ECSH82790 - Sanctions for non-compliance: financial penalties: financial penalties framework: type 1 (scale charge)

There are 3 stages to calculate the starting amount for the type 1 (scale charge) penalty:

  1. Calculate the total starting penalty (fixed starting penalty plus additional penalty).
  2. Calculate the business’ gross profit to determine the maximum amount of the starting penalty that can be charged. 
  3. Compare both the starting penalty and the gross profit penalty amount and take the lower amount to arrive at the maximum amount of the starting penalty which can be imposed, before considering any reductions as set out in stage 3 below and the appropriateness review.

Once the starting penalty is calculated, the decision-maker (DM) is required to consider whether the penalty calculated is appropriate in the circumstances of the case and may make adjustments as necessary.  This can include increasing or reducing the starting penalty.

Stage 1

For Accountancy Service Providers (ASPs), Estate Agency Businesses (EABs), Letting Agency Businesses (LABs) or Trust or Company Service Providers (TCSPs), contraventions will be grouped, see ECSH82791. For each group of regulations contravened, the business will be charged a fixed starting penalty of £5,000 plus a scale charge, see ECSH82792, based upon the number of clients, transactions or end users associated with the contravention(s) involved to calculate the starting penalty.

Stage 2

Once the starting penalty has been calculated, the second stage is to calculate the gross profit business’s gross profit to determine the maximum amount of the starting penalty. This is calculated as 25% of the business’s gross profit, see ECSH82815.

Stage 3

Compare the starting penalty amount from stage 1 and penalty maximum from stage 2. The starting penalty will be the lower of these two figures. 

The above only produces the starting penalty. Therefore, this figure may be subject to adjustments. For type 1 (scale charge) penalties, the following reductions are available:

  • Where a business makes an unprompted disclosure, see ECSH82825, they will receive up to a 50% reduction to penalty value.
  • Where a business cooperates fully, see ECSH82845, they will receive a reduction of the penalty value.
  • Where a business has carelessly, see ECSH82830, rather than deliberately, see ECSH82835, contravened the Regulations, they will receive a 25% reduction of the penalty value.

Appropriateness review

Once the DM has arrived at a penalty figure, after stages 1 to 3 above have been completed, they must then consider whether the penalty figure is appropriate.

The appropriateness review is the documented consideration that DMs must make, explaining how the penalty is appropriate and why the amount being imposed is appropriate. All of the relevant factors of the case must therefore be taken into account and documented within the appropriateness review, along with consideration of the relevant factors within regulation 83(1) MLR 2017.If the DM considers the penalty amount is not appropriate, then they should adjust the amount of the penalty accordingly (see ECSH82785 for details of what to consider when undertaking the appropriateness review). The DM may consult with the EC-S Policy and Strategy team for further advice, where they consider it appropriate to do so.

For example, some TCSPs/ASPs/EABs may only act on behalf of a small number of significant clients, who pay a large fee and where the ML/TF/PF risks caused by non-compliance are more significant than a simple calculation based on the number of clients would suggest. This could occur, for example, where the client is an intermediary. The penalty should be reviewed to ensure it is consistent with the requirements of regulation 83, including the gravity and the duration of the contravention or failure or the potential systemic consequences of the contravention.  Therefore, when a TCSP/ASP/EAB has a small number of high-volume clients, the DM might consider using the volume of transactions undertaken or number of end clients being provided with the service to apply the scale charge. Alternatively, the DM might want to consider whether the benefits gained model would be more appropriate.  

Where an alternative method of calculating the penalty is used, a full explanation should be included in the relevant documents issued to the Business.

Prompt payment

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 amount. The Penalty Administration Charge is not subject to the early payment reduction.

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