Challenges posed by the RBA
Contradictions in the RBA
The RBA begs a fundamental question - what is ‘risk’ in the AML context? Assuming that risk is measurable, it would mean that a reporting officer in a regulated entity would (almost) accurately be able to calculate the money laundering risks associated with a customer or transaction. However, whilst on the one hand the RBA allows a reporting officer to exercise flexibility in carrying out such a calculation, the law on the other hand significantly constrains this flexibility, as discussed in this section.
In the United Kingdom, the ML Regs 2017 were introduced to strengthen the RBA as laid out by the Fourth Money Laundering Directive. The ML Regs create a system of regulatory obligations for businesses under the supervision of the FCA and the relevant professional and regulatory bodies recognised within the regulations.[1] One prominent change brought about by these regulations is the requirement, inter alia, to conduct enhanced checks on politically exposed persons (PEPs), whether domestic or foreign.[2] This would mean that the spouse or relative of a person holding public office would automatically be considered high risk, irrespective of their customer profile, thus giving rise to the risk that the distinction between suspicious and non-suspicious will become a bureaucratic decision instead of a risk-based one.
A further example of rigidity in the RBA is that the 2017 Regulations necessitate the application of enhanced due diligence measures in any business relationship or transaction with a person established in a ‘high-risk’ third country.[3] Following the same reasoning, simplified due diligence is considered sufficient in cases where the customer is resident or established in a European Economic Area (EEA) state and where the geographic risk of money laundering is low.[4] In reality, this means that any person originating from a sanctioned country (for example, Iran) would automatically be categorised as high risk, and any person originating from a low-risk country (such as the United Kingdom) would automatically be low risk, assuming there are no other red flags. This categorisation begs the question, what is the rationale for accepting someone from the United Kingdom and rejecting someone from Iran when vast amounts of money are estimated to be laundered through the United Kingdom and a tiny portion relates to Iranians?[5]
Whilst high-risk activities may typically include cash intensive businesses,[6] such as restaurants and retail shops, there is nothing inherent in them that would force these entire areas to be considered high-risk per sc. A major concern with the AML regime’s attempt to delineate activities into high risk and low risk is that it cannot compartmentalise an entire category (for instance, customers based in a country subject to political sanctions) because not all customers in these areas will have the same risk profile. This approach tends to leave banks confused and ''nervous whether their own perception of risk will match regulatory expectations’ leading to possible non-compliance or ‘excessive’ compliance, such as defensive reporting or automatically filing reports of, say, all PEPs, even if there is nothing inherently suspicious about a particular transaction.[7]
Therefore, the concept of risk with respect to AML has not been given the meaning that the RBA demands and is often subject to the categories that are already laid out by the law. This is contradictory to the very essence of the RBA, which purports to allow room for flexibility and exercise of judgement. The result is an ill-defined RBA resulting in defensive reporting, which is discussed in the next section.
- [1] Law Commission, Anti-Money Laundering: The SARs Regime Consultation Paper(Law Com No. 236, 2018) para 1.8.
- [2] ML Regs, Reg.35. The term PEP means an individual who is entrusted with prominent public functions, other than as a middle ranking or more junior official, family member of such a person, or ‘known close associate’ of such a person.
- [3] ML Regs, Reg.33.
- [4] ML Regs, Reg.37(c).
- [5] The Independent, ‘Counting the cost of money laundering,’ (
- [6] HM Treasury and Home Office (fn 21).
- [7] Demetis, D. and Angell, I., ‘The risk-based approach to AML: Representation, paradox, and the 3rd directive’ (2007) 10(4) Journal of Money Laundering Control 412.
