The Corporate Offence of Failure to Prevent the Facilitation of Tax Evasion: Two years on
In a report published by Transparency International on 7 March, a series of damning indictments were set out as to the “multitude of ways in which the UK is enabling corrupt individuals to enjoy luxury lifestyles and cleanse their reputations” – including “an anti-money laundering system that is easy to bypass in order to launder money with impunity.”
With the Prime Minister-led Anti-Corruption Summit coming up on 12 May the media focus and political scrutiny in this area is intense - heightened by the leak of the so-called “Panama Papers”. Indeed the first UK National Risk Assessment, published in October 2015 found that the City is “highly exposed” to the risk of money laundering. The report concludes that the size and complexity of the UK’s financial sector is such that it is “more exposed to criminality” than in many other jurisdictions.
It is unsurprising then that one of the top priorities for the Financial Conduct Authority – as set out in its Business Plan 2016-17 – will be tackling financial crime and ensuring anti-money laundering compliance. The FCA recognises that the “UK financial system is a major global hub which attracts investment and activity from across the world. However “this can also attract criminals and terrorist organisations seeking to hide the proceeds of crime among the huge volumes of legitimate business.” The FCA intends to focus its efforts on ensuring that the UK financial system has appropriate safeguards to prevent financial crime. Thought it seeks to do this in a proportionate way to ensure that the regime put in place operates efficiently and that any unintended consequences of regulation are minimised.
One of the features of the FCA Business plan for this forthcoming year is to centre its priorities around a risk outlook. In doing so the FCA examines: risks, issues, challenges and opportunities in a particular sector, viewed through a number of different lenses. These include competition issues, firm and consumer behaviour, regulatory and legal changes. Technology and innovation is seen both from the reward – benefits to consumers – and risk perspective, whereby growth of digital tools increases the risk of online financial crime and cyber-attacks. The FCA will carry out work looking at how new technology can make AML processes more efficient, reduce financial exclusion, make it less onerous for customers and encourage easier switching between financial services providers. Examining, and addressing, consumers’ vulnerability to fraudsters and scams is also a key priority.
One of the FCA’s key concerns is to minimise unintended consequences and ensure that firms’ AML processes do not exclude people unfairly or unreasonably from using financial services.
Specifically on AML matters and financial crime the risks identified include the following: in search for profit and growth, firms may change the risk criteria they use to assess new clients leading to weaker checks and controls; higher costs and falling profits may cause firms to cut investment in systems and controls; financial crime requirements, together with a range of other factors, including reduced profitability, may cause banks to de-risk their product ranges inappropriately – ultimately this may restrict access to financial services to whole groups of individuals or businesses. For 2016-17 the FCA will complete a de-risking impact assessment in Q1, giving a clearer picture of the nature, scale and drivers of de-risking.
So what does the FCA hope to achieve this year?
The FCA wants the UK financial system to be a “hostile sector for money launderers” and it will use intelligence effectively to take early action that prevents money laundering. The FCA hopes to secure, in the medium to long term, an improvement in firms’ AML controls and an improvement in the perception of the UK’s AML regime from international assessors and overseas authorities.
How will it do this?
The FCA will continue to exercise due diligence on firms and individuals applying for authorisation and continue proactive supervisory assessments of firms whose business models present a higher inherent risk of money laundering. The Senior Managers and Certification Regime that came into force this year (see our related blog) specifically designates a Senior Manager function (SMF 17) responsible for Money Laundering Reporting.
The FCA will undertake proactive supervisory assessments of firms whose business models present a higher inherent risk of money laundering and roll out the ‘Financial Crime Annual Data Return.’ By asking firms to submit an annual data return the FCA will systematically gather statistics from firms about their financial crime risks. Examples of questions to be asked include: which countries do you operate in that you assess to be high-risk?; what is the perception of types of fraud you encounter are falling or rising in incidence? The aim being to enabling the FCA to focus supervision on the right firms and deploy its resources effectively.
Given the enforcement action taken by the FCA against Barclays in November 2015 with £72,069,400 fine for failing to minimise the risk that it may be used to facilitate financial crime, we can expect the FCA to maintain a similar stance this year. Similarly, Standard Bank PLC was fined £7.6 million in 2014 for failings relating to anti-money laundering policies and procedures for corporate customers connected to politically exposed persons.
Partnering with law enforcement
Where FCA finds firms with material weaknesses in their money laundering controls, it will use its enforcement powers to send a deterrent message to the industry and/or impose business restrictions to limit the level of risk. “Credible deterrence” being an overriding theme of the business plan. The FCA will encourage whistleblowing intelligence from the industry, either directly to firms or covered by our new rules on whistleblowing to FCA. Indeed as part of the FCA’s ambition to change banking culture and ensure good governance firms have had to nominate a Senior Manager to act as the “Whistleblowing Champion”.
Where there is suspected money laundering, the FCA will refer cases to law enforcement partners. The FCA will maintain membership of the Joint Fraud Taskforce, bringing together law enforcement agencies, firms and regulators to better identify and respond to fraud.
The FCA is committed to reviewing and refining its AML supervisory approach so that it meets the latest international standards and will work with the Treasury in implementing the 4th Money Laundering Directive into national law by next June and in preparing the Financial Action Task Force (FATF) national report in 2017.
Moreover, we may in due course have the 5th Money Laundering Directive as the European Commission is in the process of proposing amendments that would include provisions to establish harmonised and enhanced due diligence measures for high risk third countries; tackle the risks of virtual currency exchange platforms – “Bitcoin” - and pre-paid instruments; propose centralised bank and payment account registers or electronic data retrieval systems for Member States; improve access to information and exchange of information for Financial Intelligence Units.
Corporate and Individual Risk
The focus on financial crime and anti-money laundering means that Financial Services institutions and individuals will increasingly come under scrutiny, with the risk of criminal or regulatory enforcement action for weak systems and controls as against individuals who do not comply with the procedures. This will result in significant fines and a risk that individuals will no longer be regarded as fit and proper to work in the financial sector.
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