Money Laundering and the UK Financial Sector: Does Winning the War on Illicit Finance Mean Losing the Battle of the Regulatory and Cost Burden?

Jonah Anderson, Partner, and Mhairi Fraser, Associate, at global law firm White & Case

London’s status as a key financial centre has brought with it great advantages, not least an influx of investment and talent from across the globe.

However, it has also been a critical factor in concerns that the UK’s financial infrastructure can be abused for the purposes of money laundering. In turn, this has become a national security issue of critical importance. This article seeks to examine how the UK is balancing the need to tackle money laundering with the desire to attract overseas investment and limit barriers to business, with recognition of the burden the UK financial sector will face in the process.

London has enjoyed long-standing success as a financial centre. However, this factor – along with the UK’s connection to perceived secrecy jurisdictions, the enduring strength of the British property market, and the propagation of the rule of law, democracy, and (Brexit aside) stability – has been instrumental in creating an environment ripe for money laundering. It may seem counterintuitive that the rule of law can potentially and indirectly facilitate money laundering, but laws ensuring certainty that a person will not be deprived of property without due process are of crucial importance in making the UK an attractive destination for overseas capital – criminal or otherwise.

The Government has recognised the threat of money laundering and its facilitation of organised crime in the UK, most recently in the Integrated Review of Security, Defence, Development and Foreign Policy, published in March, which estimated the sum of money laundered through the UK every year to be in the tens of billions of pounds. While the Government is understandably enthusiastic at the idea of overseas capital being invested in the UK, it is also concerned about the influx of illicit funds and the national security issue this presents. The Integrated Review stated that legislation will be introduced to tackle economic crime “as soon as parliamentary time allows”.

The British Crown Dependencies – Guernsey, Jersey and the Isle of Man – and the Overseas Territories – such as the Cayman Islands and the BVI – are popular jurisdictions of incorporation for those looking to create offshore companies. In the public mind, offshore companies are often perceived to be useful tools for financial misdeeds, but they are also used for various legitimate purposes fully permitted by law, such as the protection of privacy and tax structuring. However, they are also clearly an appealing solution for individuals who wish to launder money, due to the ease with which offshore companies can be acquired, and lack of transparency associated with them. The prominence of the Crown Dependencies and Overseas Territories in UK money laundering investigations, which are often obstructed by the veil of corporate secrecy associated with offshore structures, has been explicitly noted.

A common example of money laundering is the acquisition of high-value real estate in London (which is perceived to be a relatively secure investment often promising high returns) by an offshore structure using criminal funds. To tackle this problem, the Government has drafted the Registration of Overseas Entities Bill, which would establish a public register of the beneficial owners of overseas entities that own UK property. Overseas entities that own residential or commercial property in the UK would be obliged to take reasonable steps to identify their beneficial owners, and submit this information to the register. Failure to update the information on the register, or the delivery of false, misleading or deceptive information, would result in criminal penalties of a fine and/or imprisonment. However, despite stated ambitions for the register to be operational by 2021, the Bill has not yet progressed through Parliament, and the Government has accepted that the criminal sanctions in the Bill are unlikely to be enforceable extra-territorially.

However, it is not just offshore companies that pose a money laundering threat. UK-incorporated companies and partnerships – and in particular, Scottish limited partnerships – lend a veneer of legitimacy to transactions overseas. To address fraud and money laundering concerns, last year the Government announced plans for the biggest overhaul of the UK companies register since it was established in the 1800s. This will involve compulsory identity verification for all directors and Persons with Significant Control of companies registered in the UK. While these reforms rightly seek to prevent such companies being used for the propagation of illicit activity, the Government will need to ensure that corporates are not faced with overly burdensome compliance requirements to the extent that overseas investment in the UK is disincentivised or UK citizens face onerous bureaucracy in starting and growing a business. AML-regulated firms are already subject to the relatively recent requirement to alert Companies House to any “discrepancies” between the information on the Persons with Significant Control register and the beneficial ownership information they hold themselves.

While the Government is the party taking action, the private sector is the one funding it – and taking on an ever-increasing burden. Although money laundering affects the entire country, it is likely that regulated firms will continue to bear the brunt of this. In the 2020 Budget, it was announced that the AML-regulated sector is to be subject to an economic crime levy from 2022 onwards to fund the Government’s anti-money laundering efforts, to the tune of £100 million a year. This levy would be on top of the billions of pounds spent by the regulated sector each year on maintaining anti-money laundering compliance programmes.

Additionally, there is an increasing expectation that private firms and the public sector will work together, as they currently do in the form of the Joint Money Laundering Intelligence Taskforce (“JMLIT”). JMLIT, which is comprised of more than 40 financial institutions along with the Financial Conduct Authority, Cifas (the UK fraud prevention service), and several law enforcement agencies including the Serious Fraud Office and the Metropolitan Police Service, has seen the UK act as a pioneer in structured partnership between the private and public sector.  JMLIT allows the public and private sector to share information on particular types of AML risks and allows law enforcement to target particular organised crime groups. Since its formation in 2015, JMLIT has supported more than 750 law enforcement investigations, with its private sector members commencing more than 3,500 of their own investigations. JMLIT sits within the National Economic Crime Centre, which aims to tackle economic crime as effectively as possible by harnessing intelligence and resources from across the public and private sectors.

These collective efforts look to be challenged, however, by the UK’s post-Brexit ‘Global Britain’ initiative. There have been criticisms of the Government’s announcement that free ports will be established in the UK, which are special economic zones exempt from the usual tax and customs rules. These free ports aim to increase trade with non-EU trading partners, but pose a financial crime risk due to the lack of transparency and low levels of regulation with which they are associated. Crimes commonly associated with free ports include trade-based money laundering and tax evasion. The tension between ensuring the UK remains a business-friendly jurisdiction on the one hand, and preventing the influx of criminal funds on the other, rears its head once again.

In recognition of this, the Integrated Review emphasised the need for strong collaboration between the UK and its international partners on illicit finance, and in particular with the US. London will be expected to use its relationship with other major financial hubs across the world to strengthen efforts to prevent the flow of criminal money across the globe and into the UK. The Government has already commenced such efforts, undertaking a series of joint technical AML training workshops with the Abu Dhabi authorities earlier this year, and hosting the G7 Finance Ministers’ Meeting last month, where the G7 nations pledged a minimum of $17 million to support the Financial Action Task Force in fighting international money laundering.

The issue with the facilitation of money laundering and other financial crime by the UK financial sector has clearly been recognised, and promises have been made by the Government to address this. However, it remains to be seen whether the post-pandemic, post-Brexit world will allow these aims to be fulfilled, or whether tackling illicit finance will once again slide down the list of immediate priorities. What is clear is that financial institutions and other regulated firms will continue to bear the financial burden of anti-money laundering law and regulation.

Jonah Anderson, Partner, and Mhairi Fraser, Associate, at global law firm White & Case

London’s status as a key financial centre has brought with it great advantages, not least an influx of investment and talent from across the globe.

However, it has also been a critical factor in concerns that the UK’s financial infrastructure can be abused for the purposes of money laundering. In turn, this has become a national security issue of critical importance. This article seeks to examine how the UK is balancing the need to tackle money laundering with the desire to attract overseas investment and limit barriers to business, with recognition of the burden the UK financial sector will face in the process.

London has enjoyed long-standing success as a financial centre. However, this factor – along with the UK’s connection to perceived secrecy jurisdictions, the enduring strength of the British property market, and the propagation of the rule of law, democracy, and (Brexit aside) stability – has been instrumental in creating an environment ripe for money laundering. It may seem counterintuitive that the rule of law can potentially and indirectly facilitate money laundering, but laws ensuring certainty that a person will not be deprived of property without due process are of crucial importance in making the UK an attractive destination for overseas capital – criminal or otherwise.

The Government has recognised the threat of money laundering and its facilitation of organised crime in the UK, most recently in the Integrated Review of Security, Defence, Development and Foreign Policy, published in March, which estimated the sum of money laundered through the UK every year to be in the tens of billions of pounds. While the Government is understandably enthusiastic at the idea of overseas capital being invested in the UK, it is also concerned about the influx of illicit funds and the national security issue this presents. The Integrated Review stated that legislation will be introduced to tackle economic crime “as soon as parliamentary time allows”.

The British Crown Dependencies – Guernsey, Jersey and the Isle of Man – and the Overseas Territories – such as the Cayman Islands and the BVI – are popular jurisdictions of incorporation for those looking to create offshore companies. In the public mind, offshore companies are often perceived to be useful tools for financial misdeeds, but they are also used for various legitimate purposes fully permitted by law, such as the protection of privacy and tax structuring. However, they are also clearly an appealing solution for individuals who wish to launder money, due to the ease with which offshore companies can be acquired, and lack of transparency associated with them. The prominence of the Crown Dependencies and Overseas Territories in UK money laundering investigations, which are often obstructed by the veil of corporate secrecy associated with offshore structures, has been explicitly noted.

A common example of money laundering is the acquisition of high-value real estate in London (which is perceived to be a relatively secure investment often promising high returns) by an offshore structure using criminal funds. To tackle this problem, the Government has drafted the Registration of Overseas Entities Bill, which would establish a public register of the beneficial owners of overseas entities that own UK property. Overseas entities that own residential or commercial property in the UK would be obliged to take reasonable steps to identify their beneficial owners, and submit this information to the register. Failure to update the information on the register, or the delivery of false, misleading or deceptive information, would result in criminal penalties of a fine and/or imprisonment. However, despite stated ambitions for the register to be operational by 2021, the Bill has not yet progressed through Parliament, and the Government has accepted that the criminal sanctions in the Bill are unlikely to be enforceable extra-territorially.

However, it is not just offshore companies that pose a money laundering threat. UK-incorporated companies and partnerships – and in particular, Scottish limited partnerships – lend a veneer of legitimacy to transactions overseas. To address fraud and money laundering concerns, last year the Government announced plans for the biggest overhaul of the UK companies register since it was established in the 1800s. This will involve compulsory identity verification for all directors and Persons with Significant Control of companies registered in the UK. While these reforms rightly seek to prevent such companies being used for the propagation of illicit activity, the Government will need to ensure that corporates are not faced with overly burdensome compliance requirements to the extent that overseas investment in the UK is disincentivised or UK citizens face onerous bureaucracy in starting and growing a business. AML-regulated firms are already subject to the relatively recent requirement to alert Companies House to any “discrepancies” between the information on the Persons with Significant Control register and the beneficial ownership information they hold themselves.

While the Government is the party taking action, the private sector is the one funding it – and taking on an ever-increasing burden. Although money laundering affects the entire country, it is likely that regulated firms will continue to bear the brunt of this. In the 2020 Budget, it was announced that the AML-regulated sector is to be subject to an economic crime levy from 2022 onwards to fund the Government’s anti-money laundering efforts, to the tune of £100 million a year. This levy would be on top of the billions of pounds spent by the regulated sector each year on maintaining anti-money laundering compliance programmes.

Additionally, there is an increasing expectation that private firms and the public sector will work together, as they currently do in the form of the Joint Money Laundering Intelligence Taskforce (“JMLIT”). JMLIT, which is comprised of more than 40 financial institutions along with the Financial Conduct Authority, Cifas (the UK fraud prevention service), and several law enforcement agencies including the Serious Fraud Office and the Metropolitan Police Service, has seen the UK act as a pioneer in structured partnership between the private and public sector.  JMLIT allows the public and private sector to share information on particular types of AML risks and allows law enforcement to target particular organised crime groups. Since its formation in 2015, JMLIT has supported more than 750 law enforcement investigations, with its private sector members commencing more than 3,500 of their own investigations. JMLIT sits within the National Economic Crime Centre, which aims to tackle economic crime as effectively as possible by harnessing intelligence and resources from across the public and private sectors.

These collective efforts look to be challenged, however, by the UK’s post-Brexit ‘Global Britain’ initiative. There have been criticisms of the Government’s announcement that free ports will be established in the UK, which are special economic zones exempt from the usual tax and customs rules. These free ports aim to increase trade with non-EU trading partners, but pose a financial crime risk due to the lack of transparency and low levels of regulation with which they are associated. Crimes commonly associated with free ports include trade-based money laundering and tax evasion. The tension between ensuring the UK remains a business-friendly jurisdiction on the one hand, and preventing the influx of criminal funds on the other, rears its head once again.

In recognition of this, the Integrated Review emphasised the need for strong collaboration between the UK and its international partners on illicit finance, and in particular with the US. London will be expected to use its relationship with other major financial hubs across the world to strengthen efforts to prevent the flow of criminal money across the globe and into the UK. The Government has already commenced such efforts, undertaking a series of joint technical AML training workshops with the Abu Dhabi authorities earlier this year, and hosting the G7 Finance Ministers’ Meeting last month, where the G7 nations pledged a minimum of $17 million to support the Financial Action Task Force in fighting international money laundering.

The issue with the facilitation of money laundering and other financial crime by the UK financial sector has clearly been recognised, and promises have been made by the Government to address this. However, it remains to be seen whether the post-pandemic, post-Brexit world will allow these aims to be fulfilled, or whether tackling illicit finance will once again slide down the list of immediate priorities. What is clear is that financial institutions and other regulated firms will continue to bear the financial burden of anti-money laundering law and regulation.