Lessons learned from HM Treasury’s 2019-2020 anti-money laundering and counter-terrorist financing supervision report

Late last year, HM Treasury published its ninth annual report on anti-money laundering (AML) and counter-terrorist financing (CTF) supervision.  The report covers the period from 6 April 2019 to 5 April 2020, evaluating the work and findings of the UK’s designated AML/CTF supervisors. The UK’s AML/CTF supervisors include three “statutory” supervisors (the Financial Conduct Authority (FCA), HM Revenue & Customs (HMRC) and the Gambling Commission) and 22 Professional Body Supervisors (PBSs), along with the Office of Professional Body Anti-Money Laundering Supervision (OPBAS).

Results of supervisory activity

HMRC notes a 3.5% increase from the 2018-2019 reporting period in desk-based reviews (DBRs) and site visits carried out by supervisors on firms subject to their supervision.  However, approximately 12% of supervised firms were classified by supervisors as high risk – a slight decrease from the previous reporting period – which the report attributes to an increase in the pool of supervised firms. Overall, firms subject to DBRs or site visits exhibited significant deficiencies.

During the 2019-2020 period, the FCA (which supervises the financial services industry) conducted a DBR or a site visit on 0.8% of its supervised population. Of those, 6% of firms subject to a DBR and 50% of firms visited were found to be non-compliant with the regulations.  The FCA identified the retail banking, wholesale banking, and wealth management sectors as presenting the most significant money laundering (ML) risks.

HRMC (which supervises estate and letting agency businesses, art market participants, high value dealers, money service businesses and trust or company service providers) conducted a DBR or site visit on 6% of its supervised population. Of those, 24% were found to be non-compliant. HMRC found art market participants, money service businesses, and trust or company service providers to present the most significant ML risks.  HRMC also identified money service businesses and high value dealers as presenting terrorist financing (TF) risk.

The Gambling Commission conducted a DBR or site visit on 45% of its supervised population. Of those, 53% of firms subject to a DBR and 56% of firms visited were found to be non-compliant with the regulations.  The Gambling Commission classified 36% of casinos as presenting a very high risk of ML.

PBSs conducted a DBR or site visit on approximately 10% of its supervised population.  Of the accounting firms subjected to a DBR, 9% were found to be non-compliant; of the accounting firms subjected to a site visit, 19% were found to be non-compliant.  Of the legal firms subjected to a DBR, 10% were found to be non-compliant; of the legal firms subjected to a site visit, 24% were found to be non-compliant. PBSs classified 6.5% of the legal and accounting firms it supervises as high risk and 23% as medium risk.

Key takeaways

According to HM Treasury, there was an “improvement in various areas of supervision” during the reporting period but that there is “still more work to do to achieve greater consistency in approach to supervision and enforcement.” Certain industry sectors, such as casinos, art market participants, money service businesses, trust or company service providers, and certain financial services firms, are still viewed by supervisors as presenting significant ML/TF risk.

Some of the findings related to non-compliance with the Money Laundering Regulations (MLRs) included firms’:

• failure to implement appropriately risk-based and documented AML/CTF policies, procedures, and controls;
• inadequate client risk assessments;
• inadequate due diligence performed on customers/clients (including lack of enhanced due diligence where appropriate), leading to poor risk identification and monitoring;
• inadequate firmwide risk assessments;
• inadequate AML/CTF training for employees; and
• lack of resource/attention paid to risk and compliance functions.

At least two supervisors reported that firms within their supervised population often do not fully consider and understand the specific risks associated with their businesses, and some firms allowed commercial concerns to take priority over AML/CTF compliance.

Firms should seek to develop and implement risk-based AML/CTF policies, procedures, and controls to mitigate ML/TF risk and risks of regulatory enforcement. These should be regularly tested to ensure they remain effective and take into account the latest risks and typologies in the relevant business. Supervisors will prioritise for investigation and potential penalty more serious cases of AML/CTF non-compliance.