BCL’s Serena O’Dea discusses the House of Commons’ Treasury Select Committee report, entitled ‘Economic Crime – Anti-Money Laundering Supervision and Sanctions Implementation’, published on Friday 8 March 2019 calling on the government to review the UK approach to economic crime.
The report acknowledged that the precise scale of economic crime could not be calculated, although it could reasonably be estimated to be in the tens of billions of pounds, perhaps hundreds of billions. Tom Keatinge of RUSI (the Royal United Services Institute, a British defence and security think tank) put forward the difficulty in tackling economic crime without substantive data and information as to the scale of the problem. However, Mark Thompson, the then Interim Director at the Serious Fraud Office (SFO), argued that the fact that it was difficult to quantify did not preclude the ability to tackle it.
The report described the UK’s approach to Anti-Money Laundering (AML) supervision as being inherently fragmented, with the newly launched Office of Professional Body Anti-Money Laundering Supervisors (OPBAS) overseeing 22 AML supervisors across the legal and accountancy sectors. The report addressed particular concerns with regards to the property sector, HM Revenue and Customs (HMRC), Companies House, and core financial services, and considered the options for legislative reform.
The property sector and estate agents
Property transactions can involve several parties, each with a different regulator: banks are regulated by the Financial Conduct Authority (FCA), solicitors by the Solicitors Regulation Authority (SRA), and estate agents by HMRC. The report stated:
“While there may be debate over which part of the transaction chain bears most responsibility from an AML perspective, each part has a role in reporting, or preventing, a transaction that may be used for money laundering. There is a risk that some estate agents may be unsupervised, having not registered with HMRC. We recommend that HMRC carries out further work to ensure estate agents are registered with them and following best anti-money laundering practice.”
Mark Hayward, Chief Executive of NAEA Propertymark (the UK professional body for estate agents), discussed the high numbers of purchases from individuals or companies overseas, and said that whilst the prime central London market had collapsed, more business had been transferred to other towns, university towns in particular. He discussed cautioning their members to be vigilant when the buyer is a company, and to establish the beneficial ownership, noting that this practice was beginning to improve. However, Naomi Hurst of Global Witness (an international NGO concerned with corruption and other issues) criticised the role of estate agents in that they only filed 0.1% of Suspicious Activity Reports to the National Crime Agency (NCA), and deduced they could not appreciate the AML problem. Mark Hayward “probably agreed” that estate agents were the “weakest link” in the AML regime, but concurred with Donald Toon of the NCA that there should be more emphasis on the role of lawyers in any property transaction.
The report also discussed HMRC as an AML supervisor covering a range of industries, including high value dealers, as well as estate agency businesses. These supplemental AML responsibilities, across sectors in which HMRC have limited knowledge, were likely to be deemed a secondary obligation compared with their revenue-raising duties. The Committee reasoned that in order for HMRC to retain its AML supervisory responsibilities, it should have a single stand-alone objective in respect of this aspect of its role, and that there should be a clear reporting line between its AML supervisory work, and its work investigating tax crime and associated money-laundering offences.
The report discussed the risks involved in company formation, and identified the role of Companies House as being particularly weak in the AML structure. In addition to incorporating and dissolving limited companies, and registering company information, it also keeps a ‘persons with significant control’ (PSC) register, with details of names, dates of birth and nationalities of the “beneficial owners” of a company. However, Companies House is not obliged to carry out AML checks, and does not have the requisite powers to verify information on their register; rather the onus is on the company and its directors. Naomi Hurst alluded to Companies House and their enforcement powers, saying that “Companies House has the power to impose fines and a prison sentence of two years. To date there have been no such fines or criminal proceedings undertaken around beneficial ownership information…” As a result, the report said that Companies House was in need of urgent reform, the details of which should be published by summer 2019.
The report described the banks, and other financial institutions, which are regulated by the FCA, as being at the heart of the financial system. The document detailed how the FCA identify, monitor and address risk, as well as its role in imposing substantial fines for poor AML controls, the highest one to date being just over £163 million imposed on Deutsche Bank in January 2017. More recently, in June 2018 Canara Bank was fined nearly £900,000, in addition to having a restriction imposed preventing the bank from accepting deposits from new customers for 147 days, for AML systems failings, which would have been a huge imposition to those account holders. Naomi Hurst said that the FCA fines were “too infrequent to really deter behaviour”. With reference to HSBC having entered into a Deferred Prosecution Agreement with the US Department of Justice in December 2012, whereby the bank was required to forfeit $1.256 billion for anti-money laundering and sanctions violations, Colin Bell of HSBC said the bank had since invested over $1 billion on AML technology as well as investing in training and education. He emphasised the need to fully understand the risk and to appreciate that it is an evolving and continuous process. The report concluded that the FCA needed to ensure that they kept up constant pressure on those providing core financial services, and to take appropriate enforcement action against them.
The Committee addressed concerns around de-risking, whereby a financial institution removes services from an individual due to certain characteristics, such as being connected to, or of the same nationality as those subject to targeted sanctions. These individuals are deemed too risky to do business with. The report stipulates: “This can mean that businesses and individuals who are operating within the law can find that they lose access to banking services they need.” Bright Line Law, a barrister law firm, submitted written evidence addressing the detrimental effect of de-risking on individuals’ everyday life, sometimes ultimately forcing them to go elsewhere, where their funds may be intermingled with criminal proceeds:
“Financial exclusion can have a devastating impact on individual lives, the business community, and society as a whole. Exclusion from the formal financial system exacerbates inequality and leaves marginalised groups at a severe disadvantage. A lack of access to basic financial products drives people to participate in cash economies where illegal activities flourish and customer protections are non-existent. The denial of financial services to legitimate businesses stunts innovation and overall economic development.”
The Center for Financial Inclusion, an American think tank, set out the reasons behind the de-risking modus operandi frequently employed by banks globally, including:
- Regulatory burdens, where there is an overwhelming sense in the industry that regulations and sanctions concerning AML requirements are excessive and prohibitive for those client bases affected by de-risking;
- Reputational risk, whereby non-compliance with AML requirements can lead to a host of enforcement actions, which can damage an institution’s reputation;
- Banks’ much lower appetites for risks since the 2008 global financial crisis, where many institutions have excluded doing business with those individuals or groups where there is a greater likelihood of connection to illegal activity; and
- Profitability, in that those client bases excluded by virtue of de-risking tend to generate low profits, which only strengthens the case for exclusion when coupled with criteria for satisfying AML requirements.
The report included Colin Bell’s key questions asked by the bank: Do we understand where the money came from? Do we know who can direct where it goes? Are we comfortable with the transparency as to where it goes? In a bid to be compliant, it would seem that banks take a blanket approach in terms of severing business relationships with account holders they deem as posing a risk, including those who are law-abiding. The Committee recommended that the government publishes its strategy on addressing disproportionate de-risking within six months.
The consensus from those who gave evidence to the Committee was that there need to be prosecutions in order to ensure the UK is a hostile environment for economic crime. The SFO asserted that the nature of their problem in this respect was due to the ‘identification principle’, whereby a company can be convicted of a criminal offence only by establishing that a person who was the ‘directing mind and will’ of the company at the relevant time carried out the acts with the requisite mental state. This is easier to establish in smaller businesses, but harder in large multi-national companies, where the day-to-day running of the management of the company is often assigned to managers or subsidiary companies, and pinning down the ’directing mind and will‘ can be challenging.
The SFO (in written evidence) argued that the identification principle should be replaced with a new principle for the attribution of corporate liability, where a company would be guilty of the substantive offence if a person associated with it commits that offence intending to obtain or retain business for the company, to obtain or retain a business advantage for the company, or otherwise to (financially) benefit the company; this would be in addition to an offence of failing to prevent economic crime. This would be a step towards vicarious criminal liability, whereby the corporate is responsible for the acts of the employee, which is the law in the US. However, Robert Buckland, the Solicitor General, pointed out that: “In going down the path of enhanced corporate criminal liability, we must not take away from the fact that there will be cases of rogue individuals who behave in a way that a well-intentioned company did not intend or wish.”
The report also noted that the Office of Financial Sanctions Implementation (OFSI) has not long come into existence, some eighteen months ago. The Committee recommended a review be conducted into their effectiveness in six months’ time, two years after its formation.
In summary, with respect of the AML regulations, the report found that the current regime was fragmented, with a stark disparity between regulated individuals and businesses in terms of their compliance. For example, estate agents often appear to be undiscerning, whereas banks tend to be overly cautious. The report said that training needs to be a priority, in addition to a consolidation of the AML framework, in order to operate a more effective regime.
More broadly, the concerns of the Committee were clearly more focused on strengthening the enforcement of existing rules, and on considering even stricter rules on corporate liability, than on the adverse impact and side-effects of the system for individuals and businesses. The recommendation to look at the problem of de-risking is a welcome exception, but whether and how quickly it is acted on remains to be seen.
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Serena O’Dea is a legal assistant in the Business Crime & Regulation team at BCL. Since joining the firm in 2018, Serena has been involved in a number of matters representing clients in investigations and prosecutions brought by the SFO.