The Fourth AML Directive - The current roadmap and possible changes to the AML landscape two years on

The Fourth Anti-Money Laundering Directive (4MLD) is now two years old. Last year, on its first anniversary, commentators and professionals lined up to criticise its implementation and list the challenges it faced. Twelve months further on, while much has superficially changed, the underlying issues remain the same. However there are stirrings that this could be about to change.

The government and enforcement agencies have collectively and consistently maintained that tackling money laundering is a top law enforcement priority. Donald Toon, Director of Prosperity at the NCA has said that money laundering is: “a facilitator for almost all serious, organised, and major crime. Tackling it is absolutely a strategic priority for law enforcement for the UK, and that is agreed across policing, the National Crime Agency and all of the law enforcement agencies”.

However, in March of this year the House of Commons Treasury Committee published its report on Economic Crime: Anti-money laundering provisions and the current sanctions regime (the Treasury Committee Report) and in summary, the Committee found a surfeit of regulators and enforcement agencies but a lack of resources and coordination. The fractured nature of oversight, they found, resulted in a lack of investigation, information, analysis and ultimately enforcement.

This supports what many political and legal observers have questioned for some time; whether the government’s commitment extends to action in this area. Below, we recap on the anti-money laundering (AML) landscape, some of the key suggested weaknesses in the UK’s AML regime, and look at what practitioners can expect to see in the coming year.

The AML landscape - a recap
 

Following the entry into force of the Money Laundering Regulations 2017 (MLR 2017), which implemented the provisions of the 4MLD into the UK, there have been a number of key institutional developments:

National Economic Crime Centre (NECC)

The NECC was set up in November 2018 as part of the Government’s Serious and Organised Crime Strategy. It is designed to coordinate the UK’s national response to economic crime - particularly money laundering and corruption offences. The clear intention is to address the perceived gaps created by the multi-agency approach. Speaking at the Cambridge Symposium on Economic Crime in September this year, the Solicitor General praised the NECC and outlined its role as an overseer, declaring that it “truly amplifies the notion of ‘shared responsibility’” operating as “a collaborative, multi-agency centre, which brings together law enforcement and criminal justice agencies, government departments, regulatory bodies, and the private sector”.

Furthermore, the National Economic Crime Plan 2019-2022 states that the NECC will; 1) undertake a collective threat assessment; 2) resolve evidence gaps through a long term research strategy; 3) Improve information sharing between AML supervisors and review information sharing barriers; and 4) Develop public-private action plans to combat economic crime threats.

Economic Crime Strategy Board

In January 2019 the Economic Crime Strategy Board dubbed “Taskforce” was launched to ensure that appropriate resources are allocated across the relevant agencies to (in theory) enable the Government’s objectives to be met. It puts a firm emphasis on a public-private partnership to fight financial crime and money laundering in particular. This partnership was reiterated in the Economic Crime Plan 2019-2022 (above) and appears to be at the core of the government’s ambitions.

Law Commissions report on AML

On 18 June 2019 the Law Commission published its report on the AML framework (following a 2 year consultation). The report criticised the Suspicious Activity Reporting (SARs) regime as inefficient and burdensome, echoing the Financial Action Task Force’s (FATF) assessment that the system was not effective enough when set against the scale of threat faced by the UK. The Home Office is now due to implement a SARs Transformation Programme (with £3.3 billion investment) which aims to fundamentally reform the SARs operating model and deliver a regime with much better IT, enhanced feedback and a reformed, and better funded, UK Financial Intelligence Unit.

It is hoped that this will lead to a deeper assessment of reports and continued scrutiny of those, for example, in the legal, accountancy sector and trust and company service providers who were highlighted in the report for low levels of reporting compared to the banking sector. The next iteration of the regime is to be launched in December 2020 and is expected to include an upgraded SAR submission process for reporters tailored to all different reporting sectors’ needs, improved law enforcement tools to access and analyse SARs and a better system workflow to support UKFIU in managing SARs.

Enforcement

So where are we now?

As referred to in the Treasury Committee’s Report there is still a relative lack of enforcement for AML breaches. According to publicly available data (a freedom of information request reported in the media in March 2019) no prosecutions had been brought under the MLR 2017 between June 2017 and October 2018. In addition, HMRC’s own records indicate that total fines levied on businesses for non-compliance with the Money Laundering Regulations from introduction to April 2019 amounted to a mere £294,879. This represents 0.002% of a “sector” valued, on the most conservative estimates, at £10 Billion. That said HMRC levied a record fine of £7.8 million on Touma Foreign Exchange Ltd in September for a wide range of serious failures under the MLR 2017 (see below).

Many reasons for the lack of enforcement to date have been cited – including:

• The fractured nature of AML supervision. As the Select Committee’s report reflects, oversight remains spilt between 25 separate bodies, three statutory and 22 sector specific.  In 2018 the Government launched the Office for Professional Body Anti-Money Laundering Supervision (OPBAS) to “supervise the supervisors” and raise standards of information sharing and coordination amongst the non-statutory AML bodies. Over a year later, however, concerns remain over the efficacy of OPBAS. Speaking to the Treasury Select Committee earlier this year, the Association of Accounting Technicians – one of the AML regulators under OPBAS supervision, stated that “there has been no clarity” on how OPBAS will operate “or on what its measures of success will be”.
   
• The implementation of government strategy depends on money. The Treasury Committee Report identified a consistent lack of funding for enforcement and investigation, both regulatory and criminal. NCA Director-General, Lynne Owens has stated that £2.7 billion is needed in additional funds to combat serious and organised crime over the next three years.  The National Economic Crime plan is almost largely silent on this.
   
• The inability to prosecute corporates for economic crime.  In March this year, Global Witness told the Treasury Select Committee that in AML terms, the UK’s “corporate criminal liability framework is simply not fit for purpose”. This led the committee to conclude that though “there is clear evidence that legislative reform is required”, “the Government’s proposals… have stalled”.

Are Things about to change?

• Many agencies are now making reference to long running investigations coming to fruition which may in due course have the deterrent effect that has been lacking to date.  For example in April 2019, the FCA’s Enforcement Director confirmed that it had a large number of investigations “on foot, some of them entering important phases, tackling some very serious issues, including suspected financial crime in our markets…and suspected significant AML system and control issues under the Money Laundering Regulations.”   He confirmed, that: “I think it is time that we gave effect to the full intention of the Money-Laundering Regulations which provides for criminal prosecutions”… even if “I suspect criminal prosecutions, as opposed to civil or regulatory action, will be exceptional.” These investigations may now be reaching maturity, and regulatory enforcement appears to be stepping up. If so this will send a clear message to the financial and regulated sector.
   
• In addition, the authorities are increasingly vocal about their intentions to take action against those failing to comply with the obligations under MLR 2017. In the legal sector, for example, the Solicitors Regulatory Authority confirmed in March 2019 that it would be carrying out rigorous checks on law firms to make sure they are meeting their AML obligations under the MLR 2017.   Given that there are around 7,000 SRA-regulated law firms who fall under the scope of the MLR 2017 it could be argued that this is a small sample but it comes with the clear warning that “those who fall short should expect to enter our enforcement process.”
   
• Earlier this month (September) HMRC announced it had levied a “record” £7.8million fine on a forex company for failure to put in place proper “risk assessments and associated record-keeping policies, controls and procedures, fundamental customer due diligence measures or adequate staff training”. This represents a 26 fold increase on all previous known fines.
   
• Moreover, the Ministry of Justice is currently consulting on potential reforms to corporate criminal liability. The report is expected soon and, should enforcement agencies get their wish, demonstrating compliance with the AML regime will likely be central to countering a failure to prevent charge.  Indeed the SFO hinted at this recently, noting “one of the things you can expect from us going forward is an increasing interest in the detail of your compliance programmes”.
   
• The public private partnership is also pivotal to how matters will progress. It is the central pillar of the Economic Crime Strategy Board with the aim be to persuade the private sector to pay to police itself. These more detailed operational provisions are what those in the compliance sector need to take notice of as they indicate a clear direction of travel from law enforcement. Under the Economic Crime Plan 2019-22, the government identified its wish to harness the efforts of the private sector and the significant investment made by business into preventing, detecting and investigating economic crime. Both in terms of pure financial contribution such as joint public-private sector campaigns and in terms of compliance with regulatory obligations, training and awareness-raising. This will inevitably bring pressure to bear on those developing the policies and protocols in-house and preparing and delivering compliance programmes in large scale corporate structures (and senior managers).
   
• There is also further legislative reform to come in 2020.  Notwithstanding the form the UK’s departure from the EU will ultimately take, the UK has committed to transposing the provisions of the Fifth Money Laundering Directive (5MLD) into national law for the deadline of 10 January 2020 and is currently processing the responses to its consultation. One of the developments under the 5MLD is in relation to crypto-assets and the determination of law enforcement agencies to keep up with technological developments.  Certain crypto-asset providers will fall within the MLR 2017 regime, with the FCA now confirmed as the supervisory authority for this sector. In addition, Enhanced due diligence (EDD) will be required in a wider range of circumstances , including, for example, when dealing with persons or legal entities from a new list of ‘high risk’ countries; or when dealing with politically exposed persons (PEPs).

Summary

So whether enforcement action will keep up with the frequent political pronouncements on fighting money laundering remains to be seen, but the UK’s drive to be seen to be a clean place to do business post-Brexit cannot be underestimated. While enforcement and prosecution for AML failing to date has been characterised as “no carrot, no stick”, the signs are this seems about to change.

This blog was first published and appeared in Money Laundering Bulletin on September 18 2019.

Further information

For further information on the issues raised in this blog post, please contact a member of our criminal team.

About the author

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.