FATF Criticizes ‘Deliberate’ Limitation of UK Financial Intelligence Unit

By Koos Couvée

Amid the mostly positive results outlined in its pending report on the United Kingdom, the Financial Action Task Force, or FATF, has also singled the country out for considerable criticism, especially for its “deliberate” choice to sideline its financial intelligence unit, UKFIU.

In an advanced copy of the 235-page mutual evaluation report obtained by ACAMS, FATF notes with approval that all U.K. law enforcement agencies employ “specialist” investigators who enjoy virtually unfettered access to UKFIU’s database of suspicious activity reports, or SARs.

But the scant role, resourcing and IT capacity afforded the unit, which sits within the National Crime Agency, or NCA, led FATF to rate the overall efficacy of U.K. financial intelligence-related efforts as “moderate”—the second lowest of four possible scores.

“The NCA has made a deliberate policy decision to limit the role of UKFIU in performing operational and strategic analysis,” FATF claims in the report. “UKFIU misses the opportunity to search for criminal activity that might otherwise be missed by [investigators who] mine the SARs database for issues linked to their own geographical or operational remits.”

Financial intelligence comprises one of three “outcomes” for which U.K. officials must address significant weaknesses.

Supervision of the legal and accounting industries for anti-money laundering purposes also drew a moderate rating for the United Kingdom, as did the general grasp of financial-crime risks among professionals in those sectors.

Whereas the FIUs of Germany, the Netherlands and other EU nations review all SARs before passing on only the most useful leads to investigators, UKFIU relies on a “distributed model of dissemination” and assigns only nine employees to analyze a growing volume of hundreds of thousands of SARs filed each year.

Almost all of the reports become available to British investigators within nine days of their filing, but the staffing shortages at UKFIU leave investigators analyzing the vast majority of reports themselves except in limited cases, such as high-priority counterterrorism operations.

In other words, UKFIU gives investigators quick and nearly unfettered access to financial intelligence, but in FATF’s view “does not play a sufficient role in supporting the operational needs of agencies through its analysis and dissemination function.”

As for the financial services industry, compliance officers interviewed by FATF showed “little awareness” of UKFIU guidance and claimed they received no feedback on the SARs they file—a knowledge gap FATF also attributes to the unit’s dearth of resources, including funding and staff.

U.K. officials pledged to raise UKFIU’s staff to 200 following FATF’s previous evaluation in 2007, but the unit currently counts the equivalent of just 80 full-time employees—17 fewer than it did 11 years ago.

Nor could FATF determine whether the financial intelligence unit has authority to seek all the additional information needed from banks, money services businesses and law firms to conduct analysis, such as transactional data and details of other accounts linked to suspicious activity.

Those shortcomings, as well as concerns that the unit lacks autonomy from the NCA “in defining its role or its priorities,” helped inform one of two “partially compliant” grades FATF plans to assign the United Kingdom after evaluating the country’s compliance with 40 technical recommendations.

U.K. officials will review the report before FATF publishes the final version in December.

Andy McDonald, former head of the fraud squad at London’s Metropolitan Police, wrote in an email to that U.K. officials have ignored “repeated calls” to allocate more resources and funding to the financial intelligence unit.

“Because of remote access to UKFIU data, intelligence is analyzed at the local level without wider sharing and contextualizing,” McDonald wrote. “This means that overall, the value [of intelligence] is often lost, because routinely you now need to understand the cross-border nature of crime, particularly in relation to terrorist financing, and serious and organized crime.”

UK paradox

FATF delegates approved the report Oct. 18 during the group’s latest plenary in Paris, rating the United Kingdom “high” in two outcomes of effectiveness, “substantial” in six and “moderate” in three.

A source who attended the plenary and asked not to be named told that British delegates persuaded their colleagues to upgrade the United Kingdom’s scores from substantial to high in the areas of counterproliferation financing, counterterrorist financing and protection of nonprofit groups from financial crime.

The United Kingdom as a result will rank at the top of 60 countries evaluated by FATF under a grading system adopted in 2013—a development that promises to raise eyebrows among critics concerned over the country’s prominent role as a haven and conduit for illicit wealth.

Similar skepticism arose after FATF’s mostly positive evaluation of the United States in 2016.

“It’s slightly bonkers,” Graham Barrow, a London-based anti-money laundering consultant and investigator, said. “Anyone that has studied the major money-laundering scandals in recent years will have seen that U.K. legal entities are central to nearly all of them.”

The pending report highlights the key role U.K. legal entities play in global money-laundering operations, but recommends only that British authorities ensure more accurate entries to their public register of beneficial owners, including by encouraging private firms to flag discrepancies.

FATF stops short of instructing officials to empower Companies House, the agency that administers the register, to verify all entries, and rates U.K. efforts at corporate transparency and prevention of abuse of legal entities as “substantial.”

“Anyone in the world can create a [U.K.] legal entity and use anyone else in the world to be a director for it, and there’s no due diligence,” Barrow said. “If there’s no due diligence on the entries … it’s not transparency, it’s a veneer of transparency.”

The apparent disconnect between FATF’s mostly positive take and London’s generally poor reputation may cast doubt over the group’s methods for assessing countries, and potentially raise suspicion that the mutual evaluation process lies subordinate to politics.

“The framework is not an effectiveness framework,” said Ronald Pol, a consultant with amlAssurance in Wellington, New Zealand, who has authored a study on the methodology. “It uses the word ‘outcomes,’ but they are not outcomes or even outputs—they’re mainly activity measures.”

The report also criticizes the Financial Conduct Authority, which has cited only eight firms and collected just £254 million in penalties for anti-money laundering violations since commencing operations in 2013.

Duncan Hames, policy director at advocacy group Transparency International U.K., said FATF should also emphasize the legal obstacles that often block British authorities from pursuing punitive action against large corporates involved in money laundering.

Difficulties in meeting the legal standard of having to identify a senior “controlling mind” responsible for alleged criminal conduct by a firm saw the introduction of a corporate offense for failure to prevent bribery in 2010.

“To address this, the government should legislate a ‘failure to prevent money laundering’ offense similar to the Bribery Act,” Hames said, referring to the 2010 law that lowered the threshold for assigning culpability to firms involved in corrupt payouts. “A lack of sanctions against firms involved in money laundering leaves no credible deterrent.”

FATF acknowledges in the report that U.K. officials opened a “call for evidence” last year on the need for such a standard in the context of money laundering, but offered no judgment on how those efforts appear to have stalled.

FATF spokesperson Alexandra Wijmenga-Daniel declined to comment on the specifics of the forthcoming report, but wrote in an emailed statement that assessors take each country’s unique “risk context” into account before rating its efforts against financial crime.

“Following the plenary adoption, each report, regardless of the assessing body, goes through a quality and consistency review where all FATF members, and the members of the FATF-style regional bodies—204 countries in total—have the opportunity to raise concerns about the assessment’s consistency,” Wijmenga-Daniel wrote.

An NCA spokesperson told last week that UKFIU will receive more resources over the next three years “to respond to increases in operational demands.”

Other U.K. officials declined to comment on the report.

Topics : Anti-money laundering , Corruption/Bribery , Counterterrorist Financing , International Banking , Know Your Customer
Source: FATF , United Kingdom: National Crime Agency
Document Date: October 30, 2018