I don't want Brexit, but it might allow the UK to escape the failing EU anti-money laundering regime.
The political hailstones won’t stop pelting down these days. Curiously, the same could be said about developments in lawyers’ most beloved topic of money laundering, where reports and future changes have been coming in thick and fast.
First, the House of Commons Home Affairs Select Committee published a report which shocked us all by saying that the current system for detecting money laundering in the UK is a failure. It uses the London property market as a prime piece of evidence.
This is like turning up to the party when the waiters are sweeping the floors and clearing away the empties. Everyone knows the system has failed! But it is good that MPs finally say it, too.
The report makes criticisms of various parts of the system, but this statement from its chair, Keith Vaz, will ring bells with many solicitors: ‘The main method of reporting suspicious transactions, the ELMER system, is not fit for purpose. Designed to identify money laundering or terrorist financing, it is desperately overloaded to the point where it is now completely ineffective. Capable of managing 20,000 reports a year, it is currently burdened with 381,882.
'This has rendered the whole system a futile and impotent weapon in the global fight against criminal financing, with no indication from the Home Office as to when a new state of the art system will be purchased.’
At the same time, in another part of the money laundering wood - a section we will be leaving in due course - the European Commission is continuing regardless with its efforts to strengthen the current anti-money laundering regime. Just a few days ago, it announced that it has adopted a proposed draft directive to make amendments to the fourth money laundering directive.
This will bring changes to a number of areas, including:
- the scope of information accessible by financial intelligence units will be widened, and they will have access to information in centralised bank and payment account registers and central data retrieval systems;
- virtual currency exchange platforms and custodian wallet providers will be brought under the scope of the anti-money laundering directive;
- the list of checks applicable to countries with deficiencies in their anti-money laundering regimes will be harmonised (the new list of countries has just been published;
- there will be full public access to beneficial ownership registers; member states will make public certain information on those registers on companies and business-related trusts – information on all other trusts will be included in the national registers and available to parties who can show a legitimate interest; beneficial owners who have 10% ownership in certain companies that present a risk of being used for money laundering and tax evasion will be included in the registries; the threshold remains at 25% for all other companies;
- there will be direct interconnection of the registers to facilitate cooperation between member states; and
- passive companies and trusts, such as those highlighted in the Panama Papers, will also be subject to greater scrutiny and tighter rules.
Obviously this must still go through the full EU legislative process, which will take some time – and with the UK voice on it weakened to the point of non-existence.
This brings us to the third development, which is Brexit itself. I am a dyed-in-the-wool believer that Brexit is the end of the world. But there is an opportunity here for the UK government to escape from the EU anti-money laundering regime in due course, and develop something which might actually work.
In particular, there will be an opportunity no longer to breach such a key part of lawyers’ duties (the requirement to make suspicious transactions reports – since, as we have seen from the committee's report, they bring no or little benefit).
I do not believe that this will come about, for two reasons: first, because the need for our continued close co-operation in the areas of banking and financial services will mean that we will have to continue to use the equivalent of the EU regime even after Brexit (as with so many of our laws); and, second, because the UK has been one of the keenest pupils in the Financial Action Task Force, the OECD’s committee which triggered the EU legislation in the first place – and the UK will not want to betray this role in the early days of Brexit.
Nevertheless, my hope is that the new beginning that Brexit unfortunately offers will lead to a critical look at the way suspicious transaction reports are carried out.
Any honest assessment will conclude that, though London law firms have the strongest compliance departments among any law firms in the world, that has made no difference, and lawyers are maybe not, after all, the vital gatekeepers in this area that governments once believed.
Jonathan Goldsmith is a consultant and former secretary-general at the Council of Bars and Law Societies of Europe, which represents around a million European lawyers through its member bars and law societies. He blogs weekly for the Gazette on European affairs
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