Anti-money laundering enforcement in 2020

5MLD and cryptoasset businesses

The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR) have been amended with effect from 10 January 2020. The amendments transpose the EU’s Fifth Money Laundering Directive (5MLD) into UK law.

Perhaps the most significant impact of 5MLD is to bring new sectors into scope of the MLR. Of particular note, certain types of cryptoasset businesses – cryptoasset exchange providers and custodian wallet providers – now need to comply with the MLR. The Financial Conduct Authority (FCA) is the supervisor of UK cryptoasset businesses for anti-money laundering (AML) purposes. We expect this sector to be a focus for the FCA in 2020.

Other key changes introduced under 5MLD include:

• Firms subject to the MLR now need to conduct enhanced due diligence (EDD) on customers in respect of a transaction in which any party is established in a high-risk third country, even if that party is not the firm’s customer. Previously, EDD was required only when a firm was entering into a business relationship or transaction with a person established in a high-risk third country.
• Firms subject to the MLR must report to Companies House discrepancies between the beneficial ownership information held by the firm on a UK customer and the information in the UK customer’s people with significant control register.
• Like cryptoasset businesses, art market participants and letting agents have also been brought into scope of the MLR.
• Co-operation among the Financial Intelligence Units (FIUs) of EEA member states has been broadened. In particular, the National Crime Agency (NCA) must now promptly provide information requested by FIUs (unless doing so would be contrary to UK law) and consent to a request from an FIU to disseminate such information to appropriate authorities in EEA member states (except where this could prejudice an investigation or would be contrary to UK law).

SARs reform

The UK Government’s overhaul of the suspicious activity reporting (SARs) regime is well underway and further improvements are due to be implemented in 2020. Announced as part of the National Economic Crime Plan 2019-22, the SARs Transformation Programme aims to fundamentally reform the SARs operating model and the UKFIU by 2023/24, with an investment of c.£100-150m.

A major part of the programme is dedicated to improving IT, with an initial focus on technology improvements that can help deliver quicker decision-making on defence against money laundering (DAML) requests, enhanced feedback on SARs and increased law enforcement use of SARs in operations. The first tranche of the IT upgrade is due to be completed by December 2020. In the near term, the UKFIU is also increasing headcount, which was already up from 80 in March 2018 to 118 in April 2019.

It remains to be seen whether these improvements will be sufficient to keep pace with the ongoing rise in reporting. In continuation of long-term trends, the period April 2018 to March 2019 saw:

• the volume of SARs increasing 3% on the previous year to 478,437;
• the number of DAML requests rising significantly by 53% on the previous year to 34,543; and
• UKFIU response times increasing to 5.12 days on average, from 4.32 days the previous year.

Separately, the Government is due to respond to a Law Commission report published in June 2019, which recommended a number of substantive changes to the SARs regime. For further detail, see our previous article on that report.

The National Economic Crime Centre

Since its inception in October 2018, the National Economic Crime Centre (NECC) continues to develop, with a phased approach being taken to full implementation.

The NECC brings together law enforcement agencies, government departments, regulatory bodies and the private sector to coordinate an integrated response to serious organised economic crime, including high-end money laundering. It includes and seeks to build on the Joint Money Laundering Intelligence Taskforce, a partnership between law enforcement and the financial sector to exchange and analyse information relating to money laundering and wider economic threats, which has been in operation since 2015.

The UK Government has set a target date of July 2021 by which the NECC is to be “fully established as the law enforcement lead for serious and organised economic crime in England and Wales”. A key next step in this process will be a mapping exercise to understand the existing capabilities of law enforcement across the NECC’s mandate, which is due to be completed by July 2020. Similar mapping exercises are being undertaken to understand capabilities within government and the financial sector to tackle major economic crime.

In 2019, the NECC provided an insight into what a more integrated multi-agency AML response might look like in operational terms. This included a multi-agency “day of action” in February 2019, in which c.£3.6m in 95 bank accounts was frozen, and an “intensification week” in May 2019 involving 250 visits and compliance reviews by various regulators focused on the legal, finance and property sectors.

As the NECC continues to develop, we expect to see further signs of a more joined-up approach to AML supervision, investigation and enforcement, including more integrated operations of the type we saw in 2019. The greatest impact may be less visible, however, in the form of increased inter-agency information sharing and a more coordinated approach to planning and implementing enforcement activity.

Unexplained wealth and account freezing/forfeiture orders

The NCA is taking increasing advantage of the new civil recovery powers made available under the Criminal Finances Act 2017 in the form of unexplained wealth orders (UWOs), account freezing orders (AFOs) and account forfeiture orders (Forfeiture Orders).

By way of example, 2019 saw:

• UWOs issued in three separate cases against assets worth over £93m;
• £100m frozen by AFOs in a single case in August, the largest amount of money frozen using AFOs to date; and
• the first use of Forfeiture Orders in February.

The UKFIU has also recognised AFOs as playing an important role in asset recoveries. In 2018/19, £132m was “denied to criminals” as a result of DAML requests, a big increase of 154% on the previous year.

Meanwhile, the NCA has had some early successes in defending its new civil recovery powers. In November 2019, the Crown Court dismissed the first appeal of Forfeiture Orders, which had been issued against £500,000 in bank accounts held by Vlad Filat. The Court found that the funds were derived from Filat’s father, the ex-Prime Minister of Moldova who was convicted of bribery and corruption offences in 2016 for his role in the disappearance of $1 billion from the Moldovan banking system. In October 2018, the High Court upheld the first UWO, issued against the wife of an Azerbaijani banker who was convicted for embezzlement and fraud. That case has been appealed to the Court of Appeal, which heard oral argument in December 2019. We await the Court of Appeal’s reserved judgment.

The take-up of UWOs, AFOs and Forfeiture Orders has perhaps not been as widespread as some initially expected. In April 2018, for example, the NCA said that UWOs were being considered in at least 100 cases, but we have not seen anywhere near that number. Still, given the advantages of these civil recovery tools to law enforcement, and the NCA’s successes in contested applications to date, we expect the NCA to make increased use of them going forwards.

FCA ‘dual track’ investigations

FCA has yet to bring a criminal prosecution for money laundering offences, but that could change in 2020. The FCA now routinely conducts some AML investigations on both a criminal and regulatory, or ‘dual track’, basis. In a speech in April 2019, the FCA’s Director of Enforcement and Market Oversight, Mark Steward, signalled that the FCA was giving greater consideration to pursuing criminal prosecutions for AML offences in appropriate cases, even though he thought that such prosecutions would be “exceptional”. The FCA had over 60 open AML investigations in July 2019.

Continued focus on foreign banks

The FCA first raised concerns regarding the AML systems and controls at overseas, mostly smaller, banks in July 2018. The previous month, the FCA had fined the UK branch of Canara Bank almost £900,000, and prohibited it from accepting deposits from new customers for 147 days, due to various AML deficiencies. Since then, we are continuing to see the FCA focus on AML issues at foreign banks. One common theme of investigations is the need to ensure that AML systems and controls of the UK operation are sufficiently independent of the overseas headquarters. Another theme, which was an issue at Canara, is the need for senior managers coming to the UK from an overseas head office to gain a sufficient understanding of the UK’s AML requirements.

A year of transition

The overall prospect for 2020 is a year of transition, in which the main developments continue longer-term trends. There may certainly be some new changes, although implementation of 5MLD, likely the main one, has already taken effect. For the most part, however, we see continuation of previously established trends – be that in areas of institutional development (such as the ongoing evolution of the NECC and the SARs regime) or investigative focus (such as the FCA’s use of UWOs, AFOs and dual track investigations).