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

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Resources

114.We took evidence criticising the level of public resource dedicated to combatting economic crime. For example RUSI, in its written evidence, noted that “under investment in resources and capabilities means that the UK has been unable to sufficiently manage the responsibility placed upon it as a global financial centre”.153 In its written evidence, UK Finance told the Committee that:

Firms also note that whilst the financial sector has increased resource on economic crime, there has been a reduction in public sector resource in this area. We have also seen banks, as a highly regulated sector, being increasingly required to deliver functions to supplement that of the State. These include carrying out further checks on other regulated sectors (even where they are regulated by a Government body) or carrying out due diligence that exceeds that undertaken by Companies House.154

115.While Donald Toon, of the NCA, accepted on resourcing, “there is a very simple answer here: you can always do more with more”, he also said “there is a starting-point question, which is this: are we as effective as we can be with the resources that are currently available […] law enforcement, the regulators and the private sector. That is an entirely legitimate question”.155

Mark Thompson, then interim director of the SFO, noted that “attracting and keeping high-calibre staff is an issue for most public sector organisations”.156 Donald Toon agreed.157

116.On who might pay for any additional resourcing in the public sector, Stephen Jones, UK Finance, said that “[…] there is no question that there is substantial pressure on public resources and, increasingly, the ask therefore comes from the authorities to us, the private sector, to fund that”.158 He noted a number of initiatives that are funded, or the suggestion is they will be funded, by the private sector, including:

the SARs reform programme;159
the Dedicated Card and Payment Crime Unit, which is a joint venture between the Metropolitan Police and the City of London Police and targets the organised crime end of card and payment fraud;160 and
the Banking Protocol is training police forces up and down the country to work with bank staff to spot the signs of individuals being coerced to withdraw large amounts of cash at bank branches.161

117.Given this potential need for additional resource, Stephen Jones therefore argued that there may be a need to think about other ways of raising revenue to pay for systems to combat economic crime. He called for a debate, telling us that:

[…] It may well be that, for the no-blame scenarios in APP fraud [ … ], and for other SARs reform investment programmes, we need to think about some form of central pool, which could be a levy, for example, on payment transactions.162

118.Stephen Jones, when asked whether it was right for the Government to ask the private sector to pay to tackle economic crime, told us that:

There are circumstances where the private sector can and should pay. […] we estimate that it is paying about £5 billion per year in the UK in the fight against economic crime. There are also circumstances where there is a public sector requirement as well. Sometimes it is very important that both sides see each other investing in a programme, to demonstrate that both sides have skin in the game in making the system more effective.163

119.Alison Barker, from the FCA, noted that “the assessment of money laundering is part of the DNA of the FCA, whether a firm is coming into authorisation or the ongoing supervisory work [that the FCA does]”.164

120.On resourcing for combatting economic crime, the Economic Secretary told the Committee that:

Private sector actors will need to make a significant contribution, as has been outlined. We have discussed how HMRC is probably going to increase its fees by 80 per cent to 100 per cent. There are mechanisms by which the different regulatory bodies can increase the amount of money they bring to this. I do not think we have done a cross-governmental assessment of how much money, collectively, because it is pretty difficult to do that, given that there are so many regulatory bodies, sometimes almost hybrid organisations, that work so closely with the public sector. We need to have a dynamic approach to this. We need to intervene and make additional resources available, should the risk profile change. Across a complex supervisory environment, and across different elements, we have lots of opportunities to move the dial in different domains quite quickly and effectively.165

Outsourcing to the private sector

121.The change in the regime for visa applications appeared to witnesses as a way for the Government to move some AML work to the private sector. The National risk assessment of money laundering and terrorist financing 2017, noted that, the Government made a change in 2015 to require that visa applicants must have opened a UK bank account with an FCA regulated bank for the purposes of making their qualified investment. This measure ensures that prospective applicants will have been subjected to suitable levels of due diligence and the UK’s AML/CTF regime before gaining a visa through the route.166

122.When asked about this, Tom Keatinge from RUSI commented

I am surprised, but at the same time the financial sector has the resources. […] We have to accept the fact that if we want the system to be stronger, we are going to have to rely, to a great extent, on the private sector, uncomfortable though that may be for some.167

123.Duncan Hames, from Transparency International UK, noted the initial effect of this change on how visas were AML checked:

[…] There was a degree of misunderstanding, shall we say, between the Government and the private sector as to whether anti-money laundering checks were being applied before an investor visa was awarded. There were instances of banks who accepted customers for bank accounts on the basis that they had this Government issued investor visa, without doing the same checks they otherwise would have done. When the rules were tightened up to require that you already had a UK bank account before you would be awarded an investor visa, towards the end of what we call this blind faith period, there was a dramatic drop in the number of applicants for these visas, particularly from China and Russia.168

124.The resources to combat economic crime available to the private sector dwarf those currently available to the public sector. The private sector support to the public sector, provided either through direct payments or through undertaking tasks one might expect Government to undertake on AML, is therefore welcome.

125.One significant issue is the maintenance of expertise in the public sector to undertake this work, considering the salaries available in the private sector. The Government and public sector bodies should consider whether there is the pay flexibility available to ensure that the appropriate skills are maintained.

126.The Committee is also concerned that the Government may have not allocated enough resource to effectively marshal the private sector resources to achieve a ‘hostile environment’. The Economic Secretary confirmed that there is no cross-government assessment of public resources being brought to bear in this area. The Committee recommends that such an assessment is made, and that any potential funding shortfalls are rectified.

Information flows and the National Economic Crime Centre

127.An important element of combating economic crime is to ensure that information flows easily between those trying to combat it. Stephen Jones, from UK Finance, emphasised the importance of having ways for private sector entities to share information. He said:

At the moment, there are legal gateways that allow information sharing with the public sector to happen, but the Criminal Finances Act did not take the opportunity to make it easier for banks to share information with one another or with other regulated sectors, like lawyers and accountants. As a tool, with a basic threshold that has to be met, that could be extremely useful in allowing institutions to collaborate in the fight against economic crime in general.169

128.Colin Bell, from HSBC, explained what he would want from improved information sharing.

One is what we have termed pre-suspicion information sharing. […] At some point before [we file a suspicious report], we will be conducting an investigation. That investigation will be triggered either by an alert from our monitoring systems or by a member of staff who has indicated that they have seen something they did not like. At that investigatory stage, before we have made the decision, it would be helpful, where we had an indication that there was a link to another institution, if we could share that information, and if we were then able to have a cross-institution discussion about whether we felt there was suspicion.170

Colin Bell then provided the following justification for the additional data HSBC wanted to be allowed to share between banks:

Partly it takes us back to the richness of reporting and the quality of information we want to give to law enforcement, because a single bank may see only part of the picture. […] If it is a judgment, we will file, but if we can have that conversation with another institution we can put together a much richer picture of the network that we may think is at work, so what goes to law enforcement would be that much more effective. Otherwise, we are passing half the puzzle to them, and they have to pick up the SAR and add all the bits together by going out to other institutions.171

129.Tom Keatinge, from RUSI, brought out the importance of information flows internationally:

[In high-end money laundering] the money flows across the borders without a passport, but the information to tackle that threat is very difficult to share across borders, regardless of Brexit or anything else. I am less concerned about Brexit as it relates to economic crime. I am more thinking about how we build a coalition of money centres around the world that are facilitating the movement of illicit financial flows, wittingly or unwittingly. How do we build that coalition so that information can flow across borders without the kinds of disruption that we have at the moment? If you want to launder the proceeds of crime, you only need to involve two or three jurisdictions and you are home free.172

130.Colin Bell agreed, highlighting the legal framework and noting “it is a criminal offence to tell someone outside that jurisdiction that you have filed a SAR”.173

131.The Economic Secretary, when asked about this need for the ability of banks to share information between themselves, added a note of caution. He said:

In the passage of the [Criminal Finances] Bill last year, there was considerable discussion. The key issue there is what “suspicious” is. We cannot have a situation where people’s data defaults to being shared without a sense that there are any risks around it. I understand the instinct; obviously they want to be able to minimise their exposure to illicit finance and making the wrong judgments, but we have to think about what rights individuals have and keep their financial affairs secure and private when there is no risk.174

132.Despite some praise for the Joint Money Laundering Intelligence Taskforce (JMLIT) from Colin Bell, Stephen Jones noted a limitation in how it worked.

Collaboration not only between regulated sectors but also between the public and private sectors is critical in winning this battle, and it is a battle, with a very sophisticated opponent. There are examples of where that public-private collaboration, and across multiple private sectors, has worked, such as the Joint Money Laundering Intelligence Taskforce, but it is tactical. These initiatives need to be scaled up.175

133.The Money Laundering Advisory Committee (MLAC), is co-chaired by HM Treasury and the Home Office, and designed to advise “the government on its approach to preventing money laundering in the UK”.176 When asked about the benefits of the Money Laundering Advisory Committee, Mark Hayward, Chief Executive, NAEA Propertymark, noted that:

It is very useful. […] It is useful to share best practice. It is probably very much more reportage than discussion because of the number of individuals there, but I find it very useful.177

He also noted though that it could be improved by “breaking it down into smaller groups and having more interaction in slightly longer meetings. Ninety minutes with 40 people in a room does not necessarily get the best out of it”.178

134.Rena Lalgie, Director, Office of Financial Sanctions Implementation, HM Treasury, again emphasised the importance of the information sharing regime for sanctions implementation, which she saw as “quite a critical part of improving awareness as to what it means to comply with the regulations, but also to making the enforcement regime more effective”.179 She also noted that on the enforcement side, OFSI “have the powers under the regulations that allow us […] to share information with anybody as long as it is to further compliance with the regulation”.180 This meant that information could be shared with “the FCA, the Solicitors Regulatory Authority and others”.181

135.There has been great emphasis on the need for information sharing in combatting economic crime. Such information should be shared both within sectors, and between sectors. Banks have asked for additional powers to share information between each other. Such a move would require that the privacy of lawful consumers of financial services is maintained. At the very least, there should be a number of safeguards to protect both consumers’ information, and to ensure that as a consequence of such information sharing no consumers unfairly lose their access to financial services. We recommend that the Government reviews the scope to increase information flows at the bank level and report back to this Committee within six months.

National Economic Crime Centre

136.One new element in the economic crime landscape has been the creation of the National Economic Crime Centre (NECC). Announced on 11 December 2017, it was described as follows:

A new national economic crime centre within the National Crime Agency (NCA) will task and coordinate the national response to economic crime, backed by greater intelligence and analytical capabilities. It will draw on expertise from across government, law enforcement and criminal justice agencies, as well as new resources provided by the private sector.182

137.On the National Economic Crime Centre, Donald Toon told the Committee that:

It is about drawing together all of the capabilities and ensuring we have a single coherent picture, a single approach to prioritising activity effectively to hit economic crime, and a single authoritative voice about the threat of economic crime and how the UK is responding to it. It is also about leveraging very heavily that private sector relationship.183

He went on to say that:

It is very much designed to understand the overall problem, draw together the capabilities and to prioritise the use of those capabilities across all of the different agencies. What it is not doing is taking lots of investigators from different agencies and bringing them together into one place. […] This is very much about having a single centre and a clear role in terms of understanding, prioritising and driving forward operational results across all of the economic crime agencies.184

138.The importance of the work of the NECC was emphasised to the Committee by Stephen Jones, from UK Finance.185 This was echoed by Colin Bell of HSBC:

It is really important to understand those three constituents: law enforcement, regulators and the private sector. They are three legs of a stool that all have to talk together. When I talk about how we land the NECC, if the head of that organisation has a co-ordinating authority or a tasking authority across the three elements and we can have a shared set of priorities, that will be a significant step-change improvement in terms of the way we tackle this at the moment.186

139.Alison Barker, from the FCA, emphasised to the Committee the importance of sharing information. She told us that:

It is really important that we all work together on the National Economic Crime Centre […] to support information sharing and targeting of things. Nobody has the whole picture, so agencies working together […] is really important in getting all of us targeting and focusing on financial crime.187

140.The Security Minister also stressed the importance of the NECC.

The National Economic Crime Centre is trying to put in one place HMRC, NCA, intelligence capabilities and the police, plus potentially elements of the private sector, to develop leads and analysis of what is going on at the moment, and to effectively exploit those leads, to see if they go into further investigations. Partnership and sharing are really key in intelligence-led investigations. […] we really have to stay one step ahead. The NECC will do that.188

141.The Government has placed a lot of emphasis on the benefits the National Economic Crime Centre will bring. It is welcome that a single centre will provide an element of leadership to this complex web of interacting agencies and firms. The Committee will continue to monitor the impact of NECC, and recommend that annual updates of the measures of success of the NECC are published or provided to the Committee.

Suspicious Activity Reports

142.Suspicious Activity Reports are one way in which information flows from the supervised sectors to law enforcement.

143.In the Suspicious Activity Reports (SARs) Annual Report 2017, the NCA provides a picture of SARs reporting, both in terms of the volume submitted, as well as the sectors from which those SARs emanate (see Table 1).

Table 1: SARs submitted by all sectors October 2015 to March 2017

October 2015 to March 2017	Volumes	Per cent of total
Credit institution–banks	525,361	82.85 per cent
Credit institution–building societies	22,323	3.52 per cent
Credit institution–others	19,326	3.05 per cent
Financial institution–MSBs	16,704	2.63 per cent
Financial institution–others	23,675	3.73 per cent
Accountants and tax advisers	6,693	1.06 per cent
Independent legal professionals	4,878	0.77 per cent
Trust or company service providers	112	0.02 per cent
Estate agents	766	0.12 per cent
High value dealers	265	0.04 per cent
Gaming (including casinos)/leisure (including some not under Money Laundering Regulations)*	2,223	0.35 per cent
Not under Money Laundering Regulations (MLRs)	11,787	1.86 per cent
Total	634,113	100 per cent

Source: NCA, Suspicious Activity Reports (SARs) Annual Report 2017, p12

* The MLRs place requirements on certain industry sectors (the ‘regulated sector’) to put in place internal policies and procedures to prevent and forestall money laundering and terrorist financing

144.As can be seen in table 1 above, banks dominate the reporting of SARs. Also, as has been discussed in other parts of this report, there is very limited reporting by the so-called enablers, like estate agents and company formation agents.

145.Simon York told us that SARs were used by HMRC in multiple ways. One was “as a direct piece of intelligence that leads HMRC to an investigation”.189 Secondly, they were a “defence against money laundering SARs, which are consent SARs, where a financial institution wants to pay some money and comes for consent. [HMRC has] new powers to investigate those under the Criminal Finances Act”.190 Thirdly, HMRC puts “every single SAR into [its] risking engine”.191

146.Duncan Hames, from Transparency International UK, said:

[…] I do not think anyone takes comfort in the volume of reports that are filed. I do have a high degree of discomfort […] with the very low number of reports being filed by people involved in the same transactions. Why are the banks seeing fit to report suspicious activity, and a professional is acting as an adviser on that transaction but is not filing a suspicious activity report themselves?192

147.On the disparity in the reporting from those outside the core of the financial system, Mark Hayward, from NAEA Propertymark, told us for estate agents:

When you look at that number of SARs, which is only 0.12 per cent, it is actually less than that in terms of companies doing the reporting. There are some good people out there who know what to do, but there are others turning a blind eye.193

On the low level of SARs submitted by estate agents, Mr Hayward argued that the number “must be low”, but added that “it is not an easy thing to do […] You do not always get any feedback, so there is no encouragement. You are not told what is going to happen”.194

148.This point of a lack of feedback was also expressed by Stephen Curtis, Chairman of the Association of Company Registration Agents, who noted:

I know it is difficult for the NCA, but you don’t quite get the feeling of encouragement […] The NCA go in and say they can tell you nothing. […] You don’t feel inclined to do it again.195

149.Stephen Curtis accepted that company formation agents are “probably at the bottom of the pile” in SARs reporting, but explained that lack as being:

Largely on the basis that it is very rare that [they] would have the information about suspicious activity. […] occasionally, when you have that much deeper relationship with the client, you could see suspicious activity if it is occurring.196

150.Donald Toon, from the NCA, told us that “the confidentiality of SARs is an important tenet of the regime” and was adamant that that “information is absolutely available within the various educational programmes that the different supervisors run”, though he could provide no assurance on how well attended, and how impactful, those programmes are.197

151.Mark Thompson explained the importance of SARs from the SFO’s perspective:

[…] From our point of view, we use SARs at various points. They are a useful source of information at a whole range of stages, right from the very earliest stage. If a member of the public reports something to us, it is one of the sources we would look at. We would continue to look at it throughout the course of the case. From our point of view, the system gets quite a lot of criticism that it is not terribly effective and so on, but, as an investigator myself, I know that delving into the database at all sorts of stages can give you additional information you did not know, whether it is a phone number, a bank account or just some peripheral nugget of useful information.198

152.The Security Minister was unsympathetic on estate agents’ low SARs returns.

It is quite easy to go on the NCA website and download a guide to a SAR, whether it is a digital or an online paper copy. You do not have to be a brain surgeon to do it.199

153.Following the completion of the Committee’s oral evidence hearings, the NCA published its Suspicious Activity Reports (SARs) Annual Report 2018. Table 2 shows the new sectoral split data.

Table 2: Summary of SARs reporting by sector

April 2017 to March 2018	Volumes	per cent of total	per cent comparison to 2016–17
Credit institution–banks	371,522	80.08 per cent	6.30 per cent
Credit institution–building societies	19,640	4.23 per cent	35.81 per cent
Credit institution–others	13,678	2.95 per cent	4.58 per cent
Financial institution–MSBs	21,198	4.57 per cent	80.70 per cent
Financial institution–others	21,446	4.62 per cent	30.41 per cent
Accountants and tax advisers	5,140	1.11 per cent	13.19 per cent
Independent legal professionals	2,660	0.57 per cent	-11.92 per cent
Trust or company service providers	53	0.01 per cent	-26.39 per cent
Estate agents	710	0.15 per cent	32.46 per cent
High value dealers	249	0.05 per cent	30.37 per cent
Gaming (including casinos)/leisure (including some not under Money Laundering Regulations [MLRs])	2,154	0.46 per cent	50.63 per cent
Not under MLRs	5,488	1.18 per cent	-33.76 per cent
Total	463,938	100 per cent	9.60 per cent

Source: NCA, Suspicious Activity Reports (SARs) Annual Report 2018, January 2019

154.Table 2 shows that while banks and building societies continued to increase the number of SARs they report, the picture was more mixed for the ‘enablers’. While estate agents and accountants increased their SARs reporting, independent legal professionals and trust or company service providers both saw falls in the number of SARs being reported. Even given the rise in SARs from estate agents, the NAEA propertymark noted that:

Whilst the numbers of SARs received overall was it’s highest ever—463,938—disappointingly only 710 reports came from estate agents, making up just 0.15 per cent of all SARs submitted. However, it is encouraging that this figure is up 32.46 per cent from April 2016–March 2017.

It is unclear if the low number of submissions by estate agents is due to educational need, lack of awareness of the penalties, lack of available resources or the need for improving the online process and guidance, but we would expect there to be more disproportionate to the risks our sector faces from money laundering threats.200

SARs reform programme

155.In its Suspicious Activity Reports (SARs) Annual Report 2017, the National Crime Agency noted that there was a reform programme underway for SARs reporting.

The NCA and Home Office have established a joint SARs Reform Programme to deliver more fundamental change to the regime. Work has commenced on looking at what is in the best interests of the UK with regards to its model, its funding and supporting Information Technology (IT) in the medium to longer term. The programme has also established a short-term programme of improvements that are being taken forward in parallel with longer term design work.201

156.The National Crime Agency, in its Suspicious Activity Reports (SARs) Annual Report 2018, noted on the reform programme that:

The Home Office is leading a SARs Reform Programme. This aims to improve the SARs regime, including by underpinning it with modern IT. The aim is for the public and private sectors to deliver an integrated and transformational world-leading approach that reduces harm, protects the integrity of the UK economy, supports legitimate growth and prosperity, and ensures that there are no safe spaces for economic crime or terrorism financing. The UKFIU and other regime participants have been heavily involved in this.202

The 2018 Annual Report was published after the Committee had concluded taking written evidence.

157.The case for the reform of the SARs system was made by Duncan Hames, of Transparency International. He told us that:

In defence of the system—which I am not going to defend, but briefly in defence of the system—the SARs system is an intelligence database that provides information to law enforcement that might not necessarily be in the context of a money laundering prosecution. That is where this information is sometimes held out as being beneficial. However, we have to remember that this is a system that was created at a time when it took five days for a cheque to clear. You did not have fintech activity, or all of these things that we are used to now. It is a system that was created in an analogue era, and we are operating finance at the speed of light. Yes, the system needs to be completely reconstituted. I am not sure we are going to achieve that, so in the meantime what we are trying to do is to make it more effective through these information-sharing partnerships. That is why these information-sharing partnerships are so important.203

158.When asked what he would like from the SARs reform programme, Stephen Curtis explained that there were concerns about the need to hold transactions up, which may inhibit people from putting in SARs. He provided the following description of the problems that caused:

It can take quite a long time. The difficulty is that the transaction that is being asked for takes a day; at the beginning of the day you get instructions from a company, and by the end of the day you have it. If you reported to the NCA and they told you to hold it up for a week or whatever, that would make the client suspicious. You mustn’t tip them off, but you would by not delivering the service. There tends to be a bit of a cleft stick there—“Why haven’t you phoned me?”—which is awkward.204

159.On SARs reform, RUSI argued that “building on the work of the Joint Money Laundering Intelligence Taskforce and information sharing provisions of the Criminal Finances Act 2017, further mechanisms to promote information sharing with reporting entities should be developed to allow them to file more targeted SARs”.205

160.In considering the SARs reform programme, Mr Toon explained that the reforms were to attempt to “ensure that SAR reporting is as effectively focused on risk and the priorities of risk as it can be”.206 He accepted that submission of a SAR was a regulatory and commercial decision, but noted that:

Almost the first port of call in a major investigation when you start to look at the financial side is the SARs database, so you have six years’ worth of SARs in there. It may well be that you start an investigation today and SARs that were submitted two, three, four or five years ago then become relevant. There is a series of issues here around the fact that the SARs database includes a very wide range of information. Some of it is absolutely critical now; some of it very firmly supports other investigations; some of it we think would be better not reported at all. Part of the SARs reform programme is to try to work through how we lose that which has no value without throwing the baby out with the bathwater.207

161.On the reform process, Donald Toon told us that “in terms of the efficiency and effectiveness of the SARs regime, one of the key issues is replacing the technology that currently supports the regime “which would be part of the programme led by the Home Office. The aim is to have that completed by 2021. Donald Toon though noted that “one of the complexities here is that there are around 56,000 entities spread across the regulated sector” and that “they all have to be able to support reports, so we need technology that is able to do that”. Alongside this “all the law enforcement and regulatory agencies in the UK, […] need to be able to access the database and use it at the other end”.208

162.However, not all witnesses were worried about the volume of SARs. Colin Bell, from HSBC, noted that:

In terms of the volume that we get in the UK, I would take a slightly different position on that. It is about what we do with that volume. It is about how we consume it and how we analyse the information that they present. If I take the US as a comparison, five years ago, maybe, in the US they went through a big upgrade of the way they ingest suspicious activity reports. They introduced electronic filing, something called a common data model, so it all arrives in a common format that allows law enforcement to query the data, to have direct access to it, along with regulators. It allows FinCEN, which is their financial intelligence unit, to run proactive analytics over that data. It has enabled them, in that particular case, to become slightly volume agnostic, if I can put it that way. The analytics that they can run allow them to find things in that large amount of data that have not been found before. We have an opportunity to do something similar in the UK. It is less about volume, because financial institutions will be conservative if we have a suspicion. The threshold is that you know, you suspect or you have reason to suspect. If we cross that threshold, we will file. If we file with standard information and we can interrogate that data in a way similar to the way I have described, we have an opportunity to see things in that data that we have not seen before, which is why we are hugely encouraging of the SARs reform programme that is ongoing in the UK.209

While Simon York, from HMRC, told us that “quality is more important to us than quantity”210 on SARs, he also noted that, when asked whether the system that has been created has incentivised quantity over quality:

Indeed, and the Home Office is currently leading a programme that is looking at how to reform that. There have been enormous advances with data analytics and how we can handle data generally. Technically, we are able to handle bigger amounts of data now. The example I have just given you is an example where you might have 400,000 SARs, but you can make use of them because you are using them as part of a quite sophisticated data-matching system.211

163.The Security Minister outlined the following elements of the reform programme:

We are working together on SAR reform, because we both want quality not quantity of SARs to be made. Of course, that inevitably opens up the debate to who carries the risk. At the moment, the problem with the SAR regime is 620,000 of them are made, of which roughly 83 per cent are from banks. That is your de facto defence; you make the SAR and effectively walk away. Banks quite rightly say that is an awful lot of making. I say, “Yes, let us help you to have quality referrals, not quantity”. They say, “What about the risk of us not doing a referral? Who carries that consequence?” That is why we are working together, financially and on policy, to come up with SAR reform that helps my NCA do its job, but also helps to lift some of the cost of that regulation from banks, because they are going to be doing fewer SARs but of better quality.212

164.The FATF mutual evaluation was also supportive of a reform of the SARs system, noting that:

While a significant number of high-quality SARs are received, the SAR regime needs a significant overhaul which would improve the financial intelligence available to the competent authorities […]. While the full range of financial institutions (FIs) and designated non-financial businesses and professions (DNFBPs) are required to report SARs, there remains an underreporting of suspicious transactions by higher risk sectors such as trust and company service providers (TCSPs), lawyers, and accountants.213

165.Suspicious Activity Reports (SARs) are one way in which the authorities can receive intelligence from the private sector. The SARs reform programme is therefore an exceptionally important piece of work for the AML regime. The Committee’s evidence suggests that reform should focus on increasing the number of SARs reports by those outside the core of the financial system, the so-called enablers. We have heard a number of reasons why SARs may not be submitted by the enablers. It is a legal requirement for SARs to be submitted, so the system needs to be as robust and simple to use as possible. Thought should also be given, in a world of faster payments, to how NCA requested delays to payments can be better handled. Confidence in the SARs system, at present, appears to be weak outside the core financial service. In its response to this Report, the Government should set out how it will increase confidence in the SARs regime.

166.We also heard evidence that quality, rather than the quantity of SARs, should be encouraged. While an increase in quality is always desirable, modern data analytics means that quantity may also be useful. The review will have to be careful not to stifle SARs that in and of themselves may seem of low quality, but when analysed in the round may provide far more useful information.

Politically Exposed Persons

167.An integral part of the AML regime are the rules around Politically Exposed Persons (PEPs). Regulation 35 of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 notes that there must be “enhanced customer due diligence” on PEPs or a family member or a known close associate of a PEP.214 A PEP is defined as “individual who is entrusted with prominent public functions, other than as a middle-ranking or more junior official”.215 In its recent Financial Crime Survey, the FCA reported that in 2017 “firms identified 120,000 ‘politically exposed persons’ among their customer bases”.216

168.Duncan Hames, from Transparency International UK, stressed the importance of the PEP system,217 as did Naomi Hirst, of Global Witness:

One thing to say is that the PEPs regime is fundamentally about conducting due diligence on risk where you see it. A regulated entity must be then satisfied that they have suitable measures in place. Ultimately the risk appetite can still differ from company to company, bank to bank, and so undoubtedly the risk appetite will be greater if the consequences do not follow from taking on risky clients. To get some clarity on the PEPs regime, it still fundamentally rests on decision-making in individual entities, around what their risk appetite is. I would just flag that.218

Tom Keatinge, from RUSI, added:

[…] we need to be operating on a risk-based approach. We need to be sharing information that allows decisions to be made not just because it says, “All PEPs are risky”, but because these individuals are known to have the connections that mean that they could benefit from corruption.219

In its written evidence, the NAEA Propertymark called from more assistance from the Government when dealing with PEPs. It noted that:

The Government need to provide simple tools and training to help agents and senior managers assess the level of risk. Enhanced due diligence often involves seeking a better understanding of the source of funds, requiring the payment to be carried out through an account in the customer’s name with a bank subject to customer due diligence measures and senior-management approval. To support agents with their enhanced due diligence obligations, the Treasury should issue an easily accessible Politically Exposed Person (PEP) list and advertise it widely. This is even more important now that there is no longer a distinction between a domestic or foreign PEP. Furthermore, most estate agents or senior managers will not know how to define a middle-ranking or more junior official to distinguish whether enhanced due diligence is necessary.220

169.Mark Hayward argued that it was quite hard for a high street agent to make such PEP assessments, given that 81 per cent of the sector are owner-managers with one to three offices. He noted that “they are small businesses and the owner is on the front desk. It is difficult for them to make that call if there was not a finite list to go to”.221

170.Stephen Curtis provided further detail about how Company Formation agents deal with PEPs. He noted that one ACRA member uses a commercial register of PEPs that “at the last count, has 72,855 names on it”.222 He noted that the register was international, but that it cost his members money to use, as it was a commercial database.223 When asked whether company formation agents may be better placed to identify PEPs than estate agents, Mr Curtis replied:

Better and worse. We have only got the information in front of us; we have not got that person and asked them for further and better particulars. When my ACRA member uses this register, he goes ahead in three ways. One is that he has a match and it is undoubtedly a politically exposed person. Secondly, he undoubtedly hasn’t got a match and it isn’t a politically exposed person. Thirdly, there is some doubt and he may have to go back and ask for further and better particulars.224

Colin Bell, from HSBC, provided a description of the PEP regime from the perspective of a bank. He noted that:

The definition of a politically exposed person has developed. […The definition] is a senior Government official, domestic or foreign, in a country. That is a pretty loose definition. […HSBC] have our own set of guidance. We looked at the UK, the EU, Hong Kong, the US, and we came up with our own definition of what we think a politically exposed person is. […] We make our own determination in terms of what a PEP is, against that rather loose guidance. We try to apply that consistently globally. More precise guidance would be welcome, recognising that it is quite a difficult topic to get hold of.225

171.The Politically Exposed Persons regime is an important part of the system for preventing money laundering. We have heard that defining PEPs remains difficult for institutions, both large and small. While commercial solutions are available, they may be beyond the resources of very small companies. We recommend that the Government creates a centralised database of PEPs for the use of those registered by AML supervisors.

Derisking

172.One of the Committee’s concerns has been around ‘derisking’. This is where financial institutions remove services from individuals because, owing to characteristics (such as nationality) they believe it is too risky to do business with these people. This can mean that businesses and individuals who are operating within the law can find that they lose access to banking services they need.

173.In its written evidence, the White Collar Crime Centre laid out the following stark effects of the financial exclusion derisking may cause, both when it affects individuals and businesses:

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.226

174.In its written evidence, the FCA provided the following description of the work that it had been doing on derisking, and its expectation of banks on their risk management:

We are aware that some banks no longer offer services to categories of customers they deem to be high risk of money laundering.

In 2015, we published a statement in response to de-risking decisions that clarified how banks should handle money laundering risk. We said we do not think effective money-laundering risk management should result in wholesale de-risking, that banks should not deal generically with whole categories of customers or potential customers and they should recognise the risks associated with different business relationships.

[…]

We are also working with UK banks, via UK Finance, on a set of principles on how they deal with decisions to close relationships. This encourages, where possible, communication with those customers prior to termination and we hope that dialogue might avoid some closures.227

175.Tom Keatinge from RUSI said

[De-risking] started with banks realising that they were doing business and oftentimes they did not know who their customers were. Perhaps derisking was even enforced on them by a regulator; cease and desist orders were issued by the US authorities on certain banks. […]. It was initially a knee-jerk reaction[…] was allowed to freefall over a number of years. There was little intervention by policymakers in the issue. As you know, there was the action group on remittances that was set up in, I think, 2014. That is still going, but it is not clear what action that group has generated. There is now an NGO working group, which was set up only at the end of 2017. My view is that we allowed market forces and allowed policymakers to be reticent to intervene in the private sector’s decisions to allow the financial sector to cleanse itself of a range of business that it either felt uncomfortable with or did not want from an economic perspective.228

Highlighting unexpected consequences of derisking, Mr Keatinge told us that:

[…] I remember well the Somalia remittance issue back in 2013, and fortunately we have not seen the disastrous collapse of remittances flowing to countries around the world where they are needed. They may have got more expensive, they may have become more complex, but the money has continued to flow. It may well have gone underground.229

Tom Keatinge also lamented the lack of change, though suggested that there may be some technological change that could help. He told us that:

The fact that over five years we have achieved nothing, bluntly, makes me wonder whether rather than continuing to think about the problem through that old lens, if you look at what some of the modern technology is doing to move money, that seems to me to be perhaps more promising. We are used to sitting around and talking about cryptocurrencies being something we should fear, but do you know what? There is technology there that could move value around the world without having to go anywhere near banks, and in a transparent way.230

176.Colin Bell, of HSBC, provided us with the following description of why the bank sometimes decided to end their relationships with a customer:

[…] We need confidence that we can manage the risk in the footprint within which we operate. Through that process, there is obviously a need to look at the customers you currently bank and make sure you are still comfortable with them, and to set the standards that I have described in terms of new-to-bank customers. They are difficult conversations, in some cases. At the core, it comes back to transparency. Every time we work with our customer to determine the relationship that we have with them, the core of the conversation is transparency. Do we understand where the money has come from? Do we know who can direct where it goes? Are we comfortable with the transparency as to where it goes? Clearly, in some cases, the firm could not get comfortable with that conversation and exits took place.231

Colin Bell told us though the position wasn’t static, and that there was the potential for change, again from technology. He said:

With the work we are doing today, it is a continuous improvement, partly because the threat changes as criminals get smarter, and they are relentless in their attempts, partly because the environment is changing, but partly because we want to be much more nuanced and precise in the way that we understand risk. The work we are doing around data analytics, information sharing and the need for close partnerships, as we have talked about, will help this discussion. It really will help. It will make a difference, because we will be able to get greater insight into activity and transactions, et cetera.232

177.Stephen Jones, for UK finance, discussed the factors that came into play when considering derisking. He told us that:

A very important and delicate balance needs to be struck between ensuring that criminals cannot access the financial system, on the one hand, and being able, as a legitimate person, whether you are a charity, a corporate or an individual, to operate your bank account and have access to it. Certain sectors become targets and are in the spotlight as a result, for example, of national risk assessments that are put out by the public authorities. It is very important that banks are particularly careful. You mentioned money remittance businesses. They have in the past been targeted in warnings to the banks as potential vehicles through which funding passes, for example, to terrorist organisations. We need to get the balance right.233

Stephen Jones, for UK Finance, suggested that financial firms were aware of the risk, and were attempting to find a solution. He told us that:

In terms of access to banking, it is very important that, if someone is de-banked, they understand why they have been de-banked, why the institution has derisked, and we are working with the FCA on better communications around that. We also, as UK Finance, support the Government’s action group on remittances to ensure that customers in the UK can access legitimate money transfer services. We have worked with a number of roundtables for other industry groups that have had problems, across sectors such as pawnbrokers, crowdfunding, money service bureaus and e-money institutions. All of those have been subject to enhanced scrutiny, because there have been some bad actors in those sectors and that has been highlighted by the public authorities. We are working with the Payment Strategy Forum at the moment to take forward work for payment service providers that have indirect access to payment systems, to make sure that they get easier access to payment systems. That may well also touch on money remittance service providers. There is a lot going on to make sure people are not inappropriately derisked and de-banked across the sector, but I recognise your comments.234

178.The Committee also raised concerns around derisking with HMRC, which supervises money transfer businesses. Derisking by banks is in part meant to reflect weaknesses in the supervision of such money transfer businesses. Simon York, from HMRC, outlined the work they did to supervise

[…], for every sector there is good and bad. Money service businesses are our highest-risk sector by quite some distance. That is what the national risk assessment says and that is very much our experience. They are widely exploited by criminals or exploitation is attempted by criminals. Some of them are complicit with criminality and we see them featuring in a high proportion of our tax fraud investigations and our money laundering investigations. We actually put an awful lot of attention on to the MSB sector, as with everything else, in the main trying to help them, support them, get the systems right. We have also run surge activity. We have a task force tackling MSBs and we have a significant number of criminal investigations.235

179.When the Committee raised the concern that derisking had pushed some money transfer businesses underground, Simon York replied that:

Overall, we have not seen the number of businesses or the number of premises we supervise change all that much, but there has been a change in the make-up of that. Some of the smaller businesses have joined with the bigger businesses to give them that protection and systems to help them. Some of the smaller ones may have moved into more informal money transfer systems, which absolutely pose different problems for us.236

Mr York then further explained why money service businesses presented a risk of money laundering. He told us that:

The criminals will use whichever approach they think is most effective for them, and we have seen money service businesses, as I say, widely exploited. They are very different from banks. A money service business does not have an ongoing customer relationship often. Someone will walk in literally with a bag of cash and walk out with high denomination notes in another currency, or they will walk in with bags of cash and it will be transferred to another country.237

When pressed on whether derisking can drive activity underground, Simon York told us:

It can do, absolutely. Let me just tell you something we were doing a couple of weeks ago. I had my people alongside Border Force at one of the UK’s major airports—I will not tell you which—looking at passengers going to certain destinations. We seized quite a lot of cash there and then we chased that back down to see whether it took us to either criminality or supervised businesses that are not doing the checks properly. We are very live to that. Yes, there has been some of that. Overall, we think the sector is broadly the same size as it was, though.238

180.Another of the areas where derisking has happened has been around the charity sector. Colin Bell provided this description of HSBC’s approach:

As far as charities specifically are concerned, we take the work that we do with charities really seriously. We work with the Charity Commission. We provide banking services to 32,000 charities and 106,000 not-for-profit organisations. We have a meaningful relationship with a range of charities, and we work, as I said, with the Charity Commission.239

181.Stephen Jones, for UK Finance, suggested that reform had been possible in the area of humanitarian aid. He noted that:

For humanitarian aid to countries, whether the subject of sanctions or not, there is now a fast-track process that allows banks to explicitly bypass sanctions in order to ensure that humanitarian aid, for example, arrives in areas that, on the one hand, might be the subject of sanctions but, on the other hand, desperately need those remittances to flow quickly.

Stephen Jones from UK Finance then provided the following positive example in relation to the relief efforts in the face of the recent tsunami in Indonesia:

It was very quick. It was an order that was issued. It was saying, in relation to the tsunami damage there, to the extent that there were any restrictions, “Boom, no, it is fine; money can go to NGOs that are operating in this area”. I saw it come across my desk and thought, “This is good. This is fast. It is timely”. Maybe it is getting better.240

182.The Economic Secretary, when questioned about derisking, told us:

I certainly recognise the trend in derisking, with the withdrawal of banking facilities. The UK chaired the remittance task force that was designed to look at this issue in the remittances sector. The task force has reported back to the G20 this year with 19 recommendations. Quite often, what you see is an individual who apparently has done nothing wrong and has been barred from banking services. There needs to be an examination of this matter, because it just is not just, in some of the cases I have seen. The question is how you do this in an environment where there are legitimate risks that need to be countered at a macro level by banks. We have a senior Treasury director who has led some of that work, and we are taking the conclusions of that task force forward.241

183.Derisking, where financial institutions cease customer relationships with certain ‘high risk’ customers, can have a significant impact on both individuals and businesses. As we have seen, it can also potentially move illicit flows underground. While there has seemingly been much effort, progress in tackling derisking has been achingly slow. We recommend that the Government publishes its strategy on how to address disproportionate derisking strategies within six months. That strategy must include how it will take the conclusions of the G20 taskforce forward.

153 Written evidence submitted by the RUSI Centre for Financial Crime and Security Studies (ECR0018)

154 Written evidence from UK Finance (ECR0064)

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