The small print of anti-money laundering laws

How will this consultation add clarity to the currently confusing money laundering laws? Alan Ward, associate at Stephenson Harwood, explains how simplified legislation could ease burdens while allowing companies and lawyers to create a more structured and meaningful reporting regime.

Original news

Government consults on effectiveness of anti-money laundering regime, LNB News 28/08/2015 122

The government is consulting until 23 October 2015 on the impact the current anti-money laundering (AML) and terrorist financing regime is having on business, and specifically the role of supervisors in that regime.

Why has the Department for Business, Innovation and Skills (BIS) commenced a review of AML laws?

As with much regulatory reform, the driver is largely political. The government has a stated aim of cutting red tape in order to save businesses £10bn a year. Money laundering laws appear to have been chosen as the first target of the government’s review as business groups consistently cite them as a significant and costly burden.

In undertaking this review, the government will be mindful of the fact much of the UK’s AML framework is the product of European Directives, the latest of which (the Fourth Money Laundering Directive 2015/849 EU) is due to enter into force by the end of June 2017.

However, many of the challenges businesses face in achieving AML compliance are a result of the UK ‘gold plating’ the requirements of the European money laundering Directives—imposing requirements far and above the minimum standard required. As such, the government may find that, notwithstanding the need for compliance with European law, it has significant room for manoeuvre.

What are the main challenges that businesses face from current AML laws in the UK?

Many professionals complain about the inflexible requirement, pursuant to the Money Laundering Regulations to conduct customer due diligence or ‘know your customer’ checks before accepting new business. This is a good example of a regulatory obligation that does not exist to anything like the same extent anywhere else in the European Union, and which could be lessened.

However, a far more serious challenge and onerous burden to businesses arises out of the money laundering reporting obligations that stem from the Proceeds of Crime Act 2002, Pt 7 (POCA 2002). Ascertaining whether a report is required very often necessitates reference across statutory schedules, statutory instruments and even case law. Recourse can be made to guidance published by the Joint Money Laundering Steering Group, but even that runs over 400 pages.

The challenge of the reporting obligations is the complexity of the regime, and the time spent by businesses grappling with it.

What changes do you think BIS should introduce to help businesses understand their obligations under AML rules?

In order to make clear who needs to report what and when, the relevant statutory framework either needs a complete re-write, or simple and definitive guidance needs to be drafted and issued—perhaps similar to that issued in 2011 in respect of the Bribery Act 2010 (BA 2010). The process of determining whether a money laundering report is required should not be an exercise that takes hours and days.

In purely presentational terms, I find that the notion of the ‘regulated sector’, for money laundering purposes, creates an unhelpful myopia about money laundering obligations and liabilities. It is easy for a business, and individuals, outside of the regulated sector to disregard money laundering risks and reporting entirely. This is dangerous. Any individual or company, in the UK or (following recent case law R v Rodgers [2014] EWCA Crim 1680) overseas, can commit the so-called principal money laundering offences. Those outside of the regulated sector, as well as within, may need to make disclosures to the authorities in order to avoid criminal liability.

Businesses, by and large, understand that BA 2010 may affect them. The same clarity is needed in respect of the ambit of POCA 2002.

What improvements could be made to the efficiency and effectiveness of the regulators and why? Can changes be made without compromising the ability of the law to detect criminal behaviour?

POCA 2002, Pt 7 is near unintelligible, as a result of a myriad of amendments since 2003. One has to cut through endless cross-referencing, double negatives and subtly distinct terms of art in order to understand the impact of reporting obligations. The consequence of any failure to get this analysis right is not a regulatory slap on the wrist—it can be criminal conviction and imprisonment.

The draconian consequence of any reporting failure has encouraged a culture of over-sensitive or defensive reporting. The number of suspicious activity reports (SARs) made increases by around 13% year on year, and last year passed 350,000. The number of business hours that go into making that number of SARs will be unimaginably vast.

It may be worth considering whether the burden of meeting money laundering reporting obligations could be lessened by the creation of an ‘adequate due diligence’ defence to the ‘failure to report’ money laundering offences—analogous to the ‘adequate procedures’ defence under BA 2010. There is already a ‘reasonable excuse’ defence to failing to report under POCA 2002, but clarifying and extending this could have a meaningful effect.

If individual reporting officers and institutions could be assured that they were not at risk of criminal conviction and penalty every time a judgment call is made about reporting, the cost of compliance would fall, and law enforcement may stand to gain from a leaner and higher-quality body of reported intelligence.

Interviewed by Julian Sayarer.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

 

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