21 November 2019 - Post by:
The UK’s fight against money laundering is not breaking news. In particular, the regulatory spotlight has increasingly been focused on anti-money laundering (AML) compliance. In light of HM Revenue & Customs’ (HMRC) largest ever fine against the money transmitter Touma Foreign Exchange Ltd (Touma), the question arises of whether the enforcement spotlight is shifting away from the Financial Conduct Authority (FCA) and on to HMRC.
Current supervisory landscape
The UK has one of the most comprehensive AML regimes globally. No fewer than 25 bodies in the UK are tasked with supervising the compliance of businesses and professionals with the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (2017 Regulations). However, the FCA often steals the limelight when it comes to AML enforcement.
During a speech in April 2019, Mark Steward, Director of Enforcement and Market Oversight at the FCA, confirmed that the FCA is undertaking dual-track civil and criminal investigations into breaches of Money Laundering Regulations. He stated that “it is time we give effect to the full intention of the Money Laundering Regulations…by making poor AML systems and controls potentially a criminal offence, the Money Laundering Regulations are signalling that, in egregious circumstances, AML failures let down the whole community.”
However, considering that there have been no corporate prosecutions to date, it remains to be seen quite how egregious a breach needs to be before the FCA will pursue a firm criminally.
HMRC as AML supervisor
Given the focus on the FCA’s enforcement efforts, it is easy to overlook the fact that some businesses not regulated by the FCA are still required to comply with the 2017 Regulations (the so-called “Annex 1 financial institutions”). In short, firms carrying out the activities listed within Schedule 2 of the 2017 Regulations, such as foreign exchange businesses and some lenders, are subject to the 2017 Regulations. Where those firms are not regulated by the FCA, or nor supervised by the Gambling Commission or a professional body supervisor, they must be registered with HMRC. As a result, HMRC supervises businesses operating in several high-risk sectors, including high-value dealers, money service businesses (MSBs), trust and company service providers, and parts of the accountancy sector, and is active in doing so.
During the 2017/18 financial year, HMRC was responsible for supervising 27,666 entities, over 8,000 more businesses than the FCA. Like the other AML supervisors, HMRC investigates potential failures to comply with the 2017 Regulations and imposes sanctions. Given that it applies the fit and proper test as part of its supervisory role, it can withdraw such approvals and can impose fines.
Due to the nature and smaller size of the businesses that HMRC supervises, it far surpasses the FCA in terms of the number of actions it takes. In 2017/18, HMRC imposed 798 sanctions, including 655 fines. In comparison, the complex nature of the FCA’s long-running investigations means that it took no enforcement action for breaches of the 2017 Regulations or their predecessor, the Money Laundering Regulations 2007 (2007 Regulations) during 2017/18, although it reportedly has over 60 investigations into AML failings currently open. On the flip side, the level of fines that HMRC has historically been able to impose has fallen far below those imposed by the FCA. In 2017/18, the total level of fines imposed by HMRC reached approximately £2.2 million, while the FCA has been known to impose fines in excess of £100 million on a single entity.
Comparisons with the FCA aside, HMRC has begun upping the ante. The imposition of £2.2 million of fines during 2017/18 represented a two-fold increase in the level of fines that HMRC imposed during 2016/17, and in 2018/19 it is likely that its fines will be significantly higher again.
HMRC imposes record-level fine
In a drive to tackle pockets of money laundering, HMRC has been conducting co-ordinated weeks of action together with other law enforcement agencies. The first of these took place in February 2019, when HMRC made 50 unannounced visits to estate agencies and found that a large proportion of businesses had failed to register for AML supervision.
In July 2019, HMRC worked alongside the FCA and the Metropolitan Police to engage in a further co-ordinated week of action targeting MSBs. During the crackdown, they executed 12 warrants and visited 40 MSBs. They identified a number of breaches of the 2017 Regulations, including failures to register with HMRC. HMRC and the police indicated that they would be pursuing penalties and other sanctions for these failures.
True to its word, on 4 September 2019, HMRC announced that it had imposed a record fine of £7.8 million on the money transmitter Touma for serious breaches of the 2017 Regulations. During the period June 2017 to September 2018, Touma was found to have breached fundamental requirements of the 2017 Regulations, including with respect to:
- Conducting risk assessments and associated record-keeping.
- Developing and maintaining policies, controls and procedures.
- Undertaking customer due diligence.
- Providing adequate staff training.
HMRC also took action against Touma’s founder, banning him from fulfilling any management role at a business subject to the 2017 Regulations.
In addition to the 40 MSBs visited, HMRC reportedly visited a further five higher-risk MSBs during July 2019 and has announced that it is taking civil action against four of these businesses. If the current trend is anything to go by, Touma may not be HMRC’s record holder for very long.
Like the FCA, HMRC can also pursue prosecutions under the 2007 Regulations, the 2017 Regulations and the Proceeds of Crime Act 2002 (POCA). In 2017/18, HMRC secured 18 convictions with combined jail sentences of nearly 30 years and also confiscated over £31.5 million under POCA. Its co-ordinated action against MSBs in July 2019 led to further arrests and, to date, at least one suspended sentence against an individual trading as an MSB without registering for AML supervision.
Increased scrutiny of HMRC
HMRC is facing increased scrutiny as a supervisor. In December 2018, the mutual evaluation report published by the Financial Action Task Force recommended that the UK’s AML supervisors strengthen their approach to AML supervision.
HMRC also faced criticism in the Treasury’s recent report following the Treasury Select Committee inquiry into economic crime. In particular, the question was raised of whether HMRC should retain its role as an AML supervisor due to concerns that its approach to supervision could be unduly influenced by its role as a tax authority.
In response to this increasing scrutiny, HMRC has committed to introducing significant enhancements to its supervisory role. From 1 May 2019 , it has increased the fees that it charges to relevant businesses for AML supervision in order to fund these enhancements.
The Treasury has committed to reviewing HMRC’s role as an AML supervisor. It therefore remains to be seen what the future holds for HMRC and its AML responsibilities. HMRC might stop being an AML supervisor or the record-level fine imposed on Touma could represent the beginning of a new era for HMRC. Either way, the enhancements that HMRC has made this year appear to be working; HMRC is clearly keen to show what it can do while it awaits its fate.
This article first appeared on practicallaw.com.