NatWest has pleaded guilty at Westminster Magistrates’ Court to criminal charges brought against it by the Financial Conduct Authority (FCA) in respect of offences under the old Money Laundering Regulations 2007 (MLR 2007), which required certain firms, including those regulated by the FCA, to maintain adequate and effective anti-money laundering systems and controls. NatWest accepted that it failed to comply with regulation 8(1) (dealing with requirements for ongoing monitoring) between November 7, 2013 until June 23, 2016; and regulations 8(3) and 14(1) (dealing with requirements for enhanced customer due diligence and ongoing monitoring) between November 8, 2012 until June 23, 2016 under MLR 2007. The case was sent for sentencing to Southwark Crown Court which will take place on or before December 8.
The case concerned the handling of funds, mainly cash, deposited into accounts operated by a former corporate client of NatWest, Fowler Oldfield, a gold dealership in Bradford. The FCA alleged that around £365 million was paid into the customer’s accounts, of which approximately £264 million was paid in cash through Natwest branches. When Fowler Oldfield was adopted as a client by NatWest, its predicted turnover was said to be an annual £15 million. It would appear that NatWest’s systems and controls failed adequately to monitor the customer’s activity.
The relevant MLR 2007 regulations required banks to conduct continuous monitoring of a business relationship and consider the need for enhanced customer due diligence measures/continuous monitoring. The MLR 2007 have been superseded by the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs). The NatWest case is remarkable as the first criminal prosecution brought by the FCA under the MLR 2007 and the first AML prosecution by the FCA against a bank. It is not, however, the first time that non-criminal enforcement action has been taken by the FCA against banks for AML breaches.
Most recently, in July 2020, the FCA fined Commerzbank AG (London branch) more than £37 million for inadequate AML systems and controls. In April 2019, meanwhile, the FCA fined Standard Chartered Bank more than £102 million (this was the second-largest financial penalty for AML controls failings ever imposed by the FCA). The largest-ever FCA financial penalty for AML controls failings was imposed on Deutsche Bank AG in January 2017 — £163 million. The bank had engaged in suspicious transactions which enabled its customers to transfer approximately $10 billion from Russia to overseas bank accounts without detection. NatWest is likely to face a significantly larger fine.
Why a criminal prosecution?
These other cases pursued by the FCA as civil enforcement actions were certainly regarded as serious breaches, which begs the question as to why the FCA has, for the first time, used its powers to bring a criminal prosecution in an AML case, and whether its success will establish a trend.
In its Enforcement Guide, the FCA states that its general policy is to pursue through the criminal justice system all those cases where criminal prosecution is “appropriate”, applying the basic principles set out in the Code for Crown Prosecutors. The Code for Crown Prosecutors requires consideration of a number of questions in deciding whether it is in the “public interest” to prosecute, including, inter alia:
- How serious is the offence committed?
- What is the level of culpability of the suspect?
- What are the circumstances of and the harm caused to the victim?
- What is the impact on the community?
- Is prosecution a proportionate response?
The FCA presumably considered the facts of the NatWest case to represent a level of seriousness beyond any of the recent AML enforcement actions against banks. It will also have weighed in favour of a criminal prosecution that actual money laundering had taken place; a number of individuals involved with money laundering in connection with Fowler Oldfield are facing criminal prosecution or have already pleaded guilty. The facts of the NatWest case can be distinguished from those of the FCA enforcement cases as the poor AML controls may have facilitated actual money laundering.
No individual liability
There were no charges against individuals – where an MLR offence is committed with the “consent or the connivance” of a director or is “attributable to [their] neglect”, they can face an unlimited fine and/or a prison term of up to two years. Proving neglect by an individual director to a criminal standard of proof would have been all the more evidentially challenging for the prosecution.
However, since the introduction of the Senior Managers and Certification Regime (SMCR) for banks in March 7, 2016, a similar set of facts would now almost certainly involve directors / senior managers facing individual FCA enforcement action – it is noted that there was nearly a 4 month overlap between the facts of this case and the introduction of the SMCR so it remains possible that the FCA could bring action under the SMCR.
Setting a trend?
Last month, Nikhil Rathi, the FCA chief executive, said: “In the future we will be a regulator that tests our powers to their limits, to ensure market integrity.” This could indicate a return to a policy of “credible deterrence” as pursued by its predecessor regulator, the Financial Services Authority (FSA), with respect to market abuse after the 2008 financial crisis.
However, other FCA messaging has not suggested that it intends to pursue all future — or significantly more — MLRs breaches as criminal prosecutions. In a 2019 speech, Mark Steward, FCA director of enforcement and market oversight, suggested that while the FCA should be prepared to use its criminal prosecution powers in relation to money laundering, their use was likely to be exceptional: “I think it is time that we gave effect to the full intention of the MLRs which provide for criminal prosecutions. In making poor AML systems and controls potentially a criminal offence, the MLRs are signalling that, in egregious circumstances, MLR failures let down the whole community … [However] I suspect criminal prosecutions, as opposed to civil or regulatory action, will be exceptional.”
As the FSA found in relation to insider dealing cases, proving cases to a criminal standard in a criminal court is not only more resource-intensive than allowing a firm to accept an early financial penalty as part of enforcement action, but also comes with greater risk of failure. It seems likely that the NatWest case was considered to be in the “Goldilocks zone” for a criminal prosecution by the FCA, appearing to be both sufficiently “egregious” and sufficiently likely either to result in a guilty plea by NatWest (or the production of evidence likely to persuade a jury that the bank’s due diligence was obviously lacking). Further, the FCA is now more inclined to hold individual senior managers to account under SMCR which may be regarded as a more effective deterrent than a fine for the business
regardless of whether that fine is levied by a criminal court or the FCA. On that basis, On that basis, I would not expect this case to give rise to a trend in criminal prosecutions of banks for breaches of the MLRs.
First published on Thomson Reuters Regulatory Intelligence on 11 October 2021