Consultation outcome

Anti-money laundering supervisory review: consultation

Updated 18 December 2017

1. Introduction

1.1 Background

On 15 March, the government published the Anti-money laundering supervisory regime: response to the consultation and call for further information (the call for further information).

The call for further information announced the government’s plans to reform the anti-money laundering (AML) and counter-terrorist financing (CTF) supervisory regime, including by:

• clarifying the obligations on all supervisors through the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs)
• creating a new Office for Professional Body AML Supervision (OPBAS), hosted by the Financial Conduct Authority (FCA), to improve coordination and consistency across the system. In particular, OPBAS will work with professional body AML supervisors (PBSs) to help, and ensure, they comply with their obligations in the MLRs
• working with a reformed Money Laundering Advisory Committee (MLAC) to streamline the AML guidance provided to businesses

These reforms will strengthen the UK’s AML supervisory regime, addressing a key risk identified in the 2015 UK National risk assessment of money laundering and terrorist financing (the NRA). The NRA found that the effectiveness of the UK’s supervisory regime is inconsistent and, whilst some supervisors are highly effective in some areas, there is room for improvement across the board, including in understanding and applying a risk-based approach to supervision and in providing a credible deterrent. The number of PBSs in some sectors risked inconsistencies of approach, and data is not yet shared between supervisors freely or frequently enough. Strengthening oversight of the AML supervisory regime will ensure that all AML supervisors provide effective supervision, as required by the EU Fourth Money Laundering Directive (4MLD).

The government’s aim is for the AML/CTF regime to make the UK’s financial system a hostile environment for illicit finance. These reforms to the supervisory regime complement work across government to deliver on the commitments in the 2016 Action Plan for anti-money laundering and counter terrorist finance (the action plan), which set out how the public and private sector will work together to tackle money laundering. In particular, the government has enhanced the law enforcement response through the Criminal Finances Act, which received Royal Assent on 27 April, providing new powers to protect the integrity of the UK’s financial system. In addition, on 26 June, the 2017 MLRs took effect, transposing 4MLD and bringing the UK’s AML and CTF regime into line with the latest international standards.

The call for further information reflected the findings of the Call for information: AML supervisory regime and the Cutting red tape review of the UK’s AML and CTF regime. It also sought views on the powers and mandate of OPBAS. The government is grateful for all the responses received, including from PBSs, their members, civil society and trade bodies.

This is the government’s response to the call for further information. Alongside this publication, the government has published draft regulations to establish OPBAS. The government invites views on whether they deliver the government’s intention that OPBAS help, and ensure, PBSs comply with their obligations in the MLRs. The government would also welcome views on the impact of OPBAS on business. A list of questions to inform the government impact assessment are at Annex A. Details of how to respond are provided in Annex B, and the deadline for responses is 17 August.

Chapter 2 discusses the powers OPBAS needs to fulfil its objectives effectively, the relevant fora it might attend and the issues it should report on annually.

Chapter 3 looks at how the AML supervisory regime might evolve over time.

Chapter 4 discusses the potential costs and benefits of OPBAS and streamlined AML guidance, and seeks evidence to support the government’s impact assessment. The consultation stage impact assessment is published alongside this consultation.

1.2 Key themes

Many respondents thought the announcements in the supervisory review, including greater oversight, would help strengthen the regime. Several respondents cautioned that OPBAS’s focus on PBSs could lead to inconsistent standards between professional body and statutory supervisors, especially where both professional body and statutory supervisors are active in the same sector.

Most respondents agreed that the core package of investigatory and disciplinary powers proposed for OPBAS would ensure effective oversight, though many looked forward to commenting on the detail, and several noted that an appropriate appeals mechanism must be in place. Whilst some respondents agreed OPBAS should participate in onsite visits, and thought there would be some situations where OPBAS could usefully collect information from PBSs’ members, there was strong opposition to OPBAS having powers to engage directly with PBSs’ members. This was because respondents thought that OPBAS should focus on ensuring high supervisory standards and that direct engagement with members would undermine PBSs. All PBSs noted that the cost of OPBAS, including the fee, must be proportionate.

Looking forward, several respondents noted that the number of PBSs could rise or fall over time and legal PBSs, in particular, highlighted that there are no clear alternative AML supervisors for legal services providers, in case a legal PBS were to step down, or be removed from, its role as an AML supervisor.

1.3 Next steps

In this consultation, the government is seeking:

• views on whether the draft Oversight of Professional Body AML Supervision Regulations deliver on the government’s intention that OPBAS help, and ensure, PBSs comply with their obligations in the MLRs

• evidence on the costs and benefits of OPBAS and streamlined AML guidance for businesses, to underpin the impact assessment

The full list of questions is provided in Annex A. Details of how to respond are provided in Annex B, and the deadline for responses is 17 August

The FCA will consult shortly on guidance setting out how OPBAS expects PBSs to comply with their obligations in the MLRs, and the estimated impact of OPBAS. The FCA expects to consult on OPBAS’s fees regime in autumn.

2. Office for Professional Body AML Supervision (OPBAS)

This chapter discusses the powers OPBAS needs to fulfil its objectives effectively, the relevant fora it might attend and the issues it should report on annually.

2.1 Investigatory and disciplinary powers

Most respondents agreed that the core package of investigatory and disciplinary powers proposed for OPBAS would ensure effective oversight. These powers included the power to request information from, and the attendance at interview of, their staff, and the power to publicly censure or recommend removal of professional bodies that do not fulfil their obligations in the MLRs. One respondent suggested that OPBAS should issue action plans and directions to help address specific areas for improvement, whilst another suggested OPBAS be able to require a PBS to commission a skilled third party to complete a report on its AML supervisory performance. Others, and civil society, suggested OPBAS should have the power to fine. Several PBSs noted that public censure carried substantial reputational risk for a professional body, and this power should be used carefully. Some highlighted that an appropriate appeals procedure must be in place.

Most respondents also agreed that OPBAS should have a right to participate in onsite supervisory visits. Several respondents suggested that OPBAS could helpfully engage with their membership in certain circumstances, for example, if OPBAS were looking to verify evidence or to solicit feedback, though they cautioned that direct engagement should be limited and PBSs should remain the first point of contact for their members. That said, most PBSs strongly contended that OPBAS should meet its objectives by reviewing supervisory documents and interviewing PBS staff, and by accompanying the PBS during onsite visits. Several PBSs highlighted concerns that OPBAS directly requesting information from their members would undermine their role whilst increasing burdens on their members. Several suggested that potential situations where direct intervention might be necessary – for example, to address a critical breach of the MLRs – should be matters for law enforcement.

Overall, many PBSs looked forward to commenting on the detail of these powers. Several highlighted that OPBAS must be proportionate and considerate of the burdens it could place on PBSs. One PBS noted that a risk-based supervisory approach is not risk-free, and that OPBAS should set out potential situations that might merit penalties in this context.

There was broad agreement that OPBAS’s guidance, setting out how PBSs might best meet their obligations in the MLRs, will help PBSs fulfil their roles more effectively. Whilst civil society respondents suggested a binding rulebook would ensure all PBSs adopt the same approach to supervision, most PBSs and a trade body contended that non-binding guidance would ensure a focus on effective outcomes across sectors and devolved administrations. Legal PBSs proposed the Legal Services Board’s approach as a model, noting that its Regulatory Standards Framework enables professional bodies to self-assess against consistent, scalable and robust standards. Several respondents highlighted that PBSs are currently updating their supervisory framework to reflect the new MLRs, and encouraged OPBAS to publish its guidance soon to minimise potential costs when PBSs must align their framework with OPBAS’s expectations.

2.2 Transparency

Many respondents agreed that OPBAS should report on the proposed topics, including its performance against its objectives; its priorities for the coming year; and expectations around emerging risks. Several PBSs suggested OPBAS could also helpfully report on its budget, best practice amongst supervisors or comparative statistics such as educational awareness or spending on AML supervision. Others contended that OPBAS should be careful not to publish a roadmap for criminals, and that the scope of publications should be proportionate to the cost. One respondent recommended that the content of public reports should be subject to further consultation, whilst several respondents felt the topics should be regularly reviewed.

Looking beyond OPBAS, one PBS noted HMT held overarching responsibility for the AML regime and should therefore publish analysis that reflected the supervisory system as a whole.

2.3 Representation

Most respondents agreed that OPBAS should attend the Money Laundering Advisory Committee (MLAC) and the AML Supervisors Forum (AMLSF), where OPBAS could usefully lead discussions around the supervisory regime’s effectiveness and options to further strengthen it. Most respondents felt OPBAS could similarly engage with the Legal and Accountancy Affinity Groups, though several cautioned that OPBAS should attend these groups by invitation to preserve and facilitate open conversation amongst supervisors. A civil society respondent suggested OPBAS attend the Joint Money Laundering Intelligence Task Force (JMLIT), which helps support information sharing between financial institutions and law enforcement. Others noted that OPBAS’s role, and representation, should evolve over time to ensure effectiveness.

2.4 Fees

All PBSs highlighted that the costs of OPBAS must be proportionate. Several suggested the fee be distributed according to the risk a PBS or its members pose, the size of the PBS or the number of members providing services subject to the MLRs. Several noted the OPBAS fee would increase the cost of PBS supervision, and suggested the cost of AML supervisors be standardised to improve consistency and reduce the risk of ‘supervisor shopping.’ Accountancy PBSs cautioned that, if the price were too high, their members may move to be supervised by HMRC.

Several legal PBSs highlighted legislative amendments may be necessary to ensure that they can pay the OPBAS fee.

2.5 Government response

The government welcomes the broad endorsement of the package of powers proposed for OPBAS in the call for further information. The draft Oversight of Professional Body AML Supervision Regulations have been published alongside this consultation. The government considered responses to the call for further information in preparing these draft regulations, which, when finalised, are intended to provide the FCA with the powers necessary to underpin OPBAS.

The government expects that OPBAS will focus on working with PBSs to ensure high standards of supervision, and agrees OPBAS should have powers to help PBSs comply with the MLRs. Therefore, these draft regulations include the package proposed in the call for further information. In addition, they provide OPBAS with a power to direct and to require a PBS to commission a report by a skilled and independent individual, which can be used to helpfully ensure and verify that PBS’s compliance. The government also acknowledges that PBSs voluntarily provide AML supervision for their members, and feels that public censure and the potential that a PBS may be removed from this role will provide effective and appropriate penalties in this context.

These powers will be complemented by safeguards, so that where OPBAS looks to publicly censure a PBS or recommend the Treasury removes its status as an AML supervisor, it must consider whether the PBS has followed relevant guidance and taken all reasonable steps to comply with the MLRs, then issue a warning notice prior to taking action. If OPBAS chooses to proceed with public censure, the PBS will have the right to appeal to the Upper Tribunal. The decision to remove a PBS as an AML supervisor will be taken by the Treasury and, as usual, the PBS may seek a judicial review of the Treasury’s decision. In addition, in order to ensure commercially sensitive information is not released to the public, OPBAS will only be allowed to share confidential information with specific organisations to ensure OPBAS operates, and the MLRs are implemented, effectively or where the law requires the information is passed on. Where OPBAS shares confidential information, those specific organisations may only further share the information where it supports those three objectives or facilitates enforcement action. The FCA will apply the same protections to data collected from PBSs, through OPBAS, as it applies to data collected from financial institutions through the MLRs. Once operational, OPBAS will also support the Treasury in considering applications by professional bodies to become professional body AML supervisors.

These draft regulations also provides FCA with the power to raise funding from PBSs for OPBAS, and the FCA expects to publish a consultation on how the fee might best be distributed in the autumn. OPBAS will initially report on its performance against its objectives; priorities for the coming year; and expectations around emerging risks in the FCA’s Annual Report, though the Treasury will keep these topics under review, and will seek views from the Affinity Groups and OPBAS on potential additional topics.

Separately, the government acknowledges that effective PBS supervision of their members, complemented by OPBAS’s oversight, lessens the need for OPBAS to engage members directly. That said, the government agrees that there may be scenarios where OPBAS could helpfully seek feedback or other information from members. Therefore, whilst the government will not legislate, it does expect that PBSs and their members will cooperate with OPBAS to ensure it can collect appropriate information. Similarly, whilst the government will not legislate, it does expect PBSs to involve OPBAS in onsite visits on request.

The government agrees that OPBAS could helpfully attend MLAC and AMLSF, and should attend the Affinity Groups by invitation. The government also agrees that OPBAS will play a helpful role in facilitating information sharing between law enforcement and PBSs. Existing intelligence-sharing arrangements (such as the Financial Crime Information Network (FIN-NET) and Shared Intelligence Service (SIS)) provide a firm basis for cooperation between law enforcement and PBSs, and many PBSs are already members.

The Treasury will continue to retain oversight of, and policy responsibility for, the AML supervisory regime. The MLRs require that all supervisors provide information to inform the Treasury’s Annual Supervision Report – once operational, OPBAS will request this information from PBSs on the Treasury’s behalf and submit a consolidated summary to the Treasury to inform the Annual Supervision Report.

The government would welcome views on whether these regulations deliver on the government’s intent. Details of how to respond are provided in Annex B, and the deadline for views to be submitted is 17 August.

3. Evolving anti-money laundering supervision

This chapter looks at how the AML supervisory regime might evolve over time. In particular, it considers how the government might best manage PBSs stepping down, or being removed, from the role of an AML supervisor, especially in the legal services sector.

Looking forward, many PBSs felt that innovation, including through new technologies and liberalisation in the legal services market, would create new opportunities for their members to provide better services. Respondents also cautioned that these services may also create new risks to be managed and mitigated. In this context, several PBSs highlighted their deep expertise and regular engagement with their membership as key strengths in the UK’s AML supervisory regime.

That said, a number of PBSs felt that other PBSs should invest more in their supervisory functions. Others cautioned that some PBSs may not be able to meet the direct and indirect costs of a stronger supervisory regime, and may therefore look to step down from their role as AML supervisors. A trade body proposed that, over the longer term, the UK may move toward a single supervisor model. A PBS agreed, but cautioned that whilst this may be the best solution over the long term, in the short to medium term the government should prioritise a stable supervisory regime and ensure effective supervision.

In particular, several legal PBSs noted that there is no organisation prepared to supervise legal services providers if their PBS were to step down, or be removed, from its role as an AML supervisor, and encouraged the government to plan for this contingency. A civil society respondent suggested that a process should be in place to ensure a smooth and effective transition of a PBS’s population to another AML supervisor where it steps down, or is removed, from its role.

In addition, several PBSs cautioned that OPBAS’s focus on PBSs could lead to inconsistent standards of supervision between professional body and statutory supervisors, and that this could potentially create opportunities for criminals. They felt this is especially the case where professional bodies and statutory supervisors monitor the same sector – especially accountancy and trust and company service providers, where HMRC is also a supervisor. Several respondents also noted that OPBAS should dovetail with existing government oversight of professional bodies, including by the Legal Services Board and the Financial Reporting Council, to minimise inconsistencies and unnecessary burdens.

3.1 Government response

The government recognises and appreciates the strengths PBSs bring to the UK’s AML supervisory regime, especially through their in-depth understanding of their sectors. The government intends that OPBAS will build on these strengths whilst helping to address the weaknesses identified in the NRA.

OPBAS will complement other organisations as appropriate, and the OPBAS project team has already met law enforcement agencies, the Legal Services Board and the Financial Reporting Council amongst others to discuss how they might best work together going forward.

To ensure consistent AML supervisory standards, OPBAS and PBSs should continue to liaise with statutory supervisors across the regime, especially where professional body and statutory supervisors monitor the same sectors. HMRC, as a supervisor of accountants and trust and company service providers, intends to adopt OPBAS standards to ensure it provides the same standards of supervision as PBSs. HMRC will publish an annual report on its work as an AML supervisor, and this will set out how HMRC’s supervisory teams have drawn on OPBAS’s guidance, as well as explaining any deviations from it.

The government notes the view that some PBSs may need to invest further resources in their supervisory functions, and some may instead choose to step down from their role as an AML supervisor. As the call for further information set out, the government’s primary intention is not to reduce the number of PBSs. That said, if a PBS wishes to step down from the role of an AML supervisor, or if OPBAS recommends that a PBS be removed and the Treasury agrees, the Treasury stands ready to amend the list of AML supervisors in the MLRs accordingly.

Where a PBS wishes to step down from the role of an AML supervisor, the Treasury and OPBAS will work with that PBS to ensure a smooth transfer of the regulated population and supervisory records to another appropriate AML supervisor. In practice, the government recognises that accountancy services providers may be supervised by a number of AML supervisors, including other PBSs or HMRC. However, should a legal PBS choose to step down, or be removed, from its role as an AML supervisor, it is less obvious which other organisation would supervise its members. The government notes that international best practice, and 4MLD, requires that all providers of legal services subject to the MLRs are supervised to help mitigate money laundering and terrorist financing risks.

Therefore, the government will explore potential options, and will ensure an organisation (or organisations) stand ready to supervise legal services providers should the need arise. The government notes that any contingency legal AML supervisor, or supervisors, should be prepared to supervise any individuals that provide legal services subject to the MLRs, including solicitors, barristers, conveyancers and notaries, across the UK, including in the devolved administrations.

4. Assessing the impact

This chapter discusses the potential costs and benefits of OPBAS and streamlined AML guidance, and seeks evidence to support the government’s impact assessment.

Many respondents felt that the supervisory reforms would help strengthen the regime. In the government’s initial call for information, there was strong support for greater oversight to help improve the standard of AML supervision, especially where several supervisors operate in the same sector. Many respondents to the recent call for further information agreed that OPBAS would fulfil a useful role in the regime, especially in improving cooperation across supervisors and facilitating information sharing with law enforcement. Whilst PBSs advocate for and supervise their members, many cautioned that OPBAS should not focus on this perceived risk that a potential conflict of interest could undermine their decisions in the public interest. That said, several respondents, including some PBSs, recognised this could potentially undermine the regime.

Most PBSs were interested to know how OPBAS will be resourced, and the associated burdens it would place on PBSs, their members and consumers.

Several PBSs noted that, whilst the government’s proposals to streamline guidance are welcome, this should not be at the expense of applicability across professions and the devolved administrations. Others encouraged the government to provide clarity around the process for approving guidance.

4.1 Government response

The government welcomes support for strengthening the supervisory regime, and addressing the weaknesses identified in the NRA.

The Treasury is engaging with supervisors and industry experts as they draft AML guidance, and stands ready to work with MLAC to consider and approve the guidance as it is submitted. Whilst the government recognises that streamlined guidance will reduce inconsistencies and burdens on businesses, as identified by the cutting red tape review, it agrees that this guidance must continue to be applicable across professions and thus helpful for users.

The government welcomes views on the costs and benefits of the creation of OPBAS and its plans to streamline and simplify AML guidance to inform the impact assessment. It would be helpful if respondents could provide evidence in response to the specific questions provided in Annex A.

4.7 In particular, PBS respondents should consider the FCA’s draft guidance setting out how PBSs can comply with their obligations in the MLRs and the estimated impact of OPBAS, which will be published for consultation shortly. The FCA expects to consult on the fees regime for OPBAS in the autumn.

Details of how to respond are provided in Annex B, and the deadline for responses is 17 August.

5. Annex A: Full list of questions

5.1 Section 1 – the following questions are applicable to all respondents

Question 1: Do the draft regulations deliver the government’s intention that OPBAS help, and ensure, PBSs comply with their obligations in the MLRs? In particular, are further legislative amendments required to ensure legal PBSs can raise funding for the OPBAS fee?

5.2 Section 2 – the following questions are applicable to regulated businesses only

OPBAS will support the government in simplifying and consolidating the quantity of AML guidance available to businesses to improve consistency and reduce unnecessary burdens.

Question 2: On average, how many hours do staff in your business currently spend interpreting and applying different pieces of AML guidance per year? Please round your answer to the closest 10 hours.

Question 3: Considering your answer to question 2 above, what proportion of the time your staff currently spend interpreting and applying AML guidance could be saved if the guidance were easier to understand? Please provide your answer as an estimated percentage of the total.

Question 4: Putting the cost of staff aside, does your business incur additional costs to help your staff understand AML guidance, for example expenditure on consultants? If so, how much does this cost a year on average? Please round your answer to the closest £100.

The government recognises different AML supervisors expect their populations to comply with the MLRs in different ways, and this can undermine cooperation across businesses and sectors on, for example, customer due diligence checks and reliance. OPBAS will help ensure consistent supervisory approaches across supervisors, especially amongst PBSs.

Question 5: do you expect your collaboration with other businesses to increase once AML supervisors’ expectations are aligned? If so, how much might this save your business a year, on average? Please round your answer to the closest £100.

5.3 Section 3 – the following questions are applicable to PBSs only

OPBAS will engage regularly with PBSs as it helps them, and ensures that they, fulfil their obligations in the MLRs. The FCA will publish draft guidance shortly setting out details of how PBSs should comply with their obligations in the MLRs – please consider this in your response to the following questions.

Question 6: Do you expect to increase or decrease resources in your supervisory team to support engagement with OPBAS going forward? If so, please provide estimated average annual costs or savings. Please round your answer to the closest £100.

Question 7: Do you expect to invest more, less or the same in your supervisory teams to align your approach with OPBAS’s guidance going forward? If more or less, please provide the estimated annual additional cost or saving. Please round your answer to the closest £100.

Question 8: In addition to the areas identified above, are there any other costs or benefits associated with complying with OPBAS or simplified AML guidance for businesses you would like the government to take into account? If yes, please outline these and provide estimated costs or savings. Please round your answer to the closest £100.

6. Annex B: Responding to questions

The government welcomes your views on the questions in this consultation.

In your response, please highlight the name and size of your organisation and note the question number you are responding to for each answer.

Electronic responses are preferred and should be sent to: <aml@hmtreasury.gsi.gov.uk>

Questions or enquiries specifically relating to this consultation should also be sent to the above email address. Please include the words CONSULTATION VIEWS or CONSULTATION ENQUIRY (as appropriate) in your email subject. If you do not wish your views to be published alongside the government response to this consultation, please clearly specify this in your email.

Hard copy responses may be submitted to:

Consultation – AML Supervisory Regime
Sanctions and Illicit Finance Team
1 Blue, HM Treasury
1 Horse Guards Road
London
SW1A 2HQ

6.1 Confidentiality and disclosure policy

Information provided in response to this consultation, including personal information, might be published or disclosed in accordance with the access to information regimes. These are primarily the Freedom of Information Act 2000 (FOIA), the Data Protection Act 1998 (DPA) and the Environmental Information Regulations 2004. If you want the information that you provide to be treated as confidential, please be aware that, under the FOIA, there is a statutory Code of Practice that public authorities must comply with and which deals, amongst other things, with obligations of confidence.

In view of this it would be helpful if you could explain to the Treasury why you regard the information you have provided as confidential. If government receives a request for disclosure of the information, the Treasury will take full account of your explanation, but it cannot give an assurance that confidentiality will be maintained in all circumstances.

An automatic confidentiality disclaimer generated by your IT system will not, of itself, be regarded as binding on the Treasury. Your personal data will be processed in accordance with the DPA, and in the majority of circumstances, this will mean that your personal data will not be disclosed.

6.2 Timetable

The closing date for comments to be submitted is 17 August.