The end for enablers? How the UK’s plan to shake up anti-money laundering can be a success

This week the Government announced bold new plans to shake-up the policing of anti-money laundering rules. Currently there is a patchwork of 25 different bodies, mostly industry associations, charged with ensuring businesses provide an effective first line of defence against dirty money. Reforms announced this week will hand the Financial Conduct Authority (FCA) responsibility for overseeing ‘know your customer’ checks in the legal, accountancy and trust and company service providers, ending a long period of dysfunctional self-regulation. 

This represents a positive step toward addressing the key weaknesses identified by the Financial Action Task Force’s, a global standards body, in 2018. It is also timely given the UK is hosting an international illicit finance summit next year, and will be keen to present itself as a leader in the fight against economic crime. 

Out with the old approach 

This announcement follows 10 years of campaigning by Transparency International UK and our allies, highlighting key the flaws in the old system and proposing options for change, which ministers have now adopted. 

For far too long, the UK’s professional services sector has been used as the gateway through which corrupt actors, kleptocrats and criminals access Britain’s financial system to launder their dirty money and stash the proceeds of crimes. Instead of acting as enablers of economic crimes - knowingly or unknowingly - firms providing services such as legal advice, accountancy and company formation have a critical role to play as the first line of defence in identifying money laundering risks. 

But we found that the current fragmented regulatory landscape to be totally inadequate. Inconsistent oversight – where 23 of the 25 regulators oversee elements trust and company service provision – has resulted in rogue company formation agents running rampant for years tarnishing the UK’s reputation as a clean and trustworthy place to do business in the process. 

We also raised concerns that private sector regulators acted as trade bodies for those they were supposed to regulate, leading to conflicts of interest and weak enforcement action. This was later confirmed by the Office of Professional Anti-money laundering supervisors (OPBAS), which found this affected 33 per cent of private sector supervisors. 

Unsurprisingly the 25-supervisor approach also led to inconsistent enforcement for those falling short in their anti-money laundering duties. Differing powers and practices amongst the regulators resulted in  “professional enablers” knowingly or unwittingly providing services to criminals, often without repercussions.  

In with the new 

Given the context, the Government’s announcement to consolidate this system is welcome. The FCA will now take on responsibilities held previously by 22 private sector supervisors, as well as parts of HMRC. This has the potential to create significant efficiencies and address longstanding concerns about self-regulation. 

However, this marks only the beginning of a process. To break with the past and ensure this new approach is effective, the Government will have to ensure the transition is well executed. We outline three key challenges it will need to consider, and overcome, for this new regulatory framework to be a success:  

1. The transition 

The logistics of moving oversight duties from 23 different supervisors into the FCA poses some challenges. 

All of these supervisors hold information and expertise on intelligence gathered, investigations undertaken, and enforcement brought over the best part of two decades, each in their own ways. This data is crucial to enabling the FCA’s to take a risk-based approach, prioritising its resources where they are likely to have the biggest impact. Pooling these reservoirs of intel into one place should be a high priority so the FCA does not go into its new role blind. 

Keeping some level of service continuity during this interregnum is also key. With the new system dependent on primary legislation that could take years to enact, existing supervisors should not be allowed to wind down their activities, which would create a regulatory gap. Existing supervisors should continue to actively police UK professionals to prevent standards from slipping, with interim powers to compel them to take action where they fail to do so. 

2. Resources 

Though the FCA has a better track record than others in enforcing anti-money laundering rules, it will now see a huge increase in the scope of its work, and must be resourced adequately. Government is handing it responsibility for overseeing three new sectors (legal, accountancy and trust and company service providers), covering tens of thousands of new firms. This should bring with it sufficient resources to enable effective oversight over this substantial new regulated population. When building this new service, the FCA should consider what expertise it needs to meet the challenges posed by regulating these new sectors. 

3. Powers 

The FCA will need the right powers to be an effective regulator, particularly for the legal sector which poses unique challenges. The Solicitors Regulation Authority (SRA), the existing supervisor, can issue statutory production notices to compel law firms to hand over privileged information for regulatory purposes. Even the police do not have this power, instead relying on court orders. Government needs to consider whether the FCA has sufficient tools to do the same, where necessary, to fulfil its new role. 

The timeline for the FCA taking on this expanded role remains unclear, with primary legislation needed before this change is implemented. The Government should not take too long in pressing ahead, however. A review by the Financial Action Task Force is on the horizon, who will need convincing that the UK has addressed the issues they raised previously about its supervisory regime. Similarly, with the illicit finance summit expected early next year, ministers do not have much time to get their own house in order before persuading their opposite numbers abroad to do the same.  

It has taken a decade to decide on how to sort out the current mess. If the UK wants to be taken seriously on the global stage, it should not take a decade more to hold enablers to account. 

Header image by Robert Bye on Unsplash