Written evidence submitted by HM Treasury (ECC0102)

Rt Hon Mel Stride MP

Chair of the Treasury Select Committee House of Commons

London SW1A 0AA

17 December 2021

Dear Mel,

Treasury Committee’s evidence session on economic crime: follow-up evidence

I would like to thank you and Treasury Select Committee members for your work in highlighting the challenges of Economic Crime and I look forward to reading the committee’s report on this in the new year.

The Government shares the Committee’s concerns and is committed to tackling economic crime. This protects citizens livelihoods and opportunities for legitimate business in the UK, as well as our national security and our reputation as a global financial centre. That is why we welcome the points raised at the evidence session on 29 November.

In the session, we agreed to provide further evidence to clarify specific concerns

raised by the Committee’s members. Please find these below. The Government’s action on Payment Fraud:

We recognise and share the Committee’s concerns regarding payments fraud. The Government is committed to tackling fraud within payment networks and recognises the actions of the financial services industry to help tackle Authorised Push Payment (APP) fraud, including through investment in anti-fraud capabilities, the creation of a voluntary reimbursement Code, and the implementation of initiatives such as Confirmation of Payee. While we welcome these initiatives, it is clear that more needs to be done both to prevent these scams, and to ensure that victims are not left paying for fraud through no fault of their own.

The Government therefore welcomed the publication of the Payment Systems Regulator’s Consultation on measures to counter APP scams on 18 November. This set out a range of measures: on fraud prevention, through better intelligence sharing between banks; and fraud reimbursement, through options for mandatory reimbursement of APP scams which occur in Faster Payments, to ensure that victims of APP fraud are appropriately reimbursed. Liability and reimbursement

requirements on firms need to be clear so that customers are suitably protected. The Government intends to legislate to address any barriers to regulatory action to introduce mandatory reimbursement of APP scams. As outlined in our response to the Payments Landscape Review: Call for Evidence, the Government believes that the introduction of Faster Payments rules setting out reimbursement and liability requirements on all scheme participants, alongside preventative measures, is the best possible solution to ensuring victims are reimbursed.

I note the Committee’s views regarding the speed of payments. Banks already intervene in a variety of ways where they suspect fraud, including delaying the processing of payments and contacting customers. The Government and financial regulators are engaging industry on whether there is more that can be done to improve fraud prevention, including seeking further evidence and analysis from industry on what specific actions might help support banks to prevent fraud, while ensuring that consumers continue to benefit from fast and simple payments.

Action Fraud:

At the session, there was discussion of Action Fraud and how services related to this will be replaced. The Home Office is working with the City of London Police on plans to refresh and upgrade the current Action Fraud service, the competition to find a new commercial partner to deliver the service was launched in July 2021. The new service will take over from the current Action Fraud service in 2024.

The supervision regime:

Trust and Company Service Providers

The Committee asked for further information on how businesses that can enable the use of shell companies are regulated and supervised. These Trust and Company Service Providers (TCSP) are regulated under the Money Laundering Regulations 2017, and are supervised for anti-money laundering and counter terrorism financing purposes by one of the UK’s AML/CFT supervisors. The business’s supervisor will depend on whether TCSP activity is ancillary to another regulated activity. For example, legal and accountancy service providers supervised by one of the 22 professional body supervisors (PBSs) may also provide TCSP services, while other TCSPs are supervised by FCA (for example where they are supervised for financial or credit activity) or by HMRC. The National Risk Assessment of Money Laundering and Terrorist Financing 2020 identfied that many of the higher risk TCSP providers are amongst HMRC’s population, including specialist company formation agents and virtual office providers. I have therefore provided more detailed information on the approach taken by HMRC to counter this threat.

HMRC supervises approximately 6% of UK TCSPs and as of September 2021, supervised 2,030 TCSP businesses. HMRC makes use of a wide range of tools to ensure the entities it supervises are compliant with the regulations, including:

• conducting a fit and proper test on certain individuals, including the applicant and any officer, manager or beneficial owner of the applicant, before businesses can registers as TCSPs and start trading;
• measuring compliance and implementing robust sanctions on individual business i.e. financial penalties against several non-compliant TSCPs;
• tackling risk in the sector through an intelligence-led approach.

From April 2019 to date HMRC has completed 404 direct interventions on TCSPs, resulting in penalties amounting to £55,600 in total relating to 8 cases, warning letters in 35% of cases, and no formal action in approximately 63% of cases where businesses were found to be compliant with the requirements of the MLRs.

Beneficial Ownership Transparency

Alongside our work to improve AML/CFT supervision of TCSPs, the UK also has some of the highest standards of beneficial ownership transparency in the world which help prevent abuse of corporate structures for illicit purposes. In 2016 the UK became the first major economy to implement a public register of company beneficial ownership – the People with Significant Control Register. The register was the first in the world to be publicly available for searching worldwide. This means that information on who truly owns and controls UK companies and other legal entities is available online and free of charge.

Scottish Limited Partnerships were brought into scope of the PSC register in 2017. With the support of the Crown Office and Procurator Fiscal Service, Companies House has made good progress in tackling AML abuses that existed in this sector. As of 2018, since the PSC Register was expanded to require BO reporting from SLPs, new registrations of these entities have dropped by 80%. Since October 2020 Companies House has brought forward 28 prosecutions in relation to Scottish Limited Partnerships and PSC offences.

Consistency of AML/CFT Supervision

The committee also raised questions about the consistency of enforcement by the UK’s AML/CFT supervisors, in particular the Professional Body Supervisors who oversee the legal and accountancy supervisors. It is important to note that the aim of supervisors is not only to enforce by punishing past failings, but also to prevent non-compliance and promote future compliance by working with their supervised populations to improve their understanding of risk and the effectiveness of their controls.

When making enforcement decisions, supervisors have a range of tools available, from administrative sanctions, including censures and financial penalties, to suspension, restriction or withdrawal of membership or authorisation to practise, and the ability to direct members to take action to remedy non-compliance and promote future compliance.

Regulation 49 of the Money Laundering Regulations 2017 requires professional body supervisors to make arrangements to ensure their supervisory functions are exercised independently of any of their other functions which do not relate to disciplinary matters. The Office for Professional Body AML Supervision (OPBAS) sets out the expectations and best practice for PBSs to meet this requirement in Chapter 3 of the OPBAS Sourcebook. The UK’s supervision model is being assessed through the ongoing review of the UK’s AML/CFT regime, but having a range of supervisors across the regulated sector has benefits thanks to the nuanced and expert approach it allows across sectors and this has been highlighted by respondents to our recent call for evidence on the MLRs.

HMRC fines for AML/CFT breaches

The committee also asked for confirmation on what the £9.1m of penalties paid to HMRC was made up of and over which years. HM Treasury’s latest Anti-money laundering and counter-terrorist financing: Supervision Report 2019-20 reported that HMRC issued 31 fines totalling £9,066,033. These are fines issued for a breach of the Money Laundering Regulations 2017 by any business supervised by HMRC. A table showing how this compares to recent years is below. As with other supervisors, HMRC makes use of a range of enforcement tools, including the power to issue warning letters to businesses highlighting concerns and how they should be addressed, withdraw the fit and proper status of key personnel or deregister the business.

The Economic Crime (Anti-Money Laundering) Levy

The committee enquired how Economic Crime (AML) Levy will be spent, and whether all of it is allocated in the Spending Review. Funds raised from the private sector through the levy will complement the public spending on tackling economic

crime announced at the Spending Review, and will be allocated in due course. Levy funds will support action to combat illicit finance in the UK, while providing the Government with greater scope to fund measures to tackle emerging risks and improve enforcement across the Anti Money Laundering system. For example, levy funds could potentially support key UK anti-money laundering activities to help ensure delivery of the reforms committed to in the Economic Crime Plan.

Progress made on Economic Crime legislation

Finally, the Committee raised the level of progress that had been made on economic crime legislation. In 2019, the regulatory scope of thee Money Laundering and Terrorist Financing (Amendment) Regulations 2019 was widened to include firms offering cryptoasset services, and we are currently legislating for the Economic Crime (Anti-Money Laundering) Levy as part of the Finance Bill, which will raise around £100m a year to tackle money laundering and fund economic crime initiatives from 2023-24 onwards.

Additionally, the Financial Services Act 2021 introduced tactical legislative changes to align the treatment of electronic money institutions and payment institutions with that of traditional financial institutions e.g. banks, including in relation to the submission of Defence Against Money Laundering (DAML) SARs. This has reduced the number of DAML SARs submitted in certain circumstances that are of limited use to law enforcement. In the first half of financial year FY21/22, this change is estimated to have prevented the submission of c.10,000 low utility DAML SARs when compared to the same period last year. We have identified further legislative changes and additional exemptions to the DAML system to continue to improve efficiency and effectiveness to target high priority areas. The Government agrees that this legislation is important and will continue to keep the Committee updated on developments.

Best wishes,

JOHN GLEN & DAMIAN HINDS

6 January 2022