MLR1PP16000 - New Financial Penalties Framework for MSBs, HVDs, and AMPs

Introduction

This guidance is to assist deciding officers calculate Type 1 Penalties (Compliance Penalties) for MSBs, HVDs, and AMPs only. There is a separate framework, know as Scale Charge Framework which relates to ASPs, EABs, LABs, and TCSPs Type 1 Penalties.

The Benefits Gained Framework is split into four stages:

Component A

Stage 1 - Disgorgement of benefits

Identify any income generated from non-compliant activity.

Amount - Fixed amount.

Component B

Stage 2 - Penalty calculation

Higher tier penalty (200% of stage 1 value) or Lower tier penalty (100% of stage 1 value)

Amount - +100% or +200% of stage 1

Stage 3 - Behavioural reductions

Consideration or reducing Stage 2 based on co-operation and behaviour

Amount - Variable

Stage 4 - Appropriateness

Whether penalty is too low or too high and whether other sanction(s) should be used instead or additionally.

Amount - Potential reduction or addition to stage 2 and 3

Total Payment Due = Component A + Component B

Prompt payment discount of 25% (Only applies to Component B)

An overview of the stages of the calculation

The two key components for this framework (A and B). Component A strips away, or disgorges, income received that relates to the contraventions of the MLRs.

The Stage 2 calculation is the penalty, based on the disgorged amount at Stage 1. This is intended to act as a deterrent for the business in contravention, and any other businesses who make similar contraventions.

Stage 3 and 4 – The considerations

When considering reductions (in Stage 3), as well as appropriateness of the overall final penalty (in Stage 4), this will only relate to the amount established in Stage 2, NOT the Stage 1 amount.

The overall penalty amount cannot be lower than that the amount calculated in Stage 1. The reason for this is that a penalty that is issued, as a minimum, should remove any financial benefit (including losses avoided) from non-compliant activity.

Stage One – Removal of benefits gained from contraventions or the MLRs

This is a non-negotiable element. Once identified an officer cannot adjust amount as part of the overall penalty calculation unless evidence comes to light to adjust the basis.

HMRC will not allow a business to benefit from breaching regulations.

The deciding officer should establish the income gained and / or losses avoided from the contraventions. Stage 1 of the framework ensures that all income gained by non-compliant activity are reflected in the total penalty. This calculation will vary, depending on the specific circumstances of the business, and below are some examples of how this may be calculated.

The benefit gained will be income before taking account of any costs to the business, such as bank charges.

If the contraventions relate to systemic issues, such as a business’s risk assessment, policies, controls or procedures, it is likely the entirety of the transactions will be in contravention, therefore all income gained will be liable for the Stage 1 calculation. When testing transactions and customer due diligence, if contraventions are found within a percentage of the transactions / customer due diligence, if an appropriate sample, this percentage can be apportioned to the entirety of the business.

For example:

  • Breaches found in 40% of customer due diligence tested
  • Appropriate amount of customer due diligence tested to consider it is a fair representation of the entire business
    • 40% of transactions to be used as basis for calculating benefits made from contraventions
    • If business has varying fees, calculate the average of this, considering what are the most common value for transactions fees

Different scenarios for identifying the benefits made includes:

  • Money transmitter – identifying income from the commission rates / charges for the transactions concerned
  • Currency exchange / Forex – identifying the income received o If transactions are timed / delayed, compare rate at buying compared to rate at selling
    • If not sold yet, use rate on that day
    • If it is lower, treat the rate as £0.00 profit, this will ensure the value being calculated at Stage 1 is not reduced and the business will be considered as ‘breaking even’
  • Cheque cashing – income from the difference in value of cheque and what business has paid to the customer
  • High Value Payments (cash) – difference between the sold price of the goods (or expected selling price) and the price the products were bought for
  • AMPs - the income received for the services they have provided, or goods sold.

Losses avoided

As well as calculating income received the deciding officer should also include in Stage 1 any losses avoided at this stage. Examples of losses avoided may include:

  • Not having a Compliance / Nominated Officer in place
  • Failure to complete PEP checks, how much would it have cost to undertake the checks (assuming using a system which charges for PEP checks, or how much cheaper the system is because when developing, PEP checks were not included
  • If outsourcing customer due diligence to a third party, but not utilising them correctly / fully, what was the cost for the money saved not paying the third party, for aspects of customer due diligence that was required?
  • Not correctly undertaking customer due diligence such as politically exposed persons checks which requires an additional expense

Stage Two – Penalty (Higher Tier or Lower Tier)

The next stage of the penalty framework is to establish whether the penalty is to be categorised as a higher or lower tier penalty. This will influence how much penalty will be added to the recovery of the benefits made / losses avoided from contraventions, identified in Stage 1. The seriousness of the contraventions (the nature and duration of the non-compliance) will determine whether the business should receive a higher or lower tier penalty. For contraventions with high severity, they will be categorised as a Higher Penalty and conversely, contraventions with lower severity, they will be categorised as a Lower Penalty.

When deciding whether the penalty is to be categorised as higher or lower, the deciding officer should consider:

  • Are the contraventions widespread across the relevant business activity?
  • Are the contraventions extensive / has the individual / business breached numerous regulations?
  • Did the failings continue for a substantial period before being addressed?
  • Does the individual / business have a history of non-compliance with HMRC, and been warned or sanctioned before? (We may want to consider compliance wider than the MLR as we do when deciding fit and proper such as tax compliance and furlough fraud
  • How has the individuals’/business’s risk of money laundering and/or terrorist financing been affected by the non-compliance?
  • What other negative impacts are there due to the contraventions?

Whilst there is no ‘one size fits all’ for determining whether a penalty should be classified as Higher Tier or Lower Tier, a reasonable approach would be to classify a penalty as Higher Tier if the answer to at least two of the questions above suggests that the non-compliance is / was significant. There may be cases, however, where contraventions are so significant that although only one of the above is met, the failing is so severe as to warrant a Higher Penalty. In some cases, there may be additional questions not detailed above which would assist in making the decision to classify the penalty as being either Higher or Lower.

Lower Tier Calculation

If a penalty is to be categorised as a Lower Tier, the stage 2 penalty value should be the same as the stage 1 figure.

If the Stage 1 disgorgement = £100,000, then the Stage 2 penalty will = £100,000

TOTAL £200,000

Higher Tier Calculation

If a penalty is to be categorised as a Higher Penalty, at Stage 2, the value established at Stage 1 should twice the stage 1 value. For example:

If the Stage 1 disgorgement = £100,000, then then the Stage 2 Penalty will = £200,000

TOTAL £300,000

Stage Three – Behavioural reductions

This stage involves consideration of whether the Stage 2 amount should be reduced to reflect the behaviours of the business.

Reductions must not be applied to the Stage 1 disgorgement figure. There are three considerations to make at this stage, they are:

  • Did the business proactively make an unprompted disclosure of their non-compliance (maximum 50% reduction to the penalty) or did this come to light as a result of an HMRC compliance intervention (or the imminence of one);
  • Was the non-compliance due to carelessness (25% reduction) or deliberate (no reduction); and
  • Did the business proactively co-operate with HMRC around the facts of and in addressing the non-compliance (25% reduction)

To encourage businesses to be transparent about contraventions of the Regulations, where businesses make full, unprompted disclosures, these will attract a 50% reduction to the Stage 2 penalty figure. Where a business makes an unprompted disclosure, but further investigation reveals that the full extent of the contraventions was not disclosed, this reduction should be reduced appropriately (see separate guidance). This reduction is given to business who acknowledge their mistakes and disclose these unprompted, and is an incentive for businesses to detect, disclose and address compliance failures, moving towards full compliance with the Regulations. To qualify for this, the business must provide a full disclosure of the contraventions. If the business partially discloses the contraventions (omitting other contraventions), the business will not qualify for this reduction.

An unprompted disclosure is where a business entirely proactively and without any contact from HMRC, contacts us to explain a compliance failure and the remedial action taken. A voluntary disclosure discount would not be appropriate if a business were to make such a disclosure after a compliance intervention has been scheduled or started or we have otherwise had reason to contact the business outside our usual comms re payment of fees or generic emails/alerts.

For guidance on how to approach partial disclosure and adopting a sliding scale we use the same approach as for VAT, Excise and Customs penalties outlined in CEP4150

Careless contraventions can be best explained by an extract taken from the FTT decision in HMRC v David Collis where Judge Berner said,

“That penalty applies if the inaccuracy in the relevant document is due to a failure on the part of the taxpayer (or other person giving the document) to take reasonable care. We consider that the standard by which this falls to be judged is that of a prudent and reasonable taxpayer in the position of the taxpayer in question.”

Where a business has carelessly rather than knowingly breached the Regulations, they will receive a 25% reduction of the Stage 2 penalty figure. An example might be where a business has RAs and PCPs in place but has failed to follow those in some cases (where a business fails to implement the RAs & PCPs entirely, the deciding officer should consider carefully whether this was carelessness on the business’ part or a more serious failing).

The next consideration is the level of cooperation of the business. The more a business tells, helps or gives access to HMRC, the more likely the penalty will be reduced.

To calculate the reduction for cooperation you need to consider two elements:

  • Giving us reasonable help
  • Allowing us access to records

Helping includes:

  • Giving reasonable help in identifying contraventions
  • Positive, proactive assistance as opposed to passive acceptance or obstruction
  • Actively engaging in the work to accurately identify the contraventions of the MLRs the business is liable for
  • Volunteering any information relevant to the disclosure

In considering whether a business has given reasonable help, you should always take account of the abilities and circumstances of the business. What is important is the timing, nature and extent of the help the business provides to identify the contraventions they are liable for.

The timing relates to how soon the disclosure is made and the period over which the help is given. As well as there not being any avoidable delays, for a business to receive this reduction, they should be proactive, providing and volunteering information and access to records as early as possible.

The deciding officer should consider whether the help provided is useful and saves HMRC time and effort in identifying contraventions, bearing in mind its duty to co-operate. For the business to just appear to be helpful but not actually produce anything of use is not what is required.

The extent of the help covers the whole period of the compliance check from start to finish and all aspects of the compliance check. If help is only received for part of the time or in certain aspects the reduction will not be given.

Stage Four – Appropriateness review

This final stage reviews the penalty already calculated at stages 2 and 3. This can be adjusted, up or down, as appropriate.

In helping to ensure that penalties are consistent and appropriate, deciding officers may consider:

  • Whether the contraventions are so severe, that it would be more proportionate to issue a penalty higher than the value calculated up to Stage
  • Strong consideration is required of deterrence vs financial strength

Early payment reduction

If a business pays their penalty within 30 days of the penalty notice, they will be eligible for an early payment reduction. The early payment reduction is 25% of the penalty aspect only Component B, not to Component A or the Penalty Admin Charge. For example:

  • Business owes £12,500 (£5,000 disgorgement of benefits, plus £7,500 penalty)
  • Business pays within 30 days of receiving notice
  • Business due to pay: £5,000 disgorgement of benefits + (£7,500 – 25%), plus penalty administration charge
  • £5,000 + £5,625, plus penalty administration charge