HMRCSR0013

Written evidence submitted by Transparency International UK

1. INTRODUCTION

1.1. Transparency International (TI) is the world’s leading non-governmental anti-corruption organisation. With more than 100 chapters worldwide, TI has extensive global expertise and understanding of corruption.

1.2. Transparency International UK (TI-UK) is the UK chapter of TI. We raise awareness about corruption; advocate legal and regulatory reform at local, national, and international levels; design practical tools for institutions, individuals and companies wishing to combat corruption; and act as a leading centre of anti-corruption expertise in the UK. We are independent, non-political, and base our advocacy on robust research.

1.3. TI-UK welcomes the Committee’s inquiry into the performance of HM Revenue & Customs (HMRC) in 2022-23. Our submission focuses on HMRC’s performance as an anti-money laundering (AML) supervisor. We are available to provide oral evidence or further written briefings to the Committee upon request.
 

2. BACKGROUND
    

2.1. The frontline in the UK’s defences against corrupt money should, in theory, be firms in the private sector identifying and reporting suspicions of money laundering. However, UK professionals can also be gatekeepers that let illicit finance into the UK and then help hide it.
 

2.2. To date, the UK has relied upon 25 different supervisory bodies to police private sector compliance with rules intended to detect and deter money laundering. HMRC is one of three public sector supervisors and is responsible for approximately 37,000 businesses across nine different sectors, including firms in high-risk industries such as trust and company service provision.[1]
 

2.3. The UK’s AML supervisory regime has attracted criticism from Parliament[2], the Financial Action Task Force (FATF) - a global money laundering and terrorist financing watchdog[3] - and UK civil society organisations[4] for an inconsistent approach, with differing levels of oversight and enforcement applied across their supervised population.
 

2.4. In accordance with criticisms of the current arrangements, HMT has also recognised the status quo is both ineffective and untenable, and recently consulted on models to reform the policing of private sector compliance with AML rules.[5]
 

3. HMRC’S PERFORMANCE AS AN AML SUPERVISOR
   
   Responsibility for high-risk industries
    

3.1. HMRC is responsible for supervising approximately 37,000 businesses across nine different sectors, including firms in high-risk industries such as trust and company service provision.[6]
 

3.2. Trust or Company Service Providers (TCSPs) are businesses or sole traders providing assistance to those seeking to incorporate and control legal entities, such as companies and partnerships. Activities can include incorporating, preparing, and submitting legal documents for legal entities; providing them with registered offices and mail forwarding services; and acting (or arranging for others to act) as a trustee, shareholder, director, or secretary of a legal entity.
 

3.3. In its National Risk Assessment for money laundering, HMT and the Home Office deems TCSPs are high-risk due to how their functions are often used to facilitate money laundering and hide the proceeds of corruption.[7] The National Risk Assessment also notes how their “understanding of the scale of TCSP use linked to money laundering and risk from them has increased greatly”, and that these departments therefore “now assess the money laundering risk from TCSPs as high”.[8] By 2022, HM Treasury reported that “HMRC has identified art market participants, money service businesses, and the TCSP sectors as presenting the highest inherent risks for money laundering”.[9] The classification of TCSPs as a high-risk industry is also supported by our research that demonstrates their prominence in money laundering in the UK.[10]
 

HMRC’s performance as an AML supervisor

3.4. Our analysis of shell companies in 2019 suggests Britain has been home to at least tens of thousands of shell companies over the past 10 years, and possibly more.[11] Many of these entities are structured almost identically to those used to facilitate corruption and suspicious financial activity, indicating that it is likely the same TCSPs – some based in the UK and some overseas – who formed them.
 

3.5. For example, in 2019 we identified 23 active TCSPs offering nominee director, shareholder and PSC services.[12] One of these firms was responsible for forming thousands of UK companies we identified in our analysis of suspicious UK legal entities.[13] Another TCSP provides a nominee shareholder service that appears to suggest it can hide the details of a company’s beneficial owner, which is illegal under UK law.[14] Both companies are UK based, still active, and registered with HMRC as their AML supervisor. It is not clear whether any action has been taken against the companies.

3.6. Parliament has already highlighted the governance risk of allocating HMRC AML supervision responsibilities. In the Treasury Select Committee’s 2019 economic crime inquiry, for example, HMRC’s primary role as a tax authority was raised as problematic due to the risk that supervisory activity became adjunct to its revenue-raising activities.[15] With HMRC’s 2021 outcome delivery plan containing no mention of money laundering supervision, these concerns would appear to be well-founded.[16]
 

3.7. The seemingly low prioritisation HMRC places on AML supervision contrasts starkly with HMRC’s own assessment that TCSPs are among the sectors with the “highest inherent risks for money laundering”.[17]
 

3.8. While HMRC has a valuable role to play in supporting a whole-system intelligence picture of money laundering threats, it is overloaded with responsibilities and objectives, to the detriment of its supervisory performance. This is clear when considering the number of supervisory activities HMRC undertakes annually, the rate of non-compliance it has found and subsequent low levels of enforcement action.
 

3.9. For instance, despite increasing full-time staff from 298 to 343 from 2020-21 to 2021-22, only a small number of firms were subject to supervisory action to ensure compliance with AML regulations, such as desk-based reviews or onsite visits.[18] While the impacts of COVID-19 may have contributed, between the 2020-21 and 2021-22 reporting periods, only “roughly 2% and 5% of HMRC’s supervised population were subject to supervisory action”.[19]
 

3.10.                   Furthermore, the rate of non-compliance found by HMRC is high: of the 1,426 desk-based reviews conducted by HMRC in 2021-22, more than one third were found to be non-compliant. [20] When viewed in accordance with the rate of supervision, this indicates a significant weak spot in the UK’s AML supervision regime.
 

3.11.                   To compound the above, HMRC’s relatively low levels of enforcement action is also of significant concern. For example, despite guarantees in HMRC’s 2021 Anti-Money Laundering Supervision annual assessment that it was undertaking “numerous programmes in hand to drive up performance”, HMRC’s self-assessment report from the following year in 2022 noted that only 5 financial penalties were delivered to the entire TCSP sector.[21]  Additionally, in December 2022 HMT reported that in the preceding two years HMRC made only three referrals to law enforcement regarding money laundering matters.[22] Considering the high rates of non-compliance, the low levels of enforcement activity are evidently proving an ineffective deterrence measure.

3.12.                   Therefore, although HMRC conducts fit and proper checks during the registration process for firms in both the TCSP and money service businesses sectors, the high prevalence of money laundering within this sector in combination with the high rates of non-compliance found by HMRC demonstrates that the threshold for this test is too low.
 

4. POLICY RECOMMENDATIONS
    

4.1. To improve the UK’s anti-money laundering (AML) supervision regime, the government should:
 

4.1.1.            remove AML supervision from HMRC’s responsibilities, with these duties subsumed by a new public body accountable to HM Treasury.[23] This new body should be a single professional services supervisor (SPSS), in line with Option 3 of HM Treasury’s proposed reforms to the UK’s AML supervisory system.[24]
 

4.1.2.            reform the fit and proper test for TCSPs to provide a higher bar for those entering this high-risk industry, taking into account qualifications, experience and competence in this field. This would reduce the risk of the abuse of UK companies and partnerships for financial crime.
 

4.2. To ensure a smooth transition to a new single professional services supervisor, HM Treasury should:
 

4.2.1.            create a thorough and robust project management structure to manage the process of transformation, with a dedicated senior responsible officer and ministerial lead driving reform;
 

4.2.2.            establish the new SPSS as a shadow organisation so it can prepare adequately and hit the ground running;
 

4.2.3.            increase the Office for Professional Body Anti-Money Laundering Supervisors’ (OPBAS’) powers and role in the interim to prevent backsliding amongst existing professional body supervisors;

4.2.4.            introduce a duty to cooperate with the new SPSS during the transition period amongst existing professional body supervisors, and a duty of candour to report any relevant issues among supervised firms to the new SPSS.

October 2023