The impact of ‘Brexit’ on the UK’s fight against financial crime

September 2016 | PROFESSIONAL INSIGHT | BANKING & FINANCE

Financier Worldwide Magazine

Friday 24 June 2016 is a day that not many of those in the UK will forget in a hurry. As the UK public woke up to the news that it had voted to leave the European Union, the potential consequences of this historic referendum result began to sink in. Among the many novel issues now facing the UK government is the impact the UK’s departure from the EU will have on its legal framework. In particular, the UK’s membership of the EU has led to the implementation of financial crime laws to tackle money laundering, impose sanctions, streamline extradition and aid cross-border cooperation between EU Member States. In this article, we look at the current position in each of these areas and consider what the implications of ‘Brexit’ may be for financial crime laws in the UK.

Money laundering

As a current member of the EU, the UK will continue to be obliged to implement the EU Fourth Money Laundering Directive (2015/849) (the Directive), which must be transposed into Member States’ domestic legislation by 26 June 2017. The Directive introduces some fundamental changes to the existing anti-money laundering legislation and aims to bring all EU Member States up to a consistent standard. The key amendments include: (i) removing the automatic right for ‘obliged entities’ to conduct simplified due diligence where the customer or product falls within certain categories (e.g., credit or financial institutions, local authorities or companies listed on a regulated market). Under the Directive, before applying simplified due diligence, obliged entities must establish that the business relationship or transaction presents a lower risk of money laundering occurring; (ii) maintaining central registers in each country to record the ultimate beneficial owners of businesses to be accessible by national authorities with no restrictions – those within the regulated sector conducting due diligence will also be able to have access to the registers; (iii) requiring regulated entities to retain the CDD material for five years from the date that the business relationship comes to an end or the transaction is completed; and (iv) widening the definition of a Politically Exposed Person (PEP) to include domestic PEPs as well as those of overseas countries. The period of time for which someone continues to be a PEP once they have left office will also be extended from 12 to 18 months.

The UK’s anti-money laundering legislation is considered to be one of the most draconian regimes of the EU Member States. It has already taken steps to attain a higher standard than that imposed by the Directive, by setting up a public register of beneficial ownership and encouraging other countries to follow its lead. The ‘Persons with Significant Control’ Register is a new statutory register in which UK companies and LLPs are obliged to record the identities of their ultimate beneficial owners and the amount of their holdings in the business.

In addition, the UK would continue to be a member of the Financial Action Task Force (FATF), an inter-governmental body that develops policies to tackle money laundering, terrorist financing and other related threats to the integrity of the international financial system. The FATF develops recommendations which are recognised as the international standard for anti-money laundering and terrorist financing compliance and monitors the progress of its members in implementing measures to counteract these threats to the international financial system. As a member of this international organisation, it seems improbable that the UK would seek to relax its anti-money laundering controls following its departure from the EU bloc.

Sanctions

As a member of the EU, the UK has been instrumental in encouraging the EU Council to instigate sanctions against aggressor territories such as Russia in response to its illegal annexation of Crimea and interventionist policies in eastern Ukraine. Presently, EU sanctions are created after a consensus is reached across all 28 Member States which inevitably dilutes the nature and number of targets designated during this process as each Member State seeks to balance its own self-interests with the need to agree the sanction with its fellow Member States.

Once the UK leaves the EU, it will be free to determine the conditions of its own sanctions and export controls but as much of the policy surrounding sanctions and terrorist financing emanates from the UN Security Council (UNSC), the UK, as a member, would still be bound by the UNSC’s resolutions. However, the UK may decide to introduce specific conditions which may be more restrictive than those previously agreed jointly with the EU, leading to additional constraints on those conducting business in the UK.

Extradition

The European Arrest Warrant (EAW) was introduced in the UK in 2004 as part of the Extradition Act 2003. It replaced previous separate extradition arrangements between the UK and EU Member States and operates on an EU-wide basis. Each EU national judicial authority can issue a warrant by virtue of the principle of ‘mutual recognition and trust’ to require the extradition of a suspect located in another EU Member State to the requesting Member State if that person is accused of an offence incurring a maximum penalty of imprisonment for at least 12 months or has already been sentenced to at least four months’ imprisonment.

‘Mutual recognition’ between Member States means that the decisions of the national judicial authorities of one Member State should be recognised and upheld by the judicial authorities of all the other Member States. This process permits very little scrutiny of the evidence supporting the extradition request which helped to speed up the legal process from taking years to complete to a matter of weeks. Despite this significant advantage, the lack of judicial scrutiny of the evidence against the suspect meant that many UK commentators had concerns about the inappropriate and disproportionate use of the EAW by certain Member States, as well as the extradition of UK citizens to face trial in EU jurisdictions with ‘questionable’ criminal justice regimes and detention in appalling prison conditions. This led the UK government, in 2014, to debate in parliament on whether the EAW should be one of the 35 EU’s justice and home affairs measures it should opt back in to following the UK’s opt out of all 133 justice measures in 2013. After much argument, the majority of MPs agreed with the then home secretary, Theresa May, who claimed that the EAW helped to “keep the country safe” and voted to opt back in to the EAW.

Once the UK leaves the EU, it may decide that it will no longer take part in mutual recognition agreements en bloc. The UK could enter into separately negotiated bilateral extradition arrangements with each EU country as it does now with non-EU countries, enabling it to examine the evidence against an individual in detail before consenting to their extradition. Alternatively, the UK government may seek to agree to adopt an EAW agreement with the EU as a whole as part of its conditions of access to the single market. Similarly, it could enter into agreements with the EU criminal justice agencies, Europol and Eurojust, developing a partnership that allows both parties to obtain the benefit of close cooperation in cross-border investigations into cyber crime, human trafficking and terrorism.

While the UK’s departure from the EU brings with it many uncertainties, it should not cause too much disruption to the UK’s fight against financial crime and may even lead to a number of opportunities for the UK to improve and refine its existing financial crime laws and regulations. The UK’s commitment to tackling financial crime continues to be high on its agenda and the new prime minister Theresa May has said recently that she wants to “get tough on irresponsible behaviour in big business”. Therefore, despite the upheaval of Brexit, the UK shows no signs of shrinking from its responsibilities in this area.

Elinor Lloyd is the managing partner at CCG Legal. She can be contacted on +44 (0) 207 760 7590 or by email: elinor.lloyd@ccg-legal.com.

Elinor Lloyd

CCG Legal