Call For Information: Anti-Money Laundering Supervisory Regime, 21 April 2016

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Tobias Neal
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c/o Castlewood Trust & Company Limited 9 Devonshire Square London EC2M 4YF Telephone: 020 3356 9763 Email: chiefexec@tact.uk.

1 c/o Castlewood Trust & Company Limited 9 Devonshire Square London EC2M 4YF Telephone: chiefexec@tact.uk.net Call For Information: Anti-Money Laundering Supervisory Regime, 21 April 2016 Endorsement of a submission by STEP Introduction TACT - The Association of Corporate Trustees is the membership organisation of the UK corporate trustee sector. Its members include trust companies owned by banks and major financial institutions, as well as those set up by firms of accountants, lawyers and pensions advisors. Those trust companies are responsible for the management of over 1trillion worth of assets, including sovereign and other debt of over 900million and occupational pension funds with in excess of 1.25million members representing over 10% of that sector. Many of our members have employees who are members of STEP and members of our board have assisted STEP by making contributions to their response to this consultation. Therefore, TACT endorses the response of STEP to this consultation which is as follows: Q1. Should the government address the issue of non-comparable risk assessment methodologies and if so, how? Should it work with supervisors to develop a single methodology, with appropriate sectorspecific modifications? The risk assessment methodologies are unlikely to be comparable for similar businesses. Due to the diversity of businesses that are subject to the AML/CFT regime it may be more appropriate that within each sector a single risk assessment methodology reflecting the highest standards should be developed. This may mean that it is not appropriate for all size businesses within that sector. A single risk assessment methodology in each sector at a level that all size businesses can comply with effectively and efficiently with additional factors that are appropriate to their size should be considered in order to move things forward. Q2. How should the government best support supervisors and supervisors support each other to link their risk-assessments to monitoring activities and to properly articulate how they do so? The support for supervisors should be to encourage them to share not just best practice but also problems and solutions that have been resolved. All supervisors within a single sector are likely to have come across similar problems but may have found varying solutions. Consideration of the different solutions should lead to the best practice being exercised by all supervisors within a sector. TACT The Association of Corporate Trustees, Registered in England No , Registered Charity No Registered Office: Floor 29, The Broadgate Tower, 20 Primrose Street, London, EC2A 2RS

2 Q3. Should the government monitor the identification and assessment of risks by the supervisors on an ongoing basis? Should the supervisors monitor each other s identification and assessment of risks? How might this work? We propose that the overall responsibility for AML supervision should pass to an independent wellresourced organisation that understands the businesses it supervises, while having proper regulatory experience and experience of delegating aspects of its work to other professional bodies. Since 2008 the FSA has been replaced by the FCA therefore responsibility should pass from HMRC to the FCA so that organisation can be charged with putting in place a framework that ensures that all firms operate to the same standards, irrespective of the organisation charged with their supervision. STEP is in favour of the regulation of Trust and Company Service Providers to include not just trust companies, but also professional practices where individual partners act as trustees in a professional capacity. Professional capacity should include not just those where a fee is charged for acting as a trustee, but any appointment where the individual may seek to rely upon his firm s policy of professional indemnity insurance in the event of a claim being made against him or her. Q4. Should smaller supervisors be encouraged to pool AML/CFT resources into a joint risk function and would this lead to efficiencies? If so, how should they be encouraged? We would appreciate confirmation as to what might constitute a smaller supervisor. We have no objection to the idea of pooling resources, but its effectiveness will, more than likely, be limited unless the businesses being supervised are similar. For example, a professional such as an accountant or lawyer will not have much in common with someone dealing with currency exchange in terms of AML. The professional is likely to have more contact with their clients over a longer period stretching to decades and several generations of a family. Therefore, it depends on the smaller supervisors concerned and the business that they supervise. Q6. To promote discussions between the supervisors, should attendance at the AMLSF and submission of an annual return to the Treasury be made compulsory for supervisors? How could the government ensure that this happened? It would be interesting to see what percentage of supervisors do not attend and for some analysis as to why supervisors do not attend the AML/CFT Supervisors' Forum (AMLSF) and what percentage of supervisors do not attend. It might be that the solution is found not by making attendance compulsory but by pooling resources as suggested earlier. A compulsory annual return may be regarded as more bureaucracy for little perceived benefit for the supervisors. Q7. Could the Money Laundering Advisory Committee (MLAC) have a greater role in driving improvements in the supervisory regime? The Report indicates that the Money Laundering Advisory Committee (MLAC) could have a greater role in driving improvements but only if the supervisors are listened to and constructive suggestions for improvements are taken on board by the MLAC. The supervisors are more likely to proactively use advice that has been given to them if they know it has come from a fellow supervisor with similar experience.

3 Q8. Should the government instigate a formal mechanism for assessing the effectiveness of all the supervisors AML/CFT activities with the power to compel action to address shortcomings? If so, should this be carried out by the Treasury directly, through another body such as the National Audit Office, or through creating a new body, perhaps along the same lines as the Legal Services Board which oversees legal services supervisors or the Financial Reporting Council which promotes high quality corporate governance and reporting? Are there other ways of ensuring effectiveness that should be considered? How would a formal mechanism for assessing the effectiveness of supervisors AML/CFT activities work? What would be measured and is it actually measurable? Any assessment would indicate some form of report, which could return to the possibility of a compulsory annual return. Perhaps if effectiveness is measured by the number of reports or the proportion of reports of varying seriousness to total reports the actual effectiveness is not going to be consistent for all businesses. Care would be needed to ensure that any measure of effectiveness is not just measureable but calibrated to take into account the different businesses that are supervised. We propose that a formal mechanism for assessing the effectiveness of all supervisors would be better dealt with by another organisation and not the Treasury. The Treasury is an organisation that does so much in relation to AML that it is probably too closely linked to obtain a third party perspective. A different body, such as the National Audit Office, has more independence so that if there are any issues they can be properly identified and dealt with. There would be no benefit in a report that does not bring to light the issues that need to be dealt with as well as plaudits being given where they are due. Q9. Would an overarching body be able to add value by maintaining a more strategic view of the entire AML/CFT landscape and identifying cross-cutting issues which individual supervisors might struggle to identify? Should such a body have the authority to guide and compel the activities of the supervisors, up to and including the power to revoke approval for bodies to be supervisors? Why should a separate overarching body be better than the current system in identifying the cross-cutting issues than the current system? In this instance does the word "issues" actually mean problems that need to be solved rather than points to be addressed? How would an overarching body know more than is currently known without there being some form of regular report? Who would be included in such a body and what level of direct experience of AML/CFT would be required? There are some anecdotal reports of those working for other bodies who have no real experience of the field in which they are acting as supervisors. Q10. Should the government seek to harmonise approaches to penalties and powers? For example, should supervisors have access to a certain minimum range of penalties and powers and what should these be? Should there be a common approach for deciding on penalties and calculating fines based on variables such as turnover that are scalable to the size of the business? There are some significant questions over the approach to penalties and powers, particularly penalties. For example, should the penalties be tied not just to turnover but to the level of risk pertaining to the type of business concerned? In addition, what is the aim of penalties: is it to punish or just to deter?

4 Q11. Should the government seek to establish a single standard for supervisors disciplinary and appeals functions? There should be a minimum standard for supervisors disciplinary and appeals functions. The minimum standard should include an appeals process with independent decision makers who can give an objective view to a case. Q13. Should all supervisors have powers to compel supervised businesses to submit comprehensive and up-to-date information to aid risk assessment? Yes, all supervisors should have the necessary power to compel supervised businesses to provide information to enable the supervisor to do their job properly. An individual who is unwilling to provide such information should automatically cause suspicion and be compelled to comply with their AML responsibilities. Q14. Is there a need for supervisors themselves to undergo training and/or continuous professional development? Is so, what form might this take and should it be government-recognised? Yes, training and/or continuous professional development should be required. A supervisor needs to be up to date with all the potential problems and new developments that are pertinent. It should be noted that the supervision level being addressed is a relatively small field so that such training would be relatively expensive. Training could be provided at the same time as the AMLSF meetings so that those concerned have an opportunity to discuss the information that they have acquired and how it can be implemented. This would make the meetings more advantageous as mentioned earlier. As supervisors will be providing training to the businesses they supervise then it will be essential that they are kept up to date themselves. The question of deregistration was mentioned in this section and it should be possible for the names (including aliases and trading names) of anyone deregistered by one supervisor to be accessible to another supervisor. In this way, a deregistered person does not remain registered or apply for registration with another supervisor without going unnoticed. It should be possible for there to be a website that can be updated regularly, possible daily, with such information. Q15. Is there a need for relevant persons in the supervised populations across all sectors to undergo training and/or continuous professional development to aid their understanding of AML/CFT issues? Yes, there is a need for relevant persons across all sectors to undergo training and/or continuous professional development. It is surprising that this might not be the current case. Q17. Should the government mandate the separation of representative and AML/CFT supervisory roles? What impacts might this have on the professional bodies themselves? The mandatory separation of representative and AML/CFT supervisory roles is likely to bring an increase in cost which is acceptable if there is a real benefit. In some cases the supervisory role is currently managed at least in part by visits to businesses to review their standards and ensure that they are at least of the level expected and required. The separation of the two roles would mean two separate visits for the reviews of most of the business and separately of the AML/CFT requirements. The main review of the business would most probably include some review of

5 AML/CFT as part of "know your client" and general maintenance of standards. Therefore, it is quite possible that some firms will have two reviews on AML/CFT matters which is unlikely to be received positively. Q18. How does the UK approach to professional body supervision compare to other countries regimes? The Utrecht Report runs to over 500 pages which would take some time to read and properly digest. However, a brief read through of the relevant section indicates that there are four separate ways in which AML/CFT supervision operates. The system used by the UK appears to be as good as any of the four and the UK appears to operate that system in a way that appears to be good compared with other countries. Q19. How could inconsistencies between the JMLSG guidance and the FCA s Financial Crime Guide best be resolved? Should the two be merged? Or should one be discontinued and if so, which one and why? The problems mentioned are likely to be the base cause of some of the difficulties encountered when dealing with banks and other financial organisations. On that basis action does need to be taken to remove the inconsistencies. The proposal that the guidance from the two sources should be merged, with the clearest guidance from each to improve could be very productive. This should be carried out by someone who has the ability to clarify the bare minimum required and provide guidance on best practice. The merged guidance should be written in such a way that anyone reading it can understand what is required. Further, it should be made clear that dependence on systems that do not allow for easy reference to a higher authority in cases with specific or unusual facts will not even meet basic requirements. Any reference to a higher authority will have to be dealt with within a specified time limit or it will still be possible to delay too long, which is off-putting to an investor or a potential investor. Q20. What alternative system for approving guidance should be considered and what should the government s role be? Is it important to maintain the principle of providing legal safe harbour to businesses that follow the guidance? We agree that there should be something to protect those who do their best to comply with the requirements. Those who wish to launder money or finance terrorism are perfectly capable of forging documents that the average lay person generally would not be able to distinguish from genuine documents. In cases where there are no other indications that there is fraudulent behaviour then it appears unduly harsh that someone should be punished despite their best efforts. The vast majority wish to comply with the regulations and would be horrified if they were assisting someone who was less than honest. Some guidance that helps with this point is absolutely essential. Q21. Should the government produce a single piece of guidance to help regulated businesses understand the intent and meaning of the Money Laundering Regulations, leaving the supervisors and industry bodies to issue specific guidance on how different sectors can comply? If so, would this industry guidance need to be Treasury approved? Should it be made clear that the supervised population is to follow the industry guidance? A single piece of guidance probably cannot do much more than help regulated businesses understand the intent and meaning of the Money Laundering Regulations. The range of supervised businesses is so diverse that anything much more specific is likely to include points that are not relevant to some businesses. However, businesses should be able to locate the sections that are relevant to them.

6 The question of who should produce industry specific guidance is more difficult. There is a strong case for the guidance to be written by the industry supervisors and bodies on the basis that they should know and understand their industry and, therefore, be able to produce guidance. Guidance produced by those outside a particular industry may well not have the same understanding of what is possible and reasonable thus causing more problems than are solved. Q22. Should supervisors be required to publish details of their enforcement actions and enforcement strategy, perhaps as part of the Treasury s annual report on supervisors, or in their own reports? What are the benefits and risks in doing so? Yes, good practice should be shared across all supervisors. Weaknesses should also be identified. Knowing what works and what does not work will help everyone to identify how to improve compliance efficiently. Lack of sharing information can lead to inefficiency. The best way forward is for industries to share good practice and weaknesses. Q23. Should the government publish more of the detail gathered by the annual supervisor s report process? For example, sharing good practice or weaknesses across all supervisors? The answer to this question is dependent on the category of risk. Where higher risks are inherent then such higher risk activities should be checked further. There should also be regular checks of lower risk activities that might otherwise then be targeted by money-launderers and those wanting to finance terrorism. Q26. As one means of facilitating better sharing of intelligence among supervisors and between supervisors and law enforcement, could the government mandate that all supervisors should fulfil the conditions for, and become members of, a mechanism such as FIN-NET? Are there other suitable mechanisms, such as the Shared Intelligence System (also hosted by the FCA)? We are unsure how supervisors will know what businesses they are supervising if they do not keep a register of the businesses they supervise. However, we believe that a register of supervised businesses should not be made public. Q29. Does failure of AML/CFT compliance pose a credible systemic financial stability risk? If so, does this mean that the FCA should devote more resource to the largest banks which have the greatest potential to have systemic effects? The largest banks have the greatest risks partly on the basis that the largest amounts of money are dealt with by such institutions. However, without knowing whether all bank customers have to comply with the same requirements it is difficult to know whether more resources would actually make a difference. The current bank systems appear to depend on junior staff ticking boxes with no potential to refer to something that does not easily comply to a higher authority. Whether bank customers with larger transactions are required to provide additional information is unknown so no comment can be made. A customer with larger transactions may not be a Politically Exposed Person who is already subject to greater scrutiny under the current AML/CFT regulations. Q30. How should the FCA address the perception from evidence submitted to the Cutting Red Tape Review that it is overly focused on process and ensure that its AML/CFT supervision is focused proportionately on firms which pose the greatest risk? When a professional is employed who must comply with AML/CFT regulations then information from that professional, who may have acted for the customer for many years, should also be taken into account. This

7 background experience can be used personally in that a trust beneficiary could be perceived to be untrustworthy even though there would be no problem with that person producing the necessary passport/driving licence/bank statement/credit card statement that a bank would normally accept without question. Q31. Is the number of supervisors in itself a barrier to effective and consistent supervision? Is so, how should the number be reduced and what number would allow a consistent approach? The number of supervisors might make consistent supervision more difficult but that does not mean it will be ineffective bearing in mind the diversity of businesses that are supervised. However, supervisors working together who are responsible for similar industries will improve effective and consistent supervision by giving those supervisors the chance to discuss best practice and weaknesses as previously mentioned. Q32. If this is an issue, are there other ways to address it? For example, would supervisors within a single sector benefit from pooling their AML/CFT resources and establishing a joint supervisory function? Yes, as referred to in Question 31. Response submitted by STEP 2 June 2016 Endorsed by TACT 2 June 2016

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