Integrated Review’s illicit finance pledges are limited, but banks can help

The UK’s long overdue Integrated Review includes welcome plans to track down economic criminals. Too many of these criminals are still going undetected, due to a lack of resources and focus. But some say the review lacks detail and sufficient funding promises. It will need support from the private sector to maximise impact.

In March 2021, the UK Government published its delayed Integrated Review of Security, Defence, Development and Foreign Policy. This announced plans for new laws aimed at fighting financial crime, with important implications for financial institutions such as banks. It also promised a shakeup of the suspicious activity report (SAR) regime.

The review identifies serious and organised crime (SOC), terrorism and illicit finance movements as among the biggest threats to the nation. The scale and complexity of SOC will likely increase, aided by new technologies. Illegal flows of finance will continue to support SOC and terrorism, with tens of billions of pounds likely laundered through the UK every year.

To combat this, the review promised a global sanctions regime on corruption in 2021. This will empower law enforcers to prevent those involved in corruption from freely entering the UK or channelling money through its financial system; and enable them to collaborate with allies with similar regimes, such as the US and Canada.

Economic crime measures

The review pledged a small but much-needed £63 million to tackle economic crime, including plans to reform the SAR system; grow the National Economic Crime Centre (NECC), which coordinates law enforcer’s responses to money laundering; and £20 million to reform the Companies House register.

The government also plans to strengthen the National Crime Agency (NCA), develop its data and investigative capabilities, and recruit 300 police officers dedicated to SOC in 2021/22.

It said it will ensure the NCA’s funding mechanism supports delivery of long-term goals and ability to adapt to changing threats – perhaps hinting there may be more funding available later.

The UK said it plans to use its G7 presidency this year to promote corporate transparency and accelerate asset recovery. It also plans to be at the forefront of global regulation on technology, cyber, digital and data – and bolster its status as a digital and data hub.

Long overdue

Federica Taccogna, senior managing director, financial services at FTI Consulting, said the integrated review was long overdue but the promised budget is too small for the size of the task ahead.

‘Our understanding of financial crime has changed over the last few years and we know much more about the extent and ways criminals exploit the system,’ she said. ‘Fighting financial crime is expensive. Unless governments invest much more in national frameworks to fight financial crime, we will be giving millions away to criminals.

‘We have been calling for reform for four or five years, since seeing the extent of international financial crime in the Panama papers. This includes calls for more transparency in the Companies House beneficial ownership registries.’

Companies House is one of the weakest links in the fight against financial crime, so the promised improvement in its registration process should be the priority.

Improvements in technology for law enforcers and regulators is another likely outcome of the review. ‘Speed of technology has moved fast and you would be foolish not to use what is available to fight financial crime,’ said Taccogna.

Another probable outcome will be more investment in public-private partnerships – also with the aid of better technology – because they have a key role in uncovering organised crime networks. The UK has been an early mover on such partnerships with the creation of its Joint Money Laundering Intelligence Taskforce – but Taccogna said ‘more could be done’.

What to expect from Companies House reform

In January 2021, the NECC told MPs laundromats were washing billions in dirty money in the UK because it was ‘too easy’ to set up companies here. Companies House registrations currently involve little in the way of in-depth background checks.

The UK’s existing 2019 to 2022 Economic Crime Plan will introduce laws to reform Companies House registration and limited partnerships, and introduce a register of overseas entities owning property in the UK.

The integrated review outlined plans to expand this by introducing a public register of beneficial owners of overseas legal entities that own UK property. This will happen as soon as time permits, it said.

Taccogna said more robust scrutiny of the backgrounds of corporates and individuals registering a company would help enforcers, regulators and companies connect the dots.

‘Technologies such as network analysis and machine learning can enable Companies House to stop the invisible networks,’ she said. ‘Hopefully, investment will grow in that area.’

What SAR reform could include

Criminals are usually part of a network. Rather than reporting anomalies about individual actions, reports about suspicious networks of individuals and activities that spread across accounts would be more effective.

Taccogna said: ‘Banks not looking into overarching movement are missing an opportunity. SARs also need to link to law enforcement intelligence to improve their relevance.

‘For example, on one single day, more than 200 companies were registered at the same address. Such suspicious activity needs to be monitored more closely and connected with other intelligence at banks and enforcers.

‘Again, technology will make the difference in connecting these dots. Criminals play the system extremely well. They know banks are often not allowed to share customer information with others. But technology now allows fully encrypted ways of sharing information that respect data privacy.’

Impact on the private sector

The integrated review will likely all give regulators better tools for analysis and investigation. Coupled with more and better information from Companies House, this should help them discover more criminal networks. One likely impact on financial firms will be the need to play their part by refreshing and updating their due diligence with this new information.

Taccogna said they should not stop there though.

‘Many companies apply technology simply to improve efficiency in regulatory compliance, but this does not help identify or catch more criminals,’ she said. ‘We need to rethink radically our approach to technology in the effort against financial crime. If we applied transactional monitoring, network analysis or machine learning to uncover networks with a more investigative approach, we could achieve much more compared to individual alerts. Firms who take that bold step will reap the benefits quickly.

‘It works better in cooperation with others, but a bank can achieve much on its own. It can do lots of the investigative work itself and freeze money quickly.’

Brexit and next steps

An article by legal firm Travers Smith points out that the review contains limited details about the various initiatives it wants to tackle, perhaps because of conflicting motivations post-Brexit.

‘It remains hard to assess what the UK’s approach to tackling financial crime will be following its exit from the EU,’ said the firm. ‘Balancing an ambitious “Global Britain” trade policy with barriers to incorporation and new sanctions remains a difficult path.

‘It will be important to examine exactly how expansive these regimes are once details are published later in 2021. This should provide a clearer indication of the government’s appetite for tackling financial crime and corruption while trying to encourage inward investment and growth.’

The Integrated Review is nonetheless a step in the right direction and something to build on. If financial institutions take it as an opportunity to improve their anti-money laundering tools and processes, it could make the outcomes much more effective and benefit the entire industry long-term.