Key Reminders for Regulated Firms Following FCA-NatWest Anti-Money Laundering Case

In the resulting trial, NatWest admitted to offences under Regulation 45 for failing to comply with Regulation 8(1) (conducting ongoing monitoring of a business relationship), Regulation 8(3) (conducting ongoing monitoring as applicable to customer due diligence measures), and Regulation 14(1) (applying risk-sensitive basis enhanced customer due diligence measures and enhanced ongoing monitoring as applicable) of the Money Laundering Regulations 2007.¹

Considerations for regulated firms

The NatWest case has brought to light the wide ranging risks and negative collateral consequences that can arise from insufficient anti-money laundering (AML) systems and controls and the related enforcement action. We set out below some key concerns:

• Substantial financial cost. In addition to costs arising from the proceedings and the FCA’s four-year investigation into NatWest, the FCA has announced that the likely sentence would be a “very large fine” and that it would seek a fine of up to £340 million.
• Reputational damage. FCA enforcement actions tend to be high profile and are often monitored closely by the industry and media.
• Attention from other regulators. A publicized regulatory investigation may draw attention from regulators in other jurisdictions where a relevant firm has operations and may trigger similar follow-up queries and/or proceedings abroad. In some jurisdictions, firms subject to enforcement actions may be barred from doing business with certain parties such as government agencies.
• Potential breach of contractual representations. Certain contracts, such as securities agreements and service contracts, may require regulated firms to provide representations with respect to the absence of any criminal proceedings. If a firm is subsequently convicted under the MLRs, this may lead to a breach of contract and require disclosures to be made against future agreements.
• Impact on credit ratings. While the credit rating agency Fitch Ratings previously confirmed that the NatWest proceedings did not cause any immediate impact on the bank’s credit rating, it noted that it may consider negative rating action depending on the developments of the proceedings, such as if these reveal widespread weaknesses in risk management or governance or lead to investigations from other authorities.
• Reduced capital support from shareholders. The uncertainty surrounding the size of any fines or related costs of a conviction may affect a regulated firm’s capital management and distribution of dividends. In turn, this may affect shareholder willingness to provide capital support in future if needed.

The future of anti-money laundering enforcement

The NatWest proceedings highlight the FCA’s serious commitment to investigating serious misconduct where this affects the proper functioning of the financial market. The FCA has extensive enforcement powers under the MLRs, including the ability to conduct investigations and impose civil penalties or bring criminal proceedings against FCA-authorized firms that fall within scope of the MLRs.

According to a speech published by the FCA’s Executive Director of Enforcement, Mark Steward, on March 24, 2021, the FCA is currently investigating more than 40 businesses and individuals for suspected AML offences. It also highlighted that detection, investigation, and prosecution, where necessary, either civilly or criminally, of breaches of the MLRs, the FCA’s rules and guidance on senior management arrangements, systems and controls (SYSC) relating to financial crime, and/or the Principles for Business are key priorities for the FCA (emphasis added).

Notably, no individuals had been charged as part of the NatWest proceedings. The decision not to prosecute any individuals at this time may be due in part to the FCA’s recognition that cases against individuals are very different in nature from those against corporate entities, including with respect to the greater financial implications for individuals, as well as the impact any such enforcement action may have on their reputation and livelihoods. There are also more practical difficulties associated with individual prosecutions. However, that is not to say that the FCA will not take regulatory or criminal action against individuals at a later date.

Regulated firms should also note that the UK government recently issued a call for evidence (published July 22, 2021) on the effectiveness of the UK’s anti-money laundering and counter terrorist financing (AML/CTF) regulatory and supervisory regime. The call for evidence notes that there have been very few criminal prosecutions under the MLRs to date, and the government is seeking views on the barriers to pursuing criminal prosecutions. The publication also queries if the relatively low number of prosecutions represents a failing of the current enforcement in the context of alternative civil regulatory powers. The focus of the call for evidence suggests that there may be increased policy focus on criminal prosecutions in the future.

In addition, the government published a consultation in July on the amendments to the MLR 2017 (the intention being that these amendments should be made regardless of the outcome of the broader call for evidence). It is imperative that firms regularly review and audit the adequacy and robustness of their AML/CTF systems and controls against both current and upcoming requirements. Where firms identify potential areas of concern, they should seek professional advice at an early stage. Sidley is happy to help with this.

Next steps for regulated firms

Ultimately, the NatWest case serves as a powerful reminder for regulated firms to reflect on some of the ancillary implications that such proceedings may have on their business, if they were to fall subject to such action by the FCA in the future.

Moreover, the FCA’s move to criminal proceedings and the UK government’s recent call for evidence and consultation on MLR 2017 demonstrate a key focus by the regulator and the government on combatting financial crime and reviewing enforcement measures.

In light of this, regulated firms should ensure that compliance with the MLR 2017 is a priority. This should involve proactively reviewing and, where necessary, updating their staff training, particularly with respect to large cash deposits and the approach to conducting due diligence and ongoing monitoring. Lastly, regulated firms should keep abreast of regulatory developments in regards to AML rules and the FCA’s investigatory and enforcement actions.

¹ While the Money Laundering Regulations 2007 (MLR 2007) have been superseded by the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017), the MLR 2017 apply only to conduct taking place from June 2017 onward. The proceedings against NatWest therefore remain subject to the MLR 2007. Please note that the requirements relating to due diligence and ongoing monitoring are, however, similarly contained within the MLR 2017 and therefore continue to be relevant to firms’ AML/CTF policies and procedures.