FCA and PRA enforcement trends: financial crime

Enforcement outcomes 

Between October 2021 and the end of 2022, eleven fines were imposed on firms relating to financial crime systems and controls. This represents just under half of all fines imposed on firms in that period, compared with only two financial crime-related outcomes in the previous year. The only two fines imposed by the FCA so far this year also relate to financial crime. 

To a certain extent, this is the result of a high number of open financial crime investigations in previous years working their way through the enforcement process and reaching a conclusion. Nonetheless, it is clear that financial crime remains a high priority for the FCA and it remains intent on sending this message. The FCA’s determination to drive home its regulatory messages in this area was reinforced by its decision last year to impose a second fine on an insurance broker previously fined in 2013 for similar conduct relating to failings in its controls relating to bribery and corruption.

Penalties 

Financial crime penalties continue to be among the highest financial penalties imposed on firms. By the end of 2022, penalties imposed on firms in financial crime cases, since 1 October 2021, totalled £619.7 million, including a criminal fine of £264 million for a breach of the Money Laundering Regulations 2007 (SI 2007/2157) (the MLR). 

One of the reasons for the high fines is that financial crime cases tend to consider failings that persist over a number of years, affecting substantial businesses, meaning that the relevant revenue considered in the FCA’s penalty calculation tends to be high. In fact, in two of the most recent FCA enforcements, the FCA exercised its discretion to reduce the level of penalty because it considered that the penalty would otherwise have been disproportionately high. By contrast, in the referenced case brought against an insurance broker for continued failings in its controls relating to bribery and corruption, the FCA doubled the penalty that it would otherwise have imposed because it felt that the penalties previously imposed in the sector had not acted as a credible deterrent. 

Interestingly, in the FCA’s criminal prosecution for a breach of the MLR, the court considered whether to use the company's turnover as a starting point for calculating the criminal fine, but in that case, decided that the amount laundered was a more appropriate starting point for calculating the fine. 

International co-operation

Financial crime remains a focus for international regulators and the FCA continues to co-operate with international regulators. Two of the FCA’s recent outcomes relating to anti-bribery and corruption systems and controls failings, both also involved fines and disgorgement or restitution to the US Department of Justice. 

Focus of enforcement action 

Looking at themes in financial crime enforcement, there has been an increase in enforcement under the MLRs. Four of the financial crime enforcement outcomes announced since November 2021 have related to the MLRs, including the first criminal prosecution by the FCA. The remainder were brought under Principle 2 (due skill, care and diligence) and Principle 3 (systems and controls) of the FCA’s Principles for Businesses. In contrast, there was only one enforcement for breaches of the MLRs in the prior six-year period, from January 2016 to November 2021. It is possible that this is simply a manifestation of the decision by the FCA, some time ago, to use its powers under the MLRs more extensively, working its way through the enforcement process. 

The FCA is bringing a variety of cases in relation to financial crime, both in terms of the sectors targeted and the underlying financial crime at issue. Cases have covered retail banking and commercial banking, with correspondent banking featuring in two of the FCA’s most recent enforcements, together with brokers and insurance brokers. Cases have involved actual and potential money laundering; bribery and corruption; tax fraud (in three cum-ex related cases) as well as unauthorised regulated activities. 

Business restrictions

In at least three of the FCA’s recent financial crime enforcements, the firms received mitigation credit for agreeing to voluntary business restrictions targeted at reducing financial crime risks. In the past, the FCA has used business restrictions as a sanction, as part of the penalty imposed on firms for financial crime failings. However, over the past year or so, these have not featured heavily in sanctions imposed and the FCA appears to be using them more sparingly, recognising the significant impact that business restrictions can have on both firms and consumers. Perhaps the FCA’s greater use of interventions at an earlier stage also means that there is less need to impose business restrictions. 

Common weaknesses 

Inadequate investigation or escalation of red flags and concerns was an issue in eight of the thirteen (62%) FCA financial crime enforcements since October 2021. Other commonly occurring issues include: failing to follow a firm’s own policies and procedures; conducting inadequate customer due diligence, enhanced due diligence or ongoing customer monitoring; and having inadequate policies, procedures or guidance in place. 

Global events and the current economic climate mean that the risks of financial crime are increasing and that brings with it the risk that firms’ controls will not keep pace with the risks. It would be reasonable to expect greater focus from the FCA on new market entrants, such as e-money firms and crypto businesses. 

This post is based on an article “FCA and PRA Enforcement Action: Trends and Predictions” which first appeared in the January/February edition of PLC Magazine. A copy of the full article is available here and on the two the PLC Magazine website