Why it should be the businesses in the regulated sector rather than the state that should have to fund the fight against financial crime? These businesses are the gatekeepers to a financial and economic system that is open to abuse by money launderers and terrorist financiers.
ADVERTISEMENTUK chancellor Rishi Sunak’s first budget already seems a world away, and doubtless many of his announced measures will now take some time to come to fruition - or possibly be abandoned altogether - in the wake of the coronavirus crisis. Doubtless many in the UK’s regulated sector will wish the latter fate on the Anti-Money Laundering (AML) Levy, the idea of charging a fee to firms that operate in the regulated sector for the purposes of UK law, to help fund the fight against financial crime. As one of the few measures aimed at raising revenue for an already cash-strapped area of state activity, albeit one with small and medium-sized enterprises in its sights, it seems prudent to consider its planned consultation to be just around the corner. When it appears, there are major questions about the principle and the detail to be answered.
The first fundamental question, of course, is why it should be the businesses in the regulated sector rather than the state that should have to fund the fight against financial crime. The view of the sector is that these businesses are the gatekeepers to a financial and economic system that is open to abuse by money launderers and terrorist financiers, who are therefore asked to adopt measures to detect and disrupt their activities, such as conducting due diligence on their customers and making Suspicious Activity Reports (SARs), which in the UK are handled by the National Crime Agency (NCA). The core members of the sector remain banks and other financial institutions, who submit the vast majority of SARs. Alongside them are the designated non-financial professional bodies (DNFPBs), although curiously neither the phrase nor its abbreviation have ever really caught on. These include accountants and lawyers, or when dealing with commercial or property transactions, estate agents, tax advisers, and now art market participants, crypto businesses and letting agents, when dealing with amounts above a certain threshold.
The system, then, is already one in which private businesses are obliged to conduct unpaid work – for many, a significant overhead – to help deal with the problem of financial crime. By any reasonable analysis, that is a problem whose impact is felt by society as a whole and for which the state must ultimately take responsibility, although doubtless it is fair for the private sector to be asked to play a part. It is also a problem for which no one could reasonably accuse the regulated sector of being to blame for, although the NCA has been known to accuse DNFBs - in particular lawyers - of reporting too infrequently.
What then, would be the argument for making the sector responsible for further costs? One potential example might be with the Financial Conduct Authority (FCA), which regulates banks and other financial institutions and is funded by them rather than by the state. Monitoring compliance with AML requirements is certainly part of the FCA’s functions, but the principle there is that the FCA exists to protect the reputations of their members and the public’s confidence in them. It would be hard to justify on that basis, say, a levy on art dealers that would help fund the general activities of the NCA.
These fundamental questions also feed into the detail of how the levy would operate. Though it could be characterised as a tax on a subset of businesses operating in the UK, it is unlikely to make sense to have it collected as such. The obvious alternative, given that all such businesses have to be registered, is to impose a fee for that registration and to require it to be renewed, again for a fee, on an annual basis, for example. That, however, begs an immediate question about the impact of non-payment, and whether it would turn an otherwise lawful business into a criminal one for not having a valid registration.
The next question, and the one on which any consultation would surely spend most time, is how to quantify the levy or, in other words, how to spread it amongst the businesses concerned. A flat fee per business would surely be unfair, placing the same burden on a fledgling crypto-asset firm as a bank like Barclays to help tackle financial crime. A fee calculated by reference to a firm’s turnover or its profits might be fairer, but would raise a further question for those businesses that conduct some work in the regulated sector and some outside it. These could include, for instance, letting agents, most of whose work may be below the threshold, or law firms who primarily do advisory work with perhaps the occasional conveyancing instruction. And while it would clearly risk perverse incentives to set a fee according to the number of SARs submitted, to ignore the major difference in firms’ risk profiles – between a high-street conveyancer that eschewed any ‘risky business’, and a boutique London firm that actively courted politically-exposed persons and oligarchs – would surely also risk injustice.
It may transpire in due course that these problems have all been anticipated, and Sunak’s announcement may turn out to be underpinned by a fully thought-out set of options on which we will all have the opportunity to comment. He may also have a properly articulated rationale of why financial crime and AML should be treated as a joint business activity to be taxed, rather than a problem for society and a valuable part of tackling it. But if not, this particular proposal may have already earned its place in the tray of papers on his desk, doubtless already large and growing, that merit the label “too difficult.”
John Binns is a partner at London-based BCL Solicitors LLP, specialising in AML and financial crime.
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