Economic Crime Levy consultation closes

The government has stated its intention to impose an economic crime levy on businesses in the anti-money laundering ("AML") regulated sector with the aim of raising £100m a year to resource activities to tackle economic crime.

Although no one would suggest that measures that strengthen the current AML regime and reduce economic crime are not welcome, imposing a further tax on businesses which are already required to spend significant sums on compliance, monitoring and reporting raises questions as to why the regulated sector should be contributing further. Given concerns as to the underlying principle and whether there should in fact be such a levy on the whole regulated sector, the way the government has gone about consulting on this new levy, or rather how it has failed to consult on this underlying fundamental principle, is a significant issue. The levy is coming (possibly as soon as 2022/23), no matter what the regulated sector thinks about it.

The government first announced its intention to introduce an economic crime levy on all businesses operating in the regulated sector in the 2020 Budget. It set out that the levy would be designed to fund some of the reforms set out in the Economic Crime Plan 2019-2022 (ECP). The ECP was launched in July 2019 and sets out the government's response to a range of issues impacting the UK, including money-laundering, fraud, market abuse and bribery. The ECP is an ambitious 3 year plan for fighting economic crime (with 7 strategic priorities and 52 action points) and proposes a joint public-private approach in order to do so. The ECP was developed in collaboration with UK Finance (which is the main trade association for the UK banking and financial services sector) and its strategic priorities were set in consultation with some of the UK's major banking institutions.

The consultation on the levy was launched in July 2020. The consultation, which closes at 12.15 am on 14 October 2020, focusses on how the levy should be calculated and collected, and what it should be spent on. The fundamental principle behind whether a levy should be imposed across the whole of the regulated sector is not up for discussion so the remit of the consultation is limited to the "design principles". The majority of those who will have to pay the levy have therefore had no opportunity to discuss whether it is appropriate for them to have to do so. The regulated sector encompasses a huge variety of businesses including banks, investment firms, insurance firms, accountants, book-keepers, estate agents, law firms, company formation agents, casinos and auction platforms, and it is estimated 90,000 businesses would potentially be liable for the levy. The risks of economic crime in each of these types of business (and indeed within each category of business), and how that risk manifests itself and needs to be addressed, are clearly very different. However, in imposing the levy the government proposes to apply the same formula, based on turnover (with a small business exemption), to all, with only a small adjustment for risk based on the number of suspicious activity reports ("SARs") that a business has made.

The consultation acknowledges that the private sector, as the first line of defence against economic crime, already "spends substantial sums to prevent economic crime" and that many types of business are already required to take significant (and costly) steps to ensure their businesses are not used to launder money (such activity being described as being at the "heart of all economic crime"). However, the government considers more needs to be done by the regulated sector and that "it is right that those who contribute towards the risks within the UK economy should pay towards the costs of addressing those risks" through the levy. If this is the intention, the proposal to use revenue as the basis for calculating the levy is clearly flawed and will result in a burden on many businesses that does not reflect the risk their business poses. For example, it seems entirely inequitable that those businesses that have invested heavily in sophisticated processes and procedures to prevent money laundering, and accordingly who contribute far less towards risks within the economy, should be taxed on the same basis as those which have not done so (and indeed this appears a missed opportunity to encourage robust systems to be put in place by exempting or reducing the levy accordingly). The sole assessment of risk (with a resulting adjustment to the levy) proposed in the consultation is based on the number of SARs a business has made over the preceding years. As the consultation acknowledges, this could clearly disincentivise the making of SARs, which would undermine the system underpinning the private sector's reporting of suspicions of economic crime. To avoid this risk, a multiplier to the levy is only proposed to be applied to firms consistently making high volumes of SARs – an average of 10,000 over 2 years. This may make the adjustment on the basis of the actual risk posed by a business largely meaningless. It would also clearly fail to catch those businesses operating with a laissez-faire approach to AML and reporting, and penalise those which operate on a perhaps overcautious basis. The revenue model will also be concerning for many businesses that may only conduct a small amount of regulated business because it does not appear to be intended that the levy should be based on AML regulated activity revenue only, rather than all revenue. Such businesses could find themselves paying a disproportionate amount towards combatting a risk they have little to do with. Additionally, because criminals often exploit smaller businesses with less robust procedures, the small business exemption may actually mean that those businesses that pose the highest risk end up contributing nothing. Accordingly, if the government wants regulated businesses to support the levy, significant work is needed to ensure it is reasonable, relates to actual risk and is calculated on a fair basis, none of which appears to be a given from the way the consultation is framed.