UK: HM Treasury publishes supervision report on Anti-Money Laundering and Counter-Terrorist Financing 2022 – 2023

On 1 May 2024, HM Treasury (’HMT’) published its annual report on the performance of Anti-Money Laundering (‘AML’) and Counter-Terrorist Financing (‘CTF’) supervisors. The report covers the period of 6 April 2022 – 5 April 2023 (the ‘Relevant Period’).

AML/CTF supervisors are appointed by HMT to review and enforce compliance by businesses across a range of sectors which are required to comply with the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (as amended) (‘MLRs’). The annual report attempts to promote transparency and accountability of supervisors as well as encouraging good practice. It acknowledges that previous reviews both by HMT and by the Financial Action Task Force have identified significant weaknesses in the risk based approach to AML/CTF supervision and that HMT remains committed to AML/CTF reform. Key highlights of the 2022 – 2023 report, which is based on data collected from supervisory bodies, are as follows:

Supervisory activities

AML/CFT supervisors are required to adopt a risk based approach to their supervisory activities. This requires an in-depth understanding of the sector they are responsible for and the nature of the parties they supervise. This enables supervisors to focus activities on areas of higher risk of money laundering and terrorist financing.

The report acknowledges that supervisory activities in the Relevant Period continued to be impacted by the Covid-19 pandemic. Key data highlights significant differences in both activities and outcomes across the different supervisory bodies:

• 5,253 desk-based reviews and onsite visits were conducted by all AML/CTF supervisors within the Relevant Period. This represented circa 5.5% of AML/CTF regulated businesses. The report notes that there was a lack of consistency in supervisory activity across the legal and accountancy professional body supervisors (‘PBSs’), with some conducting no desk-based reviews and no onsite visits
  
  
• while some supervisors, including HMRC, had a renewed focus on onsite visits following the Covid-19 pandemic, others focused on desk-based reviews and online interviews
  
  
• circa 10% of regulated businesses across sectors were determined to be high risk by supervisors during the Relevant Period. This accords with previous years: 11% in 2021-22 and 9% in 2020-21
  
  
• the Financial Conduct Authority (‘FCA’) specialist financial crime team dedicated to AML/CTF supervision conducted 231 desk-based reviews and 7 onsite visits for a total of 238 assessments in the Relevant Period. 181 of the reviews were on high risk firms, and 69% of the supervisory activity included sanctions related assessments. The FCA’s supervisory approach was intended to be targeted and data-led. Intelligence and data were used to “identify pockets of risk” which assisted the FCA to focus its efforts on more time-consuming onsite visits and desk-based reviews on firms with greater risk of money laundering. During the Relevant Period the FCA determined that retail banking, wholesale banking, wealth management and crypto-asset firms remained particularly vulnerable to money laundering and terrorist financing risk
  
  
• the FCA noted that for desk based reviews undertaken by financial crime specialists, 45% were found to be compliant, 13% were generally compliant and 4% were non-compliant. The remaining 38% had not reached a final review outcome before the end of the Relevant Period. Out of the 7 on-site reviews conducted, only 1 was found to be non-compliant
  
  
• the Gambling Commission (‘GC’) reported that 48% of firms on which it conducted a desk based review were non-compliant and 89% of firms reviewed onsite were non-compliant with the MLRs
  
  
• HMRC identified that the vast majority of its supervisory population is low risk for money laundering/terrorist financing, with only 4% of its overall supervisory population deemed to be high risk (comprised mainly of money service businesses, art market participants, and trust and company service providers). HMRC conducted 834 desk based reviews and 907 onsite visits during the Relevant Period and reported that 28% of this population was identified as non-compliant with the MLRs and subject to formal action
  
  
• for Professional Body Supervisors (‘PBSs’) in the legal sector, 16% were found non-compliant with the MLRs on a desk-based review, and 25% on an onsite visit

Supervisory findings 

The report sets out common themes of non-compliance with the MLRs. In particular, the FCA reported that common themes it identified included:

• inadequate risk assessments (both client and firm-wide) including the documentation of such assessments
• insufficiently risk-sensitive enhanced due diligence (‘EDD’) processes, which led to poor identification and monitoring of high risk customers
• ineffective application of EDD
• insufficient compliance monitoring, and insufficient quality assurance and testing programmes to assess operational effectiveness of systems; and
• inadequate compliance resources and training dedicated to, and training of staff responsible for, compliance

The GC identified similar issues but also highlighted that it found evidence within its non-compliant population that (i) AML/CTF concerns were outweighed by commercial and/or reputational considerations (ii) policies and procedures were not adequately documented and (iii) there was an overreliance on monetary thresholds to drive compliance as opposed to a proper risk based approach to compliance being applied.

Promoting compliance

Across all 25 supervisors during the Relevant Period total fines of £197 million were levied for non-compliance with the MLRs. This is a significant reduction from the £504 million of fines during 2021-22, however a large proportion of this was due to historic, sizeable fines issued by the FCA during the 2021-22 period.

During the Relevant Period, the average fine imposed was circa £201,000 however, as expected, there are significant variations in size of penalty issued across sectors.

Conclusion

The report highlights a number of strengths of the supervisory approach in the UK with respect to AML/CTF, however, it is clear that there are further improvements which can be made. This has been recognised by HMT and there are on-going consultations relating to changes to the MLRs and the supervisory approach adopted in relation to AML/CTF.

It is important that all persons operating in the regulated sector are aware of the findings of the HMT supervision report and that particular attention is paid to the themes relating to non-compliance. It is clear that legal and regulatory focus on money laundering and terrorist financing remains a priority and monitoring changes across this area will continue to be vital.