Anti-money laundering and counter financing of terrorism. What firms in the regulated sector should look out for in 2018

Transcription

1 Anti-money laundering and counter financing of terrorism What firms in the regulated sector should look out for in 2018

2 Introduction The 4 th EU Money Laundering Directive (4MLD) was transposed into UK legislation on 26 June 2017 by the Money Laundering Regulations 2017 (MLR17). Following its implementation, firms in the regulated sector might have hoped for a period of consolidation from further developments in the financial crime arena, particularly given the extent of change in the new Regulations. However, 2018 looks set to be an eventful year too. This EY Regulatory & Public Policy document is designed to act as an aide memoire to help firms in the regulated sector 1 identify, monitor and understand the potential impact of some of the key anti-money laundering (AML) and counter financing of terrorism (CFT) developments during We also include a number of questions that financial crime professionals and/or their boards could usefully ask themselves in this period of change. On the 11 December 2017, the UK Government published a United Kingdom Anti-corruption Strategy (the Strategy) which sets out the government s anti-corruption priorities, both domestic and international, and establishes an ambitious, long-term framework for tackling corruption 3. The Government has six strategic priorities, including to Strengthen the integrity of the UK as an international financial centre (priority 2). One of the specific goals linked to this priority is to Further enhance anti-money laundering and counter-terrorist financing capability. Which is why, when the Strategy was published, the Home Secretary, The Rt Hon Amber Rudd MP, announced 4 a package of measures to crack down on money laundering that allows ruthless gangs to profit from their crimes and fraud. What is evident throughout the Strategy, and borne out in practice, is the Government s commitment to taking active steps to enhance financial-crime-related information flows. This very positive development is to be welcomed as greater information sharing between the law enforcement and the intelligence agencies and firms, and between firms themselves, will deepen understanding of financial crime and terrorist financing risks and hence result in improved typologies and, hopefully, more successful law enforcement. Creating an effective partnership between the public and private sector is a vital component of the Strategy. This document looks at the Government s package of measures: what s new, what s being enhanced and what did we already know about? We also consider the UK s Financial Action Task Force (FATF) mutual evaluation, the future direction of travel in the EU and a possible risk to achieving enhanced information flows. 1 E.g., financial services firms, estate agents, lawyers, accountants and businesses accepting payment of Euro15,000 or more in cash

3 Questions to Ask? In addition to monitoring financial crime-related legislative and regulatory developments during and responding to opportunities to provide input to policy makers and regulators - here are a few of the questions which financial crime professionals and the Boards of their firms could be asking themselves: Are you satisfied you have updated your firm s policies and procedures in line with the changes in the UK MLR17 and the revised Joint Money Laundering Steering Group Guidance, and are you in the process of (or already finished) enhancing your controls? Are you conducting a business-wide risk assessment to identify the inherent money laundering/terrorist financing risks posed to your business, and to assess the adequacy of your controls? Is your application of a risk-based approach to mitigate and manage money laundering /terrorist financing risks in line with the new requirements of the MLR17? What would be the impact of extending the corporate criminal offence (CCO) to wider economic crimes? What procedures would you put in place if, similar to the CCO in the Criminal Finances Act 2017, there was a reasonable prevention procedures defence? What can be done to improve information flows between, and within, the private sector and LEAs? What could you do to help?

4 The link between money laundering and corruption Transparency International defines corruption as the abuse of entrusted power for private gain. It can be classified as grand, petty and political, depending on the amounts of money lost and the sector where it occurs 5 However, interestingly, and as the Strategy document explains, in the UK there is no general criminal offence of corruption. Instead, UK laws define specific offences such as bribery and misconduct in public office. There are also crimes in UK law that are often related to corruption, such as fraud. If bribery, fraud or another serious criminal offence (i.e. a predicate offence) generates illgotten gains ( illicit finance ) and a person intentionally attempts to launder these funds, the offence of money laundering will be committed. Under article 1(3) of the Fourth Money Laundering Directive 6 (4MLD) which was implemented in the UK on 26 June 2017, money laundering is regarded as intentional conduct falling under four main categories (see the next page for details). Money laundering is one of a number of economic crimes and identifying suspicions of money laundering will, in some instances, provide the law enforcement agencies (LEAs) with investigative opportunities to follow the money. This could lead back to the predicate offence committed e.g. bribery. Making the environment for would-be money launderers more hostile to illicit finance, as the Strategy refers, could, therefore, disrupt or deter corruption as it becomes harder to hide or convert the proceeds into clean money

5 What is money laundering? For the purposes of 4MLD 7, the following conduct, when committed intentionally, shall be regarded as money laundering: the conversion or transfer of property, knowing that such property is derived from criminal activity or from an act of participation in such activity, for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in the commission of such an activity to evade the legal consequences of that person's action; the concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of, property, knowing that such property is derived from criminal activity or from an act of participation in such an activity; the acquisition, possession or use of property, knowing, at the time of receipt, that such property was derived from criminal activity or from an act of participation in such an activity; participation in, association to commit, attempts to commit and aiding, abetting, facilitating and counselling the commission of any of the actions referred to in points (a), (b) and (c). Under Article 1(4) of MLD4, money laundering shall be regarded as such even where the activities which generated the property to be laundered were carried out in the territory of another Member State or in that of a third country. 7 Directive (EU) 2015/849

6 So what does the Government s package of measures include? The Strategy document and Government press release includes the following, UKfocussed, measures which are of relevance to AML and CFT: The establishment of a National Economic Crime Centre (NECC) within the National Agency (NCA) The NECC will plan, task and coordinate operational responses across agencies bringing together the UK s capabilities to tackle economic crime more effectively 8 and increase the UK s ability to investigate high-end economic crime. NECC will also have enhanced intelligence and analytical capabilities, to improve the intelligence picture on economic crime, and draw together expertise from across Law Enforcement Agencies, Government and the private sector. The inclusion of the private sector is a key development. Plans are being developed by a team that includes representatives from the City Of London Police, Serious Fraud Office, Financial Conduct Authority (FCA), the Home Office, Crown Prosecution Service and HM Revenue & Customs. The NECC has been welcomed by stakeholders such as the Consultative Committee of Accountancy Bodies, who see it as an important first step in an integrated approach to financial crime. New legislation to allow the NCA to directly task the Serious Fraud Office (SFO) to investigate the worst offenders The Government believe that this power will further improve the coordination of the law enforcement response. However, whilst the SFO has been saved from possible merger into the NCA, which was widely anticipated, some concerns have already been expressed, in the media, that the power may have an impact on the independence of the SFO and its specialist investigators. A question yet to be answered is which agency will make the public interest decision on prosecution. A new Minister for economic crime in the Home Office The Minister of State for Security, The Rt Hon Ben Wallace MP, has been made the Minister of State for Security and Economic Crime. This move has been welcomed as it will give accountability for economic crime and ensure that economic crime has the 8 6

7 same ministerial focus as other risks such as cybersecurity. According to the Strategy, the Prime Minister s Anti-corruption Champion, John Penrose MP, will also help bolster UK effort on organised crime and wider economic crime. The establishment of a Ministerial Economic Crime Strategic Board, chaired by the Home Secretary The Board will oversee strategic priorities, overall performance and align funding and capability development on economic crime. In particular, it will convene the relevant ministers from across government to agree strategic priorities and to ensure the right resources are allocated across our law enforcement agencies to tackle economic crime. This is again a welcome measure and should help to improve both the coordination and resourcing of economic crime. The Strategy document also includes a number of other UK-focused AML/CFT measures that have been announced or consulted on already, or are enhancements to existing measures. However, that does not make them any less significant. Such measures include: Possible exetnsion of corporate criminal liability beyond bribery and tax evasion to wider economic crimes The Government has committed to consider the findings from a January 2017 Ministry of Justice Call for Evidence on Corporate Liability for Economic Crime 9, which proposed extending corporate criminal liability beyond bribery and tax evasion to wider economic crimes. If minded to proceed, the Government will consult on how new offences might be introduced. Firms should already have a bribery risk management programme in place under the Bribery Act However, introducing a section 7, Bribery Act, failure to prevent style offence for other economic crime could require a company to determine and build a risk management programme for each of the fraud and economic crimes to which it might reasonably be deemed to be exposed. This would be a far more extensive exercise. Any extension of the section 7 offence to wider economic crimes may also present a challenge for smaller and medium sized enterprises, who may not have the same level of familiarity with fraud and economic crime risk management strategies and techniques. This is definitely a development to watch and, if a consultation is published, engage with. A commitment to implement all key elements of the Criminal Finances Act, including Unexplained Wealth Orders, by the end of April 2018 This commitment is subject to Parliamentary time, which, given the Brexit agenda, could be challenging. It is important firms monitor when Unexplained Wealth Orders come into effect. The creation of a new Office for Professional Body Anti-Money Laundering Supervision (OPBAS), hosted by the FCA This development is not new, as during 2017 OPBAS was the subject of one HM Treasury Consultation, two FCA consultations and a letter from the FCA to professional body supervisors 10. The Government has committed to OPBAD being fully operational by the beginning of 2018 and the FCA has now published the OPBAS Sourcebook, which will come into force on 1 February Professional services firms should watch for further announcements about how OPBAS will operate and consider

8 any indirect impacts to AML/CFT supervision and associated costs. Reform of the SAR regime (including legislative, operational and technical changes) to provide a more targeted, intelligence-led focus on high risk economic crime This long awaited reform was announced in the Government s 2016 Action Plan for Anti- Money Laundering and Counter- Terrorist Finance. As reported in the NCA Suspicious Activity Reports (SARs) Annual Report 2017, work on a joint NCA/Home Office SARs Reform Programme is ongoing: 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 11. Enhancing the Joint Money Laundering Intelligence Taskforce (JMLIT) There will be an increase in the JMLIT s analytical capabilities and continued expansion of its membership to include more banks and financial services firms. Reviews of the use of powers in the Criminal Finances Act 2017 A new working group is being established, with representatives from the NCA, the police, HMRC and SFO, to review the use of powers within the Criminal Finances Act for forfeiture of criminal money. The Government has also announced a Law Commission review of the confiscation powers in the Proceeds of Crime Act, with the aim of improving the process by which confiscation orders are made and optimising their enforcement. Establishing a public register of beneficial ownership of overseas legal entities Overseas legal entities will be required to provide details of their ultimate beneficial owners when they own or purchase property in the UK or participate in central government contracts. The Government has committed to publishing a draft bill this summer and introducing it to Parliament by summer 2019, with the register going live by early There are also some more general statements which may be the subject of announcements in For example, the Government will be: Delivering prevention campaigns (e.g. to professionals in the regulated sector to raise awareness of AML risks and the actions to mitigate them) Working with supervisors to fully embed the new MLR17 which implement 4MLD, as clarified by FCA guidance on the treatment of Politically Exposed Persons Continuing its support for the Office of Financial Sanction Implementation (OFSI) in imposing monetary penalties for financial sanction breaches under the Policing and Crime Act 2017, following publication of OFSI Financial Sanctions Guidance, which details how the new powers will be used suspicious-activity-reports-annual-report-2017/file

9 The importance of the public and private sector partnership and information sharing The strategic priority to strengthen the integrity of the UK as an international financial centre also includes, as another goal, stronger public-private partnerships to share information and improve targeting of those who pose greatest risk. As noted previously, this will be particularly welcomed by the regulated sector, as developing and further strengthening the relationship between the public and private sector has long been an aim. It also chimes with the direction of travel in the Criminal Finances Act 2017, which enables information sharing between regulated entities, subject to conditions, the Royal United Services Institute (RUSI) October 2017 report The Role of Financial Information- Sharing Partnerships in the Disruption of Crime 13 and the Financial Action Task Force s (FATF s) recent Guidance on Private Sector Information Sharing 14. The FATF Guidance aims to improve effective information sharing, one of the cornerstones of the FATF Recommendations. It contains a number of country examples, including examples of collaboration with authorities responsible for data protection and privacy. FATF also highlights that: A continuous dialogue between private and public sectors, will improve the quality of the information shared and its usefulness to authorities charged with investigating financial crime and Information sharing can allow financial institutions, supervisory and law authorities to make better use of available resources and exploit new technologies and business models to develop innovative techniques to tackle money laundering and terrorist financing. The support for the JMLIT, as discussed above, is welcomed. JMLIT started life, in 2015, as a 12-month pilot project that was developed by the Home Office, the NCA, the City of London

10 Police, the British Bankers Association (BBA) (now UK Finance) and other banks and other financial institutions. The aim of JMLIT is to improve intelligence sharing arrangements to aid the fight against money laundering and build upon the national leadership against organised economic and financial crime provided by the Economic Crime Command in the NCA. Speaking at the launch of the pilot in February , Anthony Browne, the then chief executive of the BBA, said that When banks, the government and law enforcement work together we are undoubtedly stronger in our efforts to combat crime. That s why we are playing a leading role in sharing key intelligence to help protect our customers from fraud and catch sophisticated criminals. There is a positive mood amongst AML/CFT professionals who see the Government s Strategy crystallising into continued enhancement of information flows and real change in both the public sector s approach to sharing information with firms and support for firms sharing information with peers. The screening, in particular for conduct and integrity of relevant employees under MLR 21 (including an employee whose work may contribute to the identification or mitigation of the risks of money laundering and terrorist financing or the prevention or detection of money laundering and terrorist financing) should help create an environment of trust. The UK under the spot light: the FATF mutual evaluation of the UK AML/CFT regime The UK AML/CFT regime will be reviewed by FATF for effective implementation of its 2012 Recommendations. This will be the UK s first peer review since 2007 and although the UK is world-leading in many respects, the review could still identify areas for enhancement (for example, in 2007 FATF found that the Financial Services Authority s supervision of smaller firms required enhancement). However, it would be surprising if the evaluation was negative. Look out for a final report from FATF in December The future direction of travel in the EU: proposals to amend the 4th Money Laundering Directive Whilst 4MLD was being agreed by the EU Parliament and Council, events highlighted the need for additional measures, in particular for CFT. Firstly, terrorist attacks brought to light emerging new trends, in particular regarding the way terrorist groups finance and conduct their operations. In particular, Currently, gaps still exist in the oversight of the many financial means used by terrorists, from cash and trade in cultural artefacts to virtual currencies and anonymous pre-paid cards. Secondly, the publication of the Panama Papers shone a spotlight on offshore jurisdictions being used as locations of intermediary entities that distance the real owner from the assets owned, often to avoid or evade tax. As a consequence, the EU Commission published a legislative proposal 16 to amend 4MLD this proposal, which forms part of the EU Commission s action plan against terrorist financing, is often referred to as MLD5. The majority of the changes in the new Directive are likely to have minimal impact on firm s AML/CFT obligations, and instead focus more broadly on improving transparency and information sharing on a national level, as well as extending the scope of the AML requirements to other types of services. The proposal includes centralised national bank and payment account registers (or central data retrieval systems in all Member States), a minimum standard of Enhanced Due Diligence measures to be applied to customers established in high-risk third countries, and measures to combat ML/CFT risks from virtual currencies and &t=e&l=en 10

11 anonymous pre-paid instruments (amongst a number of other new measures). The European Parliament and the Council have now reached political agreement on the final text of the MLD5 and it just remains for the text to be ratified formally and adopted by the Parliament by way of a vote. This is anticipated in early Given the UK s desire to lead in the fight against financial crime and adopt rigorous standards including by establishing public registers of company beneficial ownership and trusts with UK tax consquences - it likely that 5MLD will be implemented. Firms should therefore monitor 5MLD developments and consider what changes would need to be made to their systems and controls. Sanctions and Anti-Money Laundering Bill This Bill is designed to enshrine EU law into UK legislation before 29 March 2019 and create a UK sanctions regime. The Bill received first reading in the House of Lords on 18 October 2017 and firms should review and track the draft Bill. 11

12 A possible risk to enhanced information flows? The EU General Data Protection Regulation (GDPR) will come into effect on 25 May 2018, just under a year after the MLR17 implemented the 4MLD in the UK. However, Money Laundering Reporting Officers (MLROs) and other financial crime specialists have been concerned for some time that the GDPR may restrict firms in the regulated sector from carrying out some aspects of Enhanced Due Diligence (EDD) and/or exchanging data in the fight against financial crime. It will be important for firm s financial crime and data protection teams to consider the implications of GDPR for AML/CFT and, if concerns arise, work with relevant trade bodies and regulators to identify solutions. 12

13 Conclusion You should be aware that the year ahead will certainly bring new legal and regulatory developments and challenges for AML/CFT professionals and firms in the regulated sector. However, it is also likely to present more opportunities to work together with the public sector and benefit from increased intelligence to help the fight against AML/CFT and other economic crimes. Additionally, with the UK leaving the EU in March 2019, this raises a whole new set of questions regarding what the UK s AML/CFT legislative framework will look like from that point onwards, whether it will be subject to change and the impact of any data barriers between the UK and the EU27. Early indications from the Treasury indicate that change to the AML/CFT regime will be minimal, however, this again is something for firms to be mindful of and to stay abreast of in The Anti-corruption Strategy as a whole not only demonstrates a significant effort by the UK government to further clamp down on economic crime and enhance the UK s capability to deter it, but that the fight against financial crime is increasingly becoming higher on the governments list of priorities a priority that is unlikely to reduce anytime in the near future is certainly going to be a busy year for policy makers, regulators and firms in the regulated sector. 13

14 For further information, please contact a member of the Regulatory & Public Policy or Financial Crime Advisory teams Eamonn McGrath Partner, Regulatory & Public Policy Team emcgrath@uk.ey.com Debbie Ward Partner, Financial Crime Advisory dward1@uk.ey.com Loree Gourley Director, Regulatory & Public Policy Team lgourley@uk.ey.com Jane Hayward Green Associate Director, Regulatory & Public Policy Team Jgreen4@uk.ey.com

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