Evaluating the UK AML and CTF framework

This section engages critically with the current UK AML and CTF framework as it applies to banks and assesses the normative justifications for the substantive ML and TF offences as well as the effectiveness of the present legal regime.

Conventionally the AML regime is justified on four grounds: (a) crime prevention and crime detection; (b) maintaining the reputation, integrity and stability of the financial system; (c) the avoidance of unfair competition and price distortions; and (d) preventing capital flight to tax heavens. There are salient reasons to doubt the cogency of the second, third and fourth justification, as ML and TF are unlikely to threaten financial stability, and other areas of law are more appropriate to deal with unfair competition and tax avoidance. Arguably, the most important objective of the AML regime, and the main objective of the CTF regime, is the prevention of the predicate offences that generate funds that need laundering and the prevention of terrorist acts as well as the detection of persons who have committed such offences. This can be achieved as a result of information that is contained in SARs that are submitted by banks. In the best case, such information can lead to the avoidance of terrorist attacks, the arrest of offenders and the disruption of criminal enterprises due to lack of funding, and can reduce incentives to commit predicate offences, such as drugs trafficking, to the extent that their proceeds cannot be reintegrated into the

financial system and enjoyed by the perpetrators. These are public policy goals which few would challenge.

However, it does not follow that the present regime is well-designed to achieve these goals. One major concern is that - due to the UK’s all crimes approach,[1] and the risk that bank employees may be held liable if they hold a suspicion even without having reasonable grounds to suspect, or if they did not form a suspicion but had reasonable grounds to do so - an excessive number of SARs are submitted. If this is the case, then the current regime inevitably causes unnecessary compliance cost for banks, which is likely to be at least partially transferred to customers, and high operational cost for the NCA and other authorities, which is ultimately borne by UK taxpayers. An excessive volume of reports can also make it harder to identify these that truly need to be investigated further thus undermining crime prevention and detection. So, the crucial question to be asked is whether there is excessive production of SARs in the UK. It would appear that this is the case. Indeed, 634,113 SARS were received by the UKFIU between October 2015 and March 2017, of which 27,471 requested consent due to suspicion of ML and 422 sought consent due to suspicion ofTF. Consent was refused in only 5.67% of ML SARs and in 6.87% ofTF SARs that sought consent. The refusal of consent is significant, as cases where consent is refused are likely to lead to further investigation and ultimately prosecution. It is interesting that in more than 95% of cases disclosures do not seek consent to proceed with a transaction and are therefore required disclosures on the basis of a very mild suspicion. And that when consent is sought, it is granted in nearly 95% of cases. An additional argument supporting the claim that the UK system leads to an excessive number of reports can be drawn from comparing the situation in the UK to the situation in other EU Member States. It is remarkable that 36% of all SARs in the EU are generated in the UK. Other large countries such as Germany and France generate much fewer SARs than the UK; there were 24,054 reports in Germany in 2015 and 64,815 in France in 2016.

The cost of AML and CTF compliance for banks is staggering. Banks generated nearly 83% of UK SARs between October 2015 and March 2017, and the British Bankers’ Association estimated that its members spend at least £5 billion annually on financial crime compliance.1'16 In parallel, as was discussed in the previous section, the current regime often has devastating financial consequences for individuals and firms that have their bank accounts blocked pending consent by the NCA. Even when the suspected customers are entirely innocent of wrongdoing, there is no remedy for them to recover their losses. Furthermore, UK banks tend to terminate business relationships with customers that are perceived to

Money laundering and terrorist financing 199 present high risk, a practice known as de-risking.[2] This can lead to financial exclusion, and is likely to affect most severely members of minority groups and foreign customers.

Overall, it seems that the UK AML and CFT framework is characterised by unusually high - by international standards - and increasing volume of disclosures, which tend to be of low intelligence value and of poor quality, as a result of defensive over-reporting. The compliance burden is high, and the impact on customers that are the subjects of investigations is severe. To improve the UK regime, it is pertinent to review the all-crimes policy and to pay careful attention to the statutory threshold of criminality and especially to the notions of‘suspicion’ and of‘having reasonable grounds for suspecting’.

Glossary of terms

  • • Money laundering: The practice of hiding the criminal provenance of funds and reintegrating them into the legitimate financial system so that they can be used by the perpetrators of the underlying criminal offence.
  • • Terrorist financing: The criminal practice of raising funds to be used for, or in support of, the purposes of terrorism.
  • • Criminal property: Property that represents the gain from criminal activity or that is used to fund terrorist activity.
  • • Financial Action Task Force (FATF): Intergovernmental organisation founded in 1989 with the aim of combating money laundering and terrorist financing.
  • • Minimum harmonisation instrument: EU directive that requires Members States to achieve a minimum level of legal protection or of another legal outcome but permits them to provide for a higher level of protection/outcome.
  • • Customer due diligence: Obligation of banks and other firms to take reasonable steps to establish the true identity of their customers and monitor transactions as part of the anti-money laundering and counter-terrorist financing framework.
  • • Politically exposed persons: Individuals who currently do, or in the recent past have occupied state positions of high authority (legislative, executive, judicial, military, etc.) and their close family members.
  • Actus reus (Latin): Component of a criminal offence meaning ‘guilty act’, i.e. the act or omission that is required for a certain criminal offence to be committed.
  • Mens rea (Latin): Component of a criminal offence meaning ‘guilty mind’, i.e. the state of mind (e.g. Intention, recklessness, knowledge, suspicion) in which the perpetrator of a guilty act must be in order for him to commit the relevant criminal offence; there are offences that do not require a mens rea element and are known as strict liability offences.
  • • National Crime Agency (NCA): National law enforcement agency of the UK that deals with the most serious crime such as organised crime, human trafficking, drug trafficking, terrorism and serious economic crime.
  • • Suspicious activity report (SAR): Disclosure made by a bank or other regulated firm to the NCA under the anti-money laundering and counter-terrorist financing legislation detailing the bank’s grounds for suspecting that certain individual has engaged, or attempted to engage, in money laundering or terrorist financing.
  • • De-risking: Practice followed by certain UK banks whereby business relationships are not commenced or discontinued with individuals possessing certain demographic characteristics who are deemed to present a high level of money laundering or terrorist financing risk.

Practice questions

The harsh criminal penalties provided by UK law for failure to disclose a subjective suspicion of money laundering or terrorist financing have led to an overproduction of SARs of low quality: this is costly for banks and their customers and does little to contribute to the fight against ML and TL. Critically discuss.

You may also find it useful to review the chapter through the following questions:

  • • How did the anti-money laundering and counter terrorist financing regime develop in the UK, EU and internationally?
  • • What is the harm caused by money laundering?
  • • What processes must UK banks maintain to ensure compliance with the AML and CTF regime?
  • • What is the role of the FCA in preventing financial crime?
  • • What are the substantive money laundering and terrorist financing offences? Are they too broad compared to other jurisdictions?
  • • How are suspicious activity reports (SARs) generated?
  • • Is there any effective judicial protection for bank customers who suffer loss due to their accounts being frozen as a result of the submission of the SAR?

Part III

  • [1] For a critique of the allcrimes approach in the context of the legal profession, see Sarah Kebbell, “‘Everyone’s Looking at Nothing” - The Legal Profession and the Disproportionate Burden of the Proceeds of Crime Act 2002’ (2017) 2017 Criminal Law Review 741. 2 Bello, for instance, argues that the behaviour of MLROs can be understood through the lens of the selfprotecting theory which posits that compliance officers are likely to do what is best to protect themselves from liability rather than to fulfil their functions properly. Bello argues that MLROs align themselves with the bank they work for rather than the regulator and are therefore likely to report information in a defensive manner to protect themselves and the bank against the regulator. See Abdullahi Usman Bello, Improving Anti-money Laundering Compliance: Self-Protecting Theory and Money Laundering Reporting Officers (Palgrave Macmillan 2016) Chapter 3. 3 ‘Anti-Money Laundering: The SARs Regime’ (above n 72) [4.2]-[4.3], 4 Ibid., £4.10]—[4.13]. 5 Ibid., [1.19]-[1.20]. However, it is worth noting that there are no reliable academic studies on banks’ compliance cost and banks are not being transparent on the matter.
  • [2] On this phenomenon, see Tracy Durner and Liat Shetret, ‘Understanding Bank De-risking and Its Effects on Financial Inclusion: An Exploratory Study’ Global Center on Cooperative Security (2015) (accessed 28 May 2020). 2 This also appears to be the view of the Law Commission. See ‘Anti-Money Laundering: the SARs Regime’ (above n 72) [1.29]-[1.30],
 
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