Treasury Committee Report on Economic Crime
On 2nd February 2022 the Treasury Committee published its recommendations to Government to improve Prosecutors’ and Regulators’ responses to Economic Crime
The full report can be found here. Below are the Conclusions and recommendations:
Conclusions and recommendations
The growth in economic crime, and the Government’s response
1. The growth in economic crime and fraud is constantly evolving and poses a challenge to Government. There is no “silver bullet” solution. Government must work across departments, regulatory bodies and law enforcement agencies to address all aspects of the problem. A plan to co-ordinate this work, such as the existing Economic Crime Plan, is a sensible approach. However, it can only work if there is extensive co-ordination at all levels, from Ministers to those on the ground who are enforcing the law. This might be simpler if a single Government Department or agency had responsibility for all policy aspects. (Paragraph 33)
2. We are as unhappy as the Minister is with progress so far in tackling economic crime, and we welcome his frankness about the progress made. We acknowledge that there is a lot of activity going on across Government, by regulators and crime-fighting agencies, to tackle economic crime; but fraud and economic crime have continued to rise at an alarming rate. Work being done by Government is still not enough and not urgent enough to stem the rise, let alone start to bring it under control. (Paragraph 34)
3. The Government should give this work a far higher priority. Economic crime harms consumers and businesses, damages the reputation of the UK as a pre-eminent financial centre and, as the NCA says, threatens national security. (Paragraph 35)
4. The Economic Crime Plan is for the period 2019 to 2022, and this year there is an opportunity for the Government to review how well the Plan has operated, its strengths, and its failings. It should be adapted as necessary and renewed for a further three years. We expect that the Government will use the opportunity to push harder and act faster to reduce fraud and economic crime across a range of policy areas. (Paragraph 36)
5. We recommend that the Government considers whether the governance of the Economic Crime Plan has been effective and also whether having such a wide range of departments with responsibilities in this field is the best way to tackle a problem like economic crime. The Government should consider whether policy responsibility should be centralised in a single Government department. The Government should move to a strategy for combatting fraud which focuses on outcomes, not processes. Its explicit target should be to reduce substantially the level of fraud. (Paragraph 37)
6. Spending on economic crime needs to be sufficient to meet the challenge. The Economic Crime Levy is intended to bring in a useful amount of additional funding to support the fight against economic crime. We welcome the design of the Levy, as it is simple and excludes the vast majority of regulated businesses. However, spending on anti-money laundering should match the need and should not be limited by the yield of the Levy alone. (Paragraph 47)
7. We welcome the Government’s undertaking to be accountable for spending the money raised by the Economic Crime Levy in the way in which it is intended. We recommend that the Government publishes an annual account of its spending on economic crime, including an account of how the yield from the Economic Crime Levy has been spent, and an evaluation of its effectiveness. (Paragraph 48)
8. We recommend that the Government provides a breakdown of how the additional funding allocated to the Home Office in the Spending Review for fighting economic crime will be spent, and how much of that funding will reach crime-fighting agencies. The financial resources being brought to bear on the problem are fragmented and modest when compared to the losses attributed to fraudulent activity. Given the scale of the problem and the speed at which it is growing, we remain to be convinced that this extra resource will enable a sufficient response in the absence of a substantial reform of the anti-fraud infrastructure. (Paragraph 49)
9. The number of agencies responsible for fighting economic crime and fraud is bewildering. Each of the enforcement agencies has other crime-fighting or regulatory objectives, and although the joint working co-ordinated by for example the National Economic Crime Centre is welcome, there is a bigger question about whether there should be a single law enforcement agency with clear responsibilities and objectives to fight economic crime. We recommend that the Government seriously considers this issue as part of a review of the Economic Crime Plan. (Paragraph 56)
10. Law enforcement agencies themselves appear to note the mismatch between the scale of the problem and the response. Given the harm involved in economic crime, whether directly affecting consumers or not, the Government must consider why it seems not to be a priority for law enforcement, and how it can ensure it becomes one. The Government must ensure that law enforcement agencies are appropriately resourced to tackle the scale of the problem. (Paragraph 57)
11. There may be many reasons for low prioritisation of economic crime by crime-fighting agencies. It does not happen in the street, but often in people’s homes. Consumers often, apart from inconvenience, do not suffer directly, since they may be repaid by banks. But these are not reasons to not engage more forcefully with the problem. (Paragraph 58)
12. We recommend that, in its response to this Report, the Government sets out the legislation which is being worked upon across Government and that is relevant to addressing economic crime, and provides an assessment of the measures that might be required to be brought in through an Economic Crime Bill, the timescales for this, and why it has chosen not to bring forward such a bill at this time. (Paragraph 61)
Online economic crime
13. We agree with the Joint Committee that the Draft Online Safety Bill should be amended so as to include fraud offences in the list of “relevant offences” in Clause 41(4) of the Bill. Fraudulent content should be designated as “priority illegal content”, thereby requiring online firms to be proactive rather than reactive in removing it from their platforms. These steps would place greater responsibility on online companies to prevent their platforms from being used to promote financial fraud, something of which these online firms are capable. (Paragraph 74)
14. We reiterate our strong belief that the Government should include measures to address fraud via online advertising in the Online Safety Bill, in the interests of preventing further harm to customers being offered fraudulent financial products. (Paragraph 94)
15. The Government should consider whether online platforms and social media companies should be required to do Know Your Customer checks on their advertisers, to make it more difficult for fraudsters to promote themselves. (Paragraph 95)
16. We welcome the steps taken by certain online firms to take a clearer line in facilitating access to their platforms only for financial promotions placed by entities which are authorised by the FCA. We urge other online companies which have not made such commitments to follow suit. (Paragraph 95)
17. The Government should not allow online companies to ignore legislation designed to protect consumers from harm. The Government should ensure that financial services advertising regulations apply also to online companies, and that the FCA has the necessary powers to effectively enforce the regulations. (Paragraph 96)
18. It is not appropriate that online companies should profit both from paid-for advertising for financial products and from warnings issued on their platforms by the Financial Conduct Authority (FCA) about those advertisements. We urge all online companies to work constructively with the FCA and to follow Google’s example by giving advertisement credits to the FCA for the future. We also expect them to refund money that has been spent in the past by the FCA. (Paragraph 97)
19. We recognise that placing a responsibility on online companies to reimburse consumers who are victims of online fraud could rapidly transform their approach to fraud. Any move to force online firms to compensate victims of fraud should not be to the detriment of the outcomes for consumers already achieved through the compensation banks and other financial institutions pay. The consumer should see no loss of speed or amount in repayment. (Paragraph 101)
20. We recommend that the Government seriously consider whether online companies should be required to contribute compensation when fraud is conducted using their platforms. (Paragraph 102)
21. The Joint Committee on the Draft Online Safety Bill concluded that self-regulation of online platforms had failed. It is true that there have been many failings, and it is right that action should now be taken to place more responsibility on online firms to prevent harm from fraud and other economic crimes which their platforms and services have facilitated. However, the formation of the Online Fraud Steering Group is evidence that co-operative working between the private and public sectors can help improve outcomes and compliance. A number of online companies also showed in their evidence to us that they are taking a more constructive approach to co-operation with law enforcement agencies. (Paragraph 103)
22. We welcome the setting up of the Online Fraud Steering Group, and we encourage all online companies to work constructively with Government agencies and the wider public sector to fight online scams and fraud. The Government is correct to recognise in this area, as in the Economic Crime Plan more generally, that a public-private partnership approach is needed. (Paragraph 104)
23. The Government should build on these foundations when it updates the Economic Crime Plan. But it should also ensure that regulators and law enforcement agencies have the powers they need to ensure that online companies provide them with information and comply with regulatory requirements.(Paragraph 105)
Authorised push payment fraud
24. The work of the Payment Systems Regulator to improve the Contingent Reimbursement Model Code is welcome, as is the Government’s confirmation that it will introduce any necessary legislation to that end. Together, these steps will help improve consumer outcomes and reduce fraud. (Paragraph 116)
25. However, the pace of change has been very slow against a background of growing fraud, which should have prompted greater urgency. The super-complaint was made in 2016, and the previous Treasury Committee called for the Contingent Reimbursement Model Code to be made mandatory in 2019. Since then, nearly three years have passed, during which time authorised push payment fraud has increased, causing significant harm. The Payment Systems Regulator’s ‘Call for views’ was published in February 2021 and, although there is now a clear intention to make reimbursement mandatory, another year has been lost. (Paragraph 117)
26. We recommend that the Government urgently legislates to give the Payment Systems Regulator (PSR) powers to make reimbursement mandatory, and that the PSR then take rapid action to protect consumers. We recommend that the PSR and Treasury accelerate their consultation processes to enable quicker implementation of measures to protect consumers from fraud. (Paragraph 118)
27. We welcome the introduction of the Confirmation of Payee service in 2019, as recommended by our predecessor Committee. We also welcome the work the Payment Systems Regulator is doing to broaden its scope through the introduction of Phase 2, extending and enhancing the service. (Paragraph 123)
28. We recommend that the PSR supplies a report to our Committee on progress in the implementation of Phase 2 by the end of 2022. (Paragraph 124)
29. Improving data-sharing between banks is one of the measures which the PSR is implementing as part of its reform of the CRM Code. The Treasury should be ready to bring forward any legislation which is needed to enable this, and the PSR should ensure that banks act quickly in putting in place the necessary changes. (Paragraph 125)
Anti-money laundering
30. The National Crime Agency is right to focus on Suspicious Activity Reports as a priority, and we welcome the much-needed investment in new IT systems and the plans for increasing staff and analytical capacity. The SARs reform programme is likely to improve anti-money laundering systems and the ability of law enforcement agencies to handle large numbers of SARs quickly and effectively, so as to make full use of them in the fight against economic crime and organised crime more generally. (Paragraph 141)
31. It is, however, disappointing that the SARs reform programme is not yet complete and that no timetable or target date for its completion has been published. (Paragraph 142)
32. A timeline showing when the SARs reform programme milestones are expected to be met, and an annual progress report on the programme, should be provided to this Committee. (Paragraph 142)
33. But the SARs reform programme is not an end in itself—it can only deliver change if the law enforcement agencies have the ongoing capacity and funding to tackle the criminal activity indicated by SARs. Responsibility lies with the Government to make available all the resources needed by the Home Office, regulators and crime-fighting agencies if they are to have any meaningful impact on criminal activity indicated by SARs. (Paragraph 143)
34. The effectiveness of SARs might be increased if banks are permitted to share information with the National Crime Agency and other law enforcement agencies, before the suspicion threshold required under existing anti-money laundering legislation is reached. (Paragraph 144)
35. Whilst the Office for Professional Body Anti-Money Laundering Supervision (OPBAS) has made good progress, it is disappointing that nearly four years after it was set up, it is still encountering poor performance from a large proportion of the professional bodies that it supervises. There needs to be a plan to ramp up compliance in this sector, by resourcing OPBAS to do more checks and to allow it to take punitive action against professional body supervisors. (Paragraph 153)
36. The forthcoming Government review of the regulatory and supervisory regime for anti-money laundering and counter-terrorist financing, expected to conclude by June 2022, needs to address the concerns we have heard in this inquiry about the limited forward steps in compliance that OPBAS has so far secured. The problems which OPBAS identifies are similar to those which our predecessor Committee highlighted in 2019, shortly after OPBAS had been set up. We recommend that the review should not shy away from considering radical reforms, including a move away from the self-regulatory model and the creation of a new supervisory body, potentially independent of the FCA, which takes more direct responsibility for policing professional body compliance with anti-money laundering regulations. The review should also take a hard look at enforcement measures which apply to professional bodies.(Paragraph 154)
37. The case for a supervisor of supervisors—including statutory supervisors—is still as it was at the time of our report in in 2019. We recommend that this idea should also be considered by the review.(Paragraph 155)
38. We note the actions taken by HMRC since its previous inquiry to improve its performance in supervising anti-money laundering (AML). However HMRC’s self assessment of its performance is not truly independent, and we recommend that HMRC finds a way to provide the assurance of independent assessment. (Paragraph 166)
39. HMRC is responsible for anti-money laundering supervision in a number of risky sectors, such as Trust or Company Service Providers (TCSPs). There are signs that HMRC could improve its supervisory performance in that sector and other risky sectors. HMRC should seek to be more proactive in preventing TCSPs facilitating the use of UK companies for money laundering and should aim to drive up significantly the numbers of SARs from that sector. (Paragraph 167)
40. We recommend that HMRC’s role as a supervisor is reviewed as part of the HM Treasury review of the Oversight of Professional Body Anti-Money Laundering and Counter Terrorist Financing Supervision Regulations 2017, due by June 2022. That review should also focus on what can be done to improve money laundering compliance by trust or company service providers. (Paragraph 168)
41. The UK is a world-leading financial centre and needs an extensive legislative and regulatory regime to protect its financial system from money laundering. But it also needs enforcement and to ensure compliance with legislation. It is not obvious that either regulation or enforcement systems are robust enough or up to the job required of them. While the latest evaluation by the Financial Action Task Force of the UK’s anti-money laundering and counter-terrorist financing regime is positive, the Government should not be complacent. The FATF evaluation finds room for improvement in enforcement and compliance, and there is still much that the Government needs to do to make it more difficult to launder money in the UK. The latest FATF report is over three years old. In that time money laundering undertaken in the UK has not gone away: it has grown. The response to this threat seems slow and inadequate given the scale of the threats it poses. (Paragraph 172)
42. The new assertive approach by the FCA is welcome. The prosecution of NatWest is a major success, and the Committee congratulates the FCA and everyone in the team working on it. The level of the fine should be a deterrent to others. The question is whether this was an isolated case or whether more prosecutions of banks and financial institutions for money laundering will follow. While that would show effective enforcement, it would also signal that money laundering controls are not working as they should be within the institutions prosecuted. (Paragraph 179)
43. We will continue to monitor the de-risking of customers by banks. We recommend that the FCA report annually on numbers of de-risking decisions and on progress to ensure that banks are not unfairly freezing bank accounts and de-risking customers. (Paragraph 186)
Cryptoassets and economic crime
44. We note the increasing risks around cryptoassets and economic crime. We share the Government’s concern about the risk to consumers from the growth in the market for cryptoassets. We welcome the announcement by the Treasury that the Government will legislate to bring advertising of cryptoassets into line with that of other financial services and products, and that the FCA is strengthening financial promotion rules, including those for cryptoassets. (Paragraph 195)
45. The work being done by the Advertising Standards Authority to protect consumers from misleading advertisements for cryptoassets is also welcome. The Government should ensure that there is proper consumer protection regulation across the whole cryptoasset industry. (Paragraph 196)
46. The Government should set out in the Economic Crime Plan its intention that all cryptoasset firms should be registered for anti-money laundering (AML) purposes. This has not yet been achieved. It is unacceptable that, having introduced AML regulations for cryptoasset firms in 2020, there are so many firms which have not yet been registered. Large numbers have not even applied for registration, and it is not clear what sanction they face. (Paragraph 203)
47. While we acknowledge the need to ensure that the gateway for registration of cryptoasset firms for anti-money laundering should be a rigorous process, registration has been too slow. It needs to be speeded up, and the Government should work with the FCA to find a solution. The FCA should not extend the deadline for registration again beyond March 2022. If the FCA sees no alternative, it should write to the Committee to explain its position. (Paragraph 204)
48. If, as we recommend, the Government renews the Economic Crime Plan in 2022, it should consider instituting measures specifically to protect consumers from fraud and scams relating to cryptoassets.(Paragraph 205)
Companies and economic crime
49. We are disappointed that the Government has not yet implemented reform of corporate criminal liability. The previous Committee presented convincing evidence of the need for this in 2019, already two years after the Ministry of Justice had run its consultation in 2017. The decision taken in 2020 to ask the Law Commission to review the law on corporate criminal liability is a sensible step, given the complexity of the law in this area, but it is likely to be years before any change in the law results. We urge the Law Commission to proceed with its review speedily, and we urge the Government to act quickly in bringing forward any legislation flowing from the Law Commission’s review. In the meantime, corporate criminals will continue to be able to escape prosecution for economic crimes. (Paragraph 211)
50. Reform of Companies House is essential if UK companies are no longer to be used to launder money and conduct economic crime. We welcome the work being done by the Department for Business, Energy and Industrial Strategy and by Companies House to modernise the legal framework and operations of Companies House. However, the pace of change is slow. The problems with UK company structures were identified by the Government in 2014 in the UK Anti-Corruption Plan. While there have been welcome innovations, such as the People with Significant Control register, on current plans it will have taken over 10 years to improve matters, during which time a large number of UK companies may have been put to criminal use by a wide range of criminals. (Paragraph 230)
51. Waiting until the operational transformation of Companies House is complete risks further delay beyond 2025 if, as with many public sector change and IT projects, unexpected difficulties slow project delivery. Given the urgency of the problem, the Government should seek ways to implement as many reforms as possible sooner, before embedding a full transformation. (Paragraph 231)
52. The Government should supply us with details of the project milestones for the Companies House transformation programme, together with an annual progress report. (Paragraph 232)
53. The low costs of company formation, and of other Companies House fees (such as filing fees), present little barrier to those who wish to set up large numbers of companies for dubious purposes. The UK should be charging fees similar to those in other countries, which would yield significant extra funding for Companies House and for the wider fight against economic crime. An increased cost may also deter some formations, reducing the operational demands on Companies House. Large numbers of registrations of companies place cost burdens on other parts of the public sector, such as HMRC, and on the regulators and law enforcement agencies tackling economic crime. There is a strong case that the cost should reflect the wider burdens on the taxpayer and not just the marginal cost to Companies House. (Paragraph 237)
54. The Government should significantly increase the costs of company and Limited Liability Partnership incorporation, including Scottish Limited Partnerships, and should review other Companies House fees to bring them closer to international standards. A fee of £100 for company formation would not deter genuine entrepreneurs, and would raise significant additional funding for Companies House and for the fight against economic crime. It would also help compensate for the wider costs on the public sector of large numbers of company formations. (Paragraph 238)
55. We are disappointed that the Registration of Overseas Entities Bill is still awaiting introduction, more than five years after it was promised, and after scrutiny by a Joint Committee. Improving transparency of ownership of UK property is an important step that needs to be taken in order to improve defences against misuse of UK assets and companies by criminals and kleptocrats. (Paragraph 246)
56. We urge the Government to include a Registration of Overseas Entities Bill in the Queen’s Speech for the next Parliamentary session. (Paragraph 247)