Financial Conduct Authority Announces its First Criminal Prosecution under the UK Money Laundering Regulations

Summary

The FCA has announced its first criminal prosecution under the UK’s Money Laundering Regulations. This is undoubtedly a very significant development for the FCA and should be seen as a warning to firms within scope of the Money Laundering Regulations that the FCA is prepared to exercise its criminal jurisdiction in serious cases, including against major financial institutions. Nevertheless, looking ahead more broadly, we do not expect to see a significant change in the FCA’s approach to the enforcement of money laundering-related systems and controls issues. Although criminal prosecutions will be a threat in the most serious cases, we expect the FCA primarily to continue to take regulatory action against FCA-authorised firms under FSMA or, in some cases, by imposing civil penalties under the Money Laundering Regulations. FCA-authorised firms and firms in scope of the Money Laundering Regulations should continue to ensure that they have effective systems and controls in place in order to prevent financial crime and to comply with their obligations under the Regulations and, where relevant, related obligations under the FCA Handbook.

Background

On 16 March 2021, the Financial Conduct Authority (“the FCA”) announced that it had commenced criminal proceedings against National Westminster Bank plc (“NatWest”) in relation to alleged offences under Regulation 45 of the Money Laundering Regulations 2007 (“MLRs 2007”). The FCA alleges that NatWest failed adequately to monitor and scrutinise large deposits (including significant cash deposits) made into accounts operated by a UK-incorporated customer over the period November 2011 to October 2016, in breach of its obligations under the MLRs 2007. The FCA is not charging any individuals in connection with the matter. NatWest is due to appear at Westminster Magistrates’ Court on 14 April 2021, where it may indicate how it intends to plead and the court will determine whether the case should be transferred to the Crown Court.

The reputational damage caused by the announcement of criminal proceedings is clearly significant. If convicted, NatWest will suffer further serious consequences including the stigma of criminal offending. Assuming the case is tried on indictment (i.e. before the Crown Court), penalties could include a substantial fine which will be determined by criminal sentencing guidelines rather than under regulatory criteria; and a conviction would likely impact on the institution’s ability to tender for public contracts. As in any criminal case, however, a conviction is by no means certain. Whilst the relevant offence does not contain an intention requirement, which removes one obstacle to securing a conviction for the FCA, the FCA will, nevertheless, need to prove its case to the criminal standard and deal with any defence raised by NatWest. If the case is tried on indictment, the court is likely to hear interesting evidence and argument on the adequacy of NatWest’s anti-money laundering systems and controls at the relevant time and the extent to which those controls complied with relevant guidance issued (for example, by the Joint Money Laundering Steering Group) at the time.

FCA powers

This announcement marks the first criminal prosecution by the FCA under either the MLRs 2007 or the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (“MLRs 2017” and, together with the MLRs 2007, the “MLRs”). The FCA has extensive enforcement powers under the MLRs. It can impose civil penalties or bring criminal proceedings against FCA-authorised firms that are within scope of the MLRs, certain other types of firm including cryptoasset businesses, and related individuals, for relevant breaches of the MLRs. It can also bring private prosecutions for substantive money laundering offences, as it has in cases where it also alleges insider dealing. The civil penalties available to the FCA under the MLRs include fines and the suspension, restriction, or removal of permissions under the Financial Services and Markets Act 2000 (“FSMA”), among other things. The FCA is also able to pursue enforcement action under FSMA for breaches of its rules by FCA-authorised firms and relevant individuals (for example, for breaches of its Principles for Businesses and SYSC sourcebook by firms and breaches of the conduct rules applicable to relevant individuals).

MoFo comment

The announcement of the FCA’s first criminal prosecution under the MLRs, and the fact that the defendant is a major financial institution, undoubtedly marks a very significant development in the context of UK money laundering enforcement. It should be seen as a warning to firms within scope of the MLRs that the FCA is prepared to exercise its criminal jurisdiction in serious cases, including against major financial institutions. A significant fine recently issued to a money transfer business by HMRC indicates that it is similarly prepared to take substantial action under the MLRs, which may in future affect firms that are outside of the FCA’s jurisdiction.

The announcement of a prosecution by the FCA has, to some extent, been expected for some time following comments made in April 2019 by Mark Steward (Director of Enforcement and Market Oversight at the FCA). Mr Steward had observed that the FCA intended “to enliven the jurisdiction” of criminal prosecutions under the MLRs in order to show that they are “not a white elephant”. For some time now, the FCA has opened “dual track” investigations (which can lead to civil or criminal proceedings) into alleged breaches of the MLRs.

Although we may well see some further prosecutions in the future, we do not anticipate a sea change in the FCA’s approach to enforcement on money laundering-related issues. We expect that the FCA will primarily continue to pursue enforcement action under FSMA, where appropriate, consistent with guidance set out under the Enforcement Guide.[1] Given the time lag on enforcement cases, we may also see the FCA using alternative statutory powers under the MLRs or FSMA where it identifies issues with a firm’s systems and controls, for example in order to vary or suspend the firm’s permissions or to require the firm to appoint a skilled person. Criminal prosecutions under the MLRs will likely remain “exceptional”, as Mr Steward noted in 2019, and be reserved for the most serious cases. Mr Steward indicated then that the FCA intended to bring such prosecutions “where we find strong evidence of egregiously poor systems and controls and what looks like actual money-laundering”[2] or, in other words, “where we see what appears to be facilitation of suspected serious crime, in circumstances where plainly obvious checks and questions have neither been carried out or asked.”[3]

In line with this, it appears that the majority of money laundering-related investigations currently being progressed by the FCA are being conducted under FSMA. The FCA’s latest Annual Report, published on 31 March 2020[4], indicated that there were 65 anti-money laundering investigations underway at that time. In September 2020, a Freedom of Information Act request subsequently revealed that the FCA was investigating only six dual track investigations and one single track criminal investigation into breaches of the MLRs, and that seven such investigations had been closed since January 2020.[5] Although the 2020/2021 Annual Report is yet to be published, we do not expect to see those figures rise significantly. 

Looking ahead, FCA-authorised firms and other firms in scope of the MLRs 2017 should, together with individuals responsible for financial crime compliance, continue to ensure that their financial crime-related systems and controls are appropriate, effective and up to date and that they are in compliance with all obligations under the MLRs 2017, the Proceeds of Crime Act 2002 and, where relevant, the FCA Handbook. Firms should continue to take note of relevant guidance issued by the FCA and the Joint Money Laundering Steering Group, among others, and to ensure that they appropriately investigate and address indications of potential money laundering activity that may affect their business, and report suspicions of money laundering where needed.  

We have a team of experienced UK anti-money laundering specialists who regularly advise on AML policies and procedures, reporting obligations and related investigations, and who can provide further information on the impact of the FCA’s decision to bring criminal proceedings against a major UK financial institution.

Femi Omisore, London Trainee Solicitor, contributed to the writing of this alert.

[1] Enforcement Guide 19.14.4.

[2] Speech by Mark Steward dated 4 April 2019.

[3] Speech by Mark Steward dated 3 July 2018.

[4] The Annual Report for 2020/2021 is yet to be published as at the date of this alert.

[5] See FT article dated 14 September 2020.