Are Their Important Changes That Weaken The UK NRA In Advance Of Brexit?
The UK’s original 2015 National Risk Assessment on Money Laundering and Terrorist Financing (NRA) presented an honest, if quite broad and superficial, idea of the ML and TF risks in the UK, in an attempt to ‘inform the efficient allocation of resources and mitigate those risks’.
This showed intelligence disparities, a shaky reaction to money laundering by law enforcement ‘for an extended period of time’ and weaknesses in supervision. These discoveries have shaped a variety of responses, featuring an Action Plan for anti-money laundering and counter-terrorist finance (AML/CTF) and an AML supervisory review. Further efforts to reform the UK’s Suspicious Activity Reports regime have also been advancing.
Behind much of this particular activity is the concealed hand of the Financial Action Task Force (FATF), the global standard-setter for AML/CTF, which will determine both the specialised compliance and effective application of the UK over the next six months before publishing its assessment in 2018.
By having this in mind, the British government published a modified NRA that lays out how the key ML and TF risks for the UK have modified since the previous edition, and the action taken since 2015 to address these risks.
While presenting some welcome learning (for example the sectoral adjustment of charities from ‘medium-high’ to ‘low’; the inclusion of capital markets ML risks; and the inclusion of the TF threat from Northern Ireland-related terrorism) and showcasing some notable legislative developments (in particular the Criminal Finances Act 2017 and the Money Laundering Regulations 2017), the NRA still overlooks some vital risks, particularly the ability of law enforcement to respond to the identified threats.
It is not clear, and indeed insufficiently delineated in the NRA itself, how this nuanced view of risks, that some services, in some circumstances, pose a high risk, can be exercised
The 2017 NRA has made a welcome attempt to focus more on activity that creates risks of money laundering, instead of taking a strict sectoral approach. In comparison to the 2015 NRA, the new document has chapters including accountancy, legal, and property/estate agency services, as opposed to the associated sectors (like accountancy services providers in 2015).
It also identifies that higher risks may emerge where these professional services correspond and that separate sectors can virtually offer the same services (such as company formation or use of client accounts).
A distinction is drawn when comparing abuse of property itself and the provision of estate agency services. Nonetheless, the NRA stops short of analyzing these higher risk environments thoroughly. It thus seems inevitable that the risk ratings allocated to certain services, for example, accountancy services rated overall ‘high’ for money laundering, will be connected into customer risk models as a sectoral risk.
One remarkable element concerning this assessment is the downgrading of estate agents from medium to low risk given the sector has shown substandard awareness and compliance and is now tasked with due diligence on both sellers and buyers. The vulnerability posed by this sector is added to due to the difficulties HM Revenue and Customs (HMRC) face in supervising such a diverse sector. This regrading will seem obtuse to many and may reverse the efforts made to enforce greater compliance with ML regulations over recent years.
Money service businesses (MSBs) stand out from the NRA: in form, given that MSBs are not discussed with other financial services, but inserted between cash and non-profit organisations; and in substance, because the ML risks related to the MSB sector have been re-evaluated from medium to high.
The justifications for this adjustment include challenges for the sector’s effective supervision by HMRC; and several cases corroborating the view of law enforcement agencies that complicit MSBs are ‘a favoured and readily available money laundering vehicle for organised crime groups’.
The UK government will be evaluated mainly by FATF on whether or not it has the capacity to strengthen the MSB sector’s supervision in the UK in such a way in order to restore banks’ confidence in the sector.
Most importantly, the NRA recognises MSBs’ growing difficulties accessing banking services have even further reduced the transparency of the sector composition and operations.
The NRA refers to several of the government’s responses to these findings, including at the international level. However, as said above, the government will still be judged predominantly by FATF on whether it is able to strengthen the MSB sector’s supervision in the UK in such a way as to restore banks’ confidence in the sector. Ultimately, this will reduce the risk mitigation costs incurred by banks that provide services to MSBs.
A persistent theme through both NRAs is the importance and challenge of effective supervision. One innovation since the 2015 NRA, which identified several vulnerabilities in the UK’s supervisory regime, has been the formulation of the Office for Professional Body AML Supervision (OPBAS).
This takes into account the fact that 22 of the UK’s 27 watchdogs are professional body supervisors (rather than statutory bodies such as the Financial Conduct Agency and HMRC) that display an inconsistence, and sometimes ineffective, treatment.
Up and running at the end of 2017, OPBAS look after ‘the adequacy of the AML/CTF supervisory arrangements of professional body supervisors in the UK.’
Digital currencies remain a ‘low risk’ for both ML and TF, mirroring the continued lack of significant evidence of their greater use by organised criminals and terrorists
Greater supervisory rigour and coherence is clearly called for, yet as both the MSB and estate agency cases imply, it is not merely professional body supervisors that ought to display greater commitment to creating an effective deterrent to preserve the integrity of the system.
The NRA singles out e-money, digital currencies and crowdfunding as products that are most ‘relevant from the perspective of ML and TF’. TF risk for e-money increases from ‘low’ to ‘medium’ in response to emerging evidence of terrorists’ intent to exploit pre-paid cards to transfer funds across borders undetected.
A welcome addition is the recognition of the potential for FinTech to mitigate financial crime. This is positive, and mirrors the important work undertaken through the FCA’s regulatory ‘sandbox’ that has allowed enterprises to test products in an unencumbered environment. These opportunities, specifically in the regulatory technology (RegTech) space are likely to increase, thus an acknowledgement in the NRA is timely.
Although new laws and initiatives for example, the Joint Money Laundering Intelligence Taskforce feature prominently, there is a striking omission from the NRA. Risk assessments should not only identify the risks at hand, but also the extent to which they can be mitigated (the control measures). The 2017 NRA has, perhaps intentionally, side-stepped talking about the latter given it is here the UK is found wanting.
The NRA 2015 noted that ‘the law enforcement response to money laundering has been weak for an extended period of time’. The degree to which this weakness has been addressed is left open in the most recent Risk Assessment, with talk about ‘enhancing the law enforcement response’ limited primarily to updates on legislation.
With police budgets chopped by 20% since 2010 at the same time as law enforcement is being asked to answer a greater array of strategic threats, the levels of resource delegated to investigate complex (or perhaps simplistic) money laundering cases are decreasing.
Ultimately, a successful AML/CTF regime has to do with delivering results. The jury is out and will return with its verdict a year or so from now.
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