The FCA’s penalty setting regime has three objectives: Disgorgement; Discipline; and Deterrent. Until the FCA’s recent decision to pursue criminal charges against NatWest, those objectives were delivered by (often eye-watering) regulatory fines. Why has the FCA chosen now to avail itself of the power to prosecute, thirteen years after the Money Laundering Regulations 2007 came into force, and will the directors ultimately pay the price?
The FCA began its investigation into NatWest in July 2017, focussing on a five year period between November 2011 and October 2016 during which it is reported that the bank accepted increasingly large cash deposits from a UK incorporated commercial customer. The total paid into the customer’s account over that time was apparently £365 million, of which £264 million was deposited in cash, meaning that at least 5,280,000 laundered notes passed over the counter.
At the end of their investigation, the FCA determined that NatWest’s anti-money laundering systems and controls were inadequate, having failed to monitor and scrutinise these transactions. Rather than issue its usual sanction of a regulatory fine, the FCA chose to pursue criminal proceedings. This is the first time a bank has been prosecuted under the money laundering regulations making the initial hearing at Westminster Magistrates Court, now adjourned to 26 May, the first of its kind and likely to attract worldwide attention.
It seems that the FCA’s view was that, in this case, a financial sanction alone would serve as insufficient discipline or deterrent. This is despite the fact that the FCA has the ability to impose substantial fines and is not afraid to do so. During its four year investigation into NatWest, the FCA issued fines totalling £711,549,620, the most significant of which was £102 million imposed on Standard Charter Bank in 2019 for anti-money laundering failings, the type of which NatWest now stands accused.
In its December 2018 evaluation of the UK’s anti-money laundering and counter-terrorist financing measures, the Financial Action Task Force commented: “it is not yet clear whether the level of prosecutions and convictions of high-end[money laundering]is fully consistent with the UK’s threats, risk profile and national[anti-money laundering / counter-terrorist financing] policies”. The criminal prosecution of NatWest could be an indication that the FCA has taken these criticisms on board, demonstrating to the world that the money laundering regulations have teeth, and that the EU-independent UK is not afraid to use them.
NatWest is almost 60% publically owned and a significant financial penalty alone may be viewed by the public as punishment of the UK tax payer, rather than of any ‘wrongdoer’ at the bank, or the bank itself. Although NatWest cannot face a custodial sentence if found guilty of a criminal offence, it could face difficulties with respect to its worldwide licence and its reputation may never recover. Whilst the UK public may see this as real justice, it may do little to either get to the heart of the problem or encourage tighter scrutiny of suspicious activity.
The ultimate deterrent
The FCA cites NatWest’s “systems and procedures” as the issue. Systems and procedures do not run themselves and are only as good as the individuals who administer, develop and supervise them. The Financial Action Task Force’s 2018 evaluation identified: “significant weaknesses in supervision” and recommended that the FCA ensured that “effective and dissuasive sanctions apply”. At this stage, no criminal charges have been brought against individuals but the NatWest directors and employees are not out of the woods yet – criminal charges may still be brought against them.
An individual found guilty of the same charges brought against NatWest could face an unlimited fine and/or a prison term of up to two years. Perhaps the FCA has come to the conclusion that imposing ever increasing fines on faceless corporations does little to deter the people who, whether willingly or unwittingly, allow financial institutions to be used to launder money. In pursuing criminal proceedings against NatWest, a warning is delivered to the individuals, particularly the directors and officers, that the possibility of criminal sanctions applies to the cogs, as well as the wheel.
The threat of a personal fine and the loss of liberty will surely focus the minds of directors. It is one thing for a financial institution to be punished, but once real lives and livelihoods are in jeopardy and accountability moves from the institution to the boardroom, those with the ability to make real changes become incentivised to do so.
In deploying its power to prosecute under the money laundering regulations, the FCA has sent a clear message that it will not tolerate failures in anti-money laundering systems and that it has taken its fight to the next level. Whilst, historically, the FCA’s sights have been fixed on the financial institutions themselves, it appears that the regulator’s focus may have shifted. If convicted of these criminal charges, the punishment faced by NatWest will be little different to that the FCA could have imposed without the assistance of the criminal courts. However, the directors will be acutely aware that they are just one small step away from being in the firing line on a personal level - no doubt the FCA hopes that this threat will prove to be the ultimate deterrent.