Financial crime risks

As part of the ongoing fight against financial crime, financial institutions are not allowed to accept any proceeds of illicit financing and must implement systems to ensure that all client money is legitimate.

The financial crime risks for banks and financial institutions are huge. In 2021, over $9.5 billion of fines were issued due to not adhering to anti-money laundering regulations, and the associated reputation risks, negative publicity and loss of goodwill are equally as massive. All of which are possible when a bank or financial institution is unsuccessful in managing financial crime risk, making money laundering risks to financial institutions high on the agenda.^1,2

Whilst financial crime risks are increasing on a global level, a critical element for the financial sector is keeping up to date with the ever-changing financial crime regulatory landscape. Across the UK and Europe, changes to financial crime regulations play a key role in how financial institutions manage their financial crime risks. Maintaining an awareness of the latest updates to financial crime regulations is at the top of the agenda for financial institutions across the industry.

Financial crime regulations and managing financial crime risk

Amongst the ever-changing landscape, there are a number of key regulatory developments that will impact managing financial crime risk within the financial sector, which include:

The 6th Anti Money Laundering Directive

The 6th Anti Money Laundering Directive was introduced by the EU on 3rd June 2021 to further combat money laundering and counter terrorist financing UK.³

The main purpose of this regulatory update is to standardise what constitutes a money laundering offence to reduce interpretation between different member states domestic legislations. This can be achieved by sharing information so connected financial crimes can be prosecuted between states, to ensure that financial crime threat mitigation is harmonious across the industry.³

A key thing to note is that this financial crime regulation now covers wildlife crime, environmental crime and cybercrime as new “predicate laws” (i.e. areas where illicit financing might have originated).³

This means that banks will need to run further checks to determine whether money deposited with them has originated from financial crime and require additional financial services data sets and technology to maintain financial crime compliance. The fields of Environmental, Social, and Governance (ESG), sustainability and anti-financial crime will become ever closer, and financial crime professionals will see their remit broadened as a result.³

With additions to the list of offences under this regulation, aiding and abetting a financial crime will now be punished equally to those who have directly profited from a financial crime. Also, individuals such as legal persons, decision makers within an organisation and those acting on the organisation’s behalf, could receive financial crime punishments of up to four years in prison if they fail to take action against financial crime.³

The “failure to prevent” amendment

“Failure to prevent” regulations already exist for fraud and tax evasion in the UK, and it is likely that financial crime will also be held to the same laws. The “failure to prevent” amendment to the Financial Services Bill aims to address gaps in the law and introduce new criminal charges whereby individuals, corporates, and their directors are liable for facilitating or failing to prevent financial crime and could face time in prison.⁴

“This new amendment gives law enforcement a powerful tool in fighting money laundering and fraud. The argument is overwhelming, everyone agrees existing powers are weak and ineffective.” - Dame Margaret Hodge, Member of Parliament in the UK.⁴

Whether the “failure to prevent” amendment will come into fruition currently stands with the Law Commission. Though, it is speculated that legislative reform will not take place until 2023 at the earliest. Regardless, this is indicative of a regulatory environment which will only become stricter and demand more attention in the coming years.⁴

The Economic Crime Act 2022

The Economic Crime Act 2022 plans to strengthen the UK’s defences against financial crime and is focused on ensuring that financial institutions do not conduct business with sanctioned individuals, companies or countries. Responsibility now sits with financial institutions to uncover the true owner of the assets and critically, where the money to fund this asset has originated.⁵

Three key measures have been introduced to the Economic Crime Act 2022:⁵

1. The register of overseas entities (ROE)

Introduced to the Economic Crime Act 2022 on 1st August 2022, this measure aims to prevent money laundering through the UK property market. This measure requires an overseas entity that owns or wishes to own property/s in the UK to identify its beneficial owner/s and register them with Companies House. This information is then verified, and the entity will need to update its information annually.

2. Unexplained wealth orders

Created in 2017, this measure is used to target individuals who may pose a financial crime risk by managing UK properties within complicated offshore arrangements, even if they are not the ultimate beneficiary.

3. Strict civil liability test

Introduced for monetary penalties, this measure will mean that financial institutions could be accountable and fined up to £1 million or 50% of the economic resources (whichever is greater), even when they have no knowledge or reason to suspect that a transaction is in breach of financial crime sanctions.

The Office for Financial Sanctions Implementation (OFSI) are currently responsible for prosecuting financial institutions that breach financial crime sanctions, and this new measure permits them to publicly name financial institutions who have breached this, even if no penalty has been given yet.

The number of financial crime regulations which impact financial institutions is predicted to grow as the politicisation of sanctions increases i.e. as a result of the war in the Ukraine. This will be an ongoing and major challenge for the financial sector to overcome.

Why is financial crime prevention important?

The estimated amount of money laundered globally in a single year is 2 - 5% of global GDP, which is equivalent to $800 billion - $2 trillion US dollars.⁶

Also, it is estimated that fraud alone results in $258 billion losses every year to UK consumers, businesses and the public sector, and money laundering costs the UK more than $136 billion a year. Combined, these figures are equivalent to 14.5% of the UK’s annual GDP.⁷

The number of criminal funds that are either channelled through the UK or facilitated by UK structures, “can reasonably be said to run into the tens of billions of pounds, and probably the hundreds of billions.” - The UK Treasury Select Committee⁷

If you would like to learn more about the latest financial crime regulatory risks and how these impact the financial sector, make sure to join us on December 06 - 07, 2022 in London, UK at the Anti-Financial Crime Summit for these keynote sessions:

Keynote panel: What are the driving forces behind recent and near-term developments in financial crime regulation

Speakers:

• Professor Jimmy Gurule, Professor of Law, Notre Dame University (and former Under-Secretary of State for Enforcement, US Department of the Treasury)
• Professor Nicholas Ryder, Professor in Financial Crime, Head of Global Crime, Justice and Security Research Group, Bristol Law School, University of the West of England, Bristol
• Raluca Prună, Head of Financial Crime Unit, Directorate General Financial Stability, Financial Stability, Financial Services and Capital Markets Union (FISMA), European Commission
• David Howes, Global Head, Financial Crime Compliance, Conduct, and Compliance Frameworks, Standard Chartered Bank
• Dr. Liliya Gelemerova, Head of UK Financial Security, Crédit Agricole

Panel moderator: Stephen Rae, Chair and Publisher, AMLintelligence.com

Keynote regulatory presentation – The European Commission perspective

Speakers:

• Raluca Prună, Head of Financial Crime Unit, Directorate General Financial Stability, Financial Stability, Financial Services and Capital Markets Union (FISMA), European Commission

View the 2022 agenda here!

For more free content visit our library.

References:

1. Hearst, Elizabeth. “EXCLUSIVE: Massive drop in AML fines in 2021 as AML Intelligence launches Financial Crime Fines Review for 2021.” AML Intelligence. January 11, 2022. https://www.amlintelligence.com/2022/01/aml-intelligence-launches-2021-financial-crime-fines-review/.
2. Deloitte. “Financial Crime Compliance.” Deloitte. Accessed: September 2, 2022. https://www2.deloitte.com/content/dam/Deloitte/in/Documents/finance/in-fa-financial-crime-compliance-noexp.pdf.
3. PwC. “Highlights of the 6th Anti Money Laundering Directive (6AMLD).” PwC. Accessed: September 2, 2022. https://www.pwc.com/mt/en/publications/financial-crime-news/highlights-of-the-6th-anti-money-laundering-directive.html.
4. Stewarts. “MPs Put ‘Failure to Prevent’ Economic Crime Offence on Hold.” Stewarts. January 14, 2021. https://www.stewartslaw.com/news/mps-put-failure-to-prevent-economic-crime-offence-on-hold/.
5. The Law Society. “Economic Crime Act: What Does It Mean for Law Firms?” The Law Society. August 5, 2022. https://www.lawsociety.org.uk/topics/anti-money-laundering/economic-crime-act.
6. United Nations Office on Drugs and Crime. “Money Laundering.” United Nations Office on Drugs and Crime. Accessed: September 2, 2022. https://www.unodc.org/unodc/en/money-laundering/overview.html.
7. Napier Technologies Limited. “11 of the Biggest FinCrime and Money Laundering Facts.” Napier Technologies Limited. February 17, 2022. https://www.napier.ai/post/financial-crime-statistics-2022.