The banks and money laundering: time to atone

August 2013 | SPECIAL REPORT: WHITE-COLLAR CRIME

Financier Worldwide Magazine

Scarcely a day goes by when one doesn’t read about a bank being investigated or fined for money laundering. Recent examples include the conclusion by the Italian authorities that the Vatican Bank facilitated money laundering; the Italian inquiry focused in particular on the transaction of $30m. The Latvians fined one unnamed Latvian bank the highest fine for laundering €170m stolen from the Russian government in connection with the money laundering scheme, identified by the late Sergei Magnitsky, and pursued by the courageous and determined Bill Browder of Hermitage, and HSBC. They also finally signed off the Deferred Prosecution Agreement and received the highest fine to date, some $1.9bn, for laundering proceeds of crime in the sum of billions for various South American drug cartels, and apparently for other breaches of US sanctions concerning Iran, Libya, Sudan, Burma and Cuba.

Certainly it is true that most of the money laundering horrors that have come to light originated in the pre-economic crisis era. But what have the banks been doing since then, other than paying eye-watering fines, largely to the Americans? To be fair, the Basel Committee on Banking Supervision has put money laundering and banking regulation firmly at the top of its agenda this year, and Barclays has just announced its exit from providing services to remittance businesses, which will largely affect any immigrant communities in the UK.

However, according to both Martin Wheatley and Tracey McDermott of the Financial Conduct Authority (FCA), the banks have really done very little, having just finalised their recent enquiry into bank ‘trade finance’ businesses. The FCA has found that nearly 50 percent of the 17 banks they scrutinised (including four major UK banks) still did not exercise adequate anti-money laundering (AML) due diligence, and failed to have adequate AML procedures in place. The FCA promised to exercise its full and recently enhanced powers in order to deal with this situation and promised a joint two-pronged attack by both the FCA and the Prudential Regulation Authority (PRA).

The FCA levied fines in the sum of £312m in 2012, which is an increase from £89m in 2011. Not all of those fines related to money laundering, but it is clear they intend to maintain, if not surpass, the 2012 fine levels in the future, and of course these fines are now paid directly to the Treasury rather than supporting the FCA as has happened in the past.

Additionally, the director of the Serious Fraud Office (SFO), David Green QC, has complained about the difficulty in attempting to instigate a criminal costs prosecution against a corporate organisation in the UK. He has suggested that an extension of section 7 of the Bribery Act 2010 (failure to prevent bribery, i.e., to install and execute adequate anti-bribery compliance systems) could be made to apply to fraud and money laundering (with the aid of fresh legislation), and that it would dovetail nicely with the forthcoming Deferred Prosecution Agreements (DPAs) and encourage corporates to self-report their criminal offences.

DPAs have been used by the US since the 1990s and have, over recent years, managed to levy staggering fines. Despite the fact that the American regulatory and prosecution agencies have codes of practice and sentencing guidelines in relation to DPAs, it is fair to say that the US system can be criticised for its inconsistency, lack of transparency, and the rather partisan approach it has adopted.

Courtesy of the Crime and Courts Act 2013, DPAs will now be a feature of the criminal justice system in the UK. The SFO and the Crown Prosecution Service (CPS) have recently published a consultation focusing on the draft code of practice for DPAs.

The important difference between the US DPA system and the proposed UK system involves judicial scrutiny. In the US, the judge’s role is perceived by the US authorities as simply ‘rubber-stamping’ the DPA, though very recently some US judges have raised their heads above the parapet and asserted that federal judges have the authority to review such DPAs, much to the ire of the American authorities.

The SFO and the CPS have recently published a consultation on their proposed code of practice in DPAs, and it is envisaged that DPAs will come into practice in February 2014.

In many ways, the joint code of practice is an improved variation on the US system. It is designed to ensure consistency, transparency and confidence in these agreements, bearing in mind that they are having to convince a cynical judiciary (who universally hate DPAs) and the general public who are of the view that prosecutors feel these large corporate offenders are simply too big to jail, and that the agencies do not have the funds to prosecute them. The evidential test, such as it is, under the proposed SFO/CPS code in relation to the application of a DPA, suggests that these agencies will enter into a DPA where they have reasonable suspicion of corporate offending. This is a very low threshold. Nobody seriously expects the tsunami of DPAs that has occurred with the US authorities; in fact it is envisaged that these DPAs will be few and far between.

Simultaneously, the Sentencing Council for England & Wales, under the chairmanship of Lord Justice Leveson, has published its consultation on proposed sentencing guidelines dealing with money laundering, fraud, bribery and corruption, and corporate crime. This guideline will then underpin the level of fines set by the SFO and the CPS when using the new DPA system.

The consultation promises huge fines; indeed, companies could be fined as much as 400 percent of the profits of criminal behaviour. The consultation then goes on to list aggravating and mitigating circumstances – for example, if corporate offending had caused substantial harm to the integrity of markets or governments and involved cross-border offences, or if a large number of victims had been targeted, particularly vulnerable victims and where those victims suffered substantial harm, not necessarily financial harm. The consultation cites voluntary reporting as a mitigating factor. It states that any fine levied on the offending corporate organisation must be “substantial enough to have a real economic impact which will bring home to both management and shareholders the need to operate within the law”. The Courts must weigh up whether or not the fine would put the corporate out of business, but the consultation document insists that in “some bad cases this will be an acceptable consequence”. One of the issues that the Sentencing Council had to consider was that the fines to be levied against corporates for criminal behaviour have to be on par with the US system, otherwise multinationals in particular will go ‘jurisdiction shopping’ and seek out the jurisdiction perceived to be the softest as far as these issues are concerned.

The advice that legal practitioners will be giving to corporate offenders would be to ‘confess’ as early as possible, to be seen to be repenting for their sins in real terms. They will also encourage ‘gold plated’ compliance systems, the installation of an independent monitor, regular reviews of their systems, and close levels of supervision.

Corporate offenders would be advised to ‘confess’ to the relevant authorities as early in the process as possible. They must come with ‘clean hands’ and be determined that there will be no repetition of such behaviour in the future.

The use of DPAs in the UK heralds a new approach to corporate offending and it will be fascinating to see the developments they will bring in the future.

Siobhain Egan is a consultant solicitor at Lewis Nedas Law. She can be contacted on +44 (0)20 7387 2032 or by email: segan@lewisnedas.co.uk.

Siobhain Egan

Lewis Nedas Law