Is the Financial Conduct Authority about to up the ante on its approach to tackling money laundering? Having successfully concluded its first criminal investigation of a money laundering case, the chief City regulator is actively pursuing several more. Its leaders appear to want to send a message that they’re getting tough.
It has taken some time to reach this point. The FCA has had powers to launch criminal investigations of money laundering cases since the UK’s Money Laundering Regulations came into effect in 2007 – and those powers were strengthened by further regulation in 2017. However, it took until March 2021 for the regulator to announce its first criminal prosecution using these powers.
That case reached its conclusion in December with Royal Bank of Scotland-owned NatWest admitting to three charges of breaching anti-money laundering laws between 2012 and 2016. A Westminster court fined the bank £264.5m for the failures, though the penalty could have been as high as £340m were it not for the credit that NatWest received for its guilty plea.
The case was certainly an egregious example of money laundering failures. NatWest conceded it had failed to properly monitor its relationship with a gold trading customer that was at one point depositing £1.8m in cash each day in its branches, sometimes transported in black bin liners. It took an intervention from West Yorkshire Police for the bank to take action.
Still, the regulator appears to have been emboldened by its success. The Financial Times (FT) reports it is currently pursuing two more criminal investigations into money laundering failures at financial services businesses. A further six cases are proceeding on a dual track basis, with the FCA yet to decide whether to go down the criminal route or to run a more conventional regulatory probe.
These are not decisions the FCA can afford to take likely, given the very significant resources that criminal investigations take up. In the NatWest case, FCA chief executive Nikhil Rathi told MPs in December that work on the investigation had consumed 30,000 staff hours, required reviews of 300,000 documents, and involved 350 rounds of correspondence with the bank.
There is also concern that criminal investigations, which require higher burdens of proof, may be tougher to get over the line. In a Freedom of Information request last year to the FCA, the law firm Eversheds Sutherland discovered that the regulator had discontinued five single track criminal investigations and four dual track investigations into money laundering cases since July 2020.
Nevertheless, the regulator does see the merits of pursuing criminal inquiries. The FT’s reporting includes comments from Mark Steward, head of enforcement at the FCA, who insists that it is not backing away from criminal investigations because of resourcing constraints.
Looking forward, the consensus amongst City lawyers is that while the FCA will use its criminal powers sparingly, we will now see further prosecutions of this type. The regulator is under pressure to take a harder line on money laundering. Indeed, even in the NatWest case, it has faced some criticism over the time it has taken to secure a conviction. For those on the wrong end of an investigation, a criminal prosecution certainly raises the stakes. The reputational damage of being involved in criminal proceedings is very significant, with real stigma attached to a conviction. A court case, moreover, provides the potential for very public – and embarrassing – revelations about the failures and inadequacies of the accused.
In addition, the penalties in such cases, determined by criminal sentencing guidelines rather than regulatory criteria, may also be more substantial. Royal Bank of Scotland shareholders – including the UK Government – will have been disappointed to see NatWest waste hundreds of millions of pounds in this way. Another risk, depending on the case, is that a criminal conviction could inhibit a business’s ability to tender for public contracts. The UK’s Public Contracts Regulations 2006 provide that an economic operator will be treated as ineligible to tender for public contracts if the contracting authority has knowledge that it, or its directors, has been convicted of specified criminal offences. These include money laundering offences. The European Union maintains similar regulation.
For all these reasons, a concerted effort by the FCA to pursue more criminal investigations into money laundering should alarm the financial services industry. These cases will likely continue to be the exception rather than the norm, but they do underline the regulator’s determination to respond to calls for it to take a more aggressive line on money laundering. None of which is to suggest a regulatory investigation is light touch either. Financial services businesses need processes in place, powered by effective and efficient tools, to prevent them falling foul of money laundering rules. The aim, clearly, should be to avoid the need for any kind of investigation. Still, if criminal prosecutions are now a real possibility, the stakes on money laundering have just got higher.
Ref: https://riskscreen.com/blog/fca-could-use-criminal-powers-in-more-aml-probes-after-natwest-case/