Money laundering regulations and enforcement in the UK

February 2023  |  SPECIAL REPORT: CORPORATE FRAUD & CORRUPTION

Financier Worldwide Magazine

February 2023 Issue

Several UK authorities oversee compliance with and enforcement of the UK Money Laundering Regulations (MLR). In addition, there are several authorities (often the same) with criminal powers to prosecute offences under the MLR and other substantive money laundering offences under the Proceeds of Crime Act 2002.

The MLR apply to financial institutions, legal professionals and other professionals such as auditors, accountants and credit institutions in the conduct of general business and transactional work. The regulations create a single offence under regulation 86 of the MLR 2017 of a failure to comply with a requirement made by one of the regulations. Criminal prosecution may result in a fine or up to two years imprisonment, or both. The statutory defence available for the failure to comply offence can be met if the relevant person can prove that they took all reasonable steps to follow relevant guidance (including guidance issued by supervisory authorities and approved by HM Treasury) at the relevant time and exercised all the due diligence possible to avoid committing the offence.

There is an obvious tension between the relevant authorities’ civil powers to fine for MLR breaches and in some instances their parallel power to criminally prosecute for the same conduct. In recent years, there has been pressure for such authorities to use those criminal powers to deter what is perceived as the enablement of serious financial crime by others. As Mark Steward, executive director of enforcement and market oversight at the Financial Conduct Authority (FCA), stated in the recent high profile NatWest case: “anti-money laundering (AML) controls are a vital part of the fight against serious crime, like drug trafficking, and such failures are intolerable ones that let down the whole community…”.

This article sets out recent enforcement activity by the supervisory authorities and recent apparent renewed focus on the use of criminal powers by UK authorities.

On 7 April 2022, the FCA published its ‘Business Plan and its Strategy Paper for 2022/25’. The ‘2022/23 Business Plan’ suggests a renewed focus on enforcement. In that plan, the FCA promises to “rapidly intervene where firms risk being used as conduits for illegal activity” or where firms “pose harm to consumers or market integrity”. The FCA states that it will continue to use its enforcement powers to disrupt, pursue and sanction those committing financial crime, fraudsters and their enablers and will use its “full range of… supervisory and enforcement tools, including criminal or civil sanctions where appropriate” to pursue offenders and provide effective deterrents.

Preceding this renewed focus was the FCA’s first criminal prosecution for offences under the MLR. Following a criminal prosecution of NatWest by the FCA, the bank pleaded guilty to three offences of failing to comply with the MLR at Westminster Magistrates Court on 7 October 2021. On 13 December 2021, NatWest was fined £264.8m by the court for those offences. Justice Cockerill, the sentencing judge, stated: “throughout the indictment period it is accepted NatWest sought to discharge its obligations under the regulations and that it failed to do so… Although in no way complicit in the money laundering which took place… without the bank’s failings the money could not have been laundered”.

The FCA has always had a wide range of civil and criminal powers to pursue money laundering committed by UK-based individuals and companies working in financial services. However, while the FCA’s ability to bring civil cases for money laundering has been used quite frequently, it was only the NatWest prosecution that showed its use of criminal powers to do so.

The FCA’s civil powers to impose fines and censures on firms and individuals under regulations 76(1) and (2) of the MLR have led to several high-profile fines. On 6 May 2022, the FCA fined HSBC Bank plc £63.946m for failings in its AML processes under the MLR. HSBC used automated processes to monitor hundreds of millions of transactions a month to identify possible financial crime. However, the FCA found that three key parts of HSBC’s transaction monitoring systems showed serious weaknesses over a period of eight years from 31 March 2010 to 31 March 2018.

On 23 June 2022, the FCA fined Ghana International Bank Plc (GIB) £5.829m for poor AML and counter-terrorist financing (CFT) controls over its correspondent banking activities. Between 1 January 2012 and 31 December 2016, GIB did not adequately perform the additional checks required when it established relationships with the overseas banks and failed to demonstrate it had assessed those banks’ AML controls. GIB also failed to undertake annual reviews of the information it held on the banks with which it had a relationship, failed to give staff adequate training on how to scrutinise transactions properly and did not establish appropriate policies and procedures for staff.

On 14 October 2022, the FCA fined Gatehouse Bank Plc £1.584m for significant weakness in its financial crime systems and controls. Between June 2014 and July 2017 Gatehouse failed to conduct sufficient checks on its customers based in countries with a higher risk of money laundering and terrorist financing. Gatehouse also failed to undertake the correct checks when some of the customers were classed as politically exposed persons. This case highlights that the FCA will seek to enforce weaknesses in financial crime systems and controls even where no underlying criminal offence (e.g., money laundering) is identified.

On 9 December 2022, the FCA fined Santander UK Plc £107.7m after it found serious and persistent gaps in its AML controls affecting its business banking customers. The FCA stated that: “Santander had ineffective systems to adequately verify the information provided by customers about the business they would be doing. The firm also failed to properly monitor the money customers had told them would be going through their accounts compared with what actually was being deposited.”  

The FCA continues to open parallel civil and criminal financial crime investigations. While many of these matters become civil-only investigations, having a criminal toolkit allows the FCA to present significant deterrence messages to the financial services sector. Time will tell whether the NatWest case demonstrates an overall renewed emphasis on the use of criminal powers, but the size of the fine will have caused ripples in the compliance departments of most banks.

HM Revenue and Customs (HMRC) is another supervisory authority for businesses subject to the MLR including money services businesses (not supervised by the FCA), high value dealers and estate agents. HMRC states in its ‘Guidance on money laundering supervision appeals and penalties’ that it “may impose measures, including a financial penalty, if you do not comply with the Money Laundering Regulations. In more serious cases, it may consider criminal prosecution”. HMRC states that “You’ll be protected from penalties and prosecution if you can show you have followed HMRC’s Money Laundering Regulations guidance. HMRC can take various measures from warning letters to criminal prosecution if your business does not comply with the regulations”. Again, criminal prosecution may result in a fine or up to two years imprisonment, or both.

On 11 October 2022, HMRC announced that it had fined over 60 estate agents for more than £500,000 for breaching AML requirements. These fines followed the first prosecution of an estate agent for trading despite not registering with HMRC, to ensure compliance with money laundering regulations. Nick Sharp, deputy director of economic crime at HMRC, said: “We are determined to create a level playing field for businesses who play by the rules. That means taking action against the minority of businesses who fail to fulfil their legal responsibilities under the money laundering regulations.” The full list of businesses that received HMRC compliance and registration penalty notices between 1 January 2022 and 31 March 2022 shows that there were fines against 175 businesses receiving penalties totalling £2.180m.

The Crown Prosecution Service (CPS) is a prosecutor for all criminal offences, but it has a role in prosecuting specific money laundering offences under the Proceeds of Crime Act 2002 (POCA). On 2 June 2002, the CPS updated its guidance on prosecuting standalone ‘failure to disclose’ cases under section 330 of POCA. The guidance states that “It is possible to charge an individual under section 330 even though there is insufficient evidence to establish that money laundering was planned or has taken place”.

This is a notable departure from what many perceived as a previous position that a prosecution of professionals failing to disclose was very unlikely unless there was actual substantive money laundering taking place that had not been disclosed given the obvious harm of not doing so. This is yet another example of an increased focus on the use of criminal prosecution for what many commentators would have viewed previously as “regulatory breaches” more suitable for fines and public censure than a criminal prosecution carrying a maximum prison sentence of five years.

So, there is clearly a desire on the part of regulatory and prosecuting agencies to use criminal powers but there are important limitations on the practicability of doing so. The first limitation is the standard of proof being beyond reasonable doubt, as opposed to a balance of probabilities test. This increased burden means that criminal cases often take longer to comprehensively investigate and hence face longer delays and more costs. The second is the regulated sector’s possible reaction to the increased use of criminal powers.

Such a change in course could prompt overly defensive compliance and defensive reporting of suspicious activity reports to the National Crime Agency (NCA). That does not necessarily assist from an intelligence gathering perspective, as it can result in overwhelming the regulatory process and the NCA’s limited resource to process such defensive disclosures. There is clearly a balance to be struck and it will be interesting to see how supervisors and law enforcement seek to tackle competing interests.

 

Michael Potts is a partner at PCB Byrne LLP. He can be contacted on +44 (0)20 7842 1640 or by email: mpotts@pcb-byrne.com.

© Financier Worldwide

BY

Michael Potts

PCB Byrne LLP

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