Article:

Reshaping the UK’s economic crime framework through the Economic Crime Levy

05 October 2021

Background and context

On 24 September the UK Government published draft legislation for the UK’s Economic Crime Levy (“the Levy” herein). The aim of the Levy is to bolster and sustain the anti-money laundering (AML) framework of the UK’s economy, injecting over £100 million per year into economic crime compliance and building on the 2019-2022 Economic Crime Plan. The implementation of the Levy will commence in 2023/4 and it will be collected on an annual basis from applicable firms. 

The Levy is intended to apply to any firm which:

  • Has undertaken business which falls within the remit of the UK Money Laundering Regulations (MLRs) within the preceding year; and 
  • Has an annual turnover over £10.2m.

Under the proposed plans, AML-regulated firms will contribute a sum of money proportionate to their UK revenue generated – those which derive more revenue from their UK operations will be required to pay a greater amount. The contribution ranges preliminarily defined by the UK Government are included in the below table. 

Level of revenue

UK revenue amount

Proposed Levy contribution banding

Medium

Between £10.2m and £36m

£5,000 to £15,000

High

Between £36m and £1b

£30,000 to £50,000

Very High

Over £1b

£150,000 to £250,000

In terms of whose budget the Levy will be taken from, it is possible that Levy payments will be borne by both compliance and economic crime departments, however this is yet to be confirmed. 

Impact

So what could the Levy mean for the future of UK plc’s economic crime framework and strategy? 

Responses collated during the Government’s consultation on the Levy, which ran from July to October 2020, indicated that helping to sustain the Suspicious Activity Reports (SAR) reform programme and increase the number and skill of staff in the UK’s Financial Intelligence Unit (UKFIU) would likely be supported by the Levy. However, the Government is yet to specify exactly how it intends to spend the funds collected via the Levy. 

Whilst the Levy will undeniably enhance the UK’s fight against economic crime by fuelling and funding a raft of initiatives and their associated resources, there undoubtedly remain competing priorities. Some examples of these are set out below. 

1 - Data and Information and communications technology (ICT)

The modernisation and integration of legacy ICT systems is long overdue in order to facilitate efficient and effective economic crime prevention, especially with respect to existing initiatives which require further development and investment to make them sustainable. 

For example:

  • Significant enhancements to ICT infrastructure and the development of data analytics capabilities are a crucial component of the Government’s ongoing SAR reform programme. Whilst considerable progress has been made to enhance the UK’s SAR framework, there remains a burning platform to enhance data analysis and subsequent information and intelligence sharing between the industry, regulators and law enforcement to overhaul the way in which we investigate and prosecute criminal activity
     
  • The financial crime data return (REP-CRIM) has entered its 5th annual cycle and was extended in scope in April 2021 to cover approximately 4,500 additional firms. The FCA will likely need to increase investment in its data and analytics capabilities in order to effectively analyse and maximise the potential of the data captured from the total of circa 7,000 in scope firms to shape its supervisory strategy and meet its strategic aims with respect to better use of data.   

2 - Supervisory capacity and capability

The funding from the Levy should also allow a sustainable increase to the UKFIU’s headcount. It’s vital that the UK recruits, trains and develops skilled and experienced practitioners to enhance the efficiency and effectiveness of economic crime detection, prevention and deterrence. 

Headcount expansion could also support the expedition of other in-flight initiatives which require significant time and expertise. For example:

  • The UK Government has recently agreed changes with respect to the Companies House reform. Once implemented, these aim to make the platform a more reliable, accurate and secure repository for UK company information; and 
  • A better staffed FIU could bring improvements in the number and quality of targeted alerts that inform industry about economic crime related typologies and risks, meaning that faster and more detailed feedback on SAR quality and usability may become a reality.

Ultimately, more highly skilled staff in the UKFIU who are able to leverage reliable systems and data should permit better exchange of information amongst regulators and law enforcement. These resulting shared insights will enable the different components of the regulatory system to target sectors and firms that they believe represent the most risk, thereby honing in on specific pain points to prevent, detect and deter criminal activity.

3 - Supervisory tools

We have observed that the FCA’s approach to 166 skilled person reviews has become more targeted, and to-date we have seen a notable shift from purely retail banking to encompassing investment banking as well payment services/e-money institutions. However, if s166 reviews are to become more targeted and deep-dive into certain areas of the economic crime control framework, the deep subject matter expertise as well as oversight capacity within the FCA’s supervisory and enforcement teams will likely need to be reinforced. 

Outside of the FCA, the UK boasts numerous other regulators, including Her Majesty’s Revenue and Customs (HMRC); the UK Gambling Commission (UKGC); and a cluster of 25 legal and accountancy professional body supervisors, which are responsible for economic crime supervision across a diverse range of AML-regulated sectors. Following the expansion of the scope of the MLRs to entity types such as the art market, lettings agents and cryptoasset firms, the expectations and requirements placed on their respective supervisors has also increased – these would likely benefit from additional investment and resource to maintain and sustain their regulatory remit.   

Other considerations for funding

The UK’s economic crime plan was introduced in 2019 and largely focussed on the AML agenda, in which considerable progress was made. However, fast-forward 24 months, it has become apparent that fraud must be elevated up the priority list. The significant increases in fraud cases has been expedited by multiple factors, including:

  • The COVID-19 pandemic, which saw a seismic shift towards remote working, socialising and spending and has left many people financially vulnerable; and 
  • The continued boom of online and alternative financial services, such as cryptocurrencies, and the learning curve which the general public are embarking on to understanding the potential risks and rewards of such investments. 

As a result, it has become increasingly apparent that the fraud agenda needs a greater proportion of airtime, but also requires additional investment and resource to react to this peak. 

However, fraud currently remains excluded from the Levy funding, as both the Government and consultation respondents agreed that countering fraud requires a societal response beyond those regulated by the MLRs, and thus internet service providers and social media platforms should share this financial burden with the regulated sector. Whilst nothing has been legislated yet, this could be a horizon matter for UK plc firms to keep an eye out for. 

What should firms be doing?

Whilst the draft legislation for the Levy is yet to be ratified, firms should take a proactive approach to preparing for its imminent arrival. As a first step, firms should factor the possibility of this additional cost burden into budget and resource planning for 2023/4 and beyond. 

In addition, the Levy symbolises another clear signal of the UK’s ever-increasing focus economic crime prevention. In light of this, Firms should ensure that they: 

  • Factoring the possibility of this additional cost burden into budget and resource planning for 2023/4 and beyond; 
  • Perform a gap analysis against requirements contained in the Proceeds of Crime Act (POCA), MLRs and relevant industry guidance to understand any pockets of weakness and areas for enhancement;
  • Develop clear and structured action plans to resolve gaps identified, and track these to completion;
  • Gain a deep and comprehensive understanding of the nature of economic crime risks facing their business, such as through the business wide risk assessment, and using outputs from this to uplift policies, procedures, systems and controls; 
  • Prepare for regulatory interactions through maintaining robust audit trails of risk-decisions taken and solidifying the three lines of defence model; and 
  • Maintain horizon scanning practices to identify changes to regulation coming down the track to enable their business to be agile and responsive.   

How can we help?

BDO’s Economic Crime Advisory team work closely with AML-regulated firms across a wide range of sectors including financial services; gambling and gaming; legal and professional services; the art market; cryptoassets; and real estate. We have a deep understanding of their businesses and the specific environments in which they operate, enabling us to act as a strategic partner, providing clear advice which is both balanced and constructive. 

We have experience in reviewing and helping firms to enhance their economic crime frameworks, including risk assessments; due diligence measures; governance and training; and transaction monitoring controls. Therefore, please do not hesitate to contact Clarinda Grundy, Senior Manager in our Economic Crime Advisory team if you have any questions regarding how your economic crime framework can be optimised in readiness for the market-wide enhancements resulting from the incoming Levy.