With the Fifth Anti-Money Laundering Directive (5AMLD) now endorsed by the European Union , the thoughts of the United Kingdom government and the governments of all the other 27 Member States will turn to converting it into national law through their domestic legislative procedures.
The UK has played a key role in contributing to the legislative framework of the AMLDs, and has taken the lead in implementing some important steps in the fight against corruption and money laundering.
It may therefore seem appropriate to consider what other legal measures that the UK might adopt to enhance the fight against money laundering and terrorist financing, and ‘stay ahead of the pack.’
Take a lead on public registers
The principal measure in this fight the UK government could take is to require the governments of the UK Crown Dependencies (CD) and Overseas Territories (OTs) to introduce public registries of beneficial owners of companies and trusts domiciled in their jurisdictions.
British parliamentarians have now agreed to order the OTs to establish public registers, which is a huge step in the right direction.
One has only to look at the Panama Papers and the Paradise Papers to understand the role that the CDs and OTs in hiding some ill gotten gains from crooks and cheats from all over the world.
The Metropolitan Police’s Proceeds of Corruption Unit have revealed that 75% of their investigations involve a company based in a “secrecy” jurisdiction – of these 78% involve a company domiciled in a CD or OT.
David Cameron suggested in 2013 that these jurisdiction follow the example of the UK in making details of the beneficial owners of companies generally available to the public, however, his pleas have fallen on deaf ears.
The governments of the CDs and OTs suggest that if they followed the UK’s example in the absence of a global standard, they would lose significant business to other centres.
One may wonder what such a view indicates about the quantum of “dirty” funds and assets are maintained in the CDs and OTs if their governments are concerned about a loss of business.
London’s legal muscle
Supporters of the long standing status quos of no public registers for the OTs and CD may argue that the constitutional arrangements that currently prevail would be upset if the London government were to directly legislate against the wishes of those in the CDs and OTs.
However, in the past two decades, there have been precedents of direct legislation.
Firstly, Westminster prohibited capital punishment in the jurisdictions, secondly, London, swept away anti-gay legislation and thirdly, for some of the CDs and OTs, Westminster directly legislates for changes to UK and EU sanctions provisions, whilst for others the domestic governments legislate to give effect to new sanctions.
Finally, in the late 1990s, the UK government imposed direct rule in the Turks & Caicos Islands following the discovery of widespread corruption in the islands’ government.
Furthermore, with many governments around the world, including those in the EU, being disappointed with the policies of these jurisdictions and the London government being responsible for their foreign relations, the UK Foreign & Commonwealth Office, in this post Brexit world may wish to maintain and enhance good relations with their counterparts around the world.
Strengthen Companies House
Another significant legislative measure that the UK government could take is to strengthen the powers of Companies House, the registry of UK corporates.
At present, Companies House falls outside the scope of the 2017 Money Laundering Regulations in contrast to trust and company service providers (TCSPs), who have a legal obligation to collect and verify the details of the beneficial owners of the structures they assist in creating.
It is due to this absence of necessary due diligence checks that Companies House can significantly undercut the TCSPs in price terms of creating corporate and other structures.
As a result of this significant price difference that Companies House now directly creates 25% of new companies.
Additionally, the absence of due diligence checks represents a significant incentive to those who wish to establish a corporate for an improper purpose to elect to use the services provided by Companies House rather than those offered by the regulated and supervised TCSPs.
More resources needed
Outside legislative measures, the UK government could allocate significantly more resources to assist the estimated 20 Companies House staff whose role is to monitor that UK corporate disclosure requirements have met for all 3.5 million companies on its register.
Amnesty International has recently analysed the details of beneficial ownership currently published at Companies House.
They found that over 4,000 companies had a beneficial owner who was less then two years old, whilst the beneficial owner of one company has yet to be born! Five beneficial owners between them control 6,000 companies.
One may reasonably suspect they may be acting as nominees.
While 7,000 companies are controlled by companies domiciled in secrecy jurisdictions, which represents a direct breach of the relevant regulations.
About 10% of the 3.5 million companies on the register have failed to disclose details of any beneficial owners or have failed to state they have no beneficial owner who directly or indirectly controls 25% of the companies voting shares.
These revelations demonstrate the need for Companies House to ensure that the beneficial ownership disclosure obligations are rigorously enforced.
Notwithstanding this proposal, Companies House could require the TCSPs they work with in the creation of companies to give evidence to Companies House that the appropriate due diligence checks on beneficial owners have been performed.
Failure to provide adequate evidence would result in the proposed company not being registered.
Turning directly to those TCSPs who create and establish UK corporates, supervisory controls on them could be enhanced if such TSCPs were required to have a place of business in the UK at which they have substantial operations.
At present, TCSPs operating anywhere in the world may incorporate a UK company at Companies House.
Accordingly, the quality of AML and CTF controls of those overseas based TCSPs are reviewed by foreign supervisors and hence such controls are not directly visible to the UK authorities.
New AML legislation
Another significant legislative measure that the UK government could take when enacting 5AMLD in the UK is to introduce a corporate offence of failing to prevent money laundering, similar to the offences of the failure to prevent bribery and the failure to prevent facilitation of tax evasion that have been introduced in recent years.
In those situations where companies had committed the failure to prevent money laundering offence, their directors would be liable to disqualification on the grounds that they were not fit and proper.
These measures together would represent a major addition to the powers available to the Crown Prosecution Service and the Serious Fraud Office.
Collectively, if all these proposals were adopted in full, the UK defences against money laundering and terrorist financing would be considerably strengthened. It will be interesting to see whether any or all of them will be put on the Statute Book in the forthcoming months and years.
Denis O’Connor is both a Fellow of the Institute of Chartered Accountants in England & Wales and the Chartered Institute of Securities and Investment. He was a member of the British Bankers’ Association Money Laundering Committee from 2003 -10; and a member of the JMLSG’s Board and Editorial Panel between 2010 and 2016.
He has been a frequent speaker at industry conferences on financial crime issues, both in the UK and abroad.