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Top financial services enforcement trends: financial crime

Well over half of all fines secured by the UK Financial Conduct Authority (FCA) last year related to failings in financial crime controls.  

The FCA has also confirmed that over half of its open enforcement investigations into senior managers concern potential breaches of their regulatory obligations relating to their firms’ money laundering controls, although it remains to be seen how many (if any) result in successful enforcement action against individuals.

In any event, financial crime has been a key area of focus for a number of years, attracting some of the highest financial penalties, and this looks set to continue. 

Common breaches and areas of focus 

Most, of the FCA’s enforcement action relating to financial crime has relied on breaches of Principle 2 (due skill, care and diligence) and Principle 3 (management and control) of the FCA’s Principles for Businesses, but it has also brought successful civil and criminal cases under the Money Laundering Regulations 2007. 

Recent FCA enforcements have been concerned both with failings specific to a particular transaction and with systemic weaknesses in firms’ financial crime controls. 

More than half of the FCA’s financial crime cases in 2021 highlighted weaknesses in firms’ KYC (know-your-customer) policies and procedures. The FCA has also criticised firms’ identification of red flags, escalation of financial crime issues, assessment and mitigation of financial crime risks, financial crime policies and procedures, record keeping, remediation of known weaknesses in financial crime controls, and prioritisation of financial crime risk mitigation. 

Inadequate governance and scrutiny of financial crime risks, a perceived or actual lack of senior management engagement with financial crime issues and under-resourced financial crime functions have also featured in FCA findings. 

Big penalties 

Penalties imposed on firms for financial crime failings remain among the highest.  Last year, the FCA imposed financial penalties totalling over GBP476.7 million in financial crime cases, representing 84% by value of all financial penalties it imposed on firms in 2021. These ranged from GBP178,000 to just over GBP264.7 million, with the average coming in at around GBP95.3 million. 

There are several reasons why financial penalties for financial crime failings are among the highest.  Most relevantly, breaches can occur over a relatively long period of time and affect substantial parts of a firm’s business.   When present, these factors inflate the relevant revenue that the FCA uses as a starting point when calculating financial penalties in these cases. 

A bolder and more assertive regulator

In addition to imposing high penalties, the FCA is taking a bolder approach to the use of its enforcement powers. One of the larger fines imposed last year concerned a breach of FCA Principle 3 (management and control) in relation to financial crime issues affecting unregulated activities. 

The FCA justified this on the basis that the unregulated activities in question were carried out in a “prudential context”, meaning it considered that they had or might reasonably be regarded as likely to have had a negative effect on the integrity of the UK financial system.

Criminal prosecutions 

After much talk by the FCA about its intention to use its criminal powers under the Money Laundering Regulations 2007 and the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, it has secured its first criminal prosecution under the 2007 Regulations. This resulted in the court imposing the highest financial penalty that the FCA has secured to date for financial crime issues.

The FCA continues to open “dual track” civil and criminal financial crime investigations. Whilst many of these transition into civil-only investigations, having a criminal element to an FCA enforcement investigation has significant ramifications for how the FCA conducts an investigation, as well as how a firm manages and responds to that investigation.

Joint investigations and global settlements 

Although the FCA is the regulator principally associated with taking action against firms for financial crime failings in the UK, the Prudential Regulation Authority (PRA) has also taken an interest in this area. In 2020, the FCA and the PRA both took enforcement action against a bank for financial crime failings: the PRA justified its action on the basis that, if a firm fails to manage its financial crime risk appropriately, that can have a significant impact on its safety and soundness. 

International co-ordination between regulators and law enforcement agencies remains strong and is on the rise, reflecting the global focus on financial crime. 2021 saw a number of significant co-ordinated global settlements relating to fraud, money laundering, bribery and corruption. This focus is unlikely to decrease in the future; if anything, it may intensify if an expected uptick in enforcement activity by US authorities also drives enforcement activity in other jurisdictions.

Our next blog in this series considers FCA enforcement trends relating to fintech and cryptoassets.

This post is based on an article "FCA and PRA Enforcement Action: Trends and Predictions" which first appeared in the January edition of PLC Magazine and a copy of the full article is available here and on the PLC Magazine website.