This article recaps some of the key money laundering updates emanating from the FCA in 2019.
The FCA is one of three UK statutory anti-money laundering (AML) supervisors under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations (MLR) 2017, regulating approximately 20,000 firms subject to the regulations. It also has powers under the Financial Services and Markets Act 2000 (FSMA) to help ensure that all firms within its scope (approximately 60,000) have appropriate systems and controls in relation to, amongst other things, financial crime. A focus on AML was listed in the FCA’s annual Business Plan for 2019/2020 as one of its eight ‘cross-sector’ priorities (as it was in the four years prior). Therefore, it’s safe to say that the regulator’s focus on the issue is here to stay. These are some of the key updates from the year.
A focus on high risk areas, such as correspondent banking and other connections with non-UK based entities
In April, the FCA concluded a case against Standard Chartered Bank, fining it £102.2m for AML breaches. This was the second largest AML financial penalty the regulator had have ever imposed. The failures, albeit historic, related to issues within the Bank’s wholesale correspondent banking business and its United Arab Emirates branches. In the Decision Notice the regulator highlighted serious and sustained shortcomings in the Bank’s controls for customer due diligence and ongoing monitoring. The FCA is likely to continue to focus on high risk areas such as these.
Money Laundering in the Capital Markets
In June, the FCA published a thematic review: “Understanding the Money Laundering Risks in the Capital Markets.” The FCA’s stated aim was to identify, where possible, the money-laundering risks and vulnerabilities in the capital markets. The review was broad in terms of its participants, including investment banks, custodian banks, inter-dealer brokers and clearing houses. The review identified several important issues:
- Customer-focused risk assessment and due diligence is key. Specifically, market participants need to have a good understanding of their customers, and the ultimate beneficiaries, to protect against the risk flowing from the typically complex and fast-moving capital market transactions.
- Generally, capital markets need to increase focus on money-laundering risk. The FCA found that the participants in its review were focused on, and alive to, the risk posed by market abuse. By contrast, the risk that capital market transactions may be used to facilitate money-laundering was considered to a far lesser degree. The FCA found that work was still needed to change behaviours within firms operating in capital markets.
Firms operating in these markets should expect to see more intense AML supervision throughout 2020.
The continued use of dual track enforcement investigations
Lastly, throughout 2019, the FCA has repeated its commitment to increasing criminal investigations into breaches of the MLR. The FCA restated this promise in April, in a speech by its Director of its Enforcement and Markets Oversight division, Mark Steward, and again in July, through its AML annual report. The July report stated that “some” of the FCA’s current investigations are dual-track, though it also indicated that criminal prosecutions will only be considered in the most egregious of cases of systems and controls issues. Whilst it is understandable that the FCA is seeking to give full intention to the regulations, there are practical considerations which most probably inform the regulator’s continued focus on regulatory enforcement. Whether 2020 will bring the FCA’s first criminal MLR prosecution, of a corporate, individuals, or both, will be a key issue to keep a close eye on. Our experience is that firms and individuals under such investigations find seeking early specialist legal advice incredibly useful.
Other relevant issues
Another key component of the UK framework in combatting money-laundering, is the suspicious activity report (SAR) regime. Financially regulated businesses often submit SARs, are often asked by the FCA about their SAR submissions, and this is becoming an increasingly complex area in which firms may benefit from legal advice. In June, the Law Commission published a report on its findings relating to the current reporting regime. The review was prompted by a recommendation made by the Home Office in 2017 as law enforcement agencies flagged ongoing issues with “over-reporting”, as they struggled to analyse and investigate the large volume of poor-quality SARs made by businesses.
The Law Commission made nineteen recommendations, the key recommendations being:
- Creation of an Advisory Board to oversee and publish guidance on making a SAR;
- Issuance of statutory guidance for business covering the threshold for suspicion as set out in the Da Silva test;
- Further statutory guidance as to what constitutes a “reasonable excuse” for not making a SAR; and
- The introduction of a prescribed online format for SARs.
In all, the proposals set out by the Law Commission were modest, focusing more on clarification and guidance, as opposed to substantial changes to the law (though a proposal to only report suspicion of “serious” crime was mooted). The Government is yet to respond to the Law Commission’s report.
Every indication is that the FCA’s focus on tackling money laundering will carry on through 2020 and the following years. Firms would be prudent to ensure that their risk assessments are adequate and current. Individuals would be wise to refresh their understanding of the MLRs and their obligations under the Senior Managers and Certification Regime and consider whether they have in place adequate directors and officers liability insurance should they become subject of an investigation.