Routinely and aggressively pursuing money-laundering investigations: the verdict on the UK’s AML regime

15 January 2019

In December 2018, the Financial Action Task Force (FATF) published its report on the UK regime to counter money laundering (ML) and terrorist financing (TF). The report praises the strength of the UK regime, noting that the UK has a ‘robust’ understanding of ML/TF risk, and proactively investigates, prosecutes and convicts ML and TF. The report cites that the UK achieves “around 7900 investigations, 2000 prosecutions and 1400 convictions annually for stand-alone ML offences or where ML is the principle offence”.

Generally, there has been a marked improvement since the last FATF evaluation in 2007 and this progress was lauded in the 1 Year Update to the Government’s Anti-Corruption Strategy. (See our related blog Tackling economic crime 2018-19)

Particular money laundering and terrorist financing risks faced by the UK

The FATF acknowledges that, as one of the major global finance centres, the UK faces particularly acute risks with respect to ML/TF. The status of the UK means that it may well be a destination or transit location for the proceeds of crime, particularly proceeds from fraud and tax offences, drug offending, human trafficking, and organised crime. As such, there is a serious risk of high-end ML and cash-based ML. In light of this, the effectiveness of the UK’s compliance regime is yet more important.  Indeed, the report noted that “it is not yet clear whether the level of prosecutions and convictions of high-end ML is fully consistent with the UK’s threats, risk profile and national AML/CFT policies”.

Strengths noted by the FATF

Particular strengths that are earmarked are numerous. In particular, the report notes the closeness of the interaction between public and private sectors, typified by the Joint Money Laundering Intelligence Task Force (JMLIT). Information sharing by this means is linked to improved investigations and prosecutions.

The FATF also commends the breadth of the coverage of UK compliance measures, for example, that all financial institutions (as defined by FATF) are obliged to have counter-terrorist financing and anti-money laundering policies in place, and that this regime is well supervised.

Given the particular risk of high-end ML facing the UK, the report highlights that this has been identified as an area of importance since December 2014, resulting in an increase of resources provided to the NCA and an increase in the number of high-end ML investigations. However, given the complex, transnational nature of these cases, it remains to be seen whether the increased level of investigations will actually result in more prosecutions. Nevertheless, statistics show dramatically increased activity from UK authorities, particularly from HMRC and the NCA.

Weaknesses Identified by the FATF

Against this backdrop of improvement and compliance, a number of areas are identified as requiring significant improvement: the use of the UK Financial Intelligence Unit (UKFIU), suspicious activity reports (SARs), and measures relating to correspondent banking.

First, the UK use of financial intelligence and the limited role of the UKFIU are criticised. The FATF considers that the UK has “pursued a deliberate policy to limit the role of the UKFIU.” Although similar issues were raised by the FATF in 2007, it notes that the UK has done nothing to rectify a significant lack of resources at the UKFIU (citing insufficient IT or human resources). As such doubt is cast upon the quality of financial intelligence available to investigators because the UKFIU has a limited role in MF/TL regulation. In addition, interaction between the UKFIU and foreign FIUs is hampered (even though other law enforcement agencies can access the UKFIU database and plug the resource gap to some extent, the FATF were not satisfied that this was adequate).

The SAR regime is also subject to criticism. Whilst the report notes that some high quality SARs are received, there remain many sectors in which SAR reporting is at a low level, and some of those sectors have been identified as high risk. (See our related blog Tackling illicit finance: lawyers under the spotlight). Even among banks, which are responsible for 85% of SARs, there are a large number of poor quality SARs being filed. Smaller banks and financial institutions are singled out for their lack of understanding of the risks involved in the sector, this presumably being revealed by the SARs they produce. Additionally, the FATF considers that low quality SARs may be submitted by firms who are “defensively filing”, supporting Law Commission criticisms of the system. Essentially, where transactions are unusual or unexplained, banks may be submitting SARs as a way to indemnify themselves against risk without properly analysing or investigating the transactions.

As to the numbers of SARs coming through the system, the National Crime Agency 2018 report on SARs (December 2018) states that UK Financial Intelligence Unit processed a record number of SARs (463,938); 22,619 of those were requests for a defence against money laundering: “which resulted in a total of £51,907,067 being denied to criminals”.

The report clearly evidences how SARs are vital to tackling the many and varied forms of criminality impacting the UK. However, the view in the media (FT.com) was more circumspect highlighting that whilst the number of red flags increasing by 20 per cent, to 22,196 – these led to “just 40 arrests across 28 different cases”.  This is perhaps a practical example of FATFs complaint.

Finally, the regulation of correspondent banking is deficient, according to the FATF. Correspondent banking generally comprises a domestic bank partnering with a foreign bank to provide investment opportunities to customers in markets they would not otherwise be able to access.  Although the sector is improving, compliance gaps persist, particularly at smaller banks.

Conclusion

The UK has scored highly in almost every area of the FATF evaluation of measures combatting ML/TF. However, given UK’s prominent role in the global finance industry, this is hardly surprising. The FATF criteria act as a level playing field across diverse countries, most of which will have nothing like as much involvement in global finance as the UK, so they may not be the best metric by which to measure UK success. Measures which go above and beyond the requirements of the FATF, such as the introduction of artificial intelligence, may be entirely apposite in the UK. Certainly, there is consensus that the FATF report should not provide grounds for complacency in the fight against ML/TF.

About the authors

Nicola Finnerty is a partner in the criminal litigation team. She has experience of fraud, corruption  (including the Bribery Act) and cartel matters, financial compliance, money laundering, asset seizure and confiscation cases, through to sexual offence cases, drugs, murder and offensive weapon crimes.

The blog was also co-authored with Dorian Robinson, paralegal in the Criminal Litigation team,

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