Intensified efforts to fight money laundering and terrorist financing – more changes for the UK financial services industry?

Citation

Chizu Nakajima, D. (2006), "Intensified efforts to fight money laundering and terrorist financing – more changes for the UK financial services industry?", Journal of Money Laundering Control, Vol. 9 No. 2. https://doi.org/10.1108/jmlc.2006.31009baa.001

Intensified efforts to fight money laundering and terrorist financing – more changes for the UK financial services industry?

The front page of a UK national newspaper reported in February that the Chancellor of the Exchequer, Gordon Brown MP, was going to announce, in two days’ time, plans to create a modern-day Bletchley Park of top financial experts to unravel terrorist finance networks (The Guardian, 11 February 2006). While other measures to combat terrorism, including those dealing with terrorist financing, were, indeed, announced in Brown’s speech at the Royal United Services Institute, reference to the establishment of such a centre was conspicuously absent. Whether a reporter “got the wrong end of the stick” or there was a deliberate withdrawal of the announcement because of the leak to the press is not known at the time of writing.

Brown stated that, to prevent terrorist financing, firstly the government will consult on protecting wire transfers and charities from being used by terrorism. The Treasury’s press release (10/06 of 13 February 2006) expands on this point by explaining that the Treasury and Home Office will review how best to further safeguard the charitable sector from terrorist infiltration and protect donor confidence. Furthermore, having put in place a new regulatory regime for bureaux de change, cheque cashiers and money remitters (money service businesses – MSBs) in the wake of 11 September, the Treasury will issue a consultation in the Spring “to ensure the right balance is struck between the need to have proper financial controls in the sector, while supporting the needs of a dynamic part of the UK financial services industry”. The Treasury’s proposals will include better targeting of high-risk premises by Her Majesty’s Revenue and Customs (HMRC); new mechanisms to exclude inappropriate people from operating MSBs; specialist hit squads within HMRC to proactively identify and prosecute MSBs that flout money laundering and terrorist finance controls; and clearer and more practical guidance to support honest operators.

Secondly, Brown is to agree new guidance to give clearer strategic advice to banks on what to target so that they can fulfil their responsibilities (the Treasury approved on the day the newly revised guidance published by the Joint Money Laundering Steering Group, referred to below), and, to work even more closely with the financial sector, he is setting up a new forum with banks to discuss how to achieve more together to “identify, root out, and prevent the use of financial networks to advance terrorism”. The Treasury’s press release (10/06) explains that Brown’s announcement of a new public-private forum marks a new stage in the government’s partnership with financial institutions to tackle terrorist finance. It states that the new forum will bring together representatives from the financial community with their government counterparts in the terrorist finance field. “By putting already strong relations on a more formal footing, the forum will help the sharing of information on terrorist-finance threats to target them more effectively”.

Thirdly, Brown confirmed the government’s commitment to strengthen its pre-emptive asset-freezing regime through “new multilateral arrangements to better join-up enforcement”, and that he will review in a year’s time the need for new legislation or a single asset freezing office. Again the Treasury’s press release (10/06) expands on this point by explaining that the UK’s asset freezing programme provides an essential means to prevent those suspected of terrorist-linked activity from either raising, moving or using funds. Brown announced new work to ensure that all financial institutions have in place appropriate systems to take swift action against those targeted. It further reveals that Brown has asked the Bank of England, Financial Services Authority (FSA) and HMRC to develop proposals for promoting awareness and robust compliance with asset freezing requirements in their work with financial institutions.

Regardless of the veracity of the press report about the chancellor’s plan to set-up a modern-day Bletchley Park to combat terrorist financing, it is hoped that his and his government’s commitments are made on a long term basis. Indeed, Brown emphasised his determination to take “a long view” in the present public expenditure review to ensure that measures are put in place to fight international and domestic terrorism. We have seen so many initiatives start as knee jerk reactions to disasters and crises of various nature. They, more often than not, do not enjoy the sustainability needed to tackle the problems that they set out to solve, as money runs out and political and media interests move elsewhere.

In what way Brown’s proposed measures to counter terrorist financing (CTF) will further change the existing required systems for anti-money laundering (AML) and CTF must be of acute interest to the financial services industry. Indeed, the regulated sector is currently having to cope with yet another change in the regime concerning this area.

The UK’s single regulator, the FSA, announced in January that it will be replacing its detailed “Handbook Rules on money laundering” with “more high-level provisions in the Senior Management Arrangements, Systems and Controls (SYSC) module” of the handbook (FSA press release, FSA/PN/008/2006, 27 January 2006). The new approach is designed to help firms to develop more effective systems and controls over fighting money laundering by enabling them to take a more risk-based approach over AML – in other words to identify the risks, work out how best to manage them and to put greatest resources in the areas of most vulnerability (e-mail from the FSA’s Financial Crime Sector Manager, 2 February 2006).

The decision was made after a period of consultation (FSA’s Consultation Paper 05/10 “Reviewing the Handbook”, July 2005) and the announcement coincided with the publication by the Joint Money Laundering Steering Group of a new edition of its guidance, which has now been approved by the Treasury, as mentioned above.

The changes to the handbook in regard to AML will be effective as of 1 March 2006 and the current standards set out in the existing money laundering sourcebook (ML) will be phased out on 31 August 2006. Once the switch is made to the new SYSC provisions, the FSA will assess firms’ compliance with its Rules on systems and controls against money laundering, as per SYSC 3.2.6E G, by giving regard to the provisions in the JMLSG’s new edition of guidance.

At one level, it is a welcoming move, which does away with an extra layer of regulation, thereby it enables each regulated firm to structure and maintain AML systems based on the assessment of risks that each area of its operation is exposed to and allocate resources accordingly.

At another level, it has created a source of anxiety for the regulated firms for not having clear rules to comply with. From the point of view of efficient and effective allocation of resources, the risk-based approach to compliance is sensible if you know how the relevant risks should be assessed and that everyone assesses and is assessed against the same set of criteria. The concerns amongst the regulated firms stem from not knowing what those criteria might be. Furthermore, such fears might be greater amongst smaller firms than larger ones, which, by virtue of their size would have the resources to allocate to all identified areas of vulnerability, even though there would be a larger number of such vulnerable areas identified, given the extent of their operations.

Such anxieties amongst small firms are understandable, particularly given that the first approved person to be fined by the FSA for AML-related breaches was a managing director of a small bond broking firm, which had only six members of staff and 23 clients at the time of the rule breaches. It is also to be noted that the FSA found no evidence of money laundering, or that the firm or the managing director had deliberately sought to mislead the bank to which they had failed to supply appropriate information about their clients (FSA press release, 9 November 2006, FSA/PN/117/2005).

The solution for some firms might be to conduct a thorough “compliance audit”. Once again large firms will either have sufficient capacity in-house or will be in a position to retain city law firms or specialist compliance or AML consultants to carry out risk assessments. What happens to smaller firms which might not have the capacity to conduct such audits in-house or to retain such professionals, who are, after all, not cheap? Some of the respondents to the FSA consultation did point out that for this reason, smaller firms tend to prefer greater prescription (FSA Consultation CP05/10 – Reviewing the FSA Handbook – Response from the Building Societies Association, October 2005).

In the case of the above mentioned firm that was fined by the FSA for AML related breaches, since the FSA’s investigation, it has engaged independent compliance consultants to review its AML procedures and to assist in the ongoing monitoring of its compliance with applicable legal and regulatory requirements. All staff have also undergone AML training.

The move to be less prescriptive is in line with other areas of compliance, such as corporate governance, where best practice indicated in the Combined Code on Corporate Governance has not been overridden by statutory provisions and regulatory rules. Of course, it is to be noted that in the case of the Combined Code, non-compliance would not amount to the imposition of penalties, whereas it would with SYSC.

As stated above, when considering whether a breach of SYSC rules against money laundering has occurred, the FSA “will have regard to whether a firm has followed relevant provisions in the guidance for the UK financial sector issued by the Joint Money Laundering Steering Group” (SYSC 3.2.6E G), which represents best practice in the area of AML.

In response to the FSA’s consultation, a number of respondents pointed out the need for different areas of the FSA, such as Supervision and Enforcement, to adopt a consistent approach in the move towards “principles-base regulation” (FSA Policy Statement 06/1, January 2006, at 3). The FSA does not directly address this concern but states, in its Policy Statement, that recent enforcement action has demonstrated that the FSA continues to “attach a great deal of importance to firms” systems and controls on AML, and to individual responsibility at senior management level to ensure that they are adequate’(FSA Policy Statement 06/1, January 2006, at 8).

It is nevertheless to be noted that, while the new approach is less prescriptive, which appears to be welcomed by the industry, it leaves more room for interpretation, as has been pointed out by the FSA (Policy Statement 06/1, January 2006, at 11). This may not be a comforting factor for the regulated firms and those individuals vested with AML responsibility, particularly given that the recent enforcement action referred to by the FSA as an example, must be the case discussed above, in which both the firm and its managing director were fined for AML failures.

Dr Chizu Nakajima