In a recent speech, Mark Steward, Director of Enforcement and Market Oversight at the Financial Conduct Authority (FCA), addressed how the FCA is responding to the UK's October 2017 National Risk Assessment of Money Laundering and Terrorist Financing, which identified an emerging risk of money laundering in capital markets.
This reflects the focus amongst other law enforcement agencies where evidence given to the Treasury Select Committee confirmed that “money laundering is a facilitator of almost all serious, organised and major crime. Tackling it is absolutely a strategic priority for law enforcement for the UK.”
Mr Steward disclosed that the FCA has several on-going investigations on a series of capital market transactions that appear to have no market purpose or function. Mr Steward commented that if the FCA's suspicions are correct, these transactions falsify liquidity, trading volume, and supply and demand in the market and their purpose is unrelated to the sale and purchase of the underlying investments.
Mr Steward also stated that the FCA has started a small number of investigations into firms' systems and controls. It has indicated to these firms that it is looking at whether there has been any misconduct that may justify a criminal prosecution under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI 2017/692) (MLR 2017).
The MLR 2017 entered into force on 26 June 2017. Regulation 86 makes it a criminal offence to breach a “relevant requirement” and where found guilty a relevant person (which includes an officer or manager of a corporate body) may be liable to a fine/up to 2 years’ imprisonment.
Relevant requirements include taking appropriate steps to identify and assess the risks of money laundering and terrorist financing to which a business is subject (Reg 18 MLR 2017) and establishing and maintaining policies, controls and procedures to mitigate and manage effectively the risks of money laundering and terrorist financing identified in any risk assessment (Reg 19 MLR 2017).
Mr Steward remarked that he was “conscious that starting criminal investigations against firms … [for] poor Anti Money Laundering systems and controls may draw some sharp intakes of breath”. In response to this perceived concern he made four observations:
- That the MLR 2017 specifically makes provision for criminal prosecutions and the FCA is simply giving effect to the purpose of the regulation;
- That in most cases an investigation will be opened on a dual-track, with both regulatory and criminal offences under consideration, with a broad range of outcomes, including no further action;
- That the fact that criminal proceedings may be brought does not mean they will be brought. Mr Steward re-iterated that an investigation is a fact-finding mission and the presumption of innocence applies during an investigation; and
- That in any potential criminal prosecution, the FCA must satisfy both the evidential and public interest test in order to bring criminal charges.
Mr Steward said that in practice, criminal proceedings for anti-money laundering (AML) failings were likely to be reserved for the more serious cases. However, he said that it was difficult to prescribe what would constitute a serious case. A case in which involved the facilitation of suspected serious crime where “plainly obvious checks” had not been carried out, was likely to pass the seriousness test.
What was “plainly obvious” Mr Steward believes depended on context and the FCA would keep in mind the difference between how something appeared at the time and looking back with the benefit of hindsight.
Mr Steward warned however that the excuse of hindsight would not “protect a lack of rigour and discipline in the way systems and controls operate”.
Mr Steward’s speech reiterates what is set out in the FCA Business Plan 2018-19; that tackling money laundering is one of the FCA’s priorities. The Business Plan makes clear that the FCA will use its “full range of supervision and regulatory enforcement tools… regulatory and criminal investigations” to combat money laundering and financial crime more generally.
Whilst there is continued talk of the FCA using its criminal powers to address AML systems and controls failings there have so far been no published criminal outcomes or criminal prosecutions resulting from a use of these powers. Whilst the MLR 2017 has only been in force for just over a year, the FCA and its predecessor, the Financial Services Authority, had much the same powers to prosecute under the previous regulation, the Money Laundering Regulations 2007. It is therefore perhaps difficult to maintain that there has not been sufficient time for these cases to work their way through the FCA enforcement process.
In reality, it seems likely that criminal prosecutions for systems and controls failings will struggle to pass the relatively high evidential and public interest test required to bring proceedings and that for the time being, the vast majority of these breaches will fall to be dealt with in the regulatory arena.