Evidence submitted by The Law Society (ECR0041)

House of Commons Treasury Select Committee inquiry: Economic Crime

1. The Law Society of England and Wales is the independent professional body that works to support and represent over 170,000 members, promoting the highest professional standards and the rule of law.

2. This submission outlines the Law Society of England and Wales’ views on the UK’s Anti-Money Laundering (AML), Counter-Terrorist Finance (CTF) and sanctions regime. 

3. The Law Society is a named supervisor under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs). The Law Society does not perform functions or actions relating to monitoring, securing or enforcing compliance with the requirements of the MLRs by the persons for whom the Society is the supervisory authority. Those functions are delegated to the Solicitors Regulation Authority (SRA), which is operationally independent of the Society but not a separate legal entity.

4. The Society provides advice, training and guidance to solicitors to help them meet their AML compliance obligations.

Executive Summary

5. We believe the UK’s AML, CTF and sanctions regime is among the most comprehensive in the world.

6. Nevertheless, considering the ratio of resources invested into compliance versus criminal assets recovered, it is clear that there is scope for improvement[1].

7. The AML regime could be made more effective by:

• Improving the efficiency of the Suspicious Activity Reports (SARs) regime - minimising the submission of large volumes of low value SARs.

• Increasing the resources available to the National Crime Agency (NCA) - allowing the agency to upgrade its IT infrastructure to support better analysis of SARs which would support improved intelligence to the professional sectors, leading to better quality SARs.

8. Undoubtedly, as in every other profession, there may be a few solicitors who are deliberately involved in aiding criminals. However, the vast majority of solicitors invest great resources into avoiding unwitting involvement. As the Royal United Services Institute’s report ‘Known Unknowns’[2] said, it is important that the Government avoid the use of unhelpful language, in criticising the entire legal profession as ‘enablers’ of money laundering.

The scale of money laundering, terrorist financing and sanctions violations in the UK, and the means by which this activity is enabled’

9. The scale of money laundering in the UK is, by its nature, difficult to calculate. Our assessment of the scale relies on the most recent data supplied by Government agencies.

10. In a December 2017 factsheet[3], the Home Office suggested that the scale of money laundering affecting the UK was upwards of £90bn a year. The National Risk Assessment issued jointly by the Home Office and HM Treasury in 2017 did not provide new data, but cited the statistics given in the 2015 National Risk Assessment. These suggest that the “social and economic cost of the most serious and organised crimes total £24bn per year, with most of this related to drugs supply at £10.7bn and fraud at £8.9bn”.

11. Estimates of the volumes of illicit finance flowing affecting the UK thus vary, but it is clear that the scale is significant, and the UK must continue to strive to make itself unattractive to criminal finance.

12. The Law Society provides advice to solicitors on effective compliance with the UK’s AML, CTF and sanctions frameworks. We work to foster a professional culture that prides itself on vigilance towards suspicious activity.

13. The criminals targeting our members’ practices can be very well-resourced and able to set up ‘professional’ structures that on paper mimic legitimate sources of wealth and funds. These groups and individuals target all three ‘gatekeeping’ sectors – banks, solicitors and accountants – often as part of the same transaction.

14. To counter these criminals the legal sector needs access to up-to-date intelligence on the methods they use to undermine the UK economy. We would strongly encourage the Government to provide additional resources to the NCA. Additional funds would enable the NCA to effectively process, analyse and follow up on the 400,000 SARs received annually, and to supply the sector with the latest typologies.

The current legislative and regulatory landscape, including any weaknesses in the rules and their enforcement

15. The UK has one of the strongest and most comprehensive AML legislative and regulatory frameworks in the world. The Law Society fully supports the risk-based approach set out in the legislation, endorsed by the EU and the Financial Action Task Force (FATF).

16. Subject to the conclusions of the FATF report this winter, we believe that the UK fully complies with international best practice. In some areas, the UK’s framework already exceeds the requirements of Directives being developed at EU level[4].

17. To give one example, the UK is one of the few countries to have implemented an obligation on the legal sector to report suspicious activity directly to government agencies[5]. Many other countries remain concerned about the potential conflicts between solicitors’ obligation to report and their duty to maintain client confidentiality, and information subject to legal professional privilege.

18. In 2016, UK Finance estimated that banks spend £5bn annually on compliance with the UK’s AML and sanctions regimes[6].

19. We cannot provide aggregate data for the entire legal sector. But our 2016 survey of 125 firms of all sizes on Client Due Diligence (CDD) compliance costs found that:

• More than 30% of respondents said that their total annual salary cost of people employed in their firm undertaking CDD work exceeded £100,000 in the past year, with 22% of respondents spending more than £200,000 on salaries for CDD work in the same period.
• Nearly a quarter of respondents spend between £5,000 and £25,000 each year on maintaining their internal CDD systems.
• 61% of respondents employed the services of an external database company for the purposes of client screening in the past year with some firms having spent more than £200,000 on such a service during that period.
• 84% of firms believe their total CDD costs will rise as a result of the implementation of 4MLD.
• 29% of respondent firms which expressed a view expected their total CDD costs to rise by more than 10% as a result of the implementation of 4MLD in the UK.

20. According to the Home Office, these significant resources, and resources invested by the other regulated sectors led to the seizure of only £201 million in 2016/2017

21. Banks, legal professionals, accountants and other regulated sectors together submitted 634,113 SARs between October 2015 and March 2017[7], and the total volume of SARs submitted has increased nearly eight-fold since the 56,000 SARs submitted in 2002[8]. This suggests that the regulated sectors are taking their obligations to help seize illicit funds very seriously, but that capacity is lacking at UK Financial Intelligence Unit (UKFIU) to utilise the data provided by all sectors to its full potential.

22. This also suggests that there are effectiveness gaps in the regime, and effort is being expended in ways that could, with some changes, be more impactful. We are aware of several changes the Government is considering, to improve the effectiveness of the regime. Our proposals are set out below.

Changes to the SARs regime

23. We believe that the wide terms of sections 327 to 329 of the Proceeds of Crime Act 2002 (POCA), combined with the scope of the definition of criminal property result in firms being obliged to submit a large volume of disclosures of little or no intelligence value to UKFIU, for example where the transaction involves trivial amounts of money, where multiple parties are obliged to disclose the same information; where the offence is technical and may involve no dishonesty or where the full circumstances are already known to the law enforcement agencies.

24. Changes which could improve the efficiency of the SARs regime include:

1. Introducing a tiered reporting structure

25. Requiring disclosures to be graded according to the degree of suspicion surrounding the transaction under consideration would assist the UKFIU in assessing and processing those disclosures. This option could be achieved without legislative reform.

2. Expanding the scope of the reasonable excuse defence

26. The Legal Sector Affinity Group’s AML guidance, approved by HM Treasury in March 2018, states that an independent legal professional is likely to have a reasonable excuse for not making an authorised disclosure when:

• His/her knowledge or suspicion is based on privileged information and the crime/fraud exception does not apply;
• It is clear the relevant law enforcement authority is already aware of the suspected criminal conduct and the reporter does not have any additional information which might assist the authority;
• The only information the reporter would be providing is already within the public domain; or
• The suspected predicate offending occurred outside the UK, the suspected money laundering occurs outside the UK and there is otherwise no UK nexus to the suspected criminality.

27. Consideration should be given to incorporating this guidance into the legislation, for example by means of a non-exhaustive list of reasons that would constitute a reasonable excuse. This would provide greater reassurance to practitioners considering whether to make a disclosure or rely on a reasonable excuse and would ensure a consistent interpretation of ‘reasonable excuse’ across different sectors.

3. Amending the principal money laundering offences.

28. Sections 327 to 329 of POCA criminalise conduct by a person who ‘knows or suspects’ that the property involved is criminal property. One option for reform would be to add to those offences the mental element of intent. The relevant intention would be to evade the legal consequences of the predicate offence which generated the criminal property. This would ensure that persons who unwittingly come into possession of criminal property and act honestly do not commit a principal money laundering offence.

29. In addition to these recommendations, we continue to be strongly opposed to removing the consent regime without a comprehensive overhaul of the existing principal money laundering offences. Removing consent would result in over-criminalisation of day to day business activities as a result of the “all crimes” approach which treats minor, “technical” infractions the same way as “real” money laundering[9]. As the principal POCA offences carry a maximum penalty of 14 years of imprisonment, repealing consent would not be viable without substituting a defence regime of equivalent scope.

30. In the meantime we will continue to engage in the very welcome SARs reform programme which seeks to overhaul the ageing IT infrastructure at UKFIU, improve the user experience of SAR Online, and develop long-term plans for public-private information-sharing partnerships.

The effectiveness of the Treasury and its associated bodies in supporting and supervising the regimes

31. In our response to the Government’s 2016 consultation on the AML Supervisory Regime[10], we said that an adequately resourced HM Treasury would be able to use its existing powers to supervise the supervisors and revoke their supervisory status should supervision standards fall below acceptable levels.

32. Our strong preference was to avoid a multi-faceted regime, with parallel supervision of different professional body supervisors by the FCA, HMRC and now the Office for Professional Body AML Supervisors (OPBAS).

33. Adequate Government resourcing of the HM Treasury could have led to a more direct and engaged relationship between the 22 Professional Body Supervisors (PBS) named in the MLRs and itself. With the launch of OPBAS in January 2018, the provision of resources has shifted to the private sector PBS who will fund its creation and operation.

34. We believe that resources to boost the supervisory and enforcement powers of the various government agencies should instead have been derived from illicit funds seized under the POCA regime. This source of funds should be seriously considered whenever future calls for additional resources arise.

OPBAS

35. The establishment of OPBAS could lead to harmonisation across the twenty-two PBS, provided that OPBAS first seeks to understand the reasons for the different approaches to supervision and consults all PBS whose activities it seeks to harmonise. It may not be possible to create complete harmonisation. For example, where greater information-sharing across the legal, banking and accountancy sectors would be welcome, the use of FIN-NET and SIS information-sharing platforms may not suit all PBS for budgetary reasons or due to nature of the information provided to these platforms.

36. We hope to see OPBAS announce its strategy in due course, and elaborate on the methods it will use to harmonise standards and outline the parameters by which it will measure success.

NCA/UKFIU

37. The NCA needs sufficient funding to be able to distribute typologies based on SARs intelligence. Funds are needed to develop new IT software, better able to cope with the large volumes of SARs and to improve the user experience, ideally adjusted to the needs of the legal sector as well as the banks for which the software was originally designed.

38. We are aware that the NCA is seeking secondees from private sector organisations, an indication of its resource constraints.

39. The establishment of the new National Economic Crime Centre (NECC) could alleviate some of the pressure on UKFIU. We are interested in hearing more about NECC’s role and strategy in due course.

OFSI

40. We welcomed the establishment of OFSI in 2016. The financial sanctions guidance revised by OFSI earlier this year has assisted our members in complying with the UK and international sanctions regimes, it would be even more helpful were it to be accompanied by sector-specific guidance.

41. We have heard reports from members that the OFSI sanctions licensing process can take up to a year to complete, significantly affecting business. We believe OFSI should provide clearer timelines for issuing or refusing sanctions licensing, to help our members and their clients to comply with the regime.

The impact of the implementation of the current regimes on individuals, firms and the wider economy, including unintended consequences, such as the removal/refusal of financial services from/to individuals or firms

42. In announcing its 13th Programme of Law Reform, the Law Commission stated that:

‘The anti-money laundering regime disproportionately affects businesses and is not optimal in preventing, detecting and prosecuting money-laundering[11].’

43. Although some of these costs are incurred for good reason, others are less justifiable. The extension of the moratorium period from 31 to a maximum 186 days under the Criminal Finances Act 2017 in cases where consent is refused adds substantially to costs by delaying business transactions.

44. We would like to see, for example, a boost in the asset recovery rates achieved in response to private sector investment into AML. We will continue to work with law enforcement and Government agencies to improve the efficiency of the UK’s AML and sanctions regimes.

The role of financial institutions and/or professional bodies in these regimes

45. The Law Society provides practise advice, training and events, and guidance on compliance and best practice to solicitors to help them meet their AML obligations. The legal sector AML guidance approved by the Treasury earlier this year is based on the Law Society’s earlier AML Practice Note. The guidance is greatly valued by solicitors as it has been developed by the leading AML experts in the profession and contains practical solutions and recommendations for compliance.

46. The existence of the guidance may have contributed to the positive findings of this year’s thematic review conducted by the SRA. 96% of the 50 firms visited by the SRA since July 2017 had adequate AML policies, controls and procedures in place by March this year.

47. Although work needs to be done by some firms in writing their firm wide-risk assessments as soon as possible, delays were to be expected owing to the rapid transposition (one working day) of the Fourth Money Laundering Directive into UK law last year. The UK’s National Risk Assessment was only published in October 2017 and the SRA’s sector-wide risk assessment was published in March 2018: under the Regulations, both these documents should be taken into account in writing firm-wide risk assessments, so it is hardly surprising that most firms had not yet written their risk assessments by the time of the thematic review.

48. The Law Society is urging members to complete their risk assessments as soon as possible.

UK’s role in international efforts to tackle money laundering and terrorist financing, and implement sanctions

49. The Law Society is not able to provide evidence in response to this question but would like to reiterate the importance of maintaining alignment in regulatory standards and best practice with the EU and other countries following Brexit.

May 2018

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