Money laundering is a formidable threat to the UK economy, with an annual cost estimated at £100 billion. To address the problem, the government has unveiled a £400 million three-year Economic Crime Plan, aiming to fill gaps in fraud, anti-money laundering (AML) and more
The issue of money laundering is so pervasive in the nation’s capital that London has garnered nicknames like ‘The Laundromat.’ The extensive reach of financial crime in the UK has compelled the government to enact more substantial measures.
Several areas of AML and CTF processes in the UK have been identified as weak points in the system. The 2018 Financial Action Task Force (FATF) demonstrated this was especially true in the supervision of the professional services sector, which represents a sizable 8.3% of the total economic output for the whole country.
To better protect the UK’s financial sector from money laundering and terrorist financing, the UK government is conducting a consultation on potential new regulatory frameworks for AML and CTF supervision. Compliance teams need to be aware of the changing face of AML legislation in the UK and the role they play in ensuring the integrity of the system. The decisions resulting from this consultation will reshape compliance obligations in the UK for years to come.
The current state of anti-money laundering (AML) oversight
Regulating AML and CTF within the UK is a complex endeavour falling under the purview of the 2017 Money Laundering Regulations. This comprehensive legislation manages a diverse range of business activities, overseen by twenty-five supervisory bodies. Among these, three hold statutory supervisory roles – The Financial Conduct Authority (FCA), The Gambling Commission (GC), and His Majesty’s Revenue and Customs (HMRC). The remaining twenty-two function as Professional Body Supervisors (PBSs), overseeing legal and accountancy firms.
In 2018, the Financial Action Task Force (FATF) conducted a critical evaluation of the UK’s AML regime, ultimately deeming the AML/CTF supervision regime “moderately effective.” The FATF identified “significant weaknesses in the risk-based approach” across all supervisory bodies, excluding the Gambling Commission, which was praised for its work. Subsequent reports from the Treasury Select Committee in 2021-22 called for “radical reforms,” a sentiment echoed by a 2022 HM Treasury review citing issues such as inconsistent enforcement powers and inadequate information sharing.
The UK government has enacted, alongside the AML consultation, the Crime and Corporate Transparency Act to implement its Economic Crime Plan, a crucial element that includes reforming Companies House. The Act grants new powers to Companies House to verify company directors’ identities during registration to prevent criminals from using false names for illicit purposes. Companies House will also share data with law enforcement agencies to bolster money laundering investigations, aligning with efforts to combat economic crime.
A national consultation
In response to issues identified by the FATF, the UK government is overhauling its AML and CTF supervisory regime, with critical objectives including strengthening supervisory effectiveness, improving AML/CTF system coordination, and ensuring feasibility.
The consultation presents four potential reform models, to reshape AML/CTF supervision and respond to the complexities of financial regulations and heightened risks associated with sanctions.
- Model one involves improving the existing Office for Professional Body Anti-Money Laundering Supervision (OPBAS+) with additional tools, allowing fines for failings and restrictions on supervised firms.
- Model 2 proposes streamlining AML/CTF supervision by reducing the number of professional body supervisors overseen by OPBAS, with accountancy firms previously under HMRC falling into this supervision.
- Model 3 suggests a Single Professional Services Supervisor (SPSS) with broad powers and accountability to the Treasury.
- Meanwhile, Model 4 envisions a Single Anti-Money Laundering Supervisor (SAS), consolidating oversight within a single body, independent and accountable to the Treasury.
A decision on the preferred model, expected by the end of Q1 2024, will significantly impact the compliance landscape in the UK. The consultation also explored the potential for a structured system of sanctions supervision, acknowledging the increased demands and risks associated with sanctions compliance across sectors.
The changing face of AML regulation
As potential supervisory bodies are decided upon and the new sanctions enforcement team is implemented in the UK, compliance teams must adapt to coming regulatory changes. Regardless of the chosen model, all proposals underscore the need for risk-based and data-led approaches to AML/CTF compliance. Anticipating evolving regulatory landscapes, compliance teams can proactively take a risk-based approach now to stay ahead of potential reforms.
With sanctions complexities having escalated since Russia’s invasion of Ukraine, the consultation explores the necessity of formal sanctions supervision within the reform models. Moody’s Analytics Grid data from January to July 2023 revealed more than 63 million potential risk alerts related to sanctioned entities globally. Gaining insight from these alerts, compliance teams can effectively supervise risks associated with their business networks.
The decisions resulting from this consultation will reshape compliance obligations in the UK for years to come. Compliance leaders can benefit as regulations evolve by establishing robust technical foundations, investing in advanced data analytics, and prioritizing enhancements in sanctions screening and customer due diligence. Preparing data-led insight and adopting risk-based tools will ensure compliance programs are resilient and ready to navigate the next phase of the UK’s AML/CTF regime confidently.
This piece was written and provided by Keith Berry, General Manager Know Your Customer Solutions at Moody’s Analytics
