The UK’s Money Laundering Regulations 2017 (MLR 2017) created several criminal offences, most significantly the breaching of a relevant requirement. The relevant requirements demand that those operating within the regulations undertake certain activities and refrain from undertaking others unless the proper processes and procedures are in place. Regulation 86 makes it a criminal offence to breach a relevant requirement. When found guilty of any such offence, a relevant person may be liable to a fine and/or up to two years imprisonment.
The new regulations promised a far more rigorous approach to the prevention of money laundering in the UK; requiring the financial sector to have in place mechanisms that would prevent the cleaning of ‘dirty money’.
With the regulations themselves only being laid before Parliament one working day prior to commencement, those affected by their implementation were given very little time to prepare. It was perhaps not surprising therefore that some leniency was shown to allow for such significant changes to take place. Insofar as the legal profession is concerned for example, The Legal Sector Affinity Group informed the HM Treasury that they intended to take a ‘sensible and pragmatic’ approach to supervision following the commencement of the new regulations, allowing professions a period of time to adapt the new requirements.
However, a recent freedom of information request made by Eversheds Sutherland to the Home Office revealed that as of October 2018 there had been no prosecutions under the regulations. Some fifteen months after their implementation.
So what does that mean for the sanctions that were promised to better regulate the financial services sector that has itself spent in excess of £5 billion on core financial crime compliance measures? Are we to believe that the regulations are so successful that the very threat of a breach has led to a sea change in the approach taking to anti-money laundering in the UK? Or is this a case of the government simply giving lip service to the need to crack down on money laundering, without putting into effect the measures that allow that to happen?
Powers to prosecute are not new; having existed and been put into effect under the MLR 2007. So have the new regulations, in fact, had the opposite effect and stalled any such prosecutions that were in the pipeline while the effect of the new rules on those investigations are considered and professionals are given a chance to implement change?
In July 2018 Mark Stewart, Director of Enforcement and Market Oversight at the Financial Conduct Authority (FCA) indicated that they had started a small number of investigations into firms, systems and controls, to establish whether there has been any misconduct that might justify a criminal prosecution under the MLR 2017. Stewart made the following four observations:
- The MLR 2017 specifically makes provision for criminal prosecutions and the FCA is simply giving effect to the purpose of the regulation
- In most cases an investigation will be opened on a dual track with both regulatory and criminal offences under consideration with a broad range of outcomes including no further action
- The fact that criminal proceedings may be brought does not mean that they will be brought. He reiterated than an investigation is a fact finding mission and the presumption of innocence applies during an investigation
- In any potential criminal prosecution the FCA must satisfy both the evidential and public interest test in order to bring criminal charges
Stewart’s assertions are of course in line with the FCA mantra that tackling money laundering would be a priority and that the full range of supervision and regulatory enforcement tools would be utilised to combat any such criminal activity. But how do those assertions sit with the apparent lack of any such prosecution?
Prosecution is not the only way to deal with regulation breaches as is indicated by Stewart in what he sets out as a ‘dual track’ approach. It is important to bear in mind that criminal prosecution has a high evidential and public interest test; not least due to the significant costs of bringing such proceedings. As such, Stewart made clear that prosecution would therefore be reserved for the most serious of cases:
“I doubt the depths of seriousness can be fully plumbed anyway. However, it would seem safe to say that 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 nor asked, it is likely the test of seriousness will be passed.”
It is perhaps important when considering the effectiveness of new regulations to have in mind what else is being done in an attempt to bring about cultural change. Not long after the implementation of the MLR 2017, the financial services sector was required to implement further significant changes in the form of the Markets in Financial Instruments Directives II(MiFID II). MiFID II represented a regulatory overhaul for the financial services sector, no doubt representing a huge influx of work for the FCA in monitoring compliance. What became increasingly clear was the intention of financial regulators to bring about a cultural change within the sector to achieve system compliance.
Since MiFID II’s inception on January 3, 2018, the FCA’s market data processor has ingested more than half a billion reports a month on average, up 55% on the first six months of 2017. Stewart has drawn attention to the fact that MIFID II represents a whole market overview of trading which puts the FCA in a far better place to detect suspicious activity.
Criminal investigations take time, particularly when they involve the analysis of huge volumes of financial data. Although the FCA may be cautious to reserve its powers for the most serious of breaches, those in charge have made it clear that they will do so when the seriousness test is passed. It would be presumptuous or naive perhaps, for those affected to think that the MLR 2017 is failing in its objectives at what is still a relatively early stage.
There is no doubt that the attempts to bring about a cultural change have placed far greater requirements on the financial sector than ever before. Perhaps the lack of prosecutions thus far is representative of a number of factors, not least a period of adjustment but also the sectors initial response to the threat of stricter penalties, paying head to Stewart’s assertions that the new powers will be used where necessary.
Perhaps the new ‘risk based’ approach also extends further than its intended purpose of applying greater scrutiny to the origins of finance. I suspect that those at the helm of such institutions are also taking a far more risk-based approach to what is happening under their leadership. Where before they may have been able to plead ignorance of any ‘bad practice’ and offer up scapegoats for penalties and/or prosecution, new rules mean that the buck essentially stops with them. What better way to ensure compliance than making those in charge more accountable for their business practices.