in the UK, such as employee benefit schemes, and life assurance, pensions and property ownership. Clarity is needed, for example, around express trusts and what they include and exclude. “This needs to be carefully considered by government, so that it is not too widely drawn,” says ICAEW’s Paul Simkins.
“The point is to pick up abuse; people trying to hide wealth which has been acquired illegally or through dubious means.” And, Simkins says: “We are hoping to see a sensible line drawn about which aspects of trusts are to be considered of legitimate public interest.”
ICAEW AML resources
As AML becomes more complex, so does the task of staying on top of new developments and requirements. ICAEW has teamed up with training provider SWAT to offer a web-based AML service that can take the risk and pain out of compliance.