NATWEST FACING MONEY LAUNDERING CRIMINAL PROCEEDINGS

On 16 March 2021, the FCA announced that it had commenced criminal proceedings against National Westminster Bank PLC, a subsidiary of NatWest Group PLC (formerly the Royal Bank of Scotland PLC) ("NatWest") in respect of offences under the Money Laundering Regulations 2007 ("MLR 2007").

• https://www.fca.org.uk/news/press-releases/fca-starts-criminal-proceedings-against-natwest-plc#:~:text=The%20Financial%20Conduct%20Authority%20(FCA,Regulations%202007%20(MLR%202007).&text=NatWest%20is%20scheduled%20to%20appear,Court%20on%2014%20April%20202

This is the first criminal prosecution of a financial institution by the FCA under the MLR and the first such prosecution of a bank. NatWest is scheduled to appear at Westminster Magistrates' Court on 14 April 2021

The FCA alleges that NatWest failed to adhere to the requirements of:

• Regulations 8(1), 8(3) and 14(1) of the MLR 2007* between 11 November 2011 and 19 October 2016.

These provisions require firms to:

• Conduct ongoing monitoring of its customers,
• As well as enhanced due diligence and ongoing monitoring on a risk-sensitive basis for the purposes of preventing money laundering.

The case arises from the handling of funds deposited into accounts operated by a UK incorporated customer of NatWest.

• The FCA alleges that around £365 million was paid into the customer's accounts, of which around £264 million was in cash, in the five year period between November 2011 and October 2016. T
• He FCA believes that NatWest's systems and controls failed to adequately monitor and scrutinise this activity.

Key Takeaways

Under the MLR, the FCA may open an investigation into a firm's AML systems and controls using its regulatory and/or criminal powers. It is not always clear at the outset of an investigation whether it is appropriate for the regulator to use its regulatory or its criminal powers of investigation.

For this reason, the FCA has in the last few years regularly adopted

• A "dual track" approach whereby it has retained the ability to treat relevant breaches of the MLR as either incurring civil or criminal liability as its investigation progresses.

This is the first occasion, however,

• On which the FCA has decided to bring criminal charges against a financial institution as a consequence of its investigation.

it is unlikely that this case will be followed by a wave of further criminal prosecutions of financial institutions.

Mark Steward, the FCA's Director of Enforcement, has himself acknowledged that criminal prosecutions under the MLR would be rare. For instance, at the GIR Live event in April 2019, he said:

• "I suspect criminal prosecutions, as opposed to civil or regulatory action, will be exceptional.
• However, we need to enliven the jurisdiction if we want to ensure it is not a white elephant, and
• that is what we intend to do where we find strong evidence of egregiously poor systems and controls and what looks like money laundering".

The FCA's own data shows that criminal prosecutions are likely to be exceptional.

• In the FCA's latest annual report, published in September 2020, it was stated that the regulator had 65 ongoing money laundering investigations.

However, it is apparent that the vast majority of these investigations are being conducted on a regulatory basis. A response to a Freedom of Information Act request we received in August 2020 revealed the following:

1. Only one single track criminal investigation into breaches of the MLR was at that time ongoing
2. The FCA was at that stage investigating six dual-track investigations into violations of the MLR
3. Five single track criminal investigations and two dual-track investigations into violations of the MLR had been discontinued since January 2020

The FCA's preference for electing to conduct money laundering investigations using its regulatory powers rather than its criminal powers can be explained by:

• The civil standard of proof is easier to satisfy than the criminal standard, and the regulatory, investigative process generally being quicker and less burdensome than the criminal process.
• Consequently, regulatory investigations tend to be quicker, cheaper and less of a drain on the FCA's resources than criminal investigations.

The potential saving of time and costs by pursuing the regulatory route has been a significant factor in FCA decision-making in the past about which powers to use in circumstances where the outcome of a successful investigation/prosecution of a regulated firm is likely to be the same, i.e.

• A financial penalty (and where such penalties tend to be larger when the regulator is using its regulatory powers).

Going forward, it is likely that the FCA will only bring criminal prosecutions in the most severe cases.

This means instances of predicate money laundering on the part of a customer – or conceivably, the financial institution itself – or at the very least where the FCA has identified a crystallised risk of money laundering has occurred.

This appears to have occurred in the NatWest case, with media outlets reporting that the customer involved may have been part of a multi-million-pound money laundering business.

All firms would do well to note that financial crime remains a high priority for the FCA, and in the light of this case, in particular, banks should reflect on the effectiveness of their "in branch" controls around large cash deposits and their approach to carrying out due diligence and ongoing monitoring.

Source

• https://www.eversheds-sutherland.com/global/en/what/articles/index.page?ArticleID=en/Financial-services-and-dispute-investigation/FCA_starts_criminal_proceedings_against_Natwest

• It should be noted that the MLR 2007 have now been superseded by the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 ("MLR 2017") for conduct which has taken place from June 2017 onwards. However, the aforementioned requirements relating to due diligence and ongoing monitoring are similarly contained within the MLR 2017. (We will refer to the MLR 2007 and MLR 2017 together as the "MLR".)