UK Economic Crime Levy

October 21, 2020
Introduction

HM Treasury has launched a consultation on a government proposal to impose an economic crime levy on certain UK firms which are subject to anti-money laundering (AML) regulation. Since AML-regulated firms are exposed to the primary economic crime risk of money laundering, they should, in the government’s view, contribute to the costs of tackling money laundering risk.

Although a wide range of measures have been implemented by the UK government to tackle economic crime, and significant amounts have been spent by private institutions to prevent it, economic crime remains a prevalent and evolving risk. Future UK government plans to tackle this issue are outlined in its 2019 Economic Crime Plan, including the proposal to fund the response to economic crime through both public and private sector contributions.

This consultation discusses the prospect of collecting private sector contributions by imposing an economic crime levy on AML-regulated firms, and seeks views on the implementation of the levy to ensure that it is both effective and proportionate. Design principles proposed for the calculation of the levy are likely to ensure that it is effective and proportionate, though trade-offs between principles will have to be optimised, notably of solidarity, simplicity, and avoiding unintended consequences.

Of primary concern is whether and how money laundering risk should be accounted for in the calculation of the levy, so that firms’ contributions are proportionate to the level of risk they contribute to the AML-regulated sector. If an appropriate risk measure is not found, the government may simply base contributions on the firms’ revenue. However, if money laundering risk is accounted for in the levy’s calculation, the levy could have a particularly significant impact on firms and sectors generally deemed high-risk.

In the crypto-asset industry, generally treated as posing an elevated risk of money laundering, firms may incur costs of a higher levy than similar firms in lower risk sectors. Where traditional financial institutions offer cryptoasset services, they could benefit from a relatively lower levy despite offering similar services as cryptoasset businesses, giving them a competitive advantage. It is critical that any metric for accounting for money laundering risk in the calculation of the levy does not disproportionately impact certain firms or sectors, and if one cannot be found, a base measure such as revenue should be used in the meantime.

Crypto-asset businesses in the UK are speedily being brought under the scope of regulation and seeing their compliance costs increase. As from January 2021, all crypto-asset businesses in the UK are required to be registered with the Financial Conduct Authority for AML/CFT purposes and may soon after face higher regulatory costs introduced by this additional levy, which may be disproportionate depending on how it is calculated.

Below is our selective response to the consultation:

Question 1

Do you agree with the design principles as set out above? Should the government consider any further criteria?

Proportionality would require the amount paid to be proportionate not only to the amount of activity which gives rise to money laundering risk, but also the level of risk posed by that activity. However, these levels may be difficult to discern, and differences even within specific groups of activities and products may restrict the extent to which a levy proportionate to money laundering risk may be imposed.

We broadly agree with the design principles outlined above, though there may be trade-offs between these principles. For example, ensuring proportionality may require more complicated formulae to be used to calculate the levy, resulting in decreased simplicity and predictability of the levy and its calculation.

Question 4

What are your views on what the proposed levy review should consider and when it should take place?

As highlighted in paragraph 3.13 of the consultation document, the money laundering threat is continuously changing. Therefore, the levy review should analyse how this threat has changed over time, and how the levy has been or should be adjusted to reflect this in order to remain proportionate to the money laundering risks which AML-regulated firms are exposed to.

At least a rudimentary review of the levy should be published sooner than 5 years after its introduction, ideally closer to 1-2 years after. This would enable quicker identification of any issues regarding, for example, its calculation and implementation, which could then be addressed ahead of later reviews of the levy.

Question 9

What are your views on the principle of exempting small businesses from paying the levy, and on the level of a potential threshold?

This exemption would help to satisfy the levy’s design principles of affordability and cost effectiveness, though it would detract from the principles of proportionality and solidarity as some firms would not pay despite conducting activity which exposes them to money laundering risk.

At the same time, HM Treasury rightly points out that some smaller firms may incur more costs from calculating the levy itself than paying it. A threshold for exemption, therefore, should be in place and chosen carefully to be high enough to ensure affordability and cost-effectiveness of the levy. This would be a desirable approach despite the trade-offs with other design principles, especially since smaller firms nonetheless contribute to the costs of tackling money laundering risk by incurring other costs, such as the costs of compliance with the UK’s AML framework.

Question 10

What are your views on having businesses below the threshold subject to a small flat fee?

While exemptions from the levy for small businesses would not be proportionate, neither would a flat fee, which may also detract from the levy’s design principle of affordability. An exemption for smaller businesses would, therefore, be more appropriate.

Question 13

How do you think money laundering risk should be accounted for in the levy calculation?

We agree with the Treasury that using risk assessments to measure money laundering risk may not provide enough detail to inform the calculation of the levy for the whole of the AML-regulated sector, and may also have various negative ramifications.

Using the number of SARs reported as a measure of money laundering risk would be more appropriate, despite the potential unintended consequence of firms being disincentivised from filing SARs. Though the consultation points to concerns of under-reporting in certain industries, over-reporting has also been identified as a serious issue in the UK, which may have contributed to the strain on the NCA’s resources identified in the FATF’s 2018 mutual evaluation report.

While using SARs as a risk measure for the levy may disincentivise some reporting, this is likely to comprise mainly of decreases in defensive reporting: where SARs are filed as a defence against liability without there being suspicions. SARs based on genuine suspicions, on the other hand, are less likely to decrease as firms may face criminal liability under the Proceeds of Crime Act 2002 for failure to report suspicions of money laundering.

Question 14

Do you believe using number of SARs reported as a metric through a banded approach would be an appropriate means of achieving this objective? Please explain your reasoning.

Although the banded approach may minimise the risk of firms being disincentivised from submitting SARs, the proposed risk multiplier is unlikely to give much representation to money laundering risk in the levy calculation. A fairer and more accurate means of accounting for money laundering risk would be to introduce several thresholds and risk multipliers, so that the number of SARs reported has a more significant impact on the risk measure. While introducing more thresholds would increase the number of firms which may be disincentivised from filing SARs, potential criminal liability under the Proceeds of Crime Act 2002 for failure to report suspicions of money laundering would likely offset this disincentive.

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