On 17 December 2020, HM Treasury and the Home Office published the updated third National Risk Assessment (NRA), setting out the key money laundering (ML) and terrorist financing (TF) threats and risks facing the UK. It highlights the changes and developments to the threat landscape since the previous NRA was published in 2017, as well as actions taken to safeguard against such threats.
The NRA assesses the domestic risk of ML and TF in the UK, considering key industry sectors, such as financial services, money service businesses (MSBs), and gambling, along with means utilised, such as cryptocurrency and cash. The NRA also evaluates the international risks to the UK from money flowing into and out of the country and considers the impact of COVID-19 on ML and TF.
The NRA concludes that (i) despite the challenges in quantifying the ML threat to the UK, it is likely the level of risk has increased, not least because of an uptick in predicate offence crimes; and (ii) the threat to the UK from terrorism has increased to “severe” (attack is highly likely) from its previous level of “substantial” (attack is likely).
The NRA provides an outline of the ML and TF legal, regulatory, and law enforcement framework; the threats both in nature and scale; the international outlook and risk exposure from overseas; the impact of COVID-19; and the risk scores from these threats for each of the sectors for 2020 compared to 2017.
The ML risk remains unchanged as high across key financial services segments (retail, wholesale banking, private banking, and wealth management), cash businesses, MSBs, professional services providers, and property businesses and art market participants, with the risk of facilitating TF remaining high for retail banking in financial services, cash businesses, and MSBs.
The risk of high-value dealers, real estate, and letting agency businesses facilitating ML and TF is rated medium, with the ML and TF risk for use of cryptocurrencies (referred to as digital currencies in the 2017 NRA) increasing from low in 2017 to medium. The government’s improved understanding of the risk and respective mitigants of cryptoassets, the inclusion of cryptoasset exchange and custodian wallet providers into the UK’s ML regulations (MLRs 2017) and the fact that cryptoassets are yet to achieve mainstream adoption by consumers or integration into the traditional financial services sector means the risk is likely still shy of high. This is in contrast with United States (US) law enforcement’s apparent view that cryptoassets are generally high-risk. The US Department of Justice (DOJ) recognises cryptocurrencies as a danger despite acknowledging the benefits of distributed ledger technology. Concerns over these dangers culminated in the DOJ’s Cryptocurrency Enforcement Framework released in October 2020 to provide a comprehensive overview of the emerging threats and challenges associated with the increasing prevalence and use of cryptocurrency, the regulatory and enforcement efforts, and the response strategies.
The NRA highlights that as a result of the global lockdown measures implemented due to the COVID-19 pandemic, cross-border cash movement has shifted to methods such as cash via freight, use of cryptoassets, or trade-based ML. Fear of the pandemic has also been used to commit predicate offences, including, for example, sale of fake testing kits and personal protective equipment, appeals to support illegitimate charities, and exploiting government financial support schemes.
The NRA Highlights the Following Key Developments:
While traditional high-risk areas of ML remain unchanged, criminals are increasingly exploiting vulnerabilities in emerging technologies, such as their pseudo-anonymous nature, online accessibility, global reach, uneven regulatory requirements, and regulatory arbitrage to facilitate ML.
Cash-based ML remains heavily characterised by (i) the use of cash-intensive businesses to disguise the true source of the funds; and (ii) the movement of large amounts across borders. New avenues for misuse of cash-related services include cash deposit services in post offices, cash couriers, and cash/valuables in transit companies.
The NRA considers in some detail the ML and TF risks of cryptocurrency, the art market, and letting agent businesses, all of which are newly regulated businesses following the UK’s implementation of the European Union’s Fifth Money Laundering Directive (5AMLD).
The cryptoasset business has grown exponentially in the past three years, leading to increased risk of ML. Criminals often use the cryptoasset system to clean their laundered funds through purchase and exchange of cryptocurrency or through purchase and sale of cryptocurrency and withdrawal of fiat currency.
2.Art market participants and letting agency businesses are attractive for ML due to their ability to conceal beneficial ownership. Art market participants can also help to conceal the final destination of art.
Professional services remain attractive to criminals to support laundering the proceeds of crime through the creation and operation of corporate structures, the investment and transfer of funds to disguise their origin and through lending layers of legitimacy to their operations. The NRA states that a recent thematic private-public threat review associates these risks to trust, company, accountancy, and legal service providers. Plans are in place to further reform Companies House for greater transparency over beneficial ownership information and to improve Office for Professional Body Anti-Money Laundering Supervision of Accountants and Lawyers.
TF risks continue to be mainly in relation to low-level collection of funds generated through legitimate means such as salaries and state benefits, for the purposes of everyday living expenses and unsophisticated attacks. Terrorists often use easily accessible methods to purchase items for attacks, such as cash and debit/credit cards.
What This Means for You
The NRA provides an up-to-date view of the ML and TF risk landscape in the UK. It is relevant for all firms in the UK’s regulated and supervised sectors, as the NRA should be a key building block in developing firms’ AML/TF risk assessments and control frameworks. For firms that recently became subject to the MLRs 2017 and which are in the process of building or enhancing their AML/TF and sanctions programmes, the NRA provides valuable insights for the design and configuration of the various AML/TF controls. The NRA may also be of interest to firms with operational links to the UK, as it allows a comparison of the UK domestic ML/TF risks to those of firms’ own home regimes.
MLROs and heads of AML Compliance can use the publication of the NRA as a trigger to review their existing AML/TF risk assessments to evaluate whether the trends and developments identified in the NRA increase the firms’ inherent risk, and whether existing controls are sufficient mitigants. Where necessary, institutions may need to enhance controls to address any identified gaps and remain within an institution’s risk appetite.
Newly regulated firms can use the NRA as a basis for developing their AML/TF risk assessment, identifying the risks their firm’s business are exposed to and developing their control environment, with the information in the NRA helping to design and calibrate the controls in line with the current risk exposure.
How Guidehouse Can Help
Guidehouse has experience supporting a broad spectrum of clients, including financial and nonfinancial businesses in the regulated and supervised sectors in the UK and globally.
Please reach out to us if you would like to discuss further how we can assist you, for example to develop or review your AML/TF risk assessment, AML/TF and sanctions programme, or selected AML/TF or sanctions controls.