Money laundering continues to be a major issue both nationally and globally. As authorities continue to attempt to counter it, more and more UK businesses are finding themselves having to comply with increasingly stringent ani-money laundering (AML) regulations.
Whilst many directors may consider these to be a needless imposition, the truth is that it is far from it.
Experts estimate that up to £90 billion was laundered through the UK in 2024, making it the world’s second most exploited economy after only the USA. It is no surprise that the USA is the most affected by money laundering as they boast the world’s largest economy by a significant distance; but the UK is only the sixth largest. Not only that but London is actually the number one city for money laundering worldwide.
So why is the UK so popular for money laundering?
Unfortunately, the UK’s systems have historically been extremely accommodating to money laundering activity and any efforts to change this have yet to fully rectify the systemic issues that encourage financial criminals to wash dirty cash on our shores.
Our close links to the incredibly lax banking systems of British Overseas Territories such as the Caymen Islands and British Virgin Islands, which are often accused of being actively complicit in global money laundering, mean that it is easy for criminals to obscure the source of dirty funds by transferring back and forth between these and our banking systems.
The manner in which companies can be set up also lends itself to money laundering due to the extreme easy with which complex webs of shell companies can be set up and the lack of identity verification needed to do so.
The UK, especially London, also went through a concerted period of trying to attract investment from countries now considered to be high risk. Whilst the majority of this would have been completely legitimate, it also opened the door to huge amounts of foreign dirty funds.
Given these facts, it is little wonder that the UK government have introduced some of the strictest and furthest reaching AML legislation of any country. These laws have introduced a risk based approach which puts the bulk of the responsibility on the private sector and introduce stiff penalties to both businesses and individuals that are found to be non-compliant.
Unfortunately, these pieces of legislation are often nebulous and unclear around what is required, as in theory it is up to each company to decide what processes are needed (and to be correct in that decision). Compounding this problem is the lack of clear communication and support to the private sector from the government and industry governing bodies.
Resulting in a large amount of directors being unclear and confused about they need to do be compliant despite them wishing to be so.
To help bring some clarity, in this article we will look at the major pieces of UK legislation pertaining to anti-money laundering.
Who is affected?
The sectors that must comply with the UK’s AML regulations are called the regulated sector. These are:
- Art market participants (buying, selling or storing art worth €10,000 or more)
- Auditors & external accountants
- Casinos
- Credit institutions
- Estate agents
- Financial institutions
- High value dealers (handling cash payments of over €10,000 or more)
- Independent legal professionals
- Insolvency practitioners
- Letting agents
- Trust or company service providers
Proceeds of Crime Act 2002 (POCA)
POCA defines what is considered a proceed of crime and grants authorities with increased powers to investigate the source of, freeze suspected proceeds of crime, and seize criminal assets.
POCA defines money laundering as when an individual:
- Conceals, disguises, converts or transfers criminal property or removes it from England and Wales or Scotland or Northern Ireland;
- Enters in to or becomes concerned in an arrangement which they know or suspects facilitates the acquisition, retention, use or control of criminal property;
- Acquires, uses or has possession of criminal property
It also stipulates who is included in the regulated sector and makes it a legal requirement for all businesses within it, as well as all financial institutions, to report any suspected criminal property and/or money laundering to authorities.
The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017)
Simply known as the Money Laundering Regulations (MLR 2017), these were an exhaustive update to the previously existing MLR 2007 and aimed to give the UK AML defences in keeping with modern threats.
MLR 2017 primarily concerns itself with stopping professional services being used to launder dirty funds. It places additional responsibilities on the regulated sector and dictates they must perform due diligence in regards to AML on all business partners.
Key points are:
- A risk based approach must be adopted
- Businesses must perform firmwide risk assessments
- Definitions of money laundering, politically exposed persons (PEPs), and sanctions
- Introduction of high risk jurisdiction classification and the requirement to perform advanced due diligence if dealing with these
- Lying to authorities about money laundering activities became a separate chargeable offence with up to 2 years in jail as punishment
MLR 2019
This update to the MLR 2017 brought the EU 5th Money Laundering Directive into UK law.
EU 5th Money Laundering Directive (5MLD)
The key points the 5MLD introduced to the UK are:
- Extension of the regulated sector
- Member states (and the UK) are required to keep detailed lists of PEPs and what constitutes a PEP
- Discrepancies to do with ultimate beneficial ownership found by businesses during AML compliance processes must be reported to authorities
- Expansion of what constitutes enhanced due diligence and when it must be used
The Criminal Finances Act 2017 (CFA)
All UK businesses are affected by this piece of legislation. The CFA:
- Grants additional powers to authorities in investigating and combatting money laundering
- Brought unexplained wealth orders into law
- Applied AML laws to terrorism funding
- Reforming and refining suspicious activity reporting to facilitate greater information sharing and transparency between authorities
- Made it an offense to facilitate or prevent o report tax evasion
Second Economic Crime Plan
Introduced in 2023 the second Economic Crime Plan is aimed at:
- Combatting fraud
- Combatting kleptocracy
- Corporate criminal liability reform
If you are in the regulated sector it is important that you familiarise yourself with how these laws affect your business.
At Red Flag Alert we understand how confusing AML processes can be and strive to make it easy for our customers. We used our expertise to create a fully digital AML platform that keeps you compliant and reduces the strain that AML processes place on your business. Speak to one of our experts and get a free trial of the platform
