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Print articleDirty money
The UK prioritises money-laundering and terrorist finance as it assumes the presidency of the Financial Action Task Force (FATF)
 The UK aims to cut the regulatory burden |
The United Kingdom continues to play a leading role in setting international policy to counter money-laundering and restrict terrorist finance. It assumed the chairmanship of the Financial Action Task Force on Money Laundering (FATF) in July, for a term of 12 months. The FATF is comprised primarily of advanced industrial countries and Gulf States, and coordinates international antimoney laundering initiatives. The organisation has expanded to include 33 members including the United States, most EU member states, and Japan, as well as Argentina, Australia, Brazil, the Gulf Cooperation Council, New Zealand, the Russian Federation, and South Africa, with China in observer status, from its initial membership of 16, and has commenced its third round of mutual evaluation of national anti-money laundering (AML) measures. The FATF’s focus remains on encouraging national legislative and regulatory reforms, since the FATF itself lacks an investigative capacity. James Sassoon has been formally tagged to head the FATF during the UK presidency.
In regulating this area, the United Kingdom has favoured a risk-based approach, which increases monitoring and enforcement efforts in identified high-risk areas, while at the same time recommending reducing regulatory burdens in low-risk areas. During its 2005 EU presidency, the United Kingdom successfully devoted attention to pursuing AML objectives, sparking deliberations that resulted in the Third EU Money Laundering Directive, which incorporated for the first time risk-based principles into EU law. The United Kingdom set forth draft rules to implement the directive in January, and final regulations are due to be implemented by December into UK law (and the respective laws of the other EU member states). In addition to these EU initiatives, other countries have also extended their AML regimes with, most significantly, China late last year passing its first AML legislation, as part of a wider focus on reducing financial fraud.
Regulatory dilemma
A major conceptual problem haunts efforts to create an effective AML and counter-terrorist finance (CTF) regulatory regime. No test exists that could per se separate ordinary banking transactions from suspicious transactions. Any system to detect such problematic transactions by necessity requires higher levels of scrutiny of all banking transactions (and involves associated scrutiny by banking officers). It also imposes burdens and costs to the financial institutions (and regulators) charged with these responsibilities.
Banks, particularly within the United States, are finding it difficult to recruit and retain compliance officers with the appropriate set of skills to enforce complex AML/CTF regulations. In addition, there is some concern that compliance costs with various measures are forcing banks to reconsider their involvement in certain lines of business with, for example, some institutions evaluating whether to retain involvement in trade finance in light of the onerous compliance requirements imposed.
Compliance with other recent legislation, especially a US ban on internet gambling that is widely considered to be virtually impossible to enforce, has diverted resources from AML/CTF initiatives. House Financial Services Committee Chairman Barney Frank addressed these and other concerns in a bill introduced to overturn last year’s internet gambling ban, yet prospects for this legislation are at best mixed.
Despite these issues, US regulators are using existing legislative authority to pursue moneylaundering investigations, with the Securities and Exchange Commission (SEC) recently initiating its first action against a brokerage firm, Park Financial Group, for failure to report suspicious financial transactions as mandated by the USA Patriot Act.
UK initiatives
In February, the United Kingdom presented a new series of AML/CTF initiatives, which includes domestic and international elements. These initiatives recognise that financial institutions and regulators have finite resources to devote to such efforts.
The UK has successfully maintained that institutions should apply “know-thy-customer” regulations on a risk-adjusted basis, which allows for variable application of “enhanced” or “simplified” due diligence measures. The principal UK services regulator, the Financial Services Authority (FSA), retired a detailed AML/ CTF rule-book in 2006, thus taking a final step in formally moving from a rules-based, “tick-box” system of regulation to a risk-based approach.
 The UK aims to cut the regulatory burden |
Influence of UK approach
The United Kingdom’s risk-based approach to money-laundering will continue to carry great weight. The principles-based regulatory approach that London has consistently promoted with regard to financial regulation more broadly has gained greater popularity. Even the United States has acknowledged its utility in several areas despite its own past advocacy of a rules-based model. This overall shift on the part of the United States should diminish the possibility of clashes over underlying regulatory philosophy during the United Kingdom’s FATF presidency. In addition, the EU has already endorsed the risk-based approach by its adoption of the Third Money Laundering Directive.
Vulnerabilities
Yet while a risk-based system certainly enhances the flexibility available to regulators and financial services firms alike, its overall efficacy is vulnerable, at least in theory, to lack of vigilance on their behalf. Nonetheless, evidence suggests that UK regulators are increasingly asked to investigate money-laundering allegations. For example, the number of suspicious activities reports (SARS) filed in the United Kingdom increased by just under 10 per cent over the prior year, up to 215,000 allegations in the latest annual reporting period. After some initial transitional difficulties, the regulatory system has adjusted to the drastic increase in the number of such reports filed which, prior to 11 September 2001, averaged fewer than 15,000 annually.
The UK FATF approach
Although recognising that there is a split in the measures taken to combat money-laundering and terrorist finance between countries with more mature financial sectors, and those with less established financial sectors, the United Kingdom intends to attempt to pull more countries, more effectively, into the FATF framework. It will promote an outward-focused approach within the FATF, with measures to include:
- Enhanced multilateral surveillance of moneylaundering and terrorist financing threats wherever they may emerge, and to include both systemic and jurisdiction-specific concerns – in particular, the United Kingdom endorses taking counter measures instead of ignoring countries that flout international norms;
- Greater engagement with the private sector to ensure that FATF initiatives provide useful guidance to those institutions that conduct customer due diligence and report suspicious transactions (in addition, the United Kingdom seeks greater private sector input into development of FATF policy proposals);
- Focus on the membership of the FATF, with the intention of identifying priority countries for expansion and measures to encourage these countries to join;
- Enhanced support for developing countries, including guidance on the appropriate sequencing of AML/CTF reforms in the context of wider financial sector development and regulation;
- Promotion of the risk-based approach to AML/CTF regulation.
In addition, the G7, which originally established the FATF in 1989, has asked the FATF to examine financing for weapons of mass destruction.
The United Kingdom’s 12-month presidency of the FATF should provide impetus to the country’s overall risk-based approach to regulating money laundering and constraining terrorist finance. Further, the United Kingdom seeks to draw developing countries into the FATF framework. Probing the financing of weapons of mass destruction is also on the agenda.
Report by Oxford Analytica
www.oxan.com
© 2007 Oxford Analytica
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