Anti-money laundering: Significant weaknesses in supervision
HM Treasury has launched a long-awaited consultation that could see a new public body replace legal regulators in supervising lawyers’ anti-money laundering activities.
It said there were “significant weaknesses” in the UK’s supervision regime and its review of the UK’s anti-money laundering and counter-terrorism financing (AML/CTF) regime last year concluded that there was rationale for further reform.
Also, the most recent peer assessment of the UK by the Financial Action Task Force identified “inconsistencies and weaknesses” in the regime – in particular in the professional services sector – “that represent a significant vulnerability”, the Treasury said.
Currently, the Office for Professional Body Anti Money Laundering Supervision (OPBAS), set up in 2017, oversees nine legal and 13 accountancy AML supervisors.
In the law, these are the law societies and bar councils of the three UK jurisdictions (including also the Solicitors Regulation Authority (SRA) and Bar Standards Board), the Chartered Institute of Legal Executives/CILEx Regulation, the Council for Licensed Conveyancers, and the Faculty Office of the Archbishop of Canterbury, which supervises notaries.
OPBAS’s role is to ensure robust, consistent supervision across these so-called professional body supervisors (PBSs), as well as good information sharing. “OPBAS has delivered substantial improvements in PBS supervision,” the consultation said.
In addition to the 22 PBSs, the Financial Conduct Authority, HM Revenue & Customs and the Gambling Commission are statutory supervisors for other sectors.
As set out in the 2022 review, the consultation puts forward four potential models for reform -without stating a preference – the first of which is a beefed-up OPBAS with greater powers, including to levy fines.
This model would be “the most immediately feasible”, the Treasury said. “However, given the significant efforts of OPBAS in previous years, and the incremental pace of progress to date, it is possible that this model would not bring about a step-change in the risk-based approach of PBSs.”
The second option is consolidating professional body supervision, meaning that there would be a single legal sector supervisor either for the UK or for each of England and Wales, Scotland and Northern Ireland. The same model would be put in place for accountants.
This would “reduce inconsistency and complexity by ensuring only the highest-performing supervisors remained”, the Treasury said.
A UK-wide approach would enable risk and capital flows to be better tracked across the UK’s borders and improve system co-ordination but would also “increase the possibility of low-risk firms outside economic centres receiving inadequate supervisory attention”.
The benefits included economies of scale and having a fuller picture of risk and compliance.
Realistically, it is hard to see how any regulator other than the SRA could take on the task in England and Wales, given that none of the others are anything like the size needed to supervise solicitors’ firms.
The third option is to end professional body supervision and most likely create a new organisation, probably a public body, to undertake the task for both lawyers and accountants, as well as trust and company service providers – some 60,000 firms in all – and potentially another 17,000 estate and lettings agency businesses.
“There are possible benefits to this, including that it may be more appropriate for a public body to hold broad enforcement powers, due to oversight of these bodies by Parliament,” the consultation said.
“While the existing professional body supervisors would no longer be responsible for AML/CTF supervision, they could continue to supervise firms for other purposes. It would be important to mitigate the impact of this dual regulation on firms.”
There are already a number of supervisors in the legal and accountancy sectors, including the Legal Services Board, and adding another one “could increase information sharing barriers and regulatory burdens”, the Treasury said.
“Furthermore, there is a risk that supervisors are less effective if they have lower sector-specific expertise than that held by the highly specialised PBSs.”
The size of such a body “should allow it to unlock efficiencies and improve effectiveness through allocating resources in line with risk across the entire professional services sector, though would be a considerable undertaking for a new function and may mean that some firms receive less oversight than at present as a result of being of lower priority within a much larger supervisory population (in line with the risk based approach)”.
This would be “a substantial process that would take several years”, the Treasury acknowledged, risked creating “silos of knowledge”.
It explained: “AML/CTF risks are very interconnected with other risk channels and financial crimes, such as fraud, market abuse and tax matters. Currently, supervisors use their understanding of interrelations in these areas to assess risk.”
The final option expands on this and moves all current AML supervision to a new body, bringing lawyers and accountants together with financial services, gambling, estate agency and all other regulated sectors.
The consultation also seeks to gather evidence as to whether there is a need for “a more formalised system of sanctions supervision” and how this could interact with the four models.
“While most supervisors currently have no explicit powers to supervise sanctions compliance and controls for [sanctions] regimes, some supervisors already assess sanctions compliance as part of broader AML/CTF supervision,” it said.
“In light of these increased demands, supervisors could play an important role in communicating sanctions risks to businesses and supporting and overseeing the development of effective sanctions compliance controls.”
One of the issues raised in the consultation is the lack of a single authority responsible for detecting unsupervised firms in the legal sector.
“Whilst the SRA, for instance, identified ‘bogus’ solicitors who call themselves solicitors whilst not being on the roll of solicitors, no authority is responsible for identifying legal firms carrying out activity in scope of the MLRs [Money Laundering Regulations] without supervision.
“A legal PBS could be given this responsibility, albeit it would represent a significant change in the scope of its activities. It may require amongst other things the creation of a new intelligence function to detect firms carrying out activity in scope of the MLRs without supervision, and potentially legislation to allow the PBS to take action against firms they do not supervise for AML/CTF purposes.”
Commenting on the consultation, Julie Norris, a legal services regulatory partner at City firm Kingsley Napley, described the current system as both “complex and incomplete”.
“Of the four models proposed in this consultation paper, in my view consolidation of the existing supervisors would make most sense for the legal sector; industry expertise is really important when assessing the regulated community’s approach to implementation and sector-specific know-how could be lost if there were to be one single supervisor.”
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