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6. U.K. Regulation of Money Service Businesses

Author(s):
International Monetary Fund
Published Date:
March 2005
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Author(s)
David Faulkner

This paper describes both how the United Kingdom regulates its money service businesses and how, in doing so, it fulfills the requirements of Financial Action Task Force (FATF) Special Recommendation VI. Recommendation VI calls on countries to take measures to ensure that informal money or value transfer systems are licensed or registered and subject to all the FATF recommendations that apply to banks and nonbank financial institutions.

I. Background

The United Kingdom’s approach to the regulation of money service businesses has evolved considerably over the past decade and has included the introduction of a formal regulatory regime. The United Kingdom defines money service businesses as businesses falling within the following categories:

  • third-party check cashers
  • bureaux de change, and
  • money transmitters, including those engaged in informal value transfers.

The United Kingdom has adopted a two-pronged approach to the regulation of such businesses, depending on whether they operate in the formal or informal realms. Those in the formal sector, such as the bureaux de change located in main commercial banks, are regulated like the banks themselves, by the Financial Services Authority. However, businesses in the informal sector, which are stand-alone and independent, are regulated and supervised by H.M. Customs.

In terms of scale, the United Kingdom has over 2,500 registered money service operators carrying out their business in over 32,000 premises, half of which are post offices. There are more than 40 so-called significant traders such as Western Union. The remainder, therefore, are largely self-standing, independent, and individual businesses, 90 percent of which have fewer than five employees. They offer check cashing, currency exchange, and money transmission facilities, including some 800 specifically registered as providing informal money transmission services. All services, irrespective of the size and nature of the business, are subject to the regulatory regime and must comply with its requirements.

The U.K. Approach

By the time FATF’s Special Recommendation VI emerged, the United Kingdom was already exploring how this broad informal sector could be most effectively regulated. The introduction of the regulatory regime in 2001 had its origins in a number of factors. The Cabinet Office Performance and Innovation Unit, in its June 2000 report Recovering the Proceeds of Crime, first set out a proposal to establish a domestic regulatory framework for these businesses. The report examined the recovery of the proceeds of crime across a range of criminal activities. It noted that the money service transmission sector was potentially vulnerable to significant financial abuse. To address such risks, the report recommended a balanced approach, one that would both “incentivise” and involve all communities while being equally rigorous in scrutiny, tough in enforcement, and effective in sanctions imposed for noncompliance.

On this basis, the report recommended what it called a light touch approach, although the term “light touch” does not imply any sense of unwillingness to address abuse of the system. On the contrary, the aim of the U.K. regulatory regime has been to avoid introducing burdensome, overly intrusive regulation that could be counterproductive, potentially driving many businesses away from compliance, undermining transparency, and obscuring traceability. One of the key aspects of effectively regulating this sector in the United Kingdom has been to ensure that those providing money service facilities, for example to our ethnic communities, are not discouraged by overly complex and disproportionate regulations but rather are encouraged to work in partnership and cooperation with the authorities. In short, the U.K. approach is one that aims to maximize controls on areas that are subject to the highest risk while minimizing the administrative burden on industry, consumers, and communities.

Registration of U.K. Money Service Businesses

In operational terms, the U.K. regime requires that money service businesses register with Customs. That is, to operate as a money service business in one or all of the three categories indicated above (third-party check cashers, bureaux de change, or money transmitters), businesses must complete and submit a registration notice, which is available from various sources, including the Internet. Those registering are also required to pay a fee of £60—about €85/US$113—for each premises from which they operate. This fee has in fact been reduced in the past year to ensure that the levy imposed is proportionate to the type of business covered. In short, the process places the requirement to register directly on the regulated entity. Any business that operates these sorts of money services but fails to register is in breach of the United Kingdom’s money laundering regulations and subject to financial penalties of up to £5,000 or €7,000/US$9,500.

In registering, businesses receive a certificate showing a specific and unique registration number and a video explaining the system and its requirements. Businesses must notify Customs of where they intend to carry out their operations. Once a business is registered, it will be visited by a customs officer. The visit is central to the due diligence process, since it provides officials with the opportunity to monitor how the business is being run and whether the money laundering regulations are fully understood and complied with, and to ensure that customers provide sufficient evidence of their identity and that proper records are kept.

Penalties

The scope to issue penalties was recently widened considerably to allow for the imposition of civil penalties for failures in registration and anti–money laundering systems failures. Customs has adopted a stepped approach for imposing penalties for noncompliance. Any money service business found in breach of its responsibilities receives a warning letter and a subsequent visit to ensure that satisfactory controls have been put in place. This process continues in an increasingly rigorous manner until compliance is achieved. Noncompliance is met by penalties and ultimately by prosecution.

Customs sums up the requirements that businesses need to meet in the phrase CATCH—that is, businesses must do the following:

  • Confirm the identity of their customers;
  • Appoint a money laundering reporting officer;
  • Train their staff;
  • Control their business by having anti–money laundering systems in place; and
  • Hold all records for at least five years.

In short, the U.K. system places responsibility on the business rather than on the regulator—a potentially significant distinction in the debate about the merits of registration and licensing. The FATF best practices paper on Special Recommendation VI (Combating the Abuse of Alternative Remittance Systems: International Best Practices) indicates: “The key difference between the two is that licensing implies that a regulatory body has inspected and sanctioned the particular operator to conduct such a business; whereas registration means that the operator has been entered into the regulator’s list of operators.”

The U.K. experience suggests that this distinction may be too finely drawn. Despite having a registration regime, the follow-up visits made by Customs involve a clear degree of inspection and approval, together with scrutiny of the application. This approach can be defined as “risk-based and intelligence-led”—risk-based because, having made a risk assessment, those passing judgment still have to base it on proportionality and potential impact; intelligence-led because knowledge, information, and data provide assurance that the system is properly and effectively controlled. That means, in short, that Customs is operating intelligently and in ways designed to promote a culture of compliance and is bringing in those who might otherwise remain beyond scrutiny. The supervisory effort is directed by intelligence that focuses attention on the most vulnerable areas. Finally, the arrangements are ultimately underpinned by a sequence of increasingly stringent sanctions and penalties. As in any effective regulatory regime, the key should be to ensure quality of supervision, compliance, and enforcement through transparency and traceability—an approach that has been termed “registration-plus.”

However, all regulatory systems need to be kept under regular review, and the U.K. continues to review its own systems and procedures. There is certainly no one-size-fits-all solution, and circumstances and systems of money transmission vary significantly across jurisdictions. The declaration issued at the Second International Conference on Hawala in April 2004 acknowledged the need to understand different systems against the diversity of sociocultural, legal, and economic contexts.

Conclusion

By promoting the understanding of different money transmission systems, the international community can foster enhanced regulation, reduce vulnerabilities to money laundering and terrorist financing, and effectively support those communities whose livelihood often crucially depends on such systems. The U.K. will continue to play its full part in these efforts.

David Faulkner is senior policy adviser for Financial Systems and International Standards, H.M. Treasury.

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