9.2 Anti-Money Laundering and Proceeds of Crime

9.2 Anti-Money Laundering and Proceeds of Crime

Money laundering is the process by which criminals disguise the proceeds of crime so that they appear to come from a legitimate source. Financial services firms are at the front line of prevention. The UK anti-money laundering (AML) framework rests on three pillars: the Proceeds of Crime Act 2002 (POCA), the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (commonly called the MLR 2017), and the guidance issued by the Joint Money Laundering Steering Group (JMLSG). Firms in scope must also comply with sanctions administered by the Office of Financial Sanctions Implementation (OFSI), part of HM Treasury.

The Three Stages of Money Laundering

MLR 2017 — Risk-Based Approach

The MLR 2017 require firms to take a risk-based approach (RBA). Rather than apply identical procedures to every customer, firms must identify, assess and monitor the money laundering and terrorist financing risks they face, and apply proportionate controls. The RBA is documented in the firm's firm-wide risk assessment (FWRA), which feeds into each customer's individual risk rating.

Customer Due Diligence (CDD)

CDD is the cornerstone. Before establishing a business relationship or carrying out an occasional transaction above the threshold (€15,000 for most firms, or €1,000 for money transmission), the firm must:

1. Identify the customer and verify their identity using reliable, independent sources.
2. Identify any beneficial owner (the individual who ultimately owns or controls 25% or more of a legal entity, or who otherwise exercises control) and take reasonable measures to verify their identity.
3. Obtain information on the purpose and intended nature of the business relationship.
4. Conduct ongoing monitoring of the relationship to ensure transactions are consistent with the firm's knowledge of the customer.

Three Levels of Due Diligence

A PEP is an individual who holds (or has held) a prominent public position, plus their family members and known close associates. EDD must be applied on a risk-sensitive basis — UK PEPs are not automatically high-risk, but foreign PEPs always are until proven otherwise.

POCA 2002 — The Three Principal Offences

POCA 2002 creates three main money laundering offences applicable to anyone (not just regulated staff):

Failure to Report and Tipping Off

For regulated sector staff, two further offences apply:

• S330 POCA — Failure to report: A person in the regulated sector commits an offence if they know or suspect (or have reasonable grounds to know or suspect) that another person is engaged in money laundering, and they do not make a Suspicious Activity Report (SAR) as soon as practicable. The maximum penalty is five years' imprisonment.
• S333A POCA — Tipping off: It is an offence to disclose that a SAR has been made or that an investigation is being considered, if that disclosure is likely to prejudice an investigation. The maximum penalty is two years' imprisonment.

NCA SARs and Consent

SARs are submitted to the National Crime Agency (NCA) using the SAR Online portal. Where a firm needs to complete a transaction that might constitute a money laundering offence, it can request consent (defence) from the NCA within the SAR. The NCA has 7 working days to refuse consent; if it does not refuse within that period, consent is deemed given. Even after consent is granted (or deemed), there is a 31-day moratorium during which the transaction cannot proceed if the NCA is investigating.

JMLSG Guidance

The JMLSG guidance is the industry-standard interpretation of the MLR 2017. Although not legally binding, courts and the FCA treat compliance with JMLSG guidance as strong evidence that a firm has met its statutory obligations. The guidance covers risk assessment, CDD, EDD, ongoing monitoring, record-keeping, training, and suspicious activity reporting.

Sanctions and OFSI

The Office of Financial Sanctions Implementation (OFSI) publishes the UK's consolidated list of financial sanctions targets. Firms must screen customers and transactions against this list and freeze any funds or economic resources of a designated person immediately. Failure to comply with sanctions is a strict-liability criminal offence and can carry unlimited fines.

Compliance Practicalities

• Maintain a written AML policy approved by senior management and reviewed annually.
• Appoint a nominated officer (MLRO) responsible for receiving SARs and making disclosures to the NCA.
• Provide AML training to all relevant staff at least annually, with records kept for at least five years.
• Conduct ongoing monitoring proportionate to risk — higher-risk customers warrant more frequent review.

Money laundering prevention is everyone's responsibility — advisers, paraplanners, administrators and compliance staff alike.