Economic Crime - Anti-money laundering supervision and sanctions implementations Contents

2A fragmented approach to AML supervision

The UK’s AML supervisory landscape

34.The UK has a number of anti-money laundering (AML) supervisors. The Treasury has identified 13 Accountancy Professional body AML supervisors, nine Legal Professional body supervisors, and three Statutory AML supervisors: HM Revenue and Customs, (HMRC), the Financial Conduct Authority, and the Gambling Commission.41

35.When asked about the fragmented nature of this supervisory regime, Duncan Hames, Transparency International, said:

We have long criticised the fragmented nature of the UK’s anti-money laundering supervisory regime. In recent months, the Government have sought to defend the situation on the basis of their creation of OPBAS—the Office for Professional Body Anti-Money Laundering Supervision—which is a unit inside the FCA. However, […] that only covers the professional body supervisors.42

36.Tom Keatinge, RUSI, also highlighted the risks being run with the current approach to supervision.

[…] Money laundering is not just a real estate problem or an accounting problem. It is a series of activities. We have to move away from this idea that siloed this sector or that sector is a problem and think across the piece. That would perhaps argue for somebody having that overall vision, a unified supervisor, if that is the way to achieve it. Until we start thinking about activities that are required for money laundering, rather than just real estate agents or lawyers, we are never going to get on top of the issue.43

37.The next two sections examine two areas where a risk of money laundering has been identified—property and company formation—considering in each case the risk it presents and the AML supervisory regime that is meant to contain that risk.

Property

38.The National risk assessment of money laundering and terrorist financing 2017 identified property as a sector with risk of economic crime:

When separating the exploitation of property from the involvement of estate agency services, abuse of property is assessed to pose a medium risk while the services of estate agents themselves pose a low risk. Property continues to be an attractive vehicle for criminal investment, in particular for high-end money laundering.44

39.Duncan Hames, of Transparency International UK, provided further detail:

We have done a lot of research into instances of suspicious wealth being used to purchase premium property in the UK. We are probably only scratching the surface with that analysis, but we found in fewer than 200 properties, £4.4 billion-worth of investment in UK real estate from foreign, politically exposed persons in high-corruption-risk jurisdictions. Clearly, even on people who are earning very large commissions on very big property deals, there has been a failure to properly protect the UK from proceeds of corruption being stashed in our property sector.45

40.The Committee also heard evidence on where the risks from these transactions were potentially concentrated. Naomi Hirst, Global Witness, told us that “estate agents that operate in the super-prime market—which, do not forget, is not really very big—need to get their house in order, really”.46 Mark Hayward, Chief Executive of NAEA Propertymark, noted that “we all know that, at the moment, the prime central London market has collapsed—the transactions are very low—so for those on the ground, perhaps in a small, niche company for whom the fees will be significant, will they ask too many questions, which could put people off purchasing?”47 However, he also explained that the problem was not confined to a particular area. He told us that:

It is not just prime central London. […] Certainly we have seen evidence outside London, particularly where purchases are not uncommon from overseas—particularly in university towns, whether that be Cambridge, Exeter, Bristol or Manchester. There is a very high proportion of purchases from overseas, and we particularly ask our members to be careful when it is a company and to try and find the beneficial ownership of that, and that is starting to improve at the moment.48

41.Others were also critical of the role of estate agents. Naomi Hirst, Global Witness, said:

The investigations that we have done have shown that properties have been bought by politically exposed people from very corrupt countries, and the estate agents could have identified the fact that there might have been something wrong there, by simple Googling in some cases.49

She also noted that “ the very fact that […] estate agents are only filing 0.1 per cent of SARs [suspicious activity reports] in the last session really shows that they are not really aware of the problems”.50

42.Mark Hayward said that he “probably agreed” that estate agents were one of the “weakest links” in the AML regime.51 This view was shared by Ben Wallace, the Security Minister at the Home Office, who said that:

[…] It is absolutely the case that estate agents have been one of the weak links in the suspicious activity and money laundering schemes. They have not done nearly enough at all […] I have a stick, which is to say to the estate agents, “Where are your SARs? Out of 621,000 SARs each year, 83 per cent are from banks and 0.17 per cent or 0.017 per cent are from estate agents. Why is that?”52

However, Mark Hayward also noted that there were others involved in any transaction, each with a responsibility to report any concerns:

To a great extent solicitors are attuned to it, particularly now with the heightened awareness of fraud in conveyancing. I refer to the NCA’s report from two years ago, when they investigated 750 solicitors around property transactions who weren’t solicitors. So it should be picked up because of the customer due diligence done by the agent, the lawyer and possibly the lender, and we should be sharing the information about those we have picked up.53

Donald Toon, Director of Prosperity (Economic crime and cyber crime), National Crime Agency, argued that more emphasis should be placed on the roles of lawyers.

[…] Most of us will have bought houses at some point. SARs fundamentally are about the money. There is a limited involvement of estate agents with the financial transaction. Some do, but some have very little involvement whatsoever; they simply act as an agent of the seller. When you go through the process of a property transaction, for most people it is the solicitor and the conveyancing solicitor who will do the know-your-customer checks, seek to be absolutely certain of your identity and assess what the source of the funds is. Is there a need for improvements around estate agents? Yes. I am a little nervous about saying that estate agents are wholly the root of a problem in this space. There is an issue here about making sure we get good, solid reporting across the legal sector as well as estate agency around property.54

43.Mark Hayward also noted some of the gaps in the AML supervisory regime for property:

[…] Do not forget that we are not the only people who sell houses. House builders sell houses, and they are not even bound by the Estate Agents Act. They are seen as a private seller. [… and] any of us can go out today and buy a house at auction and we don’t need an interface.55

44.On estate agents, Simon York, Director, Fraud Investigation Service, HM Revenue and Customs, said:

In all these sectors, there are good and there are bad. We go back to the national risk assessment for our core guiding principles. That draws on intelligence and insight from right across the supervisors and UK law enforcement, and it guides our activity. We would not say they were the weakest link. Yes, they are driven by results, but, as I say, they do not typically handle money. That is a distinction from some of the other sectors we supervise, which are higher risk.56

However, Simon York did acknowledge that on SARs submissions by estate agents there may be weaknesses. He noted that, “in the last year, it was 766. I still do not think that is enough”.57

45.The property sector poses a risk from an anti-money laundering perspective. Yet the AML supervisory regime around property transactions is complicated. Banks are supervised by the Financial Conduct Authority, solicitors by their relevant professional body, and estate agents by HMRC. 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.

Company formation

46.Company formation can be undertaken through different institutions, or directly through Companies House. Company registration agents are supervised by HMRC. Accountants or solicitors, who may also undertake company formation activities, are either supervised by a professional body AML supervisor or, if they are not part of a professional body, by HMRC.

47.There are money laundering risks associated with company formation. The national risk assessment of money laundering and terrorist financing 2017 noted that:

While the vast majority of companies and partnerships are used for legitimate purposes, law enforcement agencies assess that criminals seeking to hide wealth or enable money laundering are likely to use companies and partnerships in order to do so. The risk of criminals seeking to launder money through UK and overseas corporate structures is therefore assessed to be high.58

48.These risks posed by company formation were also acknowledged by Stephen Curtis, Chairman of the Association of Company Registration Agents (ACRA), saying “money laundering is a risk. There is plenty of evidence, anecdotal and other, that people have used companies to hide wealth”.59

49.When asked whether company formation agents were the weak links, Mr Curtis said “my genuine belief is that members of ACRA are not a risk. We put a lot of effort into discussing best practice in anti-money laundering checks.”60 He explained that:

We have a very detailed Treasury guidance note that dictates how we do it. We are supervised by HMRC, which inspect that we are doing it in the way that they say. […] We also look at whether the client is a professional. In many cases, the client has already done the due diligence. We do things such as using the electoral roll. We use a commercial database to identify politically exposed persons […].61

50.However, Stephen Curtis also had some concerns about the AML supervision of company formation, where he noted risks around unregistered agents, and businesses that register directly with Companies House and do not use agents.62

51.There is a clearly identified risk that company formation may be used in money laundering. There are a number of entities that undertake company formation, and therefore a number of supervisors. More worryingly, there appears to be a number of unsupervised entities engaged in company formation. These should be identified by HMRC and dealt with as a matter of urgency.

Companies House

52.As highlighted above, one aspect of the anti-money laundering regime related to company formation where a risk has been raised was the role of Companies House. Companies House is an executive agency, sponsored by the Department for Business, Energy & Industrial Strategy (BEIS). Its role is to incorporate and dissolve limited companies and register company information and make it available to the public.63 Companies House also keeps the ‘people with significant control’ (PSC) register, which has details of names, dates of birth and nationalities of the “beneficial owners” of a company.64

53.However, this inquiry has identified weaknesses in the controls around the information in Companies House. The Right Hon Lord Henly, Parliamentary Under-Secretary of State for BEIS, confirmed to the Committee that Companies House was not subject to requirements to carry out anti-money laundering checks and could not refuse registration for reasons other than non-compliance with the registration requirements.65 He also confirmed that Companies House powers were limited, with it not having powers to verify the information on the register, although he went on to say that “it does carry out a number of checks on all information received, ensuring it is valid, complete, correctly formatted and in compliance with company filing requirements. The obligation to ensure the information is accurate lies with the company and its directors”.66

54.Witnesses were very supportive of the PSC register. Stephen Jones, CEO, UK Finance and Colin Bell, Group Head of Financial Crime Risk, HSBC, both underlined the importance of a register which is up to date and validated. Witnesses also questioned the current accuracy of the register. Colin Bell said “I am not sure—I think long and hard about this—whether there is really a best practice example of a public register at the moment”.67 Duncan Hames of Transparency International UK said being the first country in the G20 to have a register was “a world-leading move” but went on to say that “we have some way to go before we can claim that [the Government ensures adequate, accurate and current information on beneficial ownership] through our anti-money laundering measures in the UK”.68

55.Naomi Hirst, Global Witness, outlined potential problems with the PSC register that her organisation had found.

Five beneficial owners control more than 6,000 companies. That is indicating to us that these are not really the persons with significant control; they are nominees. That needs to be looked into. It is something that we are not sure Companies House has the capacity, resource or power to do.69

56.Stephen Curtis, Chairman of ACRA also questioned whether Companies House has the resources required to be proactive in checking the register. He went on to say that:

Absolutely, partly because my members put 10 per cent of their turnover into doing these checks. We are locking the back door very solidly and the front door is being left open. That seems to us galling, apart from anything else, uncompetitive and not right. We are worried too about what it does to reputation. The Government say that they want the UK to be a good place to do business. From our point of view, a good place to do business is also a responsible place to do business, or a place to do responsible business. We would not want the UK tarred with the sort of brush that is occasionally used in offshore.70

57.Naomi Hirst also noted problems around enforcement by Companies House, noting 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, and the one prosecution there has been on false company filings has been something of a farce as well”.71

58.Duncan Hames commented on the remit of Companies House and suggested it may need reform:

I think there is something about the duties, or indeed culture, in Companies House which for a long time will have been under political instructions to provide a great customer service to UK businesses. Actually, in the world that we have been describing this morning, it clearly needs to be partner in law enforcement and anti-money laundering protection.72

59.Stephen Curtis concurred, noting that:

Companies House is self-financing, and at the moment it only costs £12 to form a company, which is way less than half of almost anywhere else. The EU encourages members to charge less than €100, which is about £80 to £90; we charge £12. So there’s a lot of headroom there. As I said, with the PSC register, we think that Companies House should be doing more checking; we think Companies House ought to be putting more resources into the things that matter—and we believe that this is something that matters.73

60.Rt Hon Lord Henly, Parliamentary Under-Secretary of State for BEIS noted that “Companies House is undertaking a number of activities to improve the quality of information on the PSC register”.74 In their evidence to the Committee, while noting that it was a BEIS responsibility, and that a review was in train,75 Ministers appeared to suggest that there was a case for reform at Companies House. John Glen, Economic Secretary, noted that: “[…] we have a range of bodies that are fit for purpose. There are challenges to individual elements of that, at times, as we have discussed with Companies House, about how we need to reform it to make it more effective”.76 Ben Wallace, the Security Minster, said “I have concerns and the Government have concerns about how Companies House has been used in the past and the lack of diligence. […]You are right, and we need to improve the data and its quality”.77

61.Robert Buckland, the Solicitor General, when asked whether he had discussed Companies House with BEIS, told us that:

I have not spoken directly to BEIS colleagues about this, but there is a general point here. Where we have agencies such as Companies House that are already in possession of significant information that might ultimately, as it often does, form the basis of a prosecution or an investigation of another nature, I would hate to think we are missing opportunities. While I do not want to overburden Government agencies with too many flags or questions, it is a pretty important question to be asked. Therefore, I would be happy to have that conversation.78

62.On the findings of FATF, John Glen, Economic Secretary to the Treasury took this further, saying that “BEIS will look further at controls over who registers companies in the UK, what information they have to provide, and how assurance is provided over that information”.79

63.There must be no weak areas in the UK’s systems for preventing economic crime. At present, Companies House presents such a weakness. The UK cannot extol the virtue of a public register of beneficial ownership and yet not carry out the necessary rigorous checks of the information on that register. The Government must urgently consider reform of Companies House to ensure it has the statutory duties and powers to ensure it plays no role in helping those undertaking economic crime, whether here or abroad. It is welcome that the Economic Secretary has noted that BEIS is considering reform in this area, but the Government should move quickly and now publish detail of this reform by summer 2019.

Core financial services

64.At the heart of the financial system lie the banks, and other financial institutions regulated by the Financial Conduct Authority, which also acts as its AML supervisor. Alison Barker outlined the work of the FCA in this area:

We are obviously supervising a range of firms within our scope. […] We assess the risks. We use the national risk assessment to identify where the risky sectors are. Then we will use data and analytics to identify which firms we think are the highest risk in that population. Our most intensive supervisory programmes are for the highest-risk firms. […] We use outbound calling; we have a contact centre and we use that contact centre to outbound call, in particular, very small firms to ask questions about what they are doing on money laundering. We feel that we are quite intensively working with firms to drive home messages and understand what is happening in the money laundering space. On the enforcement aside, we have a range of powers and take enforcement action against firms. […] There are fines at one end [of the spectrum], but we also impose business restrictions.80

65.Stephen Jones, from UK Finance, told the Committee that:

[…] in terms of focus and attention, in terms of time, money and indeed personal accountability, as a result of the senior managers regime as well as the regulatory oversight to which banks are subject, I would strongly suggest that they do get it. They are also doing everything they can to help Government, […] to make sure that the UK is as safe and transparent as it can be, as a place to undertake financial services businesses.81

66.There have though been a number of FCA fines on banks for poor AML controls. For example, in January 2017, the FCA fined Deutsche Bank AG more than £163 million for failing to maintain an adequate anti-money laundering control framework.82 At the time, the FCA said that “this is the largest financial penalty for AML controls failings ever imposed by the FCA, or its predecessor the Financial Services Authority (FSA)”.83 More recently, in June 2018, the FCA both fined Canara Bank nearly £900,000 and imposed a restriction preventing it from accepting deposits from new customers for 147 days, for anti-money laundering systems failings.84

67.Despite this, Naomi Hirst, from Global Witness, stated that the FCA’s fines had been “too infrequent to really deter behaviour”.85 Mark Thompson, of the Serious Fraud Office, also noted certain deficiencies in the way banks AML systems work, saying “I will leave you to fill in the blanks, but it is possible that senior figures in the banks avoid being involved in some of [the compliance] decisions”.86

68.In December 2012, HSBC entered into a deferred prosecution agreement with US Department of Justice, and forfeited $1.256 billion for anti-money laundering and sanctions violations.87 Colin Bell, HSBC, provided the following outline of HSBC’s efforts to combat economic crime since that time:

It is clearly well known that we have been through a transformative effort over the last five years, with a huge amount of investment. […] In terms of technology investment, we have spent over $1 billion since 2015 on AML-type technology, but there has also been a whole-firm effort in terms of training. […] For an institution to tackle this really well, you have to really understand the risk. That is training and education. You have to be able to operate your systems at scale. That is technology investment. You have to recognise that it is a continuous process, because the threat environment continues to change. […] In terms of the level of understanding, the fingertip feel across the organisation for financial crime risk, I think that has been transformative.88

69.The regulator also suggested that it had adopted a tighter focus on financial crime. Alison Barker told us that, compared to 2008, the FCA’s focus on economic crime “has significantly increased. Financial crime has been an FCA priority and a priority on our business plan for three or four years. We have significantly increased resources. We have significantly increased our enforcement pipeline”.89 When asked whether the greater focus in the banks on financial crime was the result of the regulator, or of their own volition, Ms Barker said that it was no longer seen as a “tick-box thing” and now was more about a “public-private partnership approach”.90 She noted that the Senior Managers’ Regime had “focussed minds” but that the banks had also seen culture and behaviour changes, with people “focussing on their accountability and what they are accountable for”.91

70.When we asked the FCA whether they had noticed a change in the banks position on financial crime, Alison Barker said that for “largest, most risky institutions”:

We have seen those institutions improve in terms of their systems and controls to tackle money laundering, their ability to monitor customers and do enhanced due diligence, and their transactions monitoring. On the whole, we have seen improvements in that space.92

However, Alison Barker seemed more concerned around smaller foreign banks, were she told us the FCA had “perhaps seen fewer improvements”.

We still have work ongoing with those to improve standards. We have had a number of enforcement cases against some of those institutions; the most recent was Canara, but we have also had Sonali Bank and the Bank of Beirut. We want to see systems and controls improved.93

She warned, however, that the threat was not static and that the FCA needed “to be focused and on top of our game in terms of tackling what is coming up”.94

71.The Economic Secretary was keen to combat the suggestion that the banks were undertaking a disproportionate amount of the supervisory burden. He told us that “Banks have a responsibility to work with the FCA and others to deal with the risks that exist among their customers. That is responsible capitalism and they need to be participating in that”.95

72.Though the emphasis has been on the risk presented by enablers, such as accountants or solicitors, there should also be a sharp focus on the supervision of the core financial services. To the extent that this risk is not ameliorated by supervision, the FCA needs to ensure that they keep up a constant pressure on the core financial services businesses and take appropriate enforcement action against them.

The Periphery versus the Core

73.During this inquiry, another potential split in the supervisory regime was identified by the Committee, between the core banking system, supervised by the FCA, and the so called ‘enablers’ or ‘facilitators’, such as estate agents, accountants and solicitors. For example, Colin Bell, from HSBC, told us that “We know from the industry statistics that the vast majority of reports of suspicious activity come from banks. Almost self-evidently, more could be done by other parts of the regulated sector in terms of reporting”.96

74.Donald Toon, of the NCA, said that the Government had not been blind to this risk, noting that “the UK’s own national risk assessment of the risk on money laundering and terrorist financing identified an issue […] with fragmentation and inconsistency”,97 and he suggested this had been a reason for the creation of the Office for Professional Body Anti-Money Laundering Supervision (OPBAS), within the Financial Conduct Authority. When asked which sectors were particularly weak, Mr Toon mentioned “legal, accountancy, company-formation services, estate agency”, saying “there is no consistency in those sorts of areas. If you look at the structure of SAR—suspicious activity report—reporting, the numbers in there are lower than we think we should expect”.98

75.Duncan Hames from Transparency International, talked about the challenges faced by those outside of the core financial system.

Supervision outside the financial sector, where it would be particularly helpful, involves education and helping people for whom it is not their principal line of work. If you are an art dealer, preventing money laundering is not what makes you an exceptionally good art dealer. It is not your area of expertise. If we want these people to be our first line of defence against this kind of activity, they need advice, guidance and education to help prevent them unwittingly being part of what is ultimately a criminal enterprise.99

76.This was reinforced by Tom Keatinge, Director, Centre for Financial Crime and Security Studies, Royal United Services Institute (RUSI), who told us that:

There has been tremendous investment in building this relationship between banks and Government, so around the Joint Money Laundering Intelligence Taskforce. It is something that we should be proud of. […] Where is the same level of initiative and effort that we are putting into dealing with the banking sector when it comes to all these other sectors? […] That is the kind of gaping hole that we accuse people of being part of the problem but appear to do very little to help them deal with that issue.100

77.The concern around the role of the enablers was acknowledged by the Security and Economic Crime Minister, Ben Wallace, who told us that “I absolutely agree with the point that the facilitators have not had the same focus on them as they should have done. They have a responsibility that they need to live up to and I would like to see them being put under more pressure to comply”.101 This view was also included in the Serious and Organised Crime Strategy 2018, which noted that “professionals such as lawyers and accountants are an important part of the response to serious and organised crime”.102

78.The evidence we have received has directed our attention to those who act on the periphery of the financial system, rather than its core, the so-called enablers or facilitators. External witnesses suggested that there is a requirement for education as well as enforcement—the Security Minister pointed towards the responsibility of the enablers to play their part. It is welcome that in its Serious and Organised Crime Strategy, the Government has acknowledged a similar focus. The Committee recommends that the Government steps up education of facilitators, to ensure they have all information about their role, recouping any additional costs through fees. Once this has been completed, it should be followed with an enforcement campaign to ensure compliance.

Professional body supervision and OPBAS

79.A significant part of the UK’s AML supervisory regime is its use of professional body AML supervisors. At present, there are 22 such bodies, divided amongst the legal and accountancy sectors.103 However, the Committee heard claims that the use of professional body AML supervisors is not without risk. Duncan Hames, Transparency International UK, outlined the inherent conflict a professional body AML supervisor may face in undertaking its duties, highlighting “the problem of a body both lobbying on behalf of its members, […and] acting as a regulator of that membership, and the conflict of interest that this potentially presents. Many of our professional body supervisors have to face up to that challenge”.104

Echoes of this view were heard in the evidence from Stephen Curtis, Chairman of the Association of Company Formation Agents, who, when asked if his organisation would like to be a professional body AML supervisor, said:

On balance, I prefer having HMRC to many of the other solutions I can think of. We have thought about doing it ourselves, but we are a small, close-knit industry, so we see a potential conflict. If we were both lobbyists and supervisors, members may say, “But I thought you were supporting me”.105

In comparison, when asked whether his association would like to register as an AML supervisor, Mark Hayward of NAEA Propertymark said:

We probably would. We would then have the resource to conduct more on-site inspections. We already look at our members’ client accounts, so we already have oversight of that. We could increase the training.106

Office of Professional Body Anti-money laundering Supervisors (OPBAS)

80.The Office of Professional Body Anti-Money Laundering Supervision (OPBAS) is part of the Financial Conduct Authority. Its creation stemmed from the 2016 Action Plan for anti-money laundering and counter-terrorist finance which initiated a call for evidence on the supervisory regime.107

81.In December 2017, the Treasury announced the establishment of OPBAS.

The Office for Professional Body AML Supervision (OPBAS) will work across the UK’s anti-money laundering supervisory regime to improve standards and ensure supervisors and law enforcement work together more effectively.

OPBAS, which will operate within the FCA, will ensure the 22 bodies meet the high standards set out in the Money Laundering Regulations 2017, and have powers to investigate and penalise those that do not.108

One of the ways in which OPBAS can penalise supervisors is by recommending to the Treasury remove them from the list of professional body AML supervisors.109

82.OPBAS was launched in January 2018.110 Alison Barker, from the FCA explained that its initial priority was to visit the professional bodies, to make an assessment of how they are meeting the requirements set out in the money laundering regulations and take a view of how effective they are as supervisors. It had assessed 15 of the professional bodies by 10 October 2018.111 OPBAS also has an objective to encourage intelligence sharing between the professional bodies, and their members.

Concerns over cost and focus

83.In the written evidence received by the Committee, there has been a particularly discordant note sounded by the professional body AML supervisors around the creation of OPBAS. Adam Harper outlined the concerns the Association of Accounting Technicians (AAT) had with OPBAS:

[…] we do not have an issue with oversight; we are aware that that model is applied in other jurisdictions. […] The issue we have is that there has been no clarity on how it will do that, or on what its measures of success will be, and we are still awaiting clarity on the ramifications for us from a fee perspective.112

Give this lack of clarity on objectives and measures of success, Adam Harper proposed that there should be an independent review in a couple of years, to assess how well OPBAS has met expectations.113

84.Mr Harper also noted the potential impact of the cost of OPBAS, estimated at the time in the region of “£2 million per annum in operating costs”.114 The AAT had, at the time, not assessed the impact of OPBAS’ costs but he said it was likely “that AAT, and indeed other supervisory bodies, may then look to transfer those additional costs to [its] members, who will look to transfer those costs to their clients”.115

85.Responding to these concerns around cost, Alison Barker said that the FCA was “very alive to those concerns”.116 In its consultation published in October 2018, the FCA noted that there had been a reduction in the amount of resources needed. It explained that while in September 2017 the expectation was that the annual funding requirement (AFR) was £2.25million to be recovered through fees, having now seen the actual expenditure of OPBAS, the FCA total has been revised down from £2m to £1.4million, and the AFR to be recovered in 2018/19 is £1.65million.117

86.The Committee supports the role that The Office of Professional Body Anti-Money Laundering Supervision (OPBAS) has been given in relation to the Professional Body Anti-Money Laundering Supervisors. The inherent conflict in a membership organisation also monitoring its own members means that there is a need for external supervision. The number of such supervisors also shows there is a need for a single organisation to look at the system as a whole to identify weaknesses. We consider the concerns around whether the statutory AML supervisors also need such a coordinating body later in this Report.

87.At present, OPBAS also has the responsibility of recommending to the Treasury whether a professional body should remain an AML supervisor. It is not clear how the Treasury would consider such an OPBAS recommendation, and where it would envisage placing such AML supervisory responsibilities in such a case. Without adequate preparation in this area, AML supervisors may become too important to fail, and therefore risk undermining standards in this area. We recommend that the Treasury publishes—within six months—a detailed consideration of how it would respond to such a recommendation from OPBAS.

HMRC as an AML supervisor

88.HMRC is one of the statutory AML supervisors. It covers a wide range of unconnected industries, including:

money service businesses not supervised by the Financial Conduct Authority (FCA);
high value dealers;
trust or company service providers not supervised by the FCA or a professional body;
accountancy service providers not supervised by a professional body;
estate agency businesses;
bill payment service providers not supervised by the FCA; and
telecommunications, digital and IT payment service providers not supervised by the FCA.118

89.As this list shows, while HMRC is the sole supervisor for certain industries, HMRC often acts as the supervisor of firms that are not a member of a professional body that also has AML supervisory responsibilities. In its evidence, RUSI noted that this wide-ranging remit meant HMRC was “viewed by some as the ‘supervisor of last resort’ given the bagatelle of sectors it is required to supervise (including real estate agents and money services businesses)”.119

90.Simon York, Director, Fraud Investigation Service, HM Revenue and Customs, argued that this description of HMRC’s role was “really quite unfortunate”. He continued:

There are some sectors that naturally sit with other organisations, banks with the FCA, casinos with the Gambling Commission, but in many ways we are the supervisor of first resort. For the sectors that do not fit with anyone else, we are the place the Government come to ask us to deal with them.120

91.The Committee has heard criticism of HMRC’s work as a supervisor. RUSI said that HMRC “[…] does not represent a credible supervisory enforcement deterrent”.121 Duncan Hames, Director of Policy, Transparency International UK, said they were “not satisfied […] because of the extent of problems we see in relation to company formation. We hear from those who are meant to be supervised by HMRC in other sectors, who complain that actually HMRC’s knowledge of their sector […] for example, is very limited indeed”.122 Stephen Curtis from ACRA said he “would give HMRC about seven out of 10”.123

92.Mr Curtis went on to describe HMRC’s work on money laundering supervision as follows:

[…] We are supervised directly by HMRC. At the policy level, that works extremely well. We have a very good relationship with the policy people who are responsible for policy for trust and corporate service providers within HMRC. I can phone them up if I need to and I always feel I am getting a good hearing. That does not mean at all that we get agreement but at least I feel I am being heard, so that is very good.124

93.Accountancy is one area where HMRC supervises only those firms that are not members of a professional body AML supervisor. Adam Harper, AAT, argued that such firms posed a greater risk to the AML regime, as they had not been subject to the “rigorous set of standards” required to become a member of a professional body.125 Simon York, from HMRC, said that while those accountants who are not a member of a professional body “might not be as competent […] they are probably less likely to get involved in the more complex financial planning that would sit around money laundering”.126

The tax authority as AML supervisor

94.External witnesses raised the issue of having the tax authority as an AML supervisor as it was felt HMRC may be tempted to treat its supervisory responsibilities as adjunct to its revenue raising activities. The HMRC Single Departmental Plan contains no stand-alone objective for its AML supervisory work.127 RUSI stated that “HMRC also has a law enforcement role, in particular in relation to tax crimes, and there is a perception that its AML supervision stance is primarily driven by self-interest”.128 This was then emphasised by Tom Keatinge of RUSI who told the Committee that “fundamentally, HMRC is about maximising revenue for the Exchequer, and I do not know how comfortably it sits with HMRC to be the supervisor of these difficult sectors”.129

95.The Committee questioned HMRC about the proportion of the convictions noted in its Report on Tackling Financial Crime in the Supervised Sectors 2015–2017 were tax-related crimes that include money laundering. Simon York responded that:

There is a mixture in there. Some of the criminal prosecutions are for regulatory breaches of the money laundering regulations. Some of them are freestanding money laundering investigations. We see people who are professional money launderers, who might be abusing some of the sectors we work with, or they might be facilitating tax criminals, so there is a big tobacco job or whatever, and we have a professional money launderer here who is helping. There will be some there. There will be others where it might be a tax investigation that has that.130

96.When the Committee directly tackled HMRC on whether its priority was its role as a tax authority rather than its AML supervisory responsibilities, Simon York responded that:

Clearly, we are the UK’s tax and customs authority. I think everyone would agree that is our primary function and our primary role. That is not in any way to say that the money laundering work we do is any less of a priority. I hope I have described that we increasingly take it seriously, first, because Government want us to take it seriously, we have been given the job, and we take every job we are given seriously, but, secondly, we think it is a great way to help us on the tax side as well. Almost all tax evasion, all organised crime, involves money laundering. Being able to deploy those supervisory teams, the full enforcement functions, the full tax powers and the proceeds of crime powers all together is quite a powerful mix. There are huge opportunities for us, which we have started to take over the last few years, to really make a difference to tax crime in this country.131

Resourcing

97.Another area of concern raised with the Committee about HMRC was around resourcing, both amount and expertise. Stephen Curtis, of the Association of Company Registration Agents, noted that “HMRC’s problems probably are down to resourcing and budget cuts”132 Mark Hayward, of NAEA Propertymark, concurred.133 Mr Curtis also raised concerns around the knowledge and stability of those supervising company registration agents. He said that his “members find they spend quite a lot of time explaining the arcane work of a company registration agent to the inspector” and said there was a high turnover of staff.134

98.Simon York, HMRC, acknowledged that HMRC’s resources were currently not sufficient for its supervision work.135 He noted that there was no cross-subsidisation with HMRC’s other work, and that was why HMRC was “consulting on increasing the fees. To fully implement the 2017 regulations, we feel we need more resource there”.136

Unregistered firms

99.One concern around HMRC AML supervision is whether it is ensuring that all firms that should be registered with it, are. Mark Hayward, of NAEA Propertymark, when asked whether some firms were slipping through HMRC’s net, told us that he thought some were, and that “I know that National Trading Standards is prosecuting some of them on behalf of HMRC, but it is very difficult to identify”.137 Stephen Curtis also suggested that HMRC spent too much time with those already supervised, and not enough with those who were unregistered.138

100.On the number slipping through the HMRC net in another area of its supervisory work, company formation, Mr Curtis noted that:

Interestingly, there are 105 company registration agents listed on Companies House’s website. In a study last year, RUSI found that a quarter of them are not registered with HMRC. What are they doing all being allowed to form companies?139

101.Simon York, of HMRC, said that the proportion of unregistered businesses was “[…] pretty small. […] that number has gone up from 8,000 to 10,000 over the four years we have dealt with [AML supervision]. Some of that could be market conditions and change in the actual constitution of that, but we know some of that is us bringing in people who perhaps had not registered to start with”.140 He said that HMRC is taking a number of actions to reduce the number of unregistered firms, including cross-checking information with data held through tax work.141

HMRC’s overall role as an AML supervisor

102.The concerns about HMRC mentioned above raise doubts about whether HMRC should maintain its role as an AML supervisor. When we asked the professional bodies whether HMRC should withdraw from their areas, Mark Hayward of NAEA Propertymark (which is considering becoming a professional body AML supervisor) said he “would be very much in favour of that” as it has taken HMRC a long time to get to know their sector and he felt the professional bodies would know what to look for.142

103.Adam Harper of the AAT asked “if HMRC were no longer a supervisor for AML purposes, where would those firms go? Would it mean that individuals who fall out of that environment are effectively unable to trade in that profession?”143 Stephen Curtis, Chairman of the Association of Company Registration Agents said that “on balance, I prefer having HMRC to many of the other solutions I can think of”.144

104.In June 2018, the Committee asked Sir Jonathan Thompson, Chief Executive of HMRC, whether HMRC’s AML work was a “bolt-on activity for HMRC rather than core business “. In response, he said that “there is an interesting question about whether the primary purpose of HMRC is to collect the revenue that pays for public services [ … ] these other activities are undoubtedly important, but are they best aligned with us or might they be best aligned with someone else? Our plan is to have that conversation in spending review 2019”.145

105.When the Committee queried whether some of HMRC’s roles were ‘bolt-ons’, and whether the tax authority was an appropriate supervisor of estate agents, the Economic Secretary replied:

Lots of Government Departments have a big range of responsibilities. The question is whether the Department that is doing the activity is discrete, ring-fenced, responsible and effective in what it is doing.146

106.In evidence to this Committee, the Chief Executive Officer of HMRC noted that he was considering, as part of the 2019 Spending Round, querying whether HMRC should retain its role in Anti-Money Laundering supervision. The Committee agrees that this should be given proper consideration, not only to support HMRC concentrating on its core tasks but also to address concerns expressed to the Committee about HMRC’s work as an AML supervisor, and whether its approach to its supervisory responsibilities may be unduly influenced by its role as a tax authority. The Treasury must send the Committee a report on this consideration well ahead of the Spending Review and we will take oral and written evidence.

107.Notwithstanding the above recommendation, the Committee has heard a number of concerns around the work of HMRC as an AML supervisor, including around its work on unregistered firms. If it is to retain its AML supervisory responsibilities, HMRC should:

include within its departmental objectives a single stand-alone objective related to its anti-money laundering supervisory work; and
keep a clear reporting line between its AML supervisory work and its work investigating tax crime and associated money laundering offences. HMRC should have a separate strategy for its AML supervisory work which would include key performance indicators on which HMRC can report.

Supervisor of supervisors

108.The fragmented nature of the AML supervision regime in the UK has led to calls for a ‘supervisor of supervisors’. Tom Keatinge of RUSI noted the limitation in OPBAS scope of operations, saying “the idea of OPBAS being the supervisor of supervisors makes sense, but it is not the supervisor of supervisors. It is the supervisor of some of the supervisors”.147 He explained that:

we do not have an issue with having multiple supervisors necessarily, as long as those supervisors are sufficiently expert to understand the sectors they are looking at. Quite why OPBAS does not cover and hold accountable all supervisors is not clear.148

Mr Keatinge also pointed out the advantages such a supervisor of supervisors would bring, given the interconnected nature of financial crime. He told us that:

109.Duncan Hames from Transparency International UK noted that OPBAS having no formal role in overseeing the statutory supervisors (such as HMRC) could be problematic if one of those supervisors was underperforming.150

110.The Economic Secretary to the Treasury, however, was more sceptical of the possibility of a single agency taking this responsibility. He argued that originally he’d thought of “a single button or single view of what to control and how to evaluate this. It is not possible to do that”.151 He said “that it would be impossible to develop a comprehensive new single entity, but what we have in place is optimised co-operation across Government to identify where risks need to be acted on and where changes in the law are necessary”.152

111.With the creation of OPBAS, the Government acknowledged that consistency across AML supervisors was important. The Committee recommends that it should go one stage further, by creating a supervisor of supervisors. The aim of this institution would be to ensure that there is consistency of supervision across all the AML supervisors, whether statutory or professional body. There is a strong case for this to be OPBAS, given it already has a role in the coordination of the professional body AML supervisors, and a role in information sharing.

112.The Government should then also consider moving the supervisory responsibilities of HMRC to OPBAS. This would reduce fragmentation in the current supervisory landscape and allow HMRC to focus on its tax authority responsibilities. It would also mean that OPBAS could act as supervisor of last resort in the case of a failure of a professional body supervisor. The close relationship between OPBAS and the FCA, a fellow supervisor, would also be beneficial.

113.OPBAS should be placed on a firmer statutory footing, more akin to the Financial Ombudsman Service, in having its own distinct identity protected under primary legislation. The Committee will monitor how OPBAS is working through regular evidence sessions. We will consider the funding model of OPBAS including the retention of penalties.

41 HM Treasury, Anti-Money Laundering and Counter-Terrorist Financing: Supervision Report 2015–-17, March 2018, Annexe A

42 Q16

43 Q23

44 HM Treasury and Home Office, National risk assessment of money laundering and terrorist financing 2017, October 2017, p54, para 8.4

45 Q34

46 Q38

47 Q78

48 Q76

49 Q38

50 Q38

51 Q78

52 Q431

53 Q91

54 Q244

55 Q126

56 Q383

57 Q382

58 HM Treasury and Home Office, National risk assessment of money laundering and terrorist financing 2017, October 2017, p59 [Emphasis in original]

59 Q92

60 Q79

61 Q74

62 Q79

63 Companies House, Accessed 1 November 2018

64 Companies House, Blog: The new ‘people with significant control’ register, by Gareth Lloyd, Director of Digital Services at Companies House , Accessed 2 November 2018

65 Treasury Committee, Correspondence from the Parliamentary Under-Secretary of State to BEIS to Chair relating to Companies House, 22 October 2018

66 Treasury Committee, Correspondence from the Parliamentary Under-Secretary of State to BEIS to Chair relating to Companies House, 22 October 2018

67 Q321

68 Q3

69 Q52

70 Q95

71 Q52

72 Q53

73 Q131

74 Treasury Committee, Correspondence from the Parliamentary Under-Secretary of State to BEIS to Chair relating to Companies House, 22 October 2018

75 Q429

76 Q433

77 Q486

78 Q485

79 HC Deb, 10 December 2018, Col 2WS

80 Q358

81 Q264

82 FCA, FCA fines Deutsche Bank £163 million for serious anti-money laundering controls failings, 31 January 2017

83 FCA, FCA fines Deutsche Bank £163 million for serious anti-money laundering controls failings, 31 January 2017

84 FCA, FCA fines and imposes a restriction on Canara Bank for anti-money laundering systems failings, 6 June 2018

85 Q26

86 Q230

87 United States Department of Justice,”HSBC Holdings Plc. and HSBC Bank USA N.A. Admit to Anti-Money Laundering and Sanctions Violations, Forfeit $1.256 Billion in Deferred Prosecution Agreement” , 11 December 2012, Accessed 4 November 2018

88 Q264

89 Q395

90 Q370

91 Q370

92 Q369

93 Q369

94 Q369

95 Q478

96 Q277

97 Q188

98 Q190

99 Q28

100 Q30

101 Q481

102 HM Government, Serious and Organised Crime Strategy, November 2018, p14

103 FCA, Office for Professional Body Anti-Money Laundering Supervision (OPBAS), 23 January 2018

104 Q16

105 Q171

106 Q125

107 HM Treasury/Home Office, Action Plan for anti-money laundering and counter-terrorist finance, April 2016,p44

108 HM Treasury, News story: UK establishes new money laundering watchdog, 21 December 2017

109 The Oversight of Professional body Anti-money Laundering and Counter Terrorist financing Supervision Regulations 2017, 2017 No. 1301, Regulation 17

110 HM Treasury, News story: UK launches new anti-money laundering watchdog, 23 January 2018

111 Q425

112 Q160

113 Q159

114 Q158

115 Q158

116 Q426

117 FCA, Recovering the costs of the Office for Professional Body Anti-Money-laundering Supervision (OPBAS): proposed fee rates for 2018/19, Consultation Paper, CP18/32**, October 2018 , p6

118 HMRC, “Guidance: Who needs to register for money laundering supervision”, Accessed 31 October 2018

119 RUSI Centre for Financial Crime and Security Studies (ECR0018)

120 Q387

121 RUSI Centre for Financial Crime and Security Studies (ECR0018)