Fighting financial crime post Brexit: what next?

19 March 2019

At the time of writing it is not clear whether the UK will be leaving the European Union on the basis of the Withdrawal Agreement, a No Deal scenario or whether indeed Article 50 will be extended for a period. What is clear, however, is that there are serious concerns that law enforcement co-operation will be significantly hampered due to Brexit compared to the current regime.

The Serious Fraud Office has identified the UK’s withdrawal from the EU as a “strategic risk” with a loss of access to EU measures and tools arising from Brexit leading to an adverse effect on investigations and prosecutions.  The Director of Public Prosecutions underlined that Brexit, and a fall back on 27 separate arrangements, would have a definable impact in terms of resource, management, and speed of cases.

This article looks at the measures taken to prepare for the UK’s departure from the EU – whatever the scenario - including what special steps have been taken to prepare for a No Deal Brexit.

Key instruments

The UK’s withdrawal from the European Union will affect a number of mechanisms relevant in the field of financial crime and it is worth a recap of what these are:

  • The European Arrest Warrant (EAW);
  • The European Investigation Order (EIO);
  • Membership of Eurojust and Europol as well as use of Joint Investigation Teams;
  • Mutual Legal Assistance regime;
  • Data transfer and access to databases;
  • Reduction/restriction in informal co-operation and sharing of intelligence;
  • Anti-Money Laundering and Counter-Terrorist financing mechanisms;
  • Measures relating to mutual recognition of freezing and confiscation orders; and,
  • Sanctions regime.

Brexit: with a deal and future partnership

If on the third time of being proposed, the November 2018 Withdrawal Agreement serves as the basis for the UK’s departure from the EU (with a transition period currently set to end 31 December 2020) we will see the continued application of some key political and judicial co-operation mechanisms including the EIO and measures relating to mutual recognition of freezing and confiscation orders.  The European Arrest Warrants would still be available, though EU Member States could refuse to extradite their own nationals – a backwards step from the current regime.

Some temporary certainty perhaps though the declaration for a future partnership is bereft of detail with broad commitments to co-operate: “across three areas of cooperation: data exchange; operational cooperation between law enforcement authorities and judicial cooperation in criminal matters; and anti‐money laundering and counter terrorism financing”.

On the question of extradition, there is a call for an efficient and expeditious system between the UK and EU Member States based on streamlined procedures and time limits with the “possibility” to waive dual criminality and the applicability of the new arrangements to own nationals.

A No Deal scenario

A large number of statutory instruments (across all sectors) are being prepared that introduce regulations to “address failures of retained EU law to operate effectively or address other legislative deficiencies arising from the UK’s withdrawal from the EU."   Some of these are triggered only in the event of a No Deal.  

One of these is the draft Law Enforcement and Security (Amendment) (EU exit) Regulations 2019 (the Regulations).  These set out that in a No Deal scenario, the UK’s access to EU security, law enforcement and criminal justice tools and measures would cease, and the UK would no longer be bound by EU regulatory regimes.  The UK will no longer have access to practical co-operation measures such as the European Investigation Order.

The instrument will do three main things:

  • revoke or amend retained directly applicable EU legislation and domestic legislation in the area of security, law enforcement, criminal justice and some security-related regulatory systems to ensure that the statute book continues to function effectively in a no deal scenario;
  • include transitional or saving provisions to address ‘live’ or ‘in flight’ cases – i.e. how cases ‘live’ on exit day should be dealt with; or how data received before exit should be treated;
  • and, in the case of extradition, ensure that the UK has the correct legal underpinning to operate the ‘no deal’ contingency arrangement - the 1957 Council of Europe Convention on Extradition.

It also contains provisions on proceeds of crime measures to remove the provisions introduced under EU legislation on mutual recognition of asset freezing and confiscation orders.  Provisions under EU law also cover the definition of a financial intelligence unit (FIU) and the sharing of financial information to tackle money laundering between FIUs. The EU measures also provide for the Asset Recovery Offices, which trace and identify property that is the proceeds of crime. Certain provisions in POCA also rely on definitions which are contained in EU law, such as the definition of groups of companies and references to EEA banks.

A separate instrument (Criminal Justice (Amendment etc) (EU Exit) Regulations 2018)) brings an end to the system of mutual recognition of financial penalties. 

Money Laundering

The impact on the UK’s AML regime under the Money Laundering Regulations 2017 (implementing the Fourth Money Laundering Directive) is dealt with under a standalone instrument -  the Money Laundering and Transfer of Funds (Information) (Amendment) (EU Exit) Regulations 2018.   This applies in whatever scenario the UK leaves the EU.

The Regulations are designed to ensure that legislation continues to operate effectively at the point at which the UK leaves the EU - references to EU institutions are removed and the FCA is empowered to make technical standards. The amendments will also mean that after exit the regulatory treatment of EEA member States is consistent with the current treatment of non-EEA countries.

Regarding the Fifth Money Laundering Directive, though the provisions of this are to be implemented into national law (10 January 2020) after the UK leaves the EU, the Government has confirmed that it will implement the measures in the 5MLD (key innovations relating to virtual currencies) and will consult on this in the coming months.

The UK Government, unrelated to Brexit, decided not to be bound by the Sixth Money Laundering Directive so this is not taken into account in the exit scenarios.  However for those dealing with multiple jurisdictions it is interesting to note that the Sixth Money Laundering Directive also focuses on virtual currencies; defines money laundering offences, including punishments for individuals convicted of money laundering offences; and, sets out greater co-operation between members states and third countries in terms of information sharing to improve investigation and prosecution.  This needs to be in national law by 3 December 2020.

Consequences?

Unless there is a speedy solution to this country's Brexit woes, it seems highly likely that law enforcement co-operation and information sharing will fall back on traditional co-operation measures under the Convention of Mutual Legal Assistance. This is widely viewed as cumbersome and slow.  The UK has tried to mitigate this in some areas by ensuring that there are provisions relating to the setting up of Joint Investigation Teams which facilitate coordination of criminal investigations and prosecutions conducted in parallel by two or more countries post Brexit.   However, this will be outside the more streamlined EU process, one that receives EU additional resources. 

The exclusion of the UK from measures that allow for swift and effective law enforcement across-borders and from specific financial crime instruments such as the quicker transmission and recognition of asset freezing and confiscation orders, between Member States, will arguably have a detrimental impact on the UK’s stated priority (Serious and Organised Crime Strategy) that: “this Government is committed to denying the most dangerous and determined criminals access to their money and assets”.

Indeed, tackling illicit finance is one of the key priorities of law enforcement and government with the opening of the National Economic Crime Centre (November 2018) and the launch of the Economic Crime Strategic Board (January 2019).   This ambition will undoubtedly be damaged by the loss of operational mechanisms enabling co-ordination with our nearest neighbours in the fight against economic crime.

As with all things Brexit related, certainty is in short supply. The granular detail of the steps required to maintain effectiveness in all areas of criminal law enforcement cannot be known for now – so much depends on the nature of our future relationship with Europe. What can be assumed is that, whatever the outcome,  crime will continue to be relatively high on the political agenda - meaning that there is likely to be a strong desire to find ways to maintain current operational ability one way or another.

This article first appeared in Fraud Intelligence on Monday 18 March 2019.

About the author

Jonathan Grimes is a criminal lawyer specialising in serious and complex criminal cases. His practice includes all areas of financial services and business crime as well as health and safety and related areas. He advises in a wide variety of other criminal law matters with a particular emphasis on cases with an international aspect, including war crimes and related work. Jonathan is rated as a leading expert in Chambers UK and Legal 500 UK.

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