Can The FCA Be A Regulator And Law Enforcer For Money Laundering?

- 21 April, 2021

Image credit: fca.org.uk

It’s all in the timing but can the Financial Conduct Authority (FCA) simultaneously perform as a regulator and enforce the criminal law?

This particular timing references four recent publications/broadcasts:

The FCA initiates criminal proceedings against Nat West Bank for money laundering
The FCA launch a campaign to encourage whistleblowers to report wrongdoing and misconduct, promising whistleblowers will feel welcome and safe
The new series of Line of Duty which makes reference to the term CHIS
Mark Steward Executive Director of Enforcement and Market Oversight gave a speech titled, ‘The importance of purposeful anti-money laundering controls’

Background

The FCA has three primary operational objectives:-

To secure an appropriate degree of protection for consumers.
To protect and enhance the integrity of the UK financial system.
To promote effective competition in the interests of consumers.

Nowhere is there any reference to enforcing the criminal law (where applicable) and there is no reference to preventing financial crimes. Does it follow, anti-money laundering (AML) is not an operational objective and priority for the FCA? Not according to Mark Steward who, in his speech of 24 March 2020 stated:

“Detection, investigation and prosecution, where necessary, – either civilly or criminally – of breaches of the Money Laundering Regulations, SYSC 6.3 and/or the Principles for Business are key priorities for the FCA.”

Although, this does not accord with evidence drawn from prior FCA enforcement actions, which proposes criminal prosecutions for money laundering breaches are very rare*. Over the prior 20 years, global regulatory penalties for AML failings have exceeded $250 billion and to some, AML has become the benchmark by which all compliance is judged. They posit, “If you can’t get your AML right, it is likely none of your compliance programme is right”. Thus. AML is a big issue, but given these enormous penalties, should we not now know who did it? I hear some of you ask, “Did what?” and the answer is’ “Who laundered all of the money which generated these $250 billion + penalties?”.

The problem, is we don’t know, because regulators, including the FCA haven’t found him/her. Or, in the event they have found the culprits, they have taken no action and this is a BIG problem.

Money laundering is a serious criminal offence

If you are reading this it is assumed you accept money laundering is a serious criminal offence and it is a vital component of serious and organised crime. With this agreed upon, we need to consider public policy towards serious and organised crime. In 2002, the UK Prime Minister Tony Blair heralded The Proceeds of Crime Act 2002 and suggested, “If we take the proceeds out of crime, we may ultimately stop the crimes being committed”.

Given our collective, abject failure to achieve the first part of this suggestion, i.e. take the proceeds out of crime, we may never know if Tony Blair was right. So why have we failed and why do we continue to fail? More pointedly, why has the FCA failed?

Conflicts

The answer is very simple, the FCA is conflicted and therefore unable to enforce the criminal law, prosecute culprits and protect the public in the same way as law enforcement agencies, such as the police service. The FCA is simultaneously a supervisor, a regulator, a gate keeper and a law enforcer. Whereas, the police service is simultaneously a law enforcer and a social service, but importantly, the police service are not conflicted.

The FCA approve applications and provide regulatory permissions to firm, banks and even individuals, thereafter, the FCA provides supervision to these regulated parties. This all works well until one of more, of these parties undertakes criminal conduct and uses their regulated permissions, services, products and status to launder the proceeds of crime.

Consequently, when this happens, the FCA find themselves investigating parties they previously approved as being ‘fit and proper’ parties to operate a regulated financial services business. Put another way, these parties presented themselves to the FCA who undertook some form of due diligence and determined the public could trust them. Thereafter, the FCA supervised them, helped them and behold they were in fact committing a serious crime.

The police do not approve or supervise criminals, they investigate them, frustrate them, arrest them and all being well, with the support of the Crown Prosecution Service they convict them, as individuals, not families, not clans, groups or legal entities, no, individuals, held accountable and responsible for their actions.

Now imagine the issues which the FCA face, having assessed, approved and then supervised the culprits, questions are asked as to the quality of regulation and supervision. Moreover, the culprits can build a defence around FCA approval and supervision, proposing they could not have been committing a crime as the FCA would have stopped them.

Some believe the FCA are a weak and frightened prosecutor who does not want to risk losing a criminal trial. Therefore, absent to a suspect’s confession, a DNA sample and photographic evidence of a crime being committed the FCA will not initiate a prosecution. Which is good news for launderers, but not so for the public.

The knock-on effect

One of the objectives of both the criminal justice and the police service is the prevention of crime, pursuant to which credible deterrents are vital. When sentencing offenders judges often make two sentences simultaneously providing punishment for the offender in the dock and a credible deterrent to would-be offenders in a mindset to give the same crime a try.

Would be offenders need to fear being caught and the consequences of being caught. Hence, most murders are solved and upon being convicted, offenders are sentenced to a term of life in prison. In contrast, the FCA has never convicted an individual of any criminal money laundering offences**. Absent to the fear of being caught and the consequences of being caught, those so inclined apply the motto, “Keep calm and carry on laundering”.

Presently it is the shareholders of banks/regulated firms who are being punished for money laundering/money laundering prevention failures taking place. After all, it is their profits which pay the penalties imposed by the FCA.

In March 2021, the FCA initiated criminal proceedings against Nat West Bank, which is the first time the regulator has chosen to pursue criminal rather than civil proceedings. Of course the bank has nothing to fear, or more precisely, the bank fears nothing, because fear is an emotion and corporate entities, such as banks have no emotions. No individuals have been charged and this will not change, given the date range for the alleged money laundering is 2011-2015.

Within the criminal justice system there is a maxim, “Justice delayed is justice denied”. People accused of crimes should be given the best opportunity to defend themselves. So, what were you doing in 2011? Collectively, the AML community await the outcome of the criminal proceedings.

In the meantime, the FCA has stated they are conducting in excess of forty additional money laundering investigations and have commenced a campaign to encourage more whistleblowers to come forward and report wrongdoing. We must assume this includes wrongdoing in relation to money laundering and so Mark Steward is on the front foot. Or is he?

The FCA and whistleblowing

It is universally acknowledged that whistleblowers, informants, confidential human intelligence sources (CHIS) play a vital role in fighting serious/organised crime, including money laundering. BUT, there is often a big but, the FCA do not want to deal with any CHIS, given the legal obligations which attach to dealings with a CHIS. It must follow that FCA are restricting their own ability to enforce the criminal laws applicable to money laundering. Not so fast, whereas a CHIS makes a choice to become an informant, many people in the financial services industry are compelled to do so.

Thousands of people, including executives hold their roles on the basis of approval from the FCA. This approved status demands such people are open and cooperative with the FCA^. This means such ‘approved person’ must inform the FCA of any matters, it can be assumed the FCA would want to be made aware of. Money laundering is a matter we should assume the FCA want to be made aware of.

Thus, no CHIS, no informants, but enthusiastic whistleblowers and others who are compelled to become whistleblowers. Please note, I am not a lawyer, but I do think there are some serious human rights issues here, which become even more serious when the FCA fails to act on the information provided by the whistleblower; fails to protect the whistleblower and worse still attacks the whistleblower. Believe me, this happens.

FCA track record

As presented above, the FCA does not have a great record when it comes to holding individuals accountable for money laundering. Likewise, the FCA has a poor record for protecting whistleblowers, indeed dealing with whistleblowers. In contrast, my friend Harry Markopolous^^ is very good at dealing with and protecting whistleblowers, indeed, he recruits and coaches them. He is a private citizen, he works in the US and does not purport to be a law enforcement agency, but he would be good at it.

Harry does protect and reward his whistleblowers, they are the lifeblood of his business, which I like to think of as “Whistle while you work Ltd”. He understands the value as well as the importance of whistleblowers and he issues claims for $500 million+, but as he is not a regulator or supervisor, he has no conflict of interests.

Back to the FCA campaign, given the choice, if you were to become a whistleblower would you want to be “welcomed” by the FCA and “made to feel safe”? Or would you prefer to be protected, rewarded and coached by Harry? Given the US have recently legislated to financially reward those who blow the whistle against money laundering and money launderers, Harry is likely recruiting. Moreover, perhaps it is the US legislation which has prompted the FCA to initiate this campaign, which is not actually new, rather it is a re-launch of a very similar campaign in 2015, which followed on from a lot of government criticism of the FCA.

Conclusion

The FCA is a regulator, not a law enforcement agency and consequently the FCA is incapable of properly or indeed adequately enforcing the criminal law as it relates to money laundering.

* Two in the prior twenty years

** In November 2020, the FCA initiated criminal proceedings for money laundering against Richard Jonathon Faithful. The proceedings are ongoing

^ PRIN 11 FCA Handbook

^^ The man who blew the whistle on the recently deceased Bernie Madoff