Way back in March, pre-lockdown, when life seemed relatively normal, the chancellor of the exchequer announced in his budget that the government was looking to introduce a new ‘economic crime levy’ to fund various measures to combat illicit finance.
We were promised further consultation ‘later in the spring’ but in fact the consultation did not arrive until mid-July, just as Parliament was rising for its long summer break.
As mooted in the budget announcement, the government is proposing that the levy will apply to the sectors currently in scope for Money Laundering Regulations (MLRs), which includes not just banks and other financial services firms, but also accountants, lawyers, estate agents and a wide range of other services.
Fairer cost distribution
While the consultation acknowledges the contribution firms in these sectors already make in terms of the compliance burden, it argues that the overall costs of regulation are not shared fairly. The economic crime levy is intended in part to remedy that.
The proposals published in July are for the levy to be based on turnover, with an exemption for small businesses – with the threshold for that to be determined. The Treasury consultation also proposes a small multiplier for firms submitting very large numbers of Suspicious Activity Reports (SARs) and who are therefore deemed to present a greater risk.
The consultation acknowledges that this could create a disincentive to firms submitting SARs – which would be a very serious unintended consequence. It proposes to remedy this by applying the multiplier only to those firms that consistently report high volumes: an average of 10,000 SARs per year over a two-year period.
While this may go some way to countering the perverse incentives, the overall effect may be to water down any risk-weighting impact altogether.
Back in March, we argued for a more sophisticated approach to risk-weighting. By giving each firm an individual risk-weighting based on what they have done to prevent and report money laundering, the government could effectively incentivise firms to adopt better, more secure processes.
Electronic verification
When it consulted on the most recent set of regulatory changes, incorporating the EU’s 5th Money Laundering Directive (5MLD) into UK law, the Treasury asked specifically for ideas as to how to incentivise the adoption of electronic verification (EV). The design of this new levy is one, potentially very powerful, way in which this could be achieved.
It seems perverse and unfair that businesses which have invested in up-to-date digital systems should be charged on the same basis as those which continue to rely on outmoded manual processes that leave them, and the financial system as a whole, wide open to abuse by sophisticated criminals.
The widespread adoption of EV would represent a true win-win scenario, for as well as being much more secure than paper-based processes, digital AML processes are also much more efficient and cost-effective to administer. This, too, is a point the Treasury itself acknowledged in its 5MLD consultation.
If we can reduce the cost, in terms of time and money, of dealing with the vast majority of cases where there is no suspicious activity to report, that means that the available resources can be better focused on the small minority where further investigation is required.
It is disappointing that the Treasury now seems to have forgotten this important insight in putting forward this new tax.
We hope that firms responding to the consultation will remind the government of the fact that it is possible to reduce costs to firms while also delivering a boost to the overall security of the financial system.
John Dobson is chief executive of SmartSearch
