ECSH82785 - Sanctions for non-compliance: financial penalties: financial penalties framework: type 1 Compliance Penalties [Money Service Businesses (MSBs), High Value Dealers (HVDs) and Art Market Participants (AMPs)]

Introduction

This guidance is to assist the decision maker (DM) calculate Type 1 Penalties (Compliance Penalties) for MSBs, HVDs and AMPs only. There is a separate framework, known as Scale Charge Framework, which relates to Accountancy Service Providers (ASPs), Estate Agency Businesses (EABs), Letting Agency Businesses (LABs) and Trust or Company Service Providers (TCSPs) Type 1 Penalties.

There are two key components for this framework A and B.

Component A strips away, or disgorges, income received that relates to the contraventions of the MLRs. In determining the amount income received, the DM needs to take into account any financial benefit gained and/or any losses avoided. This embeds the important principle that no one should benefit from non-compliant activity.

Component B is intended to act as a deterrent for the business in contravention, and any other businesses who make similar contraventions. 

There are 3 stages to component B

• Stage 1 is the calculation of the penalty, based on the disgorged amount calculated at component A.
• Stages 2 and 3 are the considerations of whether the penalty calculated at stage 1 is appropriate and whether reductions should be applied.

When considering potential reductions (in Stage 2), as well as the appropriateness of the overall final penalty (in Stage 3), this will only relate to the amount established in Stage 1:  the overall penalty amount cannot be lower than that the amount calculated in component A. The reason for this is that a penalty that is issued, as a minimum, should remove any financial benefit (including losses avoided) from non-compliant activity.  

-	Stage	Description	Fixed or variable amount
Component A	Disgorgement of benefits	Identify any financial benefit gained from non-compliant activity	Fixed amount
Component B	Stage 1 – Penalty Calculation	Higher Tier Penalty (200% of Component A value) or Lower Tier Penalty (100% of Component A value)	+100% or +200% of Component A
Component B	Stage 2 - Behavioural Reductions	Consideration or reducing Stage 1 based on co-operation and behaviour	Variable
Component B	Stage 3 - Appropriateness	Whether Stage 2 penalty is too low or too high and whether other sanction(s) should be used instead or additionally	Potential adjustment to penalty calculated at end of Stage 1 and 2
-	-	Issue penalty	-
-	-	Total payment due is Component A + Component B	-
-	-	Prompt payment discount of 25% (applies only to Component B)	-

An overview of the stages of the calculation

Component A– Removal of benefits gained from contraventions or the Money Laundering Regulations (MLRs)

This is a non-negotiable element. Once identified the DM cannot adjust amount as part of the overall penalty calculation unless evidence comes to light to adjust the basis: the stripping of benefits gained from non-compliant activity is core to the principle that no-one should gain from non-compliant activity.

HMRC will not allow a business to benefit from breaching regulations. 

The DM should establish the income gained and / or losses avoided from the contraventions. Component A of the framework ensures that all income gained by non-compliant activity is reflected in the total penalty. This calculation will vary, depending on the specific circumstances of the business, and below are some examples of how this may be calculated.

The benefit gained will be income before taking account of any costs to the business, such as bank charges.

If the contraventions relate to systemic issues, such as a business’s risk assessment, policies, controls or procedures, it is likely the entirety of the transactions will be in contravention, therefore all income gained will be liable for the Component A calculation.  When testing transactions and customer due diligence, if contraventions are found within a percentage of the transactions / customer due diligence, if an appropriate sample, this percentage can be apportioned to the entirety of the business. 

For example

Breaches found in 40% of customer due diligence tested

Appropriate amount of customer due diligence tested to consider it is a fair representation of the entire business

• 40% of transactions to be used as basis for calculating benefits made from contraventions
• if business has varying fees, calculate the average of this, considering what are the most common value for transactions fees

Different scenarios for identifying the benefits made includes

• Money transmitter – identifying income from the commission rates / charges for the transactions concerned
• Currency exchange / Forex – identifying the income received
  • if transactions are timed/delayed, compare rate at buying compared to rate at selling
  • if not sold yet, use rate on that day 
  • if it is lower, treat the rate as £0.00 profit, this will ensure the value being calculated at Component A is not reduced and the business will be considered as ‘breaking even’
• Cheque cashing – income from the difference in value of cheque and what business has paid to the customer
• High Value Payments (cash) – difference between the sold price of the goods (or expected selling price) and the price the products were bought for
• AMPs - the income received for the services they have provided, or goods sold

Losses avoided

As well as calculating income received, the DM should also include in Component A any losses avoided at this stage. Examples of losses avoided may include

• Not having a Compliance/Nominated Officer in place
  • (This content has been withheld because of exemptions in the Freedom of Information Act 2000)
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  • (This content has been withheld because of exemptions in the Freedom of Information Act 2000) If this could be done as part of another role, a calculation should be done based on a proportion of the typical salary of a CO/NO in that sector or a proportion of the salary of another manager in the business to act as a NO based on the amount of time it should have taken them to ensure the business was compliant

• Failure to complete politically exposed person (PEP) checks, how much would it have cost to undertake the checks (assuming using a system which charges for PEP checks, or how much cheaper the system is because when developing, PEP checks were not included)
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• If outsourcing customer due diligence to a third party, but not utilising them correctly / fully, what was the cost for the money saved not paying the third party, for aspects of customer due diligence that was required?
• Not correctly undertaking customer/enhanced due diligence which requires an additional expense
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Component B

Stage One – Penalty (Higher Tier or Lower Tier)

The next stage of the penalty framework is to establish whether the penalty is to be categorised as a higher or lower tier penalty.  This will influence how much penalty will be added to the recovery of the benefits made / losses avoided from contraventions, identified in Component A. The seriousness of the contraventions (the nature and duration of the non-compliance) will determine whether the business should receive a higher or lower tier penalty.  Contraventions with high severity will be categorised as a Higher Tier Penalty and, conversely, less severe contraventions will be categorised as a Lower Tier Penalty. 

When deciding whether the penalty is to be categorised as higher or lower, the deciding officer should consider

• Are the contraventions widespread across the relevant business activity?
• Are the contraventions extensive / has the individual / business breached numerous regulations and to what degree were these regulations breached?
• Did the failings continue for a substantial period before being addressed?
• Does the individual / business have a history of non-compliance with HMRC, and been warned or sanctioned before? (We may want to consider compliance wider than the MLR as we do when deciding fit and proper such as tax compliance and furlough fraud)
• How has the individual’s/business’s risk of money laundering and/or terrorist financing been affected by the non-compliance?
• What other negative impacts are there due to the contraventions?

Whilst there is no ‘one size fits all’ for determining whether a penalty should be classified as Higher Tier or Lower Tier, a reasonable approach would be to classify a penalty as Higher Tier if the answer to at least two of the questions above suggests that the non-compliance is / was significant. There may be cases, however, where contraventions are so significant that although only one of the above is met, the failing is so severe as to warrant a Higher Penalty. In some cases, there may be additional questions not detailed above which would assist in making the decision to classify the penalty as being either Higher or Lower.

Lower Tier Calculation

If a penalty is to be categorised as a Lower Tier, the stage 1 penalty value should be the same as the Component A disgorgement figure. 

If the Component A disgorgement = £100,000, then the Stage 1 penalty will = £100,000

Total value of the fine = £200,000

Higher Tier Calculation

If a penalty is to be categorised as a Higher Penalty, at Stage 1, the value established at Component A should be doubled.

For example:

If the Component A disgorgement = £100,000, then the Stage 1 Penalty will = £200,000

Total = £300,000

Stage Two – Behavioural reductions

This stage involves consideration of whether the Stage 1 amount should be reduced to reflect the behaviours of the business. 

Reductions must not be applied to the Component A disgorgement figure.

There are three considerations to make at this stage, they are

• Did the business make an unprompted disclosure, see ECSH82825, of their non-compliance (maximum 50% reduction to the penalty) or did this come to light as a result of any HMRC or other agency activity or intervention (or the imminence of one);
• Was the non-compliance due to carelessness, see ECSH82830, (25% reduction) or deliberate, see ECSH82835, (no reduction); and
• Did the business co-operate, see ECSH82845, with HMRC to establish the facts and establish the non-compliance (25% reduction)

Stage Three – Appropriateness review

This final stage reviews the penalty already calculated at stages 1 and 2. This can be adjusted, up or down, as appropriate.

In helping to ensure that penalties are consistent and appropriate, the DM may consider

• Whether the contraventions are so severe, that it would be more proportionate to issue a penalty higher than the value calculated at the end of Stage 2 (This content has been withheld because of exemptions in the Freedom of Information Act 2000)
• The financial strength of the sanctioned person(This content has been withheld because of exemptions in the Freedom of Information Act 2000)
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Early payment reduction

If the penalty is paid within 30 days of the date of the penalty notice, an early payment reduction is applied. The early payment reduction is 25% of the penalty aspect only, that is, Component B, not to Component A. Neither the disgorgement of benefits nor the Penalty Administration Charge should be reduced for prompt payment. For example

• Business owes £12,500 (£5,000 disgorgement of benefits, plus £7,500 penalty)
• Business pays within 30 days of receiving notice
• Business due to pay: £5,000 disgorgement of benefits + (£7,500 – 25%), plus penalty administration charge
• £5,000 + £5,625, plus penalty administration charge

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)