Research and analysis

Anti-money laundering and counter terrorist finance supervision report 2013-14

Updated 5 March 2018

1. Foreword from the Commercial Secretary to the Treasury

Law enforcement agencies believe that many hundreds of billions of pounds of criminal money is laundered through UK banks and their subsidiaries overseas each year. The UK has a strong track record of tackling money laundering and terrorist financing, but there is always more that can be done.

2013 saw a number of challenges, which we are determined to address. In particular, the Government is concerned about the increasingly broad brush and disproportionate implementation of bank’s legal and regulatory requirements in this area. In the UK this has been most prominent in the Money Service Businesses sector, from which many major banks have exited. I am also particularly concerned about reports I have received that suggest that requirements relating to Politically Exposed Persons (PEPs) have been disproportionately applied in some circumstances. The Financial Conduct Authority and other supervisors have an important role to play in ensuring that regulated firms take a proportionate and effective approach to helping prevent and detect money laundering and terrorist financing, but which does not penalise or prevent access to banking by legitimate customers and businesses.

2013 also saw a number of successes, in particular, the next step in the journey towards tackling illicit financial flows was taken when the Financial Action Task Force, the international standard setter on anti-money laundering and counter financing of terrorism (AML/CFT), published a new methodology which is being used to assess countries’ anti-money laundering and counter financing of terrorism regimes. Whilst previous rounds of assessments focussed solely on technical compliance with the standards, countries are now required to demonstrate not only that they have the required AML/CFT systems and controls in place, but that these systems and controls are being effectively implemented and achieving results at all levels.

The Treasury recognises that for many supervisors, the focus on measuring effectiveness is a significant change. Maximising the effectiveness of supervisory activities is a difficult and challenging task, but one we are determined to work in partnership with supervisors to achieve.

The 2013 - 2014 report is the fourth annual supervision report to be published by the Treasury. Few other countries’ supervisors report collaboratively and publicly on their activities. I would like to thank the supervisors again for their ongoing commitment to this voluntary initiative.

Lord Deighton Commercial Secretary to the Treasury

2. Statement from the Chair of the AML Supervisors Forum

In 2013 we saw an enhanced level of engagement between supervisors and their registered firms/entities as well as between the supervisors themselves. As we go forward into 2015 we hope to build further on our relations with fellow regulators, government bodies and law enforcement agencies, in the UK and overseas.

The consolidated facts and statistics in this report speak for themselves. They demonstrate further progress in supervisors engaging with their regulated firms and entities, in a growing range of formats and our reward has been to see increasingly positive demonstration of compliance. We all recognise there is much more to do, but progress has been sound and our increased efforts are starting to show positive results.

I am also pleased to report that through 2013, we saw a growing willingness within the affinity groups to share knowledge, exchange intelligence and provide useful examples of good practice – and we expect this willingness to extend across sectors in the coming years. This momentum is encouraging.

Looking further ahead, our challenge is to build similar relationships, grounded in trust, between supervisors and our colleagues in government, other regulatory bodies and law enforcement agencies. And it must be said that the quality of engagement of the cross-sector working groups as part of the National Risk Assessment and an increasingly explicit determination from key government bodies to share knowledge, intelligence and experience, appear to be heralding a new era of ‘working together’. To be truly effective in countering money laundering (ML) and terrorist financing (TF) - whether to achieve the goals set by the Financial Action Task Force (FATF) or simply because we wish to protect the society we live in - it is vital we all support initiatives to exchange intelligence and share skills.

However, we face a major challenge, presented by the FATF recommendations and the 4th Money Laundering Directive, to find suitable ways to measure the effectiveness of our activities where the results are reduced (or eradicated) ML and TF. Being effective and proving effectiveness are two entirely different propositions. The UK’s regulated population and supervisors invest considerable time and expense in building and running systems, checking clients, training staff and monitoring compliance. However, much of this investment is focussed, quite correctly, on prevention and deterrence. We will continue to work with FATF to find new ways to measure what has previously been seen as unmeasurable.

I would like to thank all the representatives of the UK’s supervisory authorities and government agencies who have attended our forum and affinity group meetings through the year. In particular, I would like to thank the affinity group chairs; Tania Hayes, Andy Watson and Scott Devine, who have energetically represented their groups and inspired further improvements. Your support and hard work are greatly appreciated.

Paul Simkins

3. Executive Summary

This is the Treasury’s fourth annual supervision report, covering activity undertaken in 2013-2014.

In February 2013, the Financial Action Task Force (FATF), the international standard setter on anti-money laundering and counter financing of terrorism (AML/CFT), published a new methodology ^{[footnote 1]}, which is being used to assess countries’ AML/CFT regimes. Whilst previous rounds of assessments focussed on technical compliance with the standards, the focus has now shifted. Countries will now be required to demonstrate not only that they have the required AML/CFT systems and controls in place, but that these systems and controls are being effectively implemented and achieving results at all levels across the AML/CFT regime.

For many supervisors, the focus on effectiveness is a step change. In 2014 the Treasury met all supervisors to discuss the new FATF methodology. All supervisors have developed, or are in the process of developing an action plan setting out the activity they are undertaking in light of the expectations contained in the methodology, especially immediate outcome three, which focuses on supervision.

This report follows a similar framework to the previous AML/CFT reports, placing focus on providing both quantitative and qualitative data. This report also provides a number of case studies of good practice by individual supervisors as they rise to the challenges set by FATF to better focus their efforts on demonstrating that they supervise in accordance with a risk- based approach and that this supervision is effective and proportionate.

The Treasury will continue to work in close partnership with supervisors to enhance the proportionality and effectiveness of the AML/CFT regime.

We welcome feedback on this report and on the UK’s AML/CFT regime more generally.

Comments should be sent by email to: [email protected] or by post to:

Sanctions and Illicit Finance Team
The Treasury
1 Horse Guards Road
London
SW1A 2HQ

4. Introduction

4.1 Background

The international standards on combatting money laundering and the financing of terrorism are set by the 36 members of FATF. These standards form the basis of EU legislation (the Third Money Laundering Directive^{[footnote 2]}) which is incorporated into various pieces of UK law, predominantly the Money Laundering Regulations 2007^{[footnote 3]} (the Regulations) and the Proceeds of Crime Act 2002^{[footnote 4]}(POCA.)

The Regulations place requirements on regulated persons^{[footnote 5]} to know their customers, and POCA criminalises money laundering and addresses the making of reports to law enforcement concerning money laundering activity.

The risk-based approach is the cornerstone of an effective AML/CFT regime. It means that relevant persons must identify and assess their money laundering and terrorist financing risks and put in place systems and controls to manage and mitigate them.

4.2 Supervision in the UK

The Treasury is responsible for appointing AML/CFT supervisors^{[footnote 6]} and for the Regulations which set out the role of the supervisors and gives them powers to effectively monitor their respective sectors.

There are 27 supervisors ^{[footnote 7]} which oversee a range of firms including financial institutions, credit institutions, law firms, accountancy firms and casinos^{[footnote 8]}. The supervisors are a diverse group including large global professional bodies, smaller professional bodies, and a number of public sector organisations.

Most supervisors attend the AML Supervisors Forum^{[footnote 9]} which meets three times a year. Supervisors also meet periodically in smaller affinity groups. There are three affinity groups; accountancy, legal and the public sector made up HM Revenue & Customs, Financial Conduct Authority, the Gambling Commission and the Insolvency Practitioners Service.

In order to improve the transparency of the UK’s approach to supervision and to encourage good practice, the Treasury has worked with supervisors to produce this fourth annual report, which covers supervisory activities in 2013 - 2014. We received responses from 24 of the 27 supervisors^{[footnote 10]}; 15 covering the period January 2013 to December 2013 and 8 covering the period April 2013 to March 2014^{[footnote 11]}.

4.3 Changes to the Money Laundering Regulations

In April 2014, there were changes to the supervisory regime as the Office of Fair Trading closed, with its responsibilities passing to a number of different organisations. The Financial Conduct Authority became the supervisor for consumer credit financial institutions and HM Revenue and Customs became the supervisor for estate agents.

Further changes to the supervisory regime took place in February 2015, when amendments to the Regulations came into effect. A new supervisor, the Chartered Institute of Legal Executives (CILEx), was added to the Regulations. CILEx became the supervisor of legal executives providing services independently, rather than working in the employment of other lawyers. Additionally, the Chartered Institute of Public Finance and Accountancy was omitted from the Regulations as a result of their independent decision to withdraw from this role. The businesses supervised by CIPFA were transferred to another of the listed supervisory authorities, HM Revenue and Customs.

4.4 The fourth EU AML directive and future developments

On 17 December 2014, an agreement was reached on the Fourth EU Anti-Money Laundering Directive in political trilogues between the European Parliament, the Council and the Commission. The Directive provides a common European basis for the implementation of the revised recommendations of FATF. Once adopted, the directive will be transposed into UK legislation, replacing the Money Laundering Regulations 2007.

In 2014 FATF conducted the first of its 4th round of Mutual Evaluations, focussing on both technical compliance and effectiveness. The reports can be found on FATF’s website

FATF expects countries to identify, assess and understand their money laundering and terrorist financing risks and to coordinate activity to effectively mitigate those risks. During 2014 and 2015 the Treasury and the Home Office have undertaken the first national risk assessment (NRA) of money laundering and terrorist financing risks to the UK and have engaged closely with supervisors in this process. The NRA process and its results will help ensure the Government’s understanding of ML/TF risks is informed by sector specific insights and expertise; while at the same time ensuring that supervisors are better sighted on law enforcement concerns and the wider AML/ CFT risk profile within the UK. This shared understanding of risk will inform improvement to the domestic regime from a legislative, law enforcement and supervisory perspective. A summary of the NRA findings will be published in due course.

4.5 Methodology

The 2013- 2014 AML/CFT report follows a similar framework to previous reports. However the reporting process was further refined, using a more detailed return to gather information and data more consistently from supervisors^{[footnote 12]}. This information was supplemented with evidence provided by supervisors in bilateral meetings.

Assessment of the supervisors’ returns focuses on the FATF recommendations and effectiveness methodology as a minimum benchmark to assess whether there are deficiencies in supervision and identify good practice. The relevant provisions of the Regulators Compliance Code^{[footnote 13]} are also taken into account.

Due to the diversity of the supervised population, it is not always appropriate to directly compare the different approaches of the supervisors. Where relevant and helpful to the analysis, individual supervisors are named, but activity is otherwise reported on by affinity group.

4.6 Framework of the report

The next chapter sets out the Treasury’s analysis of the information provided by supervisors under a number of subject headings, which are discussed in turn, highlighting areas of good practice which may be of relevance to all supervisors:

• how supervisors adopt a risk-based approach
• monitoring activity
• enforcement action and deterrence
• advice and outreach
• information sharing

The final chapter sets out the conclusions of the report.

5. Analysis

5.1 How supervisors adopt a risk-based approach

Context

A risk-based approach to AML/CFT requires supervisors to identity, assess and understand the AML/CTF risks to which they and their members are exposed and take measures proportionate to those risks, in order to mitigate them effectively.

In practice, this means that supervisors should pursue a risk-based approach in carrying out their own supervisory activities and likewise ensure that the members they supervise have systems in place to assess and respond to the relative risk of their clients, products and services.

Supervisors want the firms they supervise to take a risk-based approach which understands and mitigates risks in an effective and proportionate manner and do not expect firms to exit whole classes of customer without due regard to the risk presented by each customer. The Treasury is aware of a perception that the AML/CFT regime is on a “zero failure” basis; this is not a reality of supervision under the Regulations in the UK.

5.2 Analysis

ML/TF risk

Supervisors demonstrate a high level of awareness of the requirement to, and importance of, taking a risk-based approach to their AML/CFT supervision.

Implementation of the risk-based approach varies, and the level of sophistication of the risk based models adopted by supervisors vary significantly. Some supervisors devote significant time and resource to designing and implementing the approach, others are still in the early stages with a number of supervisors stating that 2013 - 2014 was a year of transition in which they developed their risk-based approach.

Identifying and maintaining an understanding of the ML/TF risks facing their sector is an integral part of a risk-based approach to supervision. Supervisors use a variety of sources to keep abreast of such risks, including: feedback from their monitoring activity, information sharing through the AML Supervisors Forum and affinity groups, publicly available information, information from FATF and alerts from the National Crime Agency (NCA).

Whilst many supervisors demonstrated a good understanding of the ML/TF risks facing their sector, the majority of supervisors had difficulty explaining how their assessment of risk translates into the specific monitoring actions they undertook during the year. To be effective supervisors’ risk assessment should be used to target their resource to the areas that pose the highest ML/TF risk.

Case study - The Law Society of Scotland’s risk-based approach to supervision

The Law Society of Scotland has developed a risk assessment tool which it uses to identify which firms should be prioritised for inspection.

The supervisor takes into account a range of factors including:

• previous compliance history
• training attendance
• whether the business carried out matches the profile of the firm in question
• whether the business is coming from outside the firms normal geographic area
• whether the business is unusually challenging/complex for the firm in question
• whether the business features higher risk jurisdictions
• if a client considered higher risk is known to have moved from one firm to another

Case study - The FCA’s risk-based approach to supervision

The FCA’s risk based approach to AML supervision enables it to focus its resources on firms that are particularly exposed to money laundering risk. It uses a variety of tools to do this including the Systematic Anti-Money Laundering Programme (SAMLP) focused on major banks, thematic reviews looking at risks across a sector and ‘event driven’ work where AML issues have arisen within individual firms.

In 2014 the FCA developed a new strategy to enable it to use its financial crime resources more effectively, classifying all regulated firms subject to the MLRs in terms of money laundering risk. The 14 major banks covered by the SAMLP continue to be subject to the most intensive AML supervision, with detailed assessments taking around six months to complete, firms in the second highest risk category are also now subject to a regular inspection programme, consisting of two or three day on-site visits. The FCA will reassess the categorisation of firms periodically.

5.3 Monitoring Activity

Context

A supervisor is required, under the Regulations to effectively monitor the relevant persons for whom it is a supervisor and take necessary measures for the purpose of securing compliance with the Regulations^{[footnote 14]}. Supervisors should have a range of techniques available to them to monitor compliance, which may include annual returns; visits; desk based monitoring; and telephone interviews.

While some supervisors undertake AML/CFT monitoring as a standalone function, others with a broader supervisory remit will undertake this monitoring as part of their overall supervision.

5.4 Analysis

Supervisors were asked to report in detail on how they monitor compliance by the members they supervise, in terms of both compliance visits, and off-site monitoring activity. For the purpose of this report both visits and desk-based reviews are classified as inspections.

For the Treasury’s 2011 - 2012 supervision report , a total of 13,571 inspections were reported. The total number of inspections decreased the following year, with a total of 11,944 inspections reported in the 2012 - 2013 reporting period. In 2013 - 2014, the number of inspections reported has decreased slightly in comparison to last year, with a total of 11,489 inspections reported.

	Number of inspections 2011 - 2012	Number of inspections 2012 - 2013	Number of inspections 2013 - 2014
Accountancy sector	—	7,718	6,485
Legal sector	—	1,615	974
Public sector	—	2,611	4,030
Total	13,571	11,944	11,489

Of course, the number of inspections in and of itself is not an indicator of effectiveness. To demonstrate effectiveness, the frequency, intensity and scope of on-site and off-site inspections should align to the risk profile of the members they supervise.

5.5 Annual returns

The use of an annual return from firms to their supervisor enables supervisors to keep up-to-date with members’ activities, driving their risk assessment and future compliance activity. 17 of the 27 supervisors report using an annual return during the reporting period.

5.6 Desk-based reviews

Desk-based reviews (DBRs) essentially reflect the processes of an on-site compliance visit, but are conducted off-site. 17 supervisors report using DBRs to monitor compliance during the reporting period. Those supervisors who decide, on the basis of their risk assessment, that this monitoring approach is not appropriate for the population they supervise should be able to clearly articulate the reasoning behind their decision not to undertake DBRs.

Broad themes emerged as to how DBRs are structured, including:

• AML specific or integrated questionnaires
• telephone reviews
• review of information submitted by members into databases held by supervisors, via email or post
• firms self-review cases and report to supervisors if any errors/omissions arise

Supervisors were asked to report on the outcomes of their DBRs, but not all supervisors currently record the results. Where supervisors did provide this information it has been broken down by affinity groups:

	Accountancy sector (1)	Legal sector (2)	Public Sector (3)
Total number of DBRs undertaken	4,834	181	2,011
Number of DBRs where firm assessed as ‘compliant’	3,197	–	44
Number of DBRs where firm assessed as ‘generally compliant’	1,563	–	25
Number of DBRs where firm assessed as ‘non-compliant’	68	–	24
Number of DBRs where no assessment of result is available	6	181	1,918

(1) The Department of Enterprise, Trade and Investment, Northern Ireland did not provide a return. Neither the Institute of Chartered Accountants of Scotland, nor the Insolvency Practitioners Association carried out desk-based reviews during the reporting period. The Institute of Chartered Accountants Ireland did carry out desk-based reviews, but was unable to provide a breakdown of the outcome of these.

(2) No return was provided by the Faculty Office of the Archbishop of Canterbury or the General Council of the Bar of Northern Ireland. Neither the General Council of the Bar England and Wales, Law Society of Scotland, Law Society of Northern Ireland nor the Faculty of Advocates carried out desk-based reviews during the reporting period. The Law Society of England and Wales was unable to provide a breakdown of the outcomes of their desk-based reviews because they are not able to extract data specific to AML compliance from general supervisory activity. A process is in place to change this for 2014 - 2015.

(3) The Insolvency Practitioners Service do not undertake desk-based reviews. The Gambling Commission outcomes were provided for a different set of compliance indicators which is why their results were not included in the breakdown of DBRs in terms of firms assessed as ‘compliant’, ‘generally compliant’, ‘non-compliant.’ The outcomes of HMRC’s desk-based review are also excluded from the breakdown of DBRs in terms of firms assessed as ‘compliant’, ‘generally compliant’, ‘non-compliant’ as they include pre-visit DBRs, with compliance scores allocated post-visit.

The number of desk-based reviews carried out in the public sector increased from the previous reporting period. Conversely, there was a decrease in the number of desk-based reviews undertaken in both the accountancy and legal sectors compared to the previous reporting period.

Unfortunately some supervisors were not able to provide a breakdown of the outcomes of all DBRs undertaken. Non-compliance issues identified in DBRs help inform risk assessments, future monitoring and outreach activity. The ability to isolate and use the results of DBRs is therefore an important step in demonstrating the effectiveness of supervisory work undertaken.

5.7 Compliance visits

On-site compliance visits are commonly used by supervisors to check that their members are complying with their AML/CFT obligations. Visits allow supervisors to understand the application of AML/CFT requirements in practice, and contribute to the supervisors’ understanding and awareness of ML/TF risks in their sectors.

Broad themes emerged as to how compliance visits are undertaken, including:

• use of a pre-visit questionnaire to inform a preliminary view and tailor the visit to areas of concern
• assessment of the firm’s commitment to embedding the risk-based approach
• review of customer due diligence, including appropriate use of enhanced due diligence and ongoing monitoring
• review of training for staff and management
• review of the role of the nominated officer (usually carried out by a Money Laundering Reporting Officer (MLRO)) within the firm

20 supervisors reported that on-site visits were used to monitor compliance during the reporting period. Visits may be on a cyclical basis and/or risk-driven. Factors considered in selecting firms for a monitoring visit include: the overall level of risks associated with the sector; whether or not non-compliance has been identified in previous inspections; and whether or not the firm has fulfilled commitments made during earlier visits.

Supervisors were asked to report on the outcomes of their compliance visits. 7 of the twenty-one supervisors that undertake visits do not currently record the outcome of their visits, or do not record the specific outcome of AML/CFT compliance where the visit covers broader regulatory activity. Developing systems which capture this information and use it to prompt future monitoring activity is an essential step for supervisors to take in order to be able to demonstrate effectiveness.

Where supervisors provided the results of compliance visits, these have been split into the three affinity groups:

Results of visits

	Accountancy sector (4)	Legal sector (5)	Public sector (6)
Total number of visits undertaken	1,651	793	2,019
Number of visits where firm assessed as ‘compliant’	619	355	583
Number of visits where firm assessed as ‘generally compliant’	755	15	338
Number of visits where firm assessed as ‘non- compliant’	125	12	253
Number of visits where no assessment of result is available	152	411	845

(4) The Department of Enterprise, Trade and Investment, Northern Ireland did not provide a return. The Chartered Institute of Management Accountants does not carry out visits. Neither the Association of Taxation Technicians, Insolvency Practitioners Association nor the Institute of Financial Accountants were able to provide a breakdown of the results of their visits.

(5) No return was provided by the Faculty Office of the Archbishop of Canterbury or the General Council of the Bar of Northern Ireland. The General Council of the Bar England and Wales did not carry out visits during the reporting period. Neither The Law Society of Scotland, nor the Law Society of England and Wales provided a breakdown of the outcome of visits. The Law Society is however undertaking a major piece of thematic work on AML compliance visiting 500 firms in various risk categories. Recommendations from this work will be factored into ongoing AML compliance work within the legal sector.

(6) The Insolvency Practitioners Service were not able to provide a breakdown of the results of their visits. Given that the Gambling Commission currently report on outcomes using a different set of compliance indicators (good, adequate, just adequate, inadequate) the figures provided could not be collated with those provided by other supervisors in the Public Sector Affinity Group.

The outcomes of visits from those supervisors who were able to provide breakdowns indicate that firms are broadly compliant with their AML/CFT obligations. Where supervisors visit a small percentage of their members, having a rigorous sampling criteria and a strong programme of other monitoring activities will enable them to demonstrate that they have an effective risk-based approach to supervision.

Separate discussions between the Treasury and individual supervisors have indicated that it would be helpful for supervisors to increase commonality in the way they define the outcomes of their monitoring activity. The AML supervisor’s forum has agreed to consider this issue in 2015.

5.8 Enforcement action and deterrence

Context

Supervisors have access to a variety of sanctions to promote compliance by members, including both civil and criminal sanctions. In terms of civil and regulatory actions HM Revenue and Customs (HMRC), the Financial Conduct Authority (FCA) and the Department of Enterprise Trade and Investment Northern Ireland (DETINI) have powers under the Regulations to require information, enter and inspect premises and administer monetary civil penalties to their supervised population. Professional bodies generally have sanctions specific to their supervisory population, for example, the ability to fine and expel firms from membership. In terms of criminal sanctions supervisors can refer non-compliant members to the relevant authorities for criminal investigation and prosecution. The FCA and DETINI can also bring criminal prosecutions themselves.

Analysis

The FATF effectiveness methodology requires supervisors to demonstrate that remedial action and/or effective, proportionate and dissuasive sanctions are being applied, and to demonstrate that these actions have an effect on members’ compliance. A number of themes emerged as to the various ways supervisors meet this requirement:

• direct calculation for a penalty based on turnover/clients
• publication of disciplinary proceedings to act as a deterrent
• justification for sanction fully documented
• approval process within the supervisory body to sign-off a sanction
• sanctions imposed by an external, independent body
• reviewing the state of the firm’s compliance before and after the application of sanction, with follow-up visits to check compliance

Supervisors were asked to provide a breakdown of the sanctions and other formal enforcement actions they had taken over the course of the year. In the table below the enforcement action taken in 2013 - 2014 has been compared to the enforcement action taken by all supervisors in the previous reporting period^{[footnote 16]}.

Enforcement action taken in 2013- 2014 in comparison to 2012- 2013 period

Enforcement action	2012-13	2013-14
fine	181	529
undertaking/condition	52	129
warning	481	409
action plan	252	440
fit and proper rejection	86	64
suspension	5	29
reprimand	27	70

Last year’s report was the first in which we asked supervisors to provide a breakdown of their enforcement activity in this way. The data suggests that there has been a significant increase in enforcement activity undertaken by supervisors in 2013 - 2014, compared to the 2012 - 2013 period. Below the enforcement action taken by supervisors in 2013 - 2014 has been broken down into the affinity groups:

Enforcement action by accountancy sector supervisors

(The Institute of Financial Accountants did not provide a breakdown on enforcement action in the reporting period.)

Enforcement action	Number of actions taken
expulsion/withdrawal of membership	31
suspension	3
fine	50
reprimand	62
undertaking/condition	46
warning	220
action plan	272

In the accountancy sector, there was an increase in the use of every enforcement tool in 2013 - 2014 compared to the 2012 - 2013 period. Of particular note was the increase in the use of fines, with 50 reported in 2013 - 2014 compared to 18 in 2012- 2013. Additionally, the use of warnings increased nearly threefold from 78 in 2012 - 2013 to 220 in 2013 - 2014. The increase in the use of enforcement activity cannot be attributed to the number of accountancy sector supervisors that provided data.

Enforcement action by legal sector supervisors

(Neither the Faculty Office Of the Archbishop of Canterbury, nor the General Council of the Bar of Northern Ireland provided a return for the reporting period.)

Enforcement action	Number of actions taken
expulsion/withdrawal of membership	65
suspension	26
fine	61
undertaking/condition	29
reprimand	8

Enforcement action by public sector supervisors

(The Insolvency Practitioners Service did not provide details of enforcement action taken during the reporting period.)

Enforcement action	Number of actions taken
expulsion/withdrawal of membership	2926
fine	418
undertaking	54
warning	189
action plan	168
fit and proper status rejection	64

In the public sector, there was an increase in the use of some enforcement tools compared to the previous reporting period. Of note was the increase in the use of fines, with 418 issued in 2013 - 2014 compared to 159 in the previous period. This can be attributed to HM Revenue & Customs making much greater use of this tool. The significant increase in the use of expulsion or membership /withdrawal is due to HM Revenue & Customs reclassifying activity that it considers within the scope of this category.

An action plan is any communication seeking improvements which is considered part of a supervisor’s general capacity development and monitoring programme, rather than part of a formal disciplinary programme. The use of action plans increased significantly within the public sector with 168 reported in 2013- 2014 compared to just 19 in the previous period. Conversely, there was a decrease in the number of investigations and the use of warning letters.

The figures provided suggest a significant increase in the use of a range of enforcement tools in all sectors. Taking robust action against those who demonstrate persistent or material breaches of the Regulations enables supervisors to demonstrate that sanctions are proportionate and effective. But supervisors should also be mindful that such action does not create perverse incentives, such as disproportionate compliance is some areas. To demonstrate effectiveness, supervisors need to be able to show clear links between the enforcement action they have taken and the resulting compliance outcomes.

Case study - FCA fines bank for failings in its AML controls for high-risk customers

The FCA fined two firms within the reporting period. In April 2013 it fined EFD Private Bank Ltd (EFG) £4.2m for failing to take reasonable care to establish and maintain effective AML controls for high risk customers. The failings were serious and lasted for more than three years. In this case while EFG’s policies looked good on paper, in practice it manifestly failed to ensure that it was addressing its AML risks. Its poor implementation of its agreed policies risked the bank handling the proceeds of crime. In August 2013 Guaranty Trust Bank (UK) was fined £525,000 for failings in its anti-money laundering controls for high-risk customers between May 2008 and June 2010. These failings were particularly serious as they affected customers based in countries associated with a higher risk of money laundering, including accounts held by Politically Exposed Persons (PEPs.)

Case study - HMRC contributes to law enforcement operations against Money Service Businesses.

In June 2013 HMRC took part in a joint operation with the Serious Organised Crime Agency (now the National Crime Agency) and Metropolitan Police, raiding 10 Money Services Businesses through which profits from crime were believed to have been laundered. Officers arrested two women and four men on suspicion of facilitating money laundering. HMRC supervisor officers immediately revoked the ‘fit and proper’ status of three people for breaches of the Money Laundering Regulations and four businesses were closed down. There was much publicity about the operation, which should help deter other MSBs from facilitating crime and encourage them to report suspicious activity.

Case study - Gambling Commission publishes public statements on weaknesses in gambling operators AML systems and controls

During 2013, the Gambling Commission worked on a number of cases that involved potential weaknesses in anti-money laundering controls put in place by several gambling operators in relation to specific customers. Following investigation of the cases, the operators involved agreed to make serious efforts to address the vulnerabilities that were identified within their organisations and recognised the importance of sharing the learning from the cases with the gambling industry more widely. In two of the cases, they also agreed to make payments to charities equivalent to the amounts by which they had benefited from the individuals’ custom, and to make a contribution to the Gambling Commission’s legal costs.

The cases resulted in a number of learnings, which were shared with all gambling operators through the publication of public statements.

Case study - HMRC continues to improve the integrity of its register

Under the Regulations HMRC are required to keep a register of all persons they supervise^{[footnote 17]}. HMRC continued to improve the integrity of its register in 2013/14. HMRC withdrew the fit and proper status of 79 individuals, with 53 businesses compulsorily deregistered as a consequence.

In addition to determining that enforcement action is appropriate, supervisors may give businesses the opportunity to remedy inadequacies in their policies and procedures through various methods.

5.9 Advice and outreach

Context

FATF and the UK Regulators’ Compliance Code expect supervisors to provide both general and targeted information and practical advice in a range of formats to the members they supervise. FATF also expects supervisors to provide members with adequate feedback on compliance with assessors looking at the level of interaction with the members they supervise through guidance and training.

5.10 Analysis

Formal guidance, written by supervisors and industry bodies, and approved by the Treasury, provides detailed assistance on the practical application of the Regulations in a particular sector. Guidance is used by supervisors to provide their supervised population with a clear understanding of their AML/CFT obligations and ML/TF risks, and is generally updated in light of developments in money laundering or terrorist financing threats, or changes in the law. Supervisors and industry bodies will need to update their guidance when the 4th Money Laundering Directive is transposed into UK law.

Guidance is also an essential part of the UK’s risk-based approach, allowing firms to take a targeted and proportionate approach. Guidance provides a degree of legal protection for relevant persons, that is to say in the event of a prosecution, or should a supervisor wish to impose a civil penalty, the firm or individual concerned can cite due regard to the Treasury approved guidance.

Many supervisors reach out to firms beyond the publishing of guidance, for example, through running AML/CFT training events or answering queries through an e-mail or telephone advice service. Other methods of engagement utilised by supervisors include advice through the supervisor’s website and e-mail updates and:

• 18 supervisors reported that they publish AML/CFT information on their website
• 15 supervisors reported engaging with their supervised population on AML/CFT issues through training events
• 11 supervisors reported that they have a telephone or email helpline which their supervised population can use to raise AML/CFT specific queries

Law Society of Scotland outreach activity

The Law Society of Scotland promotes increased awareness of money laundering requirements and risks through a range of activities including an annual programme of events, supporting AML events at local faculties and magazine articles from internal and external writers. The subject is also covered in a mandatory course for all new partners where AML content is delivered by Law Society of Scotland staff, established MLROs & law enforcement.

Supervisors are undertaking a broad range of high-quality engagement and outreach. The challenge for supervisors is to demonstrate a value-chain, in this instance what impact their outreach activity is having on levels of compliance with the Regulations. Given the challenges in measuring the direct consequences of engagement activity, supervisors may find it useful to use proxies to measure levels of engagement, recording for example the number of firms that attended a training event or the number of individuals that ‘clicked-through’ in response to an AML specific e-update. Some supervisors already do this, and a number of others are actively investigating ways in which to capture this information.

5.11 Information sharing

Context

An effective AML/CFT regime requires supervisors to communicate and share information with each other. Some ML/TF risks may be common to a number of or all relevant persons. Supervisors should therefore be able to share information on how best to identify and mitigate these risks. Supervisors may also need to work together on individual cases where, for example, a member changes supervisor.

Analysis

Supervisors were asked to provide feedback on information sharing with other supervisors and the NCA. There are a number of forums which facilitate information sharing amongst supervisors, including the AML supervisor’s forum which the Treasury, Home Office and NCA attend. The forum enables supervisors to share best practice, raise common issues and ensure that a consistent approach is taken by all supervisors.

Many supervisors also share information through their respective affinity groups; accountancy sector, legal sector and public sector, these groups meet periodically.

In addition, the Money Laundering Advisory Committee (MLAC), jointly chaired by the Treasury and the Home Office, provides a forum for representatives from industry, law enforcement, supervisors and Government to oversee and advise on the operation of an effective and proportionate AML/CFT regime in the UK. The committee review industry guidance, inform evidence based policy making and inform the development of global standards through the UK delegation to FATF.

Supervisors also report sharing information on specific cases.

Case study - Transition of estate agency businesses from the Office of Fair Trading to HMRC

During the last 6 months of 2013 HMRC prepared for the transfer of estate agency business supervision from the Office of Fair Trading (OFT). It collaborated with OFT to ensure a smooth transition, including data transfer. Publicity involved a multi-media approach including trade magazines, social media, and face-to-face workshops. The transfer happened successfully on 1 April 2014 at which point HMRC contacted each agent registered with OFT, primarily by e-mail.

Where appropriate, supervisors have a memorandum of understanding in place to facilitate information sharing. A good example of this is the MOU signed between the FCA and HMRC on MSB supervision.

Case study - Memorandum of Understanding between HMRC and FCA

HMRC supervises Money Transmitters under the Regulations but since 2009 the FCA has had responsibility for supervising these firms for their compliance with conduct obligations under the Payment Services Regulations 2009.

During the reporting period the FCA and HMRC began work on a revised Memorandum of Understanding (MOU). The objective of this MOU is to facilitate the sharing of intelligence, cooperation on operational issues as well as a channel for reviewing market developments and new and emerging business models.

The MOU, which was agreed subsequently to the reporting period, sets out the role of each organisation and explains how they will work together to avoid duplication of effort, minimise the burden on money transmitters, and disclose information about those who are not complying with the Regulations or the Payment Services Regulations 2009.

Supervisors report being able to share information with law enforcement, including through the NCA’s attendance at the AML Supervisors Forums, on individual cases and through dedicated law enforcement officers and departments within their supervisory bodies. A number of supervisors did however also express poor information sharing and engagement with and from the UK Financial Intelligence Unit in the NCA as a barrier to effectiveness.

Case study - Law Society of Scotland information sharing with law enforcement

Law enforcement received a number of SARs from various firms who had suspicions following approaches by a group of businessmen who claimed to be part of a venture which involved large sums from abroad being invested into the Scottish property market. Law enforcement suspected that the business proposal was a scam and that lawyers were needed to make the scheme appear credible to potential victims (investors). After contact with the Law Society of Scotland several alerts were issued to the Scottish solicitor profession to raise awareness of the scheme. Two years later the Law Society of Scotland became aware that the scheme had resurfaced with different details and were able to provide fresh intelligence to law enforcement via the SARs system while also again alerting the profession.

Information sharing with overseas counterparts and law enforcement is less common, and dependent on the nature and scope of the work carried out by the firms supervised. There is not currently any evidence to suggest that this ad hoc approach is insufficient. Supervisors will be asked to provide more information on these arrangements in the 2014 - 2015 reporting period.

6. Conclusions

As with previous years, evidence provided by the supervisors demonstrates instances of good practice as well as highlighting areas for improvement.

6.1 The risk-based approach

Supervisors demonstrate a high level of awareness of the requirement to, and importance of, taking a risk-based approach to their AML/CFT supervision. But implementation of the risk-based approach varies, and the level of sophistication of the risk based models adopted by supervisors vary significantly.

The majority of supervisors also had difficulty articulating how their assessment of risk translates into their monitoring approach, which is a vital step in demonstrating effectiveness.

6.2 Monitoring activity

There was a slight decrease in the number of desk-based reviews and visits undertaken in 2013 - 2014 compared to the previous reporting period.

The outcomes of the inspections from those supervisors who were able to provide breakdowns indicate that firms are broadly compliant with their AML/CFT obligations. But some supervisors were unable to report on the outcomes of their inspections. Non-compliance issues identified in DBRs and visits help inform risk assessments, future monitoring and outreach activity.

The AML supervisor’s forum have also agreed that it would be helpful for supervisors to increase commonality in the way they define the outcomes of their monitoring activity and will be looking at this issue in 2015.

6.3 Enforcement action

Supervisors have access to a variety of sanctions to promote compliance by firms, including both civil and criminal sanctions. Data provided by supervisors suggests that there has been a significant increase in enforcement activity undertaken by supervisors in 2013- 2014, compared to the 2012- 2013 period.

In the accountancy sector, there was an increase in the use of every enforcement tool in 2013- 2014 compared to the 2012 - 2013 period. In the legal sector, there was also an increase in the use of every enforcement tool compared to the previous reporting period. The rise in enforcement activity in the legal sector can be attributed to a significant increase in the use of a range of enforcement tools by the Law Society of England and Wales. In the public sector, there was an increase in the use of some enforcement tools compared to the previous reporting period. Of note was the increase in the use of fines, and action plans.

6.4 Advice/outreach

Both the FATF effectiveness methodology and the Regulators’ Compliance Code expect supervisors to provide both general and targeted information and practical advice in a range of formats to the firms they supervise.

Formal guidance, written by supervisors and industry bodies, and approved by the Treasury, provides detailed assistance on the practical application of the Regulations and is an essential part of the UK’s risk-based approach.

Many supervisors also reach out to firms beyond the publishing of guidance, for example, through running AML/CFT training events, answering queries and/or through an e-mail or telephone advice service.

6.5 Information sharing

An effective AML/CFT regime requires supervisors to communicate and share information with each other. There are a number of forums which facilitate information sharing amongst supervisors, including the Money Laundering Advisory Committee (MLAC), the AML supervisor’s forum and its three affinity groups.

The Treasury welcomes feedback on this report and more broadly on the UK’s AML/CFT regime. Comments should be sent by email to [email protected] or by post to:

Sanctions and Illicit Finance Team The Treasury 1 Horse Guards Road London SW1A 2HQ

7. Annex A: Anti-money laundering/countering the financing of terrorism supervisors

Association of Accounting Technicians (AAT)

Association of Chartered Certified Accountants (ACCA)

Association of International Accountants (AIA)

Association of Taxation Technicians (ATT)

Chartered Institute of Management Accountants (CIMA)

Chartered Institute of Legal Executives (CILEX)

Chartered Institute of Taxation (CIOT)

Council for Licensed Conveyancers (CLC)

Department of Enterprise, Trade, and Investment Northern Ireland (DETNI)

Faculty of Advocates (Scottish bar association) (FoA)

Faculty Office of the Archbishop of Canterbury (AoC)

Financial Conduct Authority (FCA)

Gambling Commission (GC)

General Council of the Bar (England and Wales) (GCBEW)

General Council of the Bar of Northern Ireland (GCBNI)

HM Revenue & Customs (HMRC)

Insolvency Practitioners Association (IPA)

Insolvency Service (SoS)

Institute of Certified Bookkeepers (ICB)

Institute of Chartered Accountants in England and Wales (ICAEW)

Institute of Chartered Accountants in Ireland (ICAI)

Institute of Chartered Accountants of Scotland (ICAS)

Institute of Financial Accountants (IFA)

International Association of Book-keepers (IAB)

Law Society of England and Wales (LSEW)

Law Society of Northern Ireland (LSNI)

Law Society of Scotland (LSS)

8. Annex B: Immediate Outcome 3

Supervisors appropriately supervise, monitor and regulate financial institutions and DNFBPs for compliance with AML/CFT requirements commensurate with their risks.

Characteristics of an effective system Supervision and monitoring address and mitigate the money laundering and terrorist financing risks in the financial and other relevant sectors by:

• preventing criminals and their associates from holding, or being the beneficial owner of, a significant or controlling interest or a management function in financial institutions or DNFBPs; and
• promptly identifying, remedying, and sanctioning, where appropriate, violations of AML/CFT requirements or failings in money laundering and terrorist financing risk management.

Supervisors provide financial institutions and DNFBPs with adequate feedback and guidance on compliance with AML/CFT requirements. Over time, supervision and monitoring improve the level of AML/CFT compliance, and discourage attempts by criminals to abuse the financial and DNFBP sectors, particularly in the sectors most exposed to money laundering and terrorist financing risks.

This outcome relates primarily to Recommendations 14, 26 to 28, 34 and 35, and also elements of Recommendations 1 and 40.

8.1 Core issues to be considered in determining if the outcome is being achieved:

How well does licensing, registration or other controls implemented by supervisors or other authorities prevent criminals and their associates from holding, or being the beneficial owner of a significant or controlling interest or holding a management function in financial institutions or DNFBPs? How well are breaches of such licensing or registration requirements detected?

How well do the supervisors identify and maintain an understanding of the ML/TF risks in the financial and other sectors as a whole, between different sectors and types of institution, and of individual institutions?

With a view to mitigating the risks, how well do supervisors, on a risk-sensitive basis, supervise or monitor the extent to which financial institutions and DNFBPs are complying with their AML/CFT requirements?

To what extent are remedial actions and/or effective, proportionate and dissuasive sanctions applied in practice?

To what extent are supervisors able to demonstrate that their actions have an effect on compliance by financial institutions and DNFBPs?

How well do the supervisors promote a clear understanding by financial institutions and DNFBPs of their AML/CFT obligations and ML/TF risks?

a) Examples of information that could support the conclusions on core issues:

1. Contextual factors regarding the size, composition, and structure of the financial and DNFBP sectors and informal or unregulated sector (e.g., number and types of financial institutions (including MVTS) and DNFBPs licensed or registered in each category; types of financial (including cross-border) activities; relative size, importance and materiality of sectors).

2. Supervisors’ risk models, manuals and guidance on AML/CFT (e.g., operations manuals for supervisory staff; publications outlining AML/CFT supervisory / monitoring approach; supervisory circulars, good and poor practises, thematic studies; annual reports).

3. Information on supervisory engagement with the industry, the FIU and other competent authorities on AML/CFT issues (e.g., providing guidance and training, organising meetings or promoting interactions with financial institutions and DNFBPs).

4. Information on supervision (e.g., frequency, scope and nature of monitoring and inspections (onsite and off-site); nature of breaches identified; sanctions and other remedial actions (e.g., corrective actions, reprimands, fines) applied, examples of cases where sanctions and other remedial actions have improved AML/CFT compliance).

b) Examples of specific factors that could support the conclusions on core issues

1. What are the measures implemented to prevent the establishment or continued operation of shell banks in the country?

2. To what extent are “fit and proper” tests or other similar measures used with regard to persons holding senior management functions, holding a significant or controlling interest, or professionally accredited in financial institutions and DNFBPs?

3. What measures do supervisors employ in order to assess the ML/TF risks of the sectors and entities they supervise/monitor? How often are the risk profiles reviewed, and what are the trigger events (e.g., changes in management or business activities)?

4. What measures and supervisory tools are employed to ensure that financial institutions (including financial groups) and DNFBPs are regulated and comply with their AML/CFT obligations (including those which relate to targeted financial sanctions on terrorism, and to counter measures called for by the FATF)? To what extent has this promoted the use of the formal financial system?

5. To what extent do the frequency, intensity and scope of on-site and off-site inspections relate to the risk profile of the financial institutions (including financial group) and DNFBPs?

6. What is the level of co-operation between supervisors and other competent authorities in relation to AML/CFT (including financial group ML/TF risk management) issues? What are the circumstances where supervisors share or seek information from other competent authorities with regard to AML/CFT issues (including market entry)?

7. What measures are taken to identify, license or register, monitor and sanction as appropriate, persons who carry out MVTs?

8. Do supervisors have adequate resources to conduct supervision or monitoring for AML/CFT purposes, taking into account the size, complexity and risk profiles of the sector supervised or monitored?

9. What are the measures implemented to ensure that financial supervisors have operational independence so that they are not subject to undue influence on AML/CFT matters?

9. Annex C: UK annual return for supervisors

The UK annual return for supervisors can be found as a word document on the Anti-money laundering and counter terrorist supervision reports page

1. The FATF methodology is available on the FATF website ↩

2. The third money laundering directive can be found on the European legislation website ↩

3. The Money Laundering Regulations 2007 can be found at legislation.gov ↩

4. The Proceeds of Crime Act can be found at legislation.gov ↩

5. Regulation 3 identifies those that are subject to the Regulations ↩

6. The duties of the Supervisors are set out in Regulation 24 ↩

7. Full list provided in Annex A ↩

8. Full list of supervised sectors include: credit institutions, financial institutions, auditors, insolvency practitioners, external accountants and tax advisers, independent legal professionals, money service businesses, trust and company service providers, estate agents, high value dealers and casinos. ↩

9. The AML Supervisors Forum was set up to encourage the sharing of information and best practice between supervisors. It is also attended by the Treasury, the Home Office and the National Crime Agency. ↩

10. All supervisors submitted a return with the exception of the General Council of the Bar of Northern Ireland, The Faculty Office of the Archbishop of Canterbury and the Department of Enterprise, Trade, and Investment Northern Ireland. ↩

11. The Institute of Financial Accountants did not provide information on the reporting period their return covered. ↩

12. The form which supervisors completed this year can be found in Annex C. ↩

13. The Regulators Code, the successor to the Regulators Compliance Code can be found on gov.uk ↩

14. Regulation 24(1) of the Money Laundering Regulations 2007 ↩

15. Data on the use of the expulsion/withdrawal of membership tool has not been included to enable a comparison to last year’s data to more easily be made. HM Revenue & Customs reported 313 compulsory deregistrations during the reporting period. This reflects a different, more accurate, reporting practice than used for a similar category for 2012-2013. ↩

16. Regulation 25(1) of the Money Laundering Regulations 2007 ↩