MLR1PP7050 - Penalties guidance: the purpose of our penalties regime and Regulation 83

The purpose of the civil penalties and sanctions regime is to:

• encourage compliant behaviour by ensuring the level of any penalty is appropriate for the breach and is effective - proportionate - dissuasive in accordance with Regulation 76 MLR 2017
• ensure consistency in the level of penalties and that relevant circumstances are taken into account as required by Regulation 83
• ensure the framework used to set the level of penalties is transparent
• ensure the framework used to set the level of penalties takes into consideration the relative size of the business and the amount the failure may have exposed to potential money laundering activity
• ensure that any penalty reductions takes into consideration the business’s past history of compliance with the Regulations and the willingness they have shown to correct weaknesses and become fully compliant in the future

Circumstances to consider under Regulation 83

An appropriate penalty must be effective, proportionate and dissuasive. HMRC is required to take into account the circumstances of a business, or an officer, in order to arrive at an appropriate level for a penalty or sanction so that we comply with regulation 83.

While this requirement is stated in MLR 2017 the considerations required are not new. Any decision to issue a penalty has always, and must continue to be made taking account of the information that is available to us before an intervention, when carrying out an intervention and asking the business if there are any other circumstances or information that needs to be taken into account at the pre-penalty stage and before the penalty decision is issued.

Generally, the amount of a penalty already takes account of the circumstances of a case. through establishing the facts at the pre-penalty stage. The gravity, duration, financial strength, profits, previous contraventions and the systemic nature of failures are taken into consideration by reference to the relevant period, turnover or client numbers affected, gross profit and behavioural reductions.

Gravity and the duration of the failure

An administrative penalty such as a failure to provide information or provide it on time, or to allow entry is set at a relatively low amount. It is normally in response to information discovered or a real time request therefore is unlikely to be of any duration. These types of request are normally complied with by most businesses so are normally considered less serious in relative terms. The fixed amount set will usually be proportionate to the failure.

However, a refusal to comply may be a first indication of a business who is determined not to comply and does not want further scrutiny, therefore a “one off “penalty may be a first step in addressing non-compliance and escalation should be considered in those cases, e.g. a further penalty or an intervention to review compliance and establish the extent of failures as the basis for a larger penalty.

Degree of responsibility

In the case of a business it will be obvious when they are responsible for a failure. The business is the relevant person and has obligations under the Regulations. Within a business a senior manager has a key role in preventing money laundering and terrorist financing. The Regulations define senior management as:

an officer or employee of the relevant person with sufficient knowledge of the relevant person’s money laundering and terrorist financing risk exposure, and of sufficient authority, to take decisions affecting its risk exposure.

The onus is on senior managers (including partners, sole practitioners and individuals purporting to act in that capacity) to, for example, approve the policies, controls and procedures as well as a business relationship with a PEP. The regulation 21 compliance officer function is a board member (or senior manager) and reports to senior management in relation to the effectiveness of the policies, controls and procedures.

In terms of the business the senior managers are the persons who make decisions and direct others in how they carry out their duties. Therefore they are responsible for what the business puts in place for the purpose of preventing money laundering and terrorist financing.

While HMRC reserves the right to sanction managers or officers it is the senior management who are the directing minds and are ultimately responsible for contraventions.

To be liable for a penalty under regulation 76(3) an officer must be knowingly concerned in a contravention. This will normally be applied to senior managers, partners, sole practitioners or the person controlling the business where failures have been pointed out to them, either through the business’s internal review process or by HMRC, and the failures continue.

Financial strength

A business that does not comply is likely to have a financial advantage over its competitors and in serious cases all of the turnover or profit may be obtained from taking the easy route and not complying with its obligations.

A compliance penalty takes into account the turnover or number of clients exposed to the risk of ML/TF through non-compliance. This is linked in direct proportion to how the business derives its financial strength or makes a profit. Therefore it is connected to the level of the penalty.

The profit cap is used to ensure an appropriate penalty and to take account of both the nature and relative size of the business to ensure that any penalty is not too high.

In some cases an administrative penalty, such as a failure to advise changes, can be large where systemic failures are found in for example a larger business. However, they are normally set at a lower amount as relatively, it may be relatively less serious, or a one off failure.

In some cases and where an officer is knowingly concerned in the contraventions then consideration should be given to imposing a penalty on the officer(s).

The amount of profits gained or losses avoided

The benefit gained from non-compliance can be difficult to quantify. Where it can be easily established then it should be used as a comparative for a final sense check of the amount arrived at through the penalty method and may be considered as an alternative, if the criteria apply, under “Suspension of the penalty framework” at MLR1PP7150 and referred to the Sanctions Panel.

https://www.gov.uk/hmrc-internal-manuals/mlr1-penalties-guidance/mlr1pp7150

The losses for third parties caused by the failure

HMRC does not have a consumer protection function so will not be in a position to take third party losses into account as it is not information that we will have access to.

Level of co-operation

Reductions for coming forward are an integral part of our penalty calculation and generous reductions are given where a business comes forward in registration and compliance penalties.

Reductions are also given, up to 70% in some cases, where the behaviour is not deliberate. These will normally be sufficient in most instances.

A voluntary disclosure reduction would not be appropriate where we discover a contravention and need to use our powers after verbal requests or in writing to, for example, obtain information or gain entry to premises.

Previous failures

These are taken onto account where previous similar failings (under the current or previous regulations) are evident, by:

• bypassing the warning stage where serious and deliberate contraventions are evidenced
• escalation to penalty where previous warning have been given for breaches
• less favourable reductions available on further instances of contravention

Potential systemic consequences of the failure

A contravention can be in relation to, for example, a failure by a member of staff to carry out due diligence or a failure to have any procedures that will enable the staff to carry out due diligence on the customers. The multiple breach approach to penalties will take account of the systemic consequence within a business particularly in relation to risk assessment, policies, controls and procedures.

When dealing with agent networks and branches the compliance approach should be to test compliance throughout where feasible or through sampling of transactions to arrive at an appropriate penalty based on the extent of the failures.