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Financial Crime Summary

Financial Crime and Market Conduct: Jan 2021

Laven regularly reports on the most interesting and relevant financial crime news to give an idea of the ongoing regulatory approach taken against money laundering and terrorist financing.

Posted on 19 Jan 2021

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Regulatory Update

Financial Crime and Market Abuse has always been the top priority for the Financial Conduct Authority (“FCA”), and these issues have only been made more prominent due to the operational difficulties of remote working and the risk of criminals taking advantage of financial systems during the pandemic. As a result of the above, 2021 will see new reviews of the systems in place to prevent financial crime and many rules will be scrutinised due to calls by the UK government. 

In Q1 2021, the FCA is expected to publish their policy statement and final rules following on from its August 2020 consultation. The paper consulted on extending the FCA’s Annual Financial Crime Reporting obligation (REP-CRIM) so that it included firms undertaking regulated activities which pose a higher money laundering risk irrespective of their revenue threshold.

Further, in response to the FATF’s 2018 UK Mutual Evaluation Report, the FCA is due to implement enhancements to its AML/CTF supervision and engagement this year. The report identified that there were areas of the UK’s system that needed improvement, including the Suspicious Activity Reports (SARs) regime and the operation of the UK Financial Intelligence Unit (UKFIU). 

From 10 January 2020, existing businesses (operating before 10 January 2020) undertaking Cryptoasset activity in the UK will need to register with the FCA as their AML/CTF supervisory. Cryptoasset businesses not registered with the FCA by 10 January 2021 must cease trading.

The Economic Crime 2019-2022 set out seven strategic priorities which aim to prevent and combat economic crime in the UK, utilising the joint efforts of both the public and private sector. As part of the plan, the FCA and HM Treasury (“HMT”) will review the UK’s criminal market abuse regime, which sets out the UK’s criminal sanctions for insider dealing and market manipulation and has not been materially updated since it was introduced. Moreover, as part of strategic priority three of the Economic Crime plan, the Law Commission is undertaking a review of the confiscation regime under the Proceeds of Crime Act 2002 (“POCA”). Based on the Commission’s impending recommendations, the Home Office will outline proposals to amend POCA by December 2021.

In addition, the UK Government has asked the Law Commission to investigate the laws around corporate criminal liability and provide options to reform them. The Commission is aiming to publish an Options Paper, in which the laws will be analysed and options for improvement will be set out in late 2021.

Finally, the European Commission has called for the implementation of a legal framework enabling the use of interoperable digital identity solutions to assist with customer onboarding. The call for this new implementation comes as part of the Commission’s ‘Digital Finance Strategy’.

FCA fines Charles Schwab UK £8.96m over safeguarding and compliance failures

The FCA has fined Charles Schwab UK Ltd (“CSUK”) £8.96 million after the firm failed to adequately protect client assets, carried out a regulated activity without permission and made a false statement to the FCA. The customers affected by these breaches were all retail customers.

Client assets which were subject to UK rules were being held with firm and client money from both UK and non-UK clients at CSUK’s affiliate, Charles Schwab & Co., Inc (CS&C). The FCA stated that CSUK did not have adequate protection and safeguarding measures in place for its customers’ client’s assets. Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA, emphasized that firms are ”Expected to make sure they have the right protections in place” for their clients. CSUK also inaccurately told the FCA that auditors had confirmed that the systems in place to protect client assets were adequate.

After discovering the breaches, the firm took some remedial action, and it was noted that there was no actual loss of client assets. CSUK has since agreed to settle the case and therefore qualified for a 30% discount. Otherwise, the FCA would have imposed a financial penalty amounting to £12,804,600.

FCA and PRA fine Goldman Sachs International £96.6m for risk management failures in connection with 1MDB

The FCA and the Prudential Regulatory Authority have fined Goldman Sachs International (“GSI”) a total of £96.6 million for risk management failures connected to 1Malaysia Development Berhad (“1MDB”). This fine is part of a US$2.9 billion resolution with the Goldman Sachs Group and its subsidiaries.

In 2012 and 2013, GSI underwrote, purchased, and arranged three bond transactions for 1MDB. These transactions were approved by global Goldman Sachs Group Committees and assigned to GSI even though the transactions involved clients in jurisdictions with higher financial crime risk. Whilst arranging these transactions GSI failed to assess and manage the risk to the standard required for a high-risk profile transaction like 1MDB. There were also failures on the part of GSI in addressing allegations of bribery and misconduct in connection with 1MDB.

Mark Steward, FCA Director of Enforcement and Market Oversight highlighted that GSI did not take the ‘responsibility’ of tackling financial crime ‘seriously’ and the ‘size of GSI’s fine reflects that’. Sam Woods, Deputy Governor for Prudential Regulation and Chief Executive Officer of the PRA, echoes the statements of Mark Steward, emphasizing the seriousness of the case and how this is reflected in GSI’s fine.

GSI have agreed to resolve the case with the FCA and PRA which qualifies them for a 30% discount in the overall penalty. Without this discount, the FCA and PRA would have each imposed a financial penalty totalling £69,012,000.

Major fine for money service business MT Global

MT Global, a Luton-based money transfer company has received a record fine of £23.8m by HM Revenue & Customs for breaking money-laundering rules. These breaches were committed between July 2017 and December 2019. The MT Global fine is more than double the value of all the penalties issued by the HMRC for Money Laundering in the 2019/20 financial year, which came to £9.1m. It is the latest effort by the HMRC, FCA and National Crime Agency to combat dirty money flowing into the UK.

The penalty given to MT Global comes as part of the HMRC’s focus on cases against money service businesses. The efforts of the HMRC have reduced the number of money service businesses by almost a fifth since 2017. Nick Sharp, deputy director of economic crime at HMRC’s fraud investigation service, said businesses such as MT Global that breach the rules “leave themselves, and the UK economy, open to attacks by criminals”.


How can we help?

At Laven, our consultants are on hand to help identify the actions your firm needs to take to ensure you are in compliance with new regulations and aware of all the risks outlined in this report. Whether this is through assisting with new policies and procedures that need to be put in place or providing online/in-person training for staff to make them fully aware of the regulatory burden.

Laven has also built Laven Tech, a unique Regulatory Technology (RegTech) solution that leverages advanced technology combined with our vast subject matter expertise. Our RegTech solution is designed to assist fund managers, service providers and investors to meet today’s growing demands.

If you would like to find out more give our London office a call on +44 (0)20 7838 0010 or click the button below.

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