UK money laundering landscape needs less talk and more action

At the time, the government announced the act would provide the legislative power needed for the UK government to respond to the Russian invasion of Ukraine. Specifically, it ensured Russian oligarchs with financial links to the UK could be sanctioned. 

While this stands true, the reality is that the legislation was not initiated in response to the invasion. Rather, the origins of the act can be traced back to December 2019 when the Treasury Committee flagged serious concerns over the state’s ineffectiveness in tackling economic crimes. 

The result was the drafting of an economic crime bill to counter fraud and money laundering in the UK. Yet in January 2022 progress stalled. There were claims the bill would be delayed until the next legislative session, resulting in the high-profile resignation of government minister Lord Theodore Agnew and general criticism of the state’s inability to combat financial crime. 

Russia’s invasion of Ukraine completely changed this dynamic, compelling the government to quicken the bill’s development and place economic crime at the top of the political agenda. What had initially seemed like an impossible legislative outcome at the beginning of the year soon became a reality with the economic crime bill fast-tracked through parliament. 

It is questionable whether the act would have been passed if the Russia-Ukraine conflict had not occurred.

Since receiving Royal Assent, the act has introduced a new register of overseas entities, requiring overseas entities owning property in the UK to register the identity of the beneficial owners at Companies House. It has also changed the regime on unexplained wealth orders, and amendments to UK legislation governing the imposition of sanctions. 

The act is an important step in the UK’s long-term objective of fighting illicit financial activities in the country. However, the speed in which it was legislated has meant there are areas of financial crime that have been overlooked.

On top of this, the imposition of sanctions on Russian oligarchs revealed the extent in which questionable individuals have been regularly using the country’s open economy to facilitate illicit activities. 

It is questionable whether the act would have been passed if the Russia-Ukraine conflict had not occurred. Regardless, the government has now taken the front foot.

As part of the Queen’s Speech in May 2022, a second economic crime bill was announced for the 2022-23 parliamentary session, with the aim of driving dirty money out of the UK and strengthening the country’s reputation as a legitimate and open location for businesses to thrive. 

What do we know about the economic crime bill 2.0? 

Specific details of the economic crime bill 2.0 have not yet been released. However, the government has given some indication of the issues it seeks to address, covering the gaps left by the Economic Crime Act. A core focus is on reforms to Companies House. 

From what we know, the bill will broaden the Registrar of Companies’ powers, making sure it has the power to oversee company creation and the ability to check for more information submitted on the Company Register, be it at the time of registration or retrospectively.

At the moment, the process of registering a company has been criticised for the lack of checks, facilitating a lax environment for criminals to set up companies in the UK and move illicit funds.  

The challenge is ensuring that policies are effectively enforced, with those in breach held accountable.

Other considerations include the examination of limited partnerships and the loopholes that currently allow criminals to use this as a money laundering mechanism.

The bill is also expected to introduce a gateway that will allow businesses in the financial services sector to share information with one another to ultimately improve their detection and prevention of economic crime. 

More details will be revealed over the coming months, yet there is the risk of the bill being sidetracked.

The resignation of Boris Johnson as prime minister and consequent leadership contest brings a degree of political uncertainty. And with rising inflation, a cost of living crisis and fears of an impending recession, there is the additional fear of economic security and financial crime slipping lower down the list of priorities, at least in the immediate term. 

A complete cultural shift 

We cannot deny the importance of having legislation in place to counter financial crime in the UK. Nevertheless, as with all pressing national issues, the challenge is ensuring that policies are effectively enforced, with those in breach held accountable.

The burden should not lie solely on state regulators, rather a collaborative solution is needed that brings together the public and private sectors. Unfortunately, both sectors have significant obstacles to overcome. 

Banks are regularly making the headlines for the wrong reasons. This came to a head in the UK recently, with Credit Suisse placed on the Financial Conduct Authority’s watchlist as a result of the bank’s involvement in risky transactions that are not internally challenged.

Data is key to identifying and reducing illicit activity, and financial institutions need to start better integrating technology.

If any strategy to fight financial crime is to be successful, making sure banks are monitoring and flagging high-risk transactions is essential. 

This is a systemic challenge facing not just the UK, but the global financial system. A survey of risk and compliance professionals by BAE Systems revealed that at least half of all money laundering activities go undetected.

The same report also showed that financial services compliance professionals are struggling with reduced budgets to actively address money laundering activities, which are becoming more sophisticated.  

While culture is part of the reason for these findings, a bigger factor has to do with misallocated investment, with banks using outdated monitoring processes. The volume of transactions they facilitate is growing, yet the vast majority rely on hiring more people using manual techniques which cannot handle the amount of available data.

There are two ways to address this. 

The first is linked to technology. Simply put, data is key to identifying and reducing illicit activity, and financial institutions need to start better integrating technology to ensure they can readily monitor activities and flag any risky transactions that require further review.

Banks will need to have sophisticated detection processes in place. Government bodies also have a role to play by monitoring the detection processes and making sure they meet a set standard. 

Having all financial institutions adhere to a standardised benchmarking of financial crime risk ensures transparency.

In fact, a whole new approach is required, applying a comprehensive know-your-data-approach rather than the customary know-your-customer, making sure all banks are fully aware of the data that they manage. 

The second is to set a global benchmark for managing financial crime risk. While addressing individual cases is valid, having all financial institutions adhere to a standardised benchmarking of financial crime risk ensures transparency and will help lead to effective preventative measures.

Imagine the impact on banks’ behaviour if they had to display their financial crime risk ratings, ensuring they are made accountable to the general public and regulatory bodies. 

Less talk, more action 

David Lewis, former executive secretary of the Financial Action Task Force and board member of Elucidate, makes the pertinent point that introducing more standards and regulations will not counter the exploitation of the banks by criminals. Essentially, the time for talking has long since passed – the time for action is now. 

As we saw with the resignation of Agnew, frustration over the lack of action brings into question whether the current regulatory bodies and government policies are simply not designed to address the evolving threat posed by financial crime. 

Without adequate enforcement the economic crime bill 2.0 risks becoming another piece of legislation bold on rhetoric but ultimately light on action.

Max Heywood is head of public policy at Elucidate