The UK’s regulatory approach to anti-money laundering (AML) has been under fierce criticism over the past six months. A report by Transparency International released in November 2017, claimed that shell companies registered in the UK were laundering tens of billions of pounds through the country each year.
This reproach comes in spite of the fact that the UK has put in place one of the more robust AML frameworks within the European Union. Given the negative headlines following the Panama Papers scandal, it’s hardly surprising that the focus on AML by the Financial Conduct Authority (FCA) is increasing even further for the 2018/2019 year in the regulator’s annual business plan. Firms in the investment management industry should keep their eyes open for the following topics:
- The 4thEU AML Directive – This legislation was implemented in the UK in June 2017. The FCA can be expected to focus on the 4th AML directive implementation during its examinations of firms. It is also updating its guidance on financial crime systems and controls to reflect changes brought about by this directive – as well as adding chapters on insider dealing and market manipulation. Firms should actively review their systems and controls to ensure compliance with this directive and the proposals for the guidance update, if they have not already done so.
- The 5thEU AML Directive – Unlike previous EU AML directives, this one does not replace its predecessor – instead, it modifies it. The legislation is moving relatively swiftly through the EU rulemaking process – the EU Parliament approved it in mid-April. The formal implementation date is expected to be in late 2019 or early 2020. Key elements of the directive include:
- Broadening sector coverage to virtual currency providers, anonymous prepaid cards and other digital currencies, art dealers and tax related services
- Establishing beneficial ownership registers for companies and trusts
- Granting new powers to financial intelligence units (FIUs) to request information from regulated firms through centralized bank and payment account registers
- Creating enhanced due diligence (EDD) requirements for transactions involving legal entities based in ‘high-risk third countries’
- Lowering the threshold for prepaid cards customer identification to €150 if the card is used in a shop, and to just €50 if used online
The implementation date for this directive is beyond the UK’s Brexit withdrawal date, but it is highly likely that the UK government will seek to implement this directive no matter what the country’s status is in relation to the EU.
- 6thEU AML Directive – Coming on the heels of the 5th directive, this new directive is designed specifically to bring key elements of the AML enforcement regime into alignment across Europe. At the moment, individual nations are setting their own frameworks around AML offenses and these discrepancies are being exploited by criminals. The directive contains 22 predicate offenses, including environmental crimes, tax crimes and cybercrime. Formal legal text is expected this summer. Again, implementation would be post-Brexit, and it is less clear whether or not the UK will adopt this directive.
- Capital Markets– The UK National Risk Assessment of Money Laundering and Terrorist Financing, published in October 2017, identified the potential for money laundering and terrorist financing through capital markets as an emerging risk. The report highlighted the fine received by Deutsche Bank in 2017 after it reported a series of mirror trades between its Russian and London offices on behalf of customers. The FCA said in its Business Plan that it will undertake a thematic review of the sector, with an eye towards improving systems and controls.
- Home Office Focus– In December 2017, the UK’s Home Secretary announced a range of measures, including:
- Establishment a new National Economic Crime Centre, which will task and coordinate the national response to economic crime
- Creation of a new economic crime strategic board chaired by the Home Secretary
- Reform of the suspicious activity reportingregime to improve the quality of the intelligence it provides.
- Other measures targeting corruption and law enforcement were also included in the package.
- FATF Evaluation– The Financial Action Task Force’s (FATF’s) mutual evaluation of the UK’s AML approach will conclude in October 2018. While the UK has been preparing for this for a long time with a wide number of initiatives in the AML space, any findings of issues or challenges by the FATF will likely be met with swift action by the UK government. The FATF report will signal key directions for UK AML policy in the coming 24 months. For example, when the International Monetary Fund (IMF) completed its own AML evaluation in 2016, it criticized the UK’s use of firm size as an indicator of money laundering risk, which led to the FCA undertaking more evaluations of AML controls at smaller firms.
- RegTech– The FCA is convening an international TechSprint to explore how technology could be used to fight financial crime, money laundering, and terrorist financing. The event, to be held in late May, is expected to bring together international regulatory experts. The FCA is hoping that RegTech will soon be used to reduce operational costs and improve data analytics that can detect criminal behavior. For example, MiFID II’s regulatory reporting data can be used by both regulators and firms to detect market abuse. Applying analytics to suspicious activity reports to uncover money laundering and terrorist financing is equally possible.
In short, firms should anticipate increased AML compliance expectations from the FCA over the next year or two. The EU’s directive pipeline is already full, and public pressure from bad press as well as the FATF report should turn up the heat further. The answer to managing this increased regulatory burden is the industrialization of AML compliance within firms. This includes having the right policies and procedures in place supporting that framework through the use of the new technologies that are becoming available and ensuring that all involved in the process are appropriately trained and supervised.
Philip Naughton is head of UK Compliance, Cordium