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Clifford Chance

Clifford Chance

Regulatory Investigations and Financial Crime Insights

HMT consultation on reform of AML/CTF supervisory regime and the need for a formal system of sanctions systems and controls supervision

HM Treasury has published a consultation paper on the anti-money laundering ("AML") and counter-terrorist financing ("CTF") supervisory regime in the regulated sector, and the need for a more formalised system of sanctions systems and controls supervision.

HM Treasury conducted a review in 2022 of the UK's AML/CTF regime (the "Review") and concluded that there was rationale for further reform.

The Review found that enforcement powers were used inconsistently across supervisors and across industries. The Review also noted that the high number of supervisors risked inconsistency of supervisory interventions and poor information sharing, as well as a potential lack of independence of supervisors from the sectors they supervised. To try and address these concerns, the Review proposed four models for reform.

The aim of the consultation is to seek industry views on which of the four proposed options would most improve the regime, as well as to gather evidence as to whether there is a need for a more formalised system of sanctions supervision.

The options proposed are:

  1. enhancing the Office for Professional Body Anti-Money Laundering Supervision ("OPBAS"), or 'OPBAS+';
  2. reducing the number of AML/CTF Professional Body Supervisors ("PBSs");
  3. creating a single AML/CTF supervisor for professional services, replacing the current PBSs; or
  4. creating a single AML/CTF supervisor for all sectors.

For those in industries other than accountancy and legal services, the above options would be unlikely to have any major impact.

However, option 4, if chosen, is likely to be of significance to financial services firms. Option 4 proposes the creation of a Single Anti-Money Laundering/Counter Terrorism Financing Supervisor, or "SAS". This would mean that, if not the FCA, firms designated under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 ("MLRs") would have multiple regulators. The FCA and PRA would continue to regulate financial services firms for systems and controls in relation to financial crime generally, but not for AML/CTF rules, which would fall under the remit of the SAS.

Potential pitfalls of the SAS model include a lack of sector-related expertise, and a disconnect between AML/CTF risk-based compliance and other financial crime risks. On the other hand, the greater consistency and information sharing brought about by a single supervisor could streamline the UK's AML/CTF supervisory regime.

The consultation also seeks views on the future of sanctions supervision. The MLRs require relevant persons to have policies, controls and procedures in place to mitigate and manage the risk of money laundering and terrorism financing, including the asset freeze provisions under the UK's three counter-terrorism sanctions regimes. However, this requirement in the MLRs does not extend to other types of financial sanctions (such as the Russia sanctions). Therefore, some current AML/CTF supervisors do not currently have statutory powers to review all sanctions systems and controls, or enforcement powers to act where these are found to be deficient.

Given the rapid expansion, in both volume and complexity, of sanctions following Russia's invasion of Ukraine in February 2022, HMT is seeking views on whether a more formalised system of sanctions systems and controls supervision is required. This could expose financial services firms potentially to a third layer of regulation, already regulated broadly by the FCA and subject to notification obligations to OFSI (which regularly asks firms questions about systems and controls in the context of sanctions enforcement), there could be yet another body regulating in this area.

The closing date for comments in response to the consultation is 30 September 2023. If you have any questions or comments on the consultation, please do not hesitate to get in touch.

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