It’s quite hard at the moment to focus on what the business environment in the UK will look like after B****t. But the Economic Crime Report issued by the Treasury Select Committee earlier this month contains some interesting signals of how the regulatory environment might develop once Britain is outside the EU.
Up front, I should say that is a big might: select committees can’t compel government to act and the recommendations contained in the report are largely broad brush observations. But one doesn’t have to read between the lines too much to sense what might be coming. After years of piecemeal improvement, the time may finally have arrived for a more joined up approach to tracing illicit assets, which would submit the darker corners of the UK economy to much needed scrutiny.
Background
The select committee report comes on the heels of the Financial Action Task Force review of the UK’s anti-money laundering regime, which was issued at the end of 2018. It also follows a series of new regulatory and legislative initiatives rolled out since the Financial Crimes Act 2017, including the establishment of the National Economic Crime Centre at the NCA, the creation of the Office of Professional Body Anti-Money Laundering Supervisors (OPBAS), a partial effort to knit together the tapestry of financial crime regulators operating in the UK, and a new Economic Crime Strategic Board chaired by the Chancellor and the Home Secretary. Cynics might see all of these initiatives as tidying exercises undertaken for the benefit of the FATF inspectors, but they could also signal a new way of thinking about financial crime that will impact huge chunks of the economy.
What does the report say?
The blunt conclusion of last week’s report is that the seemingly “robust” structures of UK financial crime regulation and enforcement conceal a much more patchy and muddled reality. The committee failed to get any of its witnesses to commit on several fairly fundamental questions about the nature of financial crime in the UK. The total value of financial crime is unclear, for example (“it can reasonably be said to run into the tens of billions of pounds, and probably the hundreds of billions”); the extent of money laundering in the economy as a whole is unknown (“in terms of which sectors that may be flowing through more than others, we do not have any information that would help us define that in any more detail”, according to the head of specialist supervision at the FCA), and the concept of a politically exposed person (PEP) cannot be readily defined (“it is quite a difficult topic to get hold of”, according to the head of financial crime at HSBC).
Most significantly, the committee found real inconsistency among the bodies that are charged with overseeing how different professions assess financial crime risks. Remarkably, there are 25 separate money laundering supervisory bodies in the UK at the moment. These include statutory bodies like the Financial Conduct Authority and major professional bodies like the Law Society and the Institutes of Chartered Accountants, but also some more niche bodies, like the International Association of Bookkeepers, the Council for Licensed Conveyancers and, most bizarrely, the Faculty Office of the Archbishop of Canterbury.
By another curious wrinkle, many businesses that aren’t regulated elsewhere are, by default, overseen by HM Revenue and Customs (better known to most of us for collecting taxes). The committee took the view, with which it is hard to disagree, that this array of different oversight bodies can’t possibly ensure regulatory consistency across the UK’s complex financial sector. A particularly glaring weak point is the property sector. Despite the significance of investment in ultra-prime property by wealthy foreigners to the UK economy, no-one seems to have a strong grip on the financial crime risks manifest in this business. The committee found that in the twelve months from April 2017, suspicion activity reports (SARs) submitted by estate agents accounted for only 0.15 percent of all SARs in the UK. And there is no dedicated body enforcing financial crime prevention standards for estate agents. They continue to reside in the “other” bucket of trades regulated by HMRC for want of a more suitable oversight body.
So what?
Whatever the British economy looks like outside the EU, its fair to assume there will be some sort of pivot from familiar European markets towards “the rest of the world”. In the select committee’s opinion, “[Brexit] will increase the likelihood that UK businesses will come into contact with corrupt markets, particularly in the developing world, raising the risk they will be drawn into corrupt practices.”
If we take recent reform initiatives at face value, it is fair to say that the government and core regulators are trying to keep on top of financial crime. The creation of OPBAS has started a process of unifying oversight of professional regulatory bodies to ensure that different regulated professions address financial crime with the same rigour. While there appears to be little appetite to centralise regulatory oversight in a super financial crime regulator with power over all non-FCA regulated professions, further consolidation seems likely. In particular, stripping HMRC of its residual regulatory responsibility and moving the businesses it oversees under a stronger OPBAS would create greater potential to share information and good practice.
Reform of Companies House could also be on the cards. At present, someone wishing to establish a company to launder the proceeds of crime is subject to minimal checks: if they register directly with Companies House, rather than going through an accountant or solicitor, there are no physical checks on their documentation because Companies House only has the resources to check that filing information is complete and correctly formatted. The select committee report floats the idea of increasing the cost of company incorporation and using this money to fund more rigorous checks on incorporation and to ensure that other transparency information, such as the Persons of Significant Control Register, is accurate and up-to-date.
Finally, tighter control of property transactions is regarded as a priority. Placing estate agents under the supervision of OPBAS might be a popular and relatively simple means of imposing stronger regulatory control over the sector. But the bigger challenge will be dealing with the murkier hinterland of property investment: at present it is quite possible for property to change hands through a private bilateral sale or at auction without any engagement by a regulated professional body. This applies both to the sale of bricks and mortar and to the lucrative trade in fine art, jewellery and antiques. Unexplained Wealth Orders (UWO) are a strong tool in winkling out proceeds of crime that are laundered through assets in the UK. But they need effective oversight of all potential transactions to be effective.
What’s the bigger picture for business?
The really interesting underlying theme that comes out in the select committee report is less about a change in the structures of regulation and more about a cultural shift. RUSI’s Tom Keatinge describes it as a need to think about money laundering as a systematic economic issue rather than a discrete problem affecting one or other sector of the economy: “Money laundering is a series of activities. We have to move away from this idea that siloed this sector or that sector is a problem and think across the piece.” Following asset flows rather than attempting to identify wrongdoing at isolated stages in different professional contexts, would be really a radical shift. But in the age of blockchain it is not that hard to envisage and would put the UK at the forefront of clean finance.
Comments