Tuesday January 29, 2019
Tuesday January 29, 2019
Mutual evaluations from the Financial Action Task Force (FATF) are big news within the anti money laundering (AML) community; its peer reviews provide insight into the AML framework of a country, the key risks that it faces and how those risks are managed.
In the latest round of reviews, FATF is focusing on two key areas: effectiveness and technical compliance. FATF is not only looking to ensure that a country has a framework in place but seeking to understand how effective the framework is in protecting the financial system from abuse.
On the 7 December, FATF published its Mutual Evaluation Report on the United Kingdom [PDF]. The report was hailed by many as good news, with the headline on the UK government website stating that the ‘UK takes [the] top spot in fight against dirty money’. Whilst FATF may not have been so flattering, its toned-down version described the UK as having ‘a well-developed and robust regime to effectively combat money laundering and terrorist financing’. Others, such as Transparency International, were quick to comment, urging the UK government not to ignore the weaknesses highlighted within the report.
Suspicious Activity Reports – Fit for purpose?
One of the key issues identified by FATF – and one of only two recommendations where the UK was deemed to be only ‘partially compliant’ – was financial intelligence units.
FATF raised serious concerns over the lack of available resources available to the UK financial intelligence unit (UKFIU), particularly as similar concerns had been previously raised by FATF in its 2007 review of the UK.
The UK has taken the decision to limit the amount of operational and strategic analysis that its FIU undertakes, but it is thought that this lack of analysis by the FIU is mitigated by providing law enforcement agencies direct access to the UKFIU database, allowing law enforcement to carry out their own analyses using their own resources.
The UKFIU sits within the National Crime Agency (NCA), so it is with some interest that December also saw the publication of the UK’s FIU 2018 Suspicious Activity Reports (SARs) Annual Report [PDF].
The NCA acknowledged the FATF visit in its report, and the different role the UKFIU adopts compared to other FIUs – one that it assures is the ‘right one for the UK’, providing ‘significant operational benefits to UK law enforcement’. Analysis by the FIU is only typically carried out where it can add unique value.
This is no doubt an area where the two sides disagree. The FATF assessment team were not convinced that the gaps could be addressed by other agencies, which leads to the risk that the financial intelligence is not fully exploited.
What do the numbers say?
The SARs Annual Report provides a fascinating insight into the number of SARs submitted to the UKFIU, which was a record-breaking number during the period April 2017 to March 2018, totalling 463,938, a 9.6% increase from the previous period. The NCA noted that not only was there an increase in the volume, but also in the complexity of submitted SARs.
The same period also saw a 20% increase in the number of requests received for a defence against money laundering (DAML). Of those refused and granted, over £50 million of assets were subsequently being denied to criminals.
Unsurprisingly, banks continue to report the largest number of SARs (371,522), with the smallest number received from ‘trust or company service providers’ (53). This did not go unnoticed by FATF, who raised concerns on the ‘underreporting of suspicious transactions by higher risk sectors such as trust and company service providers (TCSPs), lawyers, and accountants’. According to the NCA report, ‘accountants and tax advisors’ submitted 5,140 whereas independent legal professionals submitted 2,660. The NCA did not comment on the number of SARs from each sector, stating that ‘it is for the sector and their supervisors to assess if the volume of SARs submitted is proportionate to the risks their sectors face.’
There is also a difference in the quality of SARs; the NCA has done various work with the industry seeking to increase SAR quality, but the results seem to be so far inconclusive. Whilst FATF did praise the substantial number of high-quality SARs being reported, they also mentioned ‘a large number of poor-quality SARs being filed even among banks’.
The future of the SARs regime
Whilst the UK and FATF may disagree in their approaches to the SAR regime, one aspect upon which both agree is the need for reform, particularly in IT systems. The NCA’s aim is ambitious, which Donald Toon, the NCA’s Prosperity Director made explicit in his introduction to the SARs report, where he called 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’.
Despite its self-congratulatory address, the UK government does recognise the need to improve the SAR regime, and in a statement it has already committed to reform ‘to further improve the use of financial intelligence in the UK’. This seems consistent with FATF’s recommendation that the SAR regime requires ‘significant overhaul to improve the quality of financial intelligence available to the competent authorities’.
It was far from all bad news for the UK’s intelligence framework; the Joint Money Laundering Intelligence Taskforce (JMLIT) was considered by FATF to be an example of best practice for its innovative ability to allow information sharing between the public and private sectors. Whilst JMLIT is designed to complement the SAR framework, and in no way removes the legal obligation to submit a SAR, the results are telling. According to the FATF report, as a direct consequence of JMLIT activity since it began in 2015, there has been:
When looking at the SARs regime, it is often too easy to focus on the negatives and the issues that require improvement, but that should never distract us from the end goal: to fight crime. Whilst the difficulty of obtaining feedback on individual SARs is an issue for those working in financial crime, the case studies provided within the SARs report give us insight into how the SAR data is used, tackling a range of crimes from child exploitation and modern slavery to fraud.
So, is the UK report a cause for celebration? I would suggest both yes and no. It is important to recognise the hard work that is being undertaken by everyone involved in the UK’s AML efforts, but that does not mean that it is time to rest. The UK has its strengths but also its weaknesses. The fight against financial crime will never be finished, as criminals will perpetually adopt new methods – it is within their own personal interests to make sure that they stay ahead of the game and can benefit from their ill-gotten gains. Knowing that we are participating in work that contributes to the recovery of criminal assets and the safeguarding of vulnerable people – that is what make the challenge so worthwhile.
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