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National Risk Assessment of Money Laundering and Terrorist Financing – 17/21
1st December 2017
National Risk Assessment of Money Laundering and Terrorist Financing 2017
As stated in Regulation 16 of the Money Laundering Regulations 2017 the Treasury and Home Office must conduct a risk assessment in order to identify, assess, understand and mitigate the risks of money laundering and terrorist financing affecting the United Kingdom.
This assessment will provide a critical component of the evidence base for the response to money laundering and terrorist financing over the coming years. By responding to these risks through cooperation with the government we can ensure that the UK is a hostile environment for illicit finance and an open, attractive and welcoming destination for legitimate business.
The 2017 NRA expands on the work undertaken in 2015 to identify where risks have changed and where the understanding is developing. Government, law enforcement and intelligence agencies, supervisors and the private sector were all consulted in order to obtain information to develop the risk assessment. Public reports such as the EU supranational risk assessment of money laundering and terrorist financing were also examined.
Key findings of 2017 NRA
High-end money laundering and cash-based money laundering remain the greatest areas of money laundering risk to the UK. Money laundering through capital markets and increasing exploitation of technology are on the rise.
More sophisticated methods of money laundering are increasingly being used, making it more difficult to detect money laundering. Cash, alongside cash intensive sectors is the favoured method for terrorists to move funds through and out the UK, this is mainly done through cash, retail banking or money service businesses.
The UK Financial Services sector is a major global hub that attracts investment across the world. Its size and openness attracts criminals as they see an ideal opportunity for them to hide the proceeds of crime among the huge volumes of legitimate business. Gaps have been identified within law enforcement in terms of high-end, complex money laundering and information sharing between law enforcement and the banking sector which has been poor. Due to steps taken, the UK has an increased understanding of the varying risk profiles across different parts of the sector.
When looking specifically at retail banking terrorist financing risk is assessed to be high in comparison to other financial and non-financial sectors. Wholesale banking and capital markets are assessed to be exposed to high risks of money laundering due to the known risks around correspondent banking, as well as the risks of large sums being laundered through capital markets and the relative lack of controls. It is possible that international terrorist funds could or have transited through UK capital markets, however no specific incidents of this taking place have been identified and the terrorist financing risk in this area is assessed to be low.
Upon observation wealth management and private banking are assessed to be exposed to high money laundering risks due to the sector’s exposure to the proceeds of political corruption, tax evasion and persisting regulatory concerns.
Money mules and mule accounts are identified to be one of the main means by which cash proceeds are funnelled into society. The NCA has identified criminals advertising fake jobs in newspapers and on the internet often targeting students or recent migrants. Mules will accept money into their bank account before following further instructions on what to do.
HMRC has seen the use of alternative banking platforms (ABP), which are a form of shadow banking, to conceal money movements in trading fraud. ABPs are seen to pose a significant risk due to the scale of transactions going through them since transactions within an ABP are outside of the regulated banking sector and therefore difficult for law enforcement agencies and financial institutions to identify.
FATF has also identified trade-based money laundering as being an avenue through which money laundering occurs.
Wealth management and private banking firms are judged to be particularly exposed to the risk of being used as an avenue to launder the proceeds of overseas corruption. Politically exposed persons will be subject to Enhanced Due Diligence as well as their family members and close associates. Risks will need to be examined prominently especially in cases where the customer has held a public function in a high-risk third country.
The Life Insurance sector has also been identified as a sector at risk of money laundering and terrorist financing. The FCA assesses there to be risks given the global nature of the London market, but that firms have suitable controls to deal with these risks.
Law Enforcement response
The response law enforcement has had in response to the risks in the financial services sector has been characterised by:
- Development of intelligence on and investigation of the criminal entities involved
- Working with the financial sector to enable Information sharing to improve threat assessments and the development of intelligence to target and disrupt criminal activity
- Engagement with international partners to deliver upstream interventions aimed at tackling predicate offending
- Taking innovative approaches to the restraint and recovery of criminal assets
- Working with other organisations including supervisors to deliver a range of non-judicial disruptions
- Working with the regulated sector to improve its assessment of the threat in terms of the money laundering typologies involved
Financial technology applies emerging technological solutions to financial services. The rapidly developing nature of products and services in this sector puts an imperative on the ability for government, supervisors, firms and law enforcement to respond rapidly to both the opportunities and risks which they pose.
Risks around E-money are assessed to be medium for money laundering and low for terrorist financing. MLRs reduce the threshold above which CDD must be applied, mitigating the risks of abuse. In 2015, the risks associated with digital currencies were assessed to be low for money laundering and terrorist financing, however the link between digital currencies and cyber-enabled crime means that this risk is likely to increase.
The UK has the highest concentration of e-money issuers in the EU, with approximately 125 e-money firms authorised on the FCA Register. If we look at ‘open loop’ prepaid cards we can determine that they have the potential of becoming high risk due to their anonymity and the ease of transportation and vulnerabilities in law enforcement. Money launderers and terrorists may however not be too keen on this avenue due to the maximum amount which can be stored and the frequency at which such transactions may be made.
The main vulnerabilities identified in relation to digital currencies was the anonymity and cross-border exposure, as well as the lack of interaction with the regulated sector. The NCA assesses that the risk of digital currency being used for money laundering to be relatively low although they are convinced that digital currency is being used to launder low amounts of money at high volume.
From a cybercrime perspective the threat posed by digital currencies is higher due to their ability to directly enable cyber-dependent crime. This can be done either through direct facilitation of victim payments to cyber criminals who act through malware attacks where payment is predominantly requested in Bitcoin. Digital currency also enables criminals to fund each other in order to purchase illicit tools or services sold online. The ease with which such payments can be made lowers the barrier to entry for low-sophistication criminals.
Such risks are expected to grow as digital currencies become an increasingly viable and popular payment method. An increasing number of businesses are starting to accept payment through digital currency despite the fact that there is an increasing risk of criminals using the currencies to launder funds.
Supervision, compliance and law enforcement response
Supervision of e-money is challenging due to the cross-border business models and the rapid development of the sector. Law enforcement agencies also face challenges in identifying the ownership and value of prepaid cards at the point of detection. The anonymity has been limited by the electronic record of card activity since all activity is traced to the point of use.
The UK government has announced that at this point they would look to bring digital currencies within the scope of the AML/CTF regime. In achieving this the UK are intent on bringing regulation of digital currencies as part of 5MLD, in line with the risk-based approach that FATF standards require. The Home Office leads a multi-agency group focused on digital currencies, seeking to address these knowledge and skills gaps across law enforcement.
Observation and study has found that if applied correctly, FinTech offers opportunities for mitigating financial crime. Currently firms are able to test innovative products, services, models and delivery mechanisms in a live regulatory environment, this enables innovators to test their products whilst also maintaining the same AML/CTF regulations.
Trusts and corporate structures
Companies and trusts are known globally to be misused for money laundering, the UK in particular is exposed to threats of money laundering since persons from all over the world flock to London in order to invest and do business here.
A number of reforms have been introduced since 2015 to increase the transparency of UK incorporated legal persons and arrangements. Such reforms included but were not limited to, the introduction of the publicly accessible PSC register, abolition of bearer shares, introduction of a register of trusts with tax consequences, and the introduction of the Unexplained Wealth Orders.
Criminals tend to create complex and opaque structures comprising multiple legal entities and arrangements across multiple jurisdictions which can be used to obscure who really owns and controls assets. Subsequently, companies, partnerships and trusts can be set up and dissolved with relative ease at low cost and be used to set up large sums of money with less risk of detection from law enforcement or the regulated sector. The majority of companies and partnerships are used for legitimate purposes however the threat of criminals seeking to launder money through UK and overseas corporate structures is assessed to be high.
Indicators for trusts being abused could be a trust being created by a settlor for the benefit of an unconnected party, if a trust had multiple settlors or if it formed part of a complex ownership chain, particularly if that chain crossed national borders.
Often trustees are trained licensed and regulated professionals despite there being no obligation on trustees to have this status. In relation to corporate structures what is often done by criminals is they set up sequences of limited companies for illicit purposes, then wind them down before being required to submit accounts.
The availability of useful intelligence for law enforcement when investigating partnerships is undermined by the fact that there is no general requirement to submit annual accounts to Companies House. As a result, criminals are unlikely to set up Public Limited Companies to launder funds. Scottish Limited Partnerships are attractive to criminals due to the fact that under Scottish law the partnership is a distinct legal personality, separate from the partners and is subject to fewer reporting and transparency obligations than most corporate forms.
In order to tackle abuse of overseas companies the Joint Financial Analysis Centre was established in order to analyse all information available from a data leak which occurred named ‘The Panama Papers`. Overseas financial centres can allow the creation of complex and layered ownership structures quickly, at low cost, and with limited transparency requirements which would hinder law enforcement agencies. Some countries do not require officers and directors to be disclosed with no requirement to appoint a locally resident director.
Supervision, compliance and law enforcement response
Most companies are registered through a third party, the remainder of which are registered directly with Companies House which is a registrar and not a regulator. It ensures fulfilment of disclosure requirements in exchange for limited liability. Companies will need to update if certain changes occur and will also need to provide annual sets of accounts and annual confirmation statement for basic information. Non-compliance can carry a sentence of up to two years in prison. Companies House collaborates with law enforcement agencies in order to help identify suspicious activity, file SARs and impose civil penalties or prosecute when compliance is not achieved.
Annex A – Methodology
The methodology used for the 2017 NRA were the three key stages identified in the FATF guidance. They were identification, assessment and evaluation of evidence within the context of the Management of Risk in Law Enforcement model.
Evidence would be collected and reviewed after which additional evidence would be gathered to fill gaps identified. All supervisor bodies were required to produce evidence and roundtable meetings were held to follow them up, enabling a wide range of information to be gathered.
The information gathered would be analysed by stakeholders in order to establish any risks which could present themselves, assess the likelihood of them materialising and to understand their impact. Evidence gathered was considered against the following risk factors.
Considered risk factors
- Ability to use the product or service to mask the source or ownership of asset
- Ability to use the product or service to mask the destination of funds
- Level of complexity of the product or service
- Level of exposure of the product or service to high risk persons or jurisdictions
- Speed with which transactions relating to the product or service can be completed
- Typical volume and frequency of transactions relating to the product or service
- Accessibility of the product or service
- Criminal or terrorist intent to exploit the product or service
- Capacity and capability of law enforcement agencies to mitigate the money laundering or Terrorist financing risks around the product or service
- Capacity and capability of supervisors or regulators to mitigate the money laundering or terrorist financing risks around the product or service
- Capacity and capability of firms to mitigate the money laundering or terrorist financing risks around the product or service
The final stage of the assessment was the evaluation of the relative exposure of each sector to risk using the identified and assessed evidence. Areas were ranked by relevant experts from government and law enforcement against the risk factors outlined above using an adapted Management of Risk in Law Enforcement model to establish money laundering and terrorist financing risk rankings for each area.
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© CPA Audit LLP 2019.