Financial crime will continue to be a focus for the Financial Conduct Authority this year.
According to its latest annual report, 613 financial crime supervision cases were opened in 2022/23 – an increase of 65% from 2021/22 and 10% from 2020/21.
Furthermore, of the FCA’s open cases, 162 were criminal and 138 “dual track” (both criminal and regulatory) investigations.
The ECCT Act, which will enter into force in 2024, makes a range of changes to existing reporting and information sharing requirements
This matters because financial crime compliance is one of the areas where the FCA’s powers are at their broadest. When dealing with possible breaches of anti-money laundering (AML) requirements, the FCA may use its powers as a criminal prosecutor in addition to its significant regulatory powers.
However, only some cases will progress to enforcement. The number of financial crime related enforcement cases reduced from 47 in 2021/22 to 30 in 2022/23 – but the same cannot be said for the size of penalties imposed. The £107.8m fine for one bank’s ‘serious and persistent gaps’ in its AML controls is perhaps the greatest example so far.
Along with substantial financial consequences, supervisory and enforcement activity brings real disruption and practical challenges. A particularly concerning trend from its annual report is that the average duration of an FCA enforcement investigation is 41 months (an increase from 25 months in 2020/21 and 34 months in 2021/22).
Financial services firms, and individuals within them, are the eyes and ears of law enforcement authorities
This increases on average a further 23 months if the case proceeds to settlement, the Regulatory Decisions Committee or Tribunal (meaning potentially over five years in total).
Nevertheless, the FCA will likely increase its use of Own Initiative Requirements to achieve faster outcomes (having increased this by 183% over the past two years) – avoiding more lengthy and formalised enforcement processes.
Although this can bring quicker conclusions, the impact of the use of these powers on businesses’ ability to continue to operate can still be severe.
As ever, prevention remains better than cure. Businesses should always seek to ensure their systems and processes comply with the latest laws, regulation and guidance.
613 financial crime supervision cases were opened in 2022/23 – an increase of 65% from 2021/22 and 10% from 2020/21
One way firms are increasingly achieving comfort in this area is the use of a regular health check/audit over the firm’s compliance with the UK AML regime, as envisaged under Regulation 21 MLR.
1. Proactive intelligence gathering
Financial services firms, and individuals within them, are the eyes and ears of law enforcement authorities. They bear a substantial burden to disclose to the National Crime Agency (NCA) information about possible money laundering by their customers and others with whom they come into contact.
The Economic Crime and Corporate Transparency Act 2023 (ECCT Act), whose provisions will enter into force during the course of 2024, makes a range of changes to existing reporting and information sharing requirements.
Most significant is the removal of the requirement for a pre-existing suspicious activity report to have been submitted before an information order can be made
One of the most significant developments is the enhancement of the NCA’s proactive information gathering powers.
Most significant is the removal of the requirement for a pre-existing suspicious activity report to have been submitted before an information order (an NCA power which compels businesses to provide information to it) can be made. It remains to be seen how (and how often) these powers will be used in practice.
2. Crypto crackdown
There has been much commentary about the potential for cryptoassets to be used as a vehicle for money laundering. The law is now catching up with the technology in this area.
The ECCT Act has amended both the criminal confiscation and civil recovery provisions in the Proceeds of Crime Act 2002 to encompass cryptoassets.
Service providers may be required to follow court orders relating to the cryptoassets they hold on behalf of their clients
This means service providers may be required to follow court orders relating to the cryptoassets they hold on behalf of their clients (including dissolving confiscated cryptoassets and sending the resulting sum to the court), police gaining access to crypto wallets, forced transfer of cryptoassets to a wallet controlled by the authorities and the potential destruction of cryptoassets.
3. Strengthening of Companies House
Alongside additional requirements increasing the amounts of information required to be provided to Companies House (CH), the ECCT Act has also bolstered CH’s investigation and enforcement abilities, giving it the power to more effectively cross-check data with other public and private sector bodies.
CH will therefore be able to proactively share information with law enforcement bodies where they have evidence of irregular filings or suspicious behaviour. It would not be surprising to see increased numbers of investigations and enforcement action eventually flowing from the use of these powers.
4. Technological challenges
Technology will continue to be at the forefront of AML compliance efforts. In particular, artificial intelligence (AI) and blockchain are likely to assume even greater significance. Leveraging the power of AI to sift through vast volumes of data, detect anomalies and generate real-time insights is an enticing prospect.
It is vital investment in technology is not used as a justification for underinvestment in staff and training
Likewise, using a blockchain ledger to verify customer identities has the potential to greatly streamline know-your-customer processes.
The FCA certainly welcomes the advent of AI and blockchain in the financial compliance space – provided their potential drawbacks are considered carefully.
However, we are far from automated processes being able to fully replace human interactions. It is therefore vital investment in technology is not used as a justification for underinvestment in staff and training.
Chris Stott and Alex Spurgeon are part of Eversheds Sutherland’s corporate crime and investigations team
