UK AML/CFT supervision: proportionate and effective?

Written by James Thomas on Wednesday March 25, 2015

The HM Treasury Anti-money laundering and counter terrorist finance supervision report 2013-14, released earlier this week, aims to provide a snapshot of the progress made over the last 12 months by UK AML/CFT supervisors in:

• adopting a risk-based approach to their supervisory responsibilities;
• monitoring the activities of those that they supervise;
• undertaking enforcement actions;
• providing advice and outreach to regulated entities; and
• sharing information amongst themselves.

In summary, the report suggested that supervisors had made “further progress in… engaging with their regulated firms and entities” in 2013-14 when compared with the previous year. However, it also stated that finding ways to measure the effectiveness of AML/CFT systems and controls – in line with updated FATF recommendations – remains a “major challenge”.

Of particular note was the suggestion that supervisors have struggled to marry the requirement for a risk-based approach with their monitoring activities, with the report stating that: “whilst many supervisors demonstrated a good understanding of the ML/TF risks facing their sector, the majority … had difficulty explaining how their assessment of risk translates into the specific monitoring actions they undertook during the year”.

Elsewhere, record-keeping appears as a clear area in need of development for many supervisors. The report revealed that not all supervisors currently record the results of desk-based reviews and that “7 of the twenty-one supervisors that undertake [compliance] visits do not currently record the outcome of their visits, or do not record the specific outcome of AML/CFT compliance where the visit covers broader regulatory activity”.

Finally, and not surprisingly, enforcement activity showed a significant increase. Notably, numbers of fines increased from 181 to 529, issuance of action plans rose from 252 to 440, and suspensions jumped from 5 to 29. The report warned against a “broad brush” approach and the risk that increased enforcement actions may create “perverse incentives, such as disproportionate compliance”, pointing in particular to the potential for the excessive application of requirements relating to Politically Exposed Persons (PEPs) and the risk of restricting access to banking by legitimate customers.

What’s your view of the contribution (or not) of UK supervisors towards a proportionate and effective AML/CFT regime? Where should supervisors’ focus lie for 2015?