Are The EU’s 2017 Money Laundering Rules Effective?

Barrister Jessica Sobey examines whether the EU’s 2017 money laundering rules are effective, noting that 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.

Jessica’s article was published in Law360, 10 April 2019, which can be found here. 

A version of Jessica’s article has been published in Lawyer Monthly, 23 April, which can be found here. 

This article was published in International Finance Magazine’s May edition on pages 22-23, which can be found here. 

This article was published in Compliance Monitor, 04 June 2019, which can be found here. 

The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 implemented the European Union’s fourth directive on money laundering. In doing so, they did not represent a wholesale upheaval of the existing legislation but instead were aimed at improving the 2007 regulations.

Under the MLR 2017, relevant persons are obliged to adopt a more risk-based approach toward anti-money laundering, and in particular, how they conduct due diligence. Central to the regulations is an increased emphasis on risk assessment and a furtherance of the application of a risk-based approach.

The MLR 2017 creates several criminal offenses, the most significant of which is that of breaching 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 offense to breach a relevant requirement and when found guilty of any such offense, a relevant person may be liable to a fine and/or up to two years imprisonment.

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.

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 blissfully assume that the regulations are so successful that the very threat of a breach has led to a sea change within a sector that over the four years leading up to the MLR 2017, saw an average of three prosecutions per year under its predecessor? Should we perhaps naively assume that services are now so concerned with avoiding noncompliance that they are suddenly more willing to adhere to regulations? 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?

Although the fourth direction was finalized in June 2015, a draft version of the regulations was only released on March 15, 2017, with the regulations themselves only being laid before Parliament one working day prior to commencement, leaving very little time for those who would be affected to prepare for their implementation. Insofar as the legal profession is concerned, 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 to the new requirements.

In July 2018, Mark Stewart, director of enforcement and market oversight at the Financial Conduct Authority, 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.

Conscious that starting criminal investigations against firms may draw some sharp intakes of breath, Stewart made the following four observations:

• That the MLR 2017 specifically makes provision for criminal prosecutions and the FCA is simply giving effect to the purpose of the regulation;
• That in most cases an investigation will be opened on a dual track with both regulatory and criminal offenses under consideration with a broad range of outcomes including no further action;
• That the fact that criminal proceedings may be brought does not meant that they will be brought. He reiterated than an investigation is a fact-finding mission and the presumption of innocence applies during an investigation; and
• That 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 utilized to combat any such criminal activity. But how do those assertions sit with the apparent lack of any such prosecution?

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?

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.

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 or asked, it is likely the test of seriousness will be passed.

Regard should also be had to more far reaching changes that came into force in an attempt to better regulate the financial services sector shortly after the implementation of the MLR 2017. After the apparent failure of its predecessor, the Markets in Financial Instruments Directives II did represent 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.

MiFID II started on Jan. 3, 2018, and Stewart has previously drawn attention to the fact that since its inception, 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. MIFID II represents a whole market overview of trading which puts the FCA in a far better place to detect suspicious activity.

While there may at present be an eerie silence surrounding the MLR 2017, it would be reckless for firms not to adhere to the requirements of the regulations. Criminal investigations take time, particularly when they involve vast swathes 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 be prepared to use their powers when the seriousness test is passed.

I suspect that the lack of rumblings thus far is perhaps representative of a number of factors; not least a period of adjustment but perhaps 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. 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. But I also suspect that the significant spending on compliance is in part due to the fact that those at the top can no longer hide behind the apparently unauthorized activities of employees further down the chain; offering them up as scapegoats when the previously distant threat of prosecution becomes a far more visible reality.