The May 2023 deadline for the first FIN074 return is approaching for MLR firms. Here, we provide a run-down of everything these firms need to know about the upcoming requirements.
As of 1 April 2022, HM Treasury implemented the obligation for firms supervised under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR) to pay a levy in relation to economic crime and anti-money laundering. With the first payment of said levy looming over MLR firms, some clarity is required on what this levy really means.
Section 53(1) of the Finance Act 2022 requires HM Revenue and Customs (HMRC), the Gambling Commission (GC), and the Financial Conduct Authority (FCA) to collect an economic crime levy (ECL) on behalf of the Treasury. The purpose of the levy is to fund new Government action to tackle money laundering and help deliver the reforms committed to in the 2019 Economic Crime Plan. The Government expects to raise approximately £100 million per year. However, out of the 90,000 entities subject to the MLR, only 4,000 will be subject to the ECL.
What is the Economic Crime Levy?
The ECL is an annual charge that will affect entities supervised under MLR and whose UK revenue exceeds £10,200,000 per year. The levy will be based on total UK revenue and will be charged according to four size bands. The assessment, payment, collection and recovery of the due sums are set out in the Economic Crime (Anti-Money Laundering) Levy Regulations 2022. The amounts for 2023/24 are:
- Small (under £10.2m) = Exempt
- Medium (£10.2m-£36m) = £10,000
- Large (£36m-£1bn) = £36,000
- Very Large (over £1bn) = £250,000
For the purpose of determining the applicable band, eligible revenue consists of all revenue that is reasonably attributable to the firm’s activities within the UK. In practice, entities residing in the UK should deduce any revenues generated by permanent establishments located in foreign jurisdictions (whether branches or affiliated undertakings). Inversely, foreign entities should only report revenues attributable to their permanent establishment (branch or undertaking) operating in the UK.
The ECL will be collected by one of the three collection authorities: FCA, GC, or HMRC.
Each of those bodies already has responsibility for supervising businesses in certain sectors of the economy for the purposes of preventing money laundering and will be responsible for collecting the levy from them.
Firms will only need to provide information to and pay one collection authority, even if they are supervised by more than one under MLR. If a firm is supervised by the FCA, it must follow the FCA’s ECL process. They must do this even if HMRC also supervises some of their business activities.
It is worth noting that the applicability of this levy is purely based on revenue as opposed to a risk-based approach. Consequently, the level of exposure to financial crime such as money laundering and terrorist financing bears no impact on the amount of levy due. On the other hand, in-scope entities need not identify or differentiate revenues generated by in-scope activities from the remaining sources of income.
The FCA’s response
The FCA set out its position on the ECL in Section 5 of their consultation paper CP22/23:
“Since the ECL is governed entirely through legislation and HM Treasury orders, and not by FCA rules, we are not consulting on it. However, we have been instructed to start collecting the levy from 2023/24”
To keep down the costs of collection, invoicing will be conducted as part of the normal invoicing process and the levy will be an additional line on the invoice.
Furthermore, data will be collected through a new regulatory return (FIN074), accessed through the RegData system. Firms will be asked to submit the return from 1 April 2023 and more details will be communicated in due course.
FIN074 is now an active return on the RegData platform. It is stated that the purpose of this data item is so the FCA can determine which firms are liable to pay the ECL and place them in the correct levy band.
Firms are expected to report all their regulated and non-regulated UK gross revenue, as per the definition set out in section 57 of the Finance Act 2022, from the firm’s financial year that ended in the previous tax year. The total revenue must be reported in single units and GBP; these figures should be audited if possible.
FIN074 is due to be submitted on 2 May 2023. Failure to submit in time may result in a £250 administrative fee.
Where an entity is liable to pay the ECL, the FCA must give prior written notice. The indicated sum will be due after 30 days, after which the FCA may apply a late payment interest equating to 5% over the Bank of England’s based rate.
What do firms need to do?
Internally, firms will need to prepare themselves accordingly for the reporting of their FIN074. It is suggested that firms ensure the following tasks are completed:
- Assess which band they fall within based on a calculation of their UK revenue
- Engage across compliance, finance and treasury functions to ensure that appropriate provisions are made for the payment of the levy
- Be ready to meet the procedural arrangements for collecting the levy
The ECL forms part of a wider public policy on tackling money laundering and terrorist financing in the UK, alongside the suspicious activities reporting reform and increasing resources for the Financial Intelligence Unit. Coupled with the ‘REP CRIM’ returns that are now listed in some firms’ RegData reporting schedule, the latest FIN074 is a further boost in the FCA’s supervisory power. In our view, regulated firms should ensure that they are in a position to demonstrate that their current AML/CTF controls meet the FCA’s expectations in terms of adequacy and proportionality.