Written evidence submitted by Herbert Smith Freehills LLP


  1. Introduction

1.1                                           Herbert Smith Freehills LLP is an international law firm with a headquarters in the City of London. We have been involved in a number of projects related to tackling economic crime. As members of the legal profession we have a strong interest in ensuring that the rule of law is upheld. We recognise that funding is a key aspect of economic crime law enforcement. Our submission below therefore relates to the Government’s proposed economic crime levy as a funding model for future law enforcement. Whilst we have also submitted a response to the recent economic crime levy consultation issued by HM Treasury, we wish to reiterate our position on this important issue and in particular the proposal to impose a levy on the regulated sector.

1.2              The comments set out below are those of Herbert Smith Freehills LLP and do not represent the views of any of our individual clients.


  1.                                             General observations: fundamental challenges of economic crime

Whilst our perspective on economic crime reform is that of a regulated firm (and we appreciate that other stakeholders will have other perspectives), it seems clear to us that:

2.1.1            The UK anti-money laundering regime has been disproportionately expensive to operate relative to the law enforcement objectives it has achieved (we have welcomed the initiatives in the economic crime plan which seek to drive a more thoughtful response, and rebalancing of resource towards activity which will be more valuable in the fight against economic crime).

2.1.2            The current debate on economic crime seems to be overly focused on leveraging the efforts of the existing regulated sector at the expense of a more holistic approach. Whilst, as noted above, there are initiatives involving the regulated sector which will have value, we think greater improvements and outcomes could be achieved if more focus was placed on other priorities.  These include in particular:

(A)              cyber and other electronic risks for private individuals and some business sectors which interact with them. Wholesale businesses typically invest huge amounts in seeking to protect themselves and their customers from cyber-crime, as does the retail banking sector; but we expect the same is not true across the board;

(B)              addressing the challenges of cross-border enforcement and information sharing when such a large proportion of economic crime (including cyber-crime) is cross-border.

2.1.3            We urge the committee to give significant focus to this cross-border challenge rather than assuming that access to the UK by economic criminals can be prevented with the UK’s own regulatory and enforcement powers alone.

2.1.4            The UK’s economic crime problems are not all capable of being resolved by the regulated sector (whether financial institutions, or the broader AML regulated sector), in particular given the limited aspects of customer behaviour they see and can influence, and the fact that they do not have access to law enforcement data, let alone cross-border data around the world.

2.2              The point raised above about the limits posed by data access might prompt the question: should there be greater information-sharing?  We would observe as follows:

2.2.1            Giving access to financial data held by law enforcement to financial institutions (outside some specific and focussed environments, such as JMLIT), and enhanced private-private information sharing, raises significant reliability and privacy issues which are not created when information is shared between law enforcement bodies. We see the value in enhanced data sharing, but this is a very complicated issue which needs to be looked at both in terms of how crime is effectively suppressed and in terms of balancing individual civil liberties and privacy.

2.2.2            Submission of a suspicious activity report (“SAR”) does not mean that there is economic crime. A SAR is triggered on a low, ‘suspicion’, threshold, and in many cases the activity which is reported may transpire to be legitimate. We encourage the committee to be cautious about assuming SARs are a correlation to crime as opposed to a process of capturing potentially useful intelligence based on categories of perceived risk and ‘red flags’.


  1. Economic crime levy

3.1              In March 2020 the Government announced a new AML levy on the regulated sector to fund improvements to the UK’s economic crime defences set out in detail in the Economic Crime Plan 2019 - 2022. The existing proposal is that the levy should be charged on the revenues of regulated sector businesses.

3.2              Whilst we support the proposed investments and upgrades of the UK’s law enforcement capabilities, we strongly oppose the imposition of the levy on the regulated sector, particularly on a revenue basis. Should the Government pursue a levy model, we would support the Law Society view that it should be based on economic crime risk linked to SAR submissions.


Role of the regulated sector

3.3              Economic crime is an issue which affects all of society and arises from criminal activity, not the activities of the regulated sector.

3.4              Outside AML, we see no correlation between the legal sector (and certainly not the wholesale legal sector, i.e. firms like ours which do not deal with retail clients) and economic crime risk that does not apply equally – or in many cases much more directly – to every business in the UK. There is no evidence base to suggest, or reasoned argument to support the view, that the legal sector is in some way responsible for economic crimeIndeed, the sector by its very nature and by virtue of the existing effective SRA regulation applies higher standards than the vast majority of businesses in the UK. If the legal sector is not responsible for economic crime, there is no reason why the legal sector, in particular, should pay for economic crime reform

3.5              Considering the regulated sector more broadly, the correlation between the regulated sector and the funding of economic crime reform, or of law enforcement, simply because the sector already has AML regulatory responsibilities, is a wholly false one.

3.6              The substantive money laundering offences set out within the Proceeds of Crime Act 2002 apply to everyone in the UK regardless of whether they operate in the regulated sector. Any UK person or business can be convicted of a money laundering offence. It is for that reason that the National Crime Agency defence against money laundering consent regime is available to everyone in the UK. Businesses outside of the regulated sector can and do file SARs on a voluntary basis and to obtain a defence against money laundering.

3.7              Law enforcement is a public good which benefits all of society. As a matter of principle it should be funded from general government revenue and not by one particular sector.


Impact on UK competitiveness

3.8              We have particular concerns about the potential impact of the levy on the international competitiveness of UK legal services. The UK legal services sector contributed £26.8bn to the UK economy in 2017 and posted a trade surplus of £6.5bn in 2018. The levy risks damaging the competitiveness of legal services by turning the UK into the only major jurisdiction which taxes lawyers to fund law enforcement. The imposition of arbitrary taxes on law firms (and the risk that those taxes could be increased equally arbitrarily) risks making the UK appear less attractive for future investment by international law firms.


Linking the levy to economic crime risk

3.9              As we have pointed out in our separate response to the economic crime levy, it is particularly important that any levy does not include a revenue element. Arbitrarily creating a tax on a highly international segment of the UK services economy would reduce our attractiveness to international law firms seeking to relocate to the UK. We believe that no other developed economy seeks to tax the professional services sector or the financial sector (other than one retail bank focused example) to fund economic crime law enforcement.

3.10          We therefore support the Law Society proposal, if a levy is to be introduced at all, that it should be based on submission of SARs (perhaps through a filing fee consistent with other filing obligations such as Companies House, the Land Registry and HMCTS). This would best reflect economic crime risk by connecting business risk to SARs and would appear much less arbitrary. Such an approach would also be relatively simple and cost effective to establish without the need to create new infrastructure or government bodies, allowing more of the levy to be spent on economic crime prevention rather than administration. A SARs based approach would also avoid the sense of a special tax on the revenues of lawyers and others in the regulated sector and would not require the creation of new financial reporting mechanisms of in-scope revenue.

3.11          We have no doubt at all that, as a hypothecated tax, the AML levy will be highly inefficient in terms of costs to revenue raised, bringing all the well-known disadvantages of narrow sectoral taxes and levies and the competitive distortions that flow from special taxes outside of standardised taxes such as VAT.

3.12          If, contrary to our views, the Government opts to impose a revenue based levy, it should be on regulated revenue only, otherwise there is no justification for taxing the regulated sector differently from other parts of the economy.


December 2020

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