Cracks in the UK’s anti-money laundering defences

The amount of dirty money passing through the City of London has, arguably, been one of the biggest open secrets of recent years. But now it seems as if the regulator is starting to point the finger of blame.

In a recent report, the Financial Conduct Authority (FCA) states that a lack of real oversight by lawyers, book-keepers and accountants is frustrating efforts to tackle the flow of illegally-obtained cash being piped through the UK.

It has raised concerns about the efforts of the UK’s 25 professional bodies overseeing the accounting and legal sectors, highlighting the fact that some were spending minuscule amounts on anti-money laundering (AML) supervision or even subcontracting this work to others. The FCA also reported on what it saw as weaknesses in these bodies’ use of their powers. This, it argues, has led to a drop in the use of fines against members who have breached the rules, as well as failures to share information with the relevant authorities.

Money laundering has to be done in a secretive, underhand way. As a result, it is difficult to say with any degree of certainty the precise amount that is being laundered through London each year. Although earlier this year, the then-deputy foreign secretary, Andrew Mitchell, claimed that almost 40 percent of the world’s dirty money was being funnelled through the City of London and the UK’s crown dependencies.

Some attention should be paid to the statistics put out by the National Economic Crime Centre (NECC), which make interesting and alarming reading. The NECC was, after all, created – and placed within the National Crime Agency – to bring together law enforcement and justice agencies, government departments, regulatory bodies and the private sector to tackle economic crime.

The NECC’s recently-published first annual report estimates that more than £12bn of criminal cash is generated each year in the UK. In addition, the report states that as much as £100bn of criminal profits is laundered through and within the UK or using UK-registered corporate structures.

Reading the FCA’s report - which is the fifth one to be produced by the FCA’s Office for Professional Body Anti-Money Laundering Supervision (OPBAS) - it is not hard to detect the regulator’s sense of frustration. If the NECC’s figures are anywhere near accurate, the FCA’s complaining about a lack of oversight by professionals and their professional bodies is understandable.

OPBAS was created seven years ago. Its role, to put it bluntly, is to keep an eye on the AML efforts of professional bodies in the legal and accountancy sectors. It aims to make sure those bodies are providing a robust and consistently high standard of supervision and ensuring collaboration and information sharing with law enforcement agencies. But, at present, OPBAS does not like what it is seeing.

This latest report sampled the work of nine bodies. They have not been named and it would be unfair to automatically assume that all the bodies OPBAS examines are guilty of the same shortcomings as the nine that have been assessed. Nevertheless, these are bodies that have to assess their member’s activities as part of wider efforts to ensure the cogs of the financial and legal worlds are turning legally and effectively. And a sizeable number of them do not appear to be excelling at their task.

None of the nine, according to the report, were “fully effective in all areas” and showed “weaknesses” in their supervision of members. The total value of fines imposed fell by almost a third last year, with such bodies not using their powers in a proportionate manner. The report paints a picture of bodies that are spending as little as £73 a year on AML supervision or leaving it to be managed entirely by third parties. A failure to proactively and consistently share information with authorities is said to be “hampering efforts to make a real dent in the flow of illicit funds in the UK”.

This is worrying, given that the members of such bodies are considered to be at high-risk of being used to facilitate money laundering by means of transferring assets, creating corporate entities and other practices that can disguise the criminal origins of wealth. We have an unfortunate situation where the failures of bodies that should be overseeing their members are now being flagged up by these bodies’ own overseer, OPBAS. And while OPBAS may advise the government to remove a body’s designation as an anti-money laundering supervisor or can itself prevent a body carrying out particular types of work, it has no power to impose fines.

It is, as the report shows, a far from perfect situation. In fairness, there may be valid explanations for some of the shortcomings OPBAS has identified. But whether such explanations exist, these shortcomings have to be addressed – and quickly. If the flood of dirty money into the UK is to be stopped – or at least reduced – the defences that are in place have to be made more robust as a matter of urgency. But just how simple this would be will only be seen if and when attempts are made to achieve this.

There is the argument that has been voiced by anti-corruption campaigners that the policing of AML efforts should be taken away from the professional bodies for the legal and financial sectors. This argument is based on the view that such bodies are not meeting their obligations – a view that is, to some extent, boosted by this latest report.

Any significant change, however, would be far from straightforward. It would require the Treasury to take a long and close look at how AML supervision is being conducted (and by whom) in order to determine whether to stick with the current system or draw up a Plan B. And any Plan B would, if it is to be successful, have to be ambitious and wide-ranging.

It may be possible to resolve the problems that currently exist by adopting some form of stick or carrot approach to the bodies that appear to be at fault. But if, on examination, there appears to be little or no scope for this then anything short of a transformation of AML supervision would be pointless.

It is worth noting that the Treasury ran a consultation earlier this year on enhancing the effectiveness of the Money Laundering Regulations (MLRs). HM Treasury had committed to consulting on changes to the MLRs as part of a wider programme of work aimed at reducing money laundering, which was set out in the Economic Crime Plan 2023-26. The aim of its consultation was to seek opinions on possible ways of improving the Money Laundering Regulations while minimising burdens on legitimate customers. The Treasury is presently digesting the input it received about this. It would be interesting to know whether it has also had one eye on OPBAS’ findings.

There appears to be little doubt that something significant needs to be done. Money laundering is a large and toxic issue. It cannot be tackled by adopting an approach that is the AML equivalent of rearranging the deckchairs on the Tita