HM Treasury (HMT) have published the results of their consultation on the UK’s implementation of European Union (EU) Regulations 44/2009 and 45/2009, requiring Currency Exchange Offices and Money Transmitters to have procedures in place selectively to check euro notes and coins using an approved method.

Following the consultation, the Government has decided to create a new criminal offence for failure to comply with the checking requirements of the EU regulations in relation to counterfeit euros.

You can read the full report by following the link below.

UK enforcement measures for EU Regulations 44/2009 and 45/2009 on counterfeit euros on the HMT website (Opens new window)

The Court of Appeal in London ruled on 13 October that HSBC Private Bank did not have to disclose the identity of employees who had made internal reports which had led to suspicious activity reports (“SARs”) being filed with the authorities unless there was a firm suggestion on bad faith on their part.

The judgment is the result of satellite litigation arising from the more famous 2010 case of Shah v HSBC, in which the Court of Appeal ruled that parties which had suffered loss as a result of SARs being filed were entitled to demand proof from the regulated institution responsible that the suspicion on which the SAR was founded existed.

On the particular facts of the original case, the High Court ordered HSBC to identify the employees by function, but not by name. The Shahs appealed the court’s refusal to order the disclosure of the names of the employees, and HSBC cross- appealed against the court’s finding that its obligation to make standard disclosure required their names to be revealed in the first place (with the names only being protected by PII, and not as of right).

The Judgement of the Court of Appeal
Within HSBC there were three stages of AML reporting:
1. The relationship manager with a particular client would report any AML suspicion to the compliance department;
2. The compliance department would report the matter internally to the MLRO;
3. The MLRO would then, if appropriate, file an SAR with SOCA.

HSBC had disclosed a series of memos, internal reports, and similar documents. With the exception of the MLRO, the identity of all employees concerned had been redacted; they were identified only by the department (client relationship, compliance or MLRO) that they worked for. The documents did however reveal the information based on which the MLRO formed his suspicion.

The Test for Disclosure

The court found that the redacted identities of the employees concerned was not material on which HSBC relied to prove its case. As a result, the relevant question was: is the material either material which would adversely affect HSBC’s case or material which would support the Shahs’ case?
In answering the question it was important to remember that the issue remaining in the wider case of Shah v HSBC after the previous decision of the Court of Appeal was a narrow one: did HSBC have a genuine suspicion at the time when the SARs were filed? Accordingly, the Shahs did not put forward a positive “case”; they simply sought to test the bank’s case that it did have such a suspicion. For that reason, the court ruled that the only circumstance in which the employee identities would be disclosable was if they adversely affected HSBC’s case.
The Shahs had stated that two employees of HSBC (“Ms S” and “Mr J”) might have had the motivation to make an internal AML report in bad faith. One had asked for a loan from Mr Shah and been refused; the other had received an abusive email from him after a transaction had been delayed. The Shahs submitted to the court that if any of the anonymous employees concerned in making an internal report turned out to be Ms S or Mr J, they might be able to allege bad faith.

Refusing disclosure, Lord Justice Lewison commented:
The more I listened to the explanation of why the claimants wanted the names, the more convinced I became that, to use the familiar cliché, this was a fishing expedition… [the Shahs] did not say that even if Ms S’s name was revealed as one of the sources [the Shahs] would be able to assert bad faith; merely that they might be able to do so. Even that possibility was only tentatively advanced. It is all speculation and surmise.

The court concluded that, absent a firm suggestion of bad faith by the Shahs, HSBC was entitled to withhold the identity of the staff concerned as being irrelevant to the matter under dispute. For that reason, the bank did not have to rely on the doctrine of public interest immunity.
Conclusion

This important judgment provides reassurance to employees of firms in the regulated sector of England and Wales that their identities will be protected if they make internal AML reports, unless there is a firm suggestion that in doing so they acted in bad faith. It also makes clear that there is no absolute requirement to disclose the identity of the MLRO who makes an external SAR, although as a regulated firm is now required to show that it had suspicion if its reporting is challenged, it may be that it will be necessary for the MLRO (if no one else) to come to court and explain why he made the report that he did.

As a result the Treasury has announced that stocktakers who do not carry out bookkeeping or other accountancy services will be exempt from the Money Laundering Regulations (MLR) 2007 from Saturday 1 October 2011.

This means that they will no longer need to register with HMRC.

This decision also supports the Government’s policy of reducing regulatory burdens on businesses.

HMRC continue to encourage stocktakers to be diligent and report suspicious activity to the Serious Organised Crime Agency (SOCA). More information can be found at www.soca.gov.uk.

Stocktakers who offer bookkeeping or other accountancy services will stay on HMRC’s register.

From Monday 3 October 2011 HMRC will be writing to the stocktaking businesses already registered with them to give the opportunity to de-register for MLR.

If you do not receive a letter from HMRC but wish to deregister, you should write to the registration team to let them know. Your letter should include details of your registration number and the reason you wish to deregister.

The address for applications to deregister is:

MLR Registration Team
7th Floor Central
Alexander House
Southend on Sea
Essex
SS99 1AG

It separates itself from the obvious areas from which FATF will review their 40 recommendations such as PEP’s and expansion of the regime. These changes will result in the 4th Directive; however with a proposed implementation date of 1 April 2012 we could be in for two sets of new regulations in a short space of time.

After going through the document there is lots of discussions. However the main ones are

• Removal of criminal sanctions
• Increase supervisor powers to mitigate the risk of the removal of the above
• Reliance to be extended to all professional bodies in Schedule 3
• De-minimus exclusion to small businesses of euro 15,000 or below annual turnover
• UK estate agents selling offshore property to be bought into the Regulations, though not letting agents
• Powers for all supervisors to impose penalties when not allowed to enter business premises
• Powers to impose penalties for unreasonable behaviour to provide information
• Supervisor powers to enforce payment of fees and powers of de-registration
• More freedom for the exchange of information for supervisors.

There are a lot of general discussions surrounding policies and procedures and general guidance coupled with the risk based approach and the various sectors. Generally it is perceived that it is not so much as “on the shelf” guidance that does any good but those that promote active participation, the ‘toolkits’, that works. In 7.11 on this subject, I think I can take some pride here, since I believe they may be talking about the one I wrote for one of the supervisors and which is possibly going to adopted by two more.

In reality the document is a reinforcement of the risk based approach, almost a plea to work in that less rigid way, the end of the tick box approach whilst working without fear of prosecution if we should not always get it right. An approach that can only be undertaken if law enforcement, our supervisors and the regulated businesses themselves work towards the same outcome together. If achieved, it should increase compliance at a reduced cost.

Firstly, the FATF 4th round of evaluation, which proposes changes to the way we approach PEP’s and beneficial owners, reinforcing the risk based approach and importantly, including tax evasion, of both direct and indirect taxation as predicate reportable offences of the money laundering regime. These changes will be formally approved at the February 2012 Plenary. It is expected the EEC will have the 4th European directive passed by the end of 2012 to reflect the changes, prompting the UK to adopt the 2013 or 2014 Money Laundering Regulations. 

Further to these changes HM Treasury will shortly issue there proposals for changes to the UK’s own regime following their ‘call for evidence’ and other reviews of the regime. These proposals will be made available for review and consultation by all interested parties and on finalisation will be included with the implementation of the 4th directive. 

The proposed changes will include amendments such as including into the regime businesses that offer high value services for cash and a tightening up of how to demonstrate compliance to a supervisor through formal policies and procedures, amongst other adjustments to the regime.

Also included will be the two proposals made by the Chancellor in his budget speech which caused a bit of a debate. Firstly, it will be the Governments intent to remove criminality from the Regulations aimed at the private sector. This approach was confirmed by the Attorney General and further expanded to aspects of PoCA, namely sections 330 to 332, for the failure to report SAR’s it would not generally be in the public’s interest to take criminal action against the private sector, but instead make a referral to the relevant supervisor for them to deal with or commence civil proceedings for the breach. S336 concerning consent, is also an area on concern which will see an overhaul making life easier for the reporter.  

Lastly, the one that got everybody excited, is there going to be an exemption to the Regime for smaller businesses? Yes, they want to propose a £15,000 annual turnover exemption from the requirements of the regulations.  This will help many in the accountancy sector who are caught by the regime, such as part time bookkeepers, semi-retired practitioners and those staff members who do a bit extra on weekends and evenings in their own name.  This will also allow new business to get started, before firstly having to the implement ML Regulations.

I would suggest that the accountancy sector more than any other would benefit from this piece of deregulation.

Since November 2008 the UK Borders Agency (UKBA) has issued an ID card to migrants from countries outside the European Economic Area (EEA). From 21 January 2011 this form of identity will no longer be valid. If you are carrying out customer due diligence on or after that date you should not accept an ID card issued by the UKBA as proof of identity under the Money Laundering Regulations.

Acceptable forms of documents, data or information will still include passports and photographic driving licences, as well as a range of other paper based evidence, as well as electonic verification reports

• To clarify the current designated category of smuggling by referring to: smuggling including in relation to customs and excise duties and taxes.
• To add a separate designated offence category: tax crimes – related to direct taxes and indirect taxes.

For the private sector, the key result of this change will not be the impact of this change on recommendation 1, which already states crimes punishable by over 6 months of imprisonment be included within the predicate offences, but rather to the obligation to support suspicious transactions under recommendation 13.  Thus transactions related to the laundering of the proceeds of tax crimes would have to be reported as suspicious activity.

In the UK, the accountancy sector has sometimes been reluctant to be included within the money laundering regime, in some ways understandable when comparing the requirements of recommendation 13 and the all powerful PoCA 2002 and the all crimes regime, sometimes seeming to ‘gold plate’ the EU 3rd  Directive. This can be seen from the differing approaches from some of the 16 supervisory bodies within the UK, some have more urgency than others.

After another year of advising and training accountants and tax advisors in the UK, probably almost 2,000 firms and individuals of all sizes and expertise in total, I am still surprised that most have no concept of the ‘risk based approach’ and that tax evasion is reportable under PoCA. With a lot I get, I do not deal with my clients funds, I have copied their passport, tick, and I have a copy of a utility bill, tick. I have complied in full.   

This concept of ‘transaction’ based compliance seems to have seeped down into the sector, people and firms wanting to believe that they are too small to have to report or indeed be seen or even comply. The concept of transactional limits has even been debated in the House of Lords and other Parliamentary review boards so is in any wonder then given the reluctance of the sector as a whole this is the case? This is backed up by the statistic that there are still around 25,000 firms and business in the accountancy sector who just have not registered for supervision.

However, from a point of clarification the main thrust of the FATF review is the mandatory risk based approach for all countries and regulated firms for risk assessment, risk management and mitigation and higher risk concepts. This is removal once and for all of the doubt of being too small for the Regulations, it is not size that matters rather it is the risk. Couple this with tax evasion becoming a predicate office of money laundering; I would hope finally the sector as whole embraces the UK compliance culture; apparently it is not as gold plated as people thought, just ahead of its time.

It does come as no surprise, therefore, that the Financial Services Authority (FSA) has recently censured and banned three directors from acting as senior managers for failing to meet their supervisory standards. The FSA investigation found that the directors had been relying too heavily on external consultants for advice on how to run their business.

It is equally unsurprising then that HM Revenue & Customs (HMRC) have also announced that they take the same view to the FSA in relation to businesses meeting their obligations under the Money Laundering Regulations.

HMRC also state that they have no objections to businesses getting advice from external consultants regarding their obligations under the Regulations, as long as the responsibility for complying with the Regulations remains on the business rather than any consultant.

What does come as a surprise is that some consultants, who should frankly understand the Regulations better, have recently offered their services to act as the Nominated Officer for a business. HMRC has no formally announced that it does not consider that a consultant outside the business can be appointed Nominated Officer for any of the businesses HMRC supervise under the Regulations.

A First-tier Tribunal (Tax Chamber) decision regarding registration of businesses under the Money Laundering regulations 2003 has now been published.

The Appellant had claimed that it was not liable to register with HMRC under the Money Laundering Regulations 2003 because it was not carrying out any business as a money transmitter in the UK and any money transfer services in the UK were operated by its UK agents. The Tribunal, however, has dismissed this appeal and ruled that the appellant did carry on a money service business in the UK and carried that business on at each branch of its agents or sub-agents.

The appellant is therefore required to register with HMRC and pay a fee to HMRC for all premises where they had agents carrying on business on their behalf.

This confirms the present position concerning registration.

Carrying on business having failed to do so could result in the imposition of a fine by the OFT, a prison sentence, or both.

Money laundering controls help prevent legitimate businesses being used to launder money, which is where cash or assets obtained by criminal activities are exchanged for clean money or assets with no obvious link to their criminal origins.

John Parker, OFT Director of Anti Money Laundering, said:

‘The consequences for estate agents and consumer credit financial institutions of not registering under anti-money laundering regulations are severe. It is important that businesses register immediately to avoid breaking the law.

Visit the BTC website for compliance help and support for firms in the regulated sector