The IMS Group responds to the Government's review of the Money Laundering Regulations 2007

HM Treasury

To whom it may concern,

The IMS Group provides regulatory consulting services to more than 600 hundred firms in the asset management and securities industry including hedge fund managers, private equity and venture capital firms, corporate finance firms, wealth managers, family offices, brokers and investment banks.

We would like to take the opportunity to comment on the Government’s review of the Money Laundering Regulations 2007 (“the Regulations”) and also to feedback on the matters of most relevance to our client base.

Application of the Regulations

The review highlighted that the Regulations, EU Directive and wider global standards are broadly focussed on all parties to a transaction (including advisors, agents and intermediaries) and are not just concerned with cash flows. We are supportive of this approach and also any action taken to re-enforce this message.

We firmly agree with the concept that all parties involved in a financial transaction or arrangement share the burden of ensuring the bona fides of the service user(s) and the funds in question. However, we note that this complicates an enforcement mechanism which may not be able to identify which party was at fault for the purposes of punishment where a shared responsibility has failed to prevent a money laundering event.  The decision that needs to be taken is what style of approach has the best chance of achieving the desired intention of the law’s policy. It is our view that legal and regulatory requirements that empower and encourage firms to achieve a prescribed objective rather than making them fearful of not doing so are more likely to succeed. Accordingly, we support the proposed decriminalisation within the Regulations as discussed below.

De-criminalisation of procedural failings

Currently there are criminal sanctions in place for those who breach certain of the Regulations, however these offences have not been widely prosecuted.  It is worth noting however that these offences are not to be confused with those under the Proceeds of Crime Act 2002 and the Terrorism Act 2000, which are not under consideration in the course of this review which is indicative of the broader components of the national and international anti-money laundering regime not subject to this consultation process.

The review highlights that anxiety about these offences may cause businesses to be unreasonably risk averse in their application of the regulations, which in turn causes operational staff to be disproportionately risk averse in their approach to customers. We agree that the existence of inappropriate criminal offences will cause unintended consequences ie. that the fear of committing an offence unwittingly may obscure the objective of the law which is in fact to require firms to seek to identify, mitigate and help eliminate money laundering.

Enforcement cases for failure to implement appropriate and effective policies and procedures have relied on “higher-level” FSA rules, namely FSA Principle for Business 3 (the obligation to implement effective Management Systems and Controls), and SYSC 6  (countering the use of the firm in facilitating financial crime). This in effect means that the FSA does not need to rely on the criminal offences set out in the Regulations; it has effective civil powers that have already been deployed to good effect to set and enforce standards within the financial services industry.

The FSA’s “principle-based” approach to this area (and other areas) enables it to publicly outline its expectations without even having to demonstrate that money laundering has taken place. We support such an approach to achieving objectives, as it is more flexible, credible and ultimately more likely to succeed than an approach which sets expectations which are punishable by criminal sanction. That said, a potential criminal sanction can at times be effective in communicating the importance of the underlying obligation. However, at other times, it can be indicative of a dated, needlessly draconian approach to implementing public policy.

Accordingly, we are in favour of the Governments proposal to repeal certain of the criminal offences set out in the Money Laundering Regulations.

Reliance, other regulated firms and firms in third country equivalents

Much has been made in the review of the perceived failure of firms to rely on checks performed by firms that are also subject to the Regulations or firms that are regulated in equivalent jurisdictions.

The review stresses that these provisions are there to simplify the obligations on the customer and firms that are party to a transaction. This should be reconciled with the approach of the FSA who, in addition, advocate that firms employ sample testing on other firms that they place reliance upon. We would encourage HMT to engage with FSA to clarify this point given that it appears to us that an intended solution within the Regulations has been limited by the expectations of the FSA. Regulatory responsibility will always fall back to an individual firm, whether or not they have relied on another regulated firm. Therefore, it is in that firm’s interests to perform Customer Due Diligence themselves rather than rely on the assurance of another firm. We believe that a true risk-based approach should allow a firm to determine what risk is faced by reliance on another firm. Firms should assess the nature of the relationship they have with each other, and the scope of their relationship going forward. This will allow them to determine whether to request information from the client, rely on assurance from another firm, engage in sample testing where volumes are sufficient to warrant this approach, or in certain cases, to perform due diligence on another firm’s policies and procedures.

Beneficial Ownership

Firms have cited considerable difficulty and time spent identifying beneficial owners as opposed to legal owners. They have requested more guidance in this respect. The Government has responded by highlighting the importance of establishing the identity of beneficial owners as well as legal owners and promising to work with regulators to clarify the extent to which firms are required to establish beneficial ownership.

We note that it remains an area of concern and uncertainty and urge HMT to work closely with the FSA to produce guidance that is practical and proportionate to the objectives of the Regulations in the context of the information that is independently verifiable.

Written Policies and Procedures

We note that there is no requirement to produce written policies and procedures, and that HMT will not be recommending that this be changed at this stage. However, we believe that it is difficult to demonstrate the existence of any policies and procedures without them being documented, formally reviewed and tested. In practice, however, these need to be documented to demonstrate ongoing compliance with these Regulations and the FSA’s rules.  From our prospective, we are neutral on the status quo and even any change to it.

Training of Staff

Whilst this does not form part of the direct subject matter of the Review, we feel it is worthy of note here. Many firms engage with service providers for the provision of anti-money laundering training. Much of this training is delivered to firms via computer based training, some with testing and it is our opinion that this training should be reviewed to ascertain whether it provides the correct information to staff to allow staff to adequately identify money laundering risk.

It is our observation that periodic Anti-Money Laundering training, while certainly vital in certain areas of many firms, can on occasions represent an example of tick-box (and thus ineffective) compliance at its worst.  Any amendments to the Regulations which empower financial services firms to manage their money laundering risk with some discretion rather than encourage them to take a fearful (that is a fear of punishment rather than a fear of actual risk), tick box approach to the subject of money laundering, would be welcomed.

We would be happy to discuss further any matters that arise from the issues we have raised, or points on which you would like clarification.

Yours faithfully

Daniel Sharpe, Compliance Consultant, daniel.sharpe@theimsgroup.co.uk

Peter Moore, Group Director, peter.moore@theimsgroup.co.uk

To view the above letter in pdf format, please click here