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City may face flurry of litigation after ‘FinCEN’ dirty money revelations


Covid-19 may have turned the City of London into a temporary ghost town, but a far bigger threat to the Square Mile are the claims it is a washing machine for dirty international money.

Those rumours were renewed this week with the latest scandal in the form of more than 2,500 leaked documents dubbed the “FinCEN files”.

They purport to show that banks and financial services companies have blithely filed suspicious activity reports to the authorities only to carry on taking dirty cash from sources that they struggle to identify properly, expecting the authorities to deal with the problem.

Lawyers are predicting “a flurry of legal claims” as possible victims of fraud latch on to evidence of a sloppy or negligent approach to the rules. After all, ordinary investors are much more attuned to the prevalence of money laundering ever since the BBC’s McMafia hit screens two years ago.

But the latest revelations, which came in a joint exposé by the International Consortium of Investigative Journalists, the BBC and BuzzFeed, have not produced a clear-cut reaction from fraud specialist lawyers: some blame the financial institutions, others the investigatory authorities.

Regardless of who is to blame, litigation is likely.

  • “This leak could lead to a flurry of legal claims against U.K. banks by the victims of fraud and Ponzi schemes,”
  • “Banks will be livid that this confidential information is in the public domain. Trust will undoubtedly have been undermined between the regulator and the regulated.”
  • Says Sam Tate, a partner at the law firm RPC.

Tate points to the longer-term ramifications of yet more dirty cash allegations in the Square Mile:

  • “A reputation for lax money-laundering controls is a potential problem for the City as it plots a recovery post-Brexit and Covid-19.”

Aziz Rahman, a senior partner at Rahman Ravelli, takes an even harsher view. He argues that the latest disclosures have unearthed broad weaknesses in the system —

  • “Not least because banks appear to be able to flout the restrictions that apply to them”. (Aziz Rahman, a senior partner at Rahman Ravelli)

For Nicola Finnerty, a partner at Kingsley Napley, the FinCEN revelations reinforce existing suspicions in the legal profession that the suspicious activity reporting regime must be reformed. She claims that it must be made

  • “More streamlined to encourage more quality reporting”.

Finnerty argues that the U.K. has

  • “A fragmented supervisory regime and lack of uniformity on interpretations of key principles, which does not help. The underlying story here is that the anti-money laundering regime is far from perfect.”

Elements of that regime outside the suspicious activity reports are also criticised.

The Criminal Finances Act 2017 introduced unexplained wealth orders in a bid to create a civil law method of separating alleged fraudsters from assets that were thought to have been acquired illegally.

Rahman describes that approach as understandable, but in his view it has so far had limited success.

  • “The fact that many banks have now been shown not to have been doing enough to prevent the illegal movement of money has to be seen as a sign that the current system needs replacing — or at the very least needs some major repair work,” he says.

While financial institutions take a lot of heat from some lawyers, others are more sympathetic.

  • “On the whole, banks take their obligations to file suspicious activity reports very seriously,” says Neil Swift, a partner at Peters & Peters.

He argues that

  • The reporting system is used to raise a “red flag”, but that it serves little purpose if an investigation is not triggered or informed.
  • “Law enforcement agencies might feel overwhelmed by the volume of reports they are receiving, but there is doubtless more that they could be doing to trace and investigate suspicious funds, if sufficiently resourced,” he says.

Swift is more positive about the provisions of the 2017 legislation. He says

  • The law means that U.K. authorities have more time to open either criminal or civil recovery investigations when they receive a report from a bank.

And they have more tools at their disposal, such as account freezing and forfeiture orders. Swift calls for regulators and investigators to be quicker to use orders, although he acknowledges that their effectiveness

  • “Will hinge on fair use so as to avoid innocent parties getting unnecessarily caught up by them”.

British banks — HSBC, Barclays and Standard Chartered — have been in the crosshairs of the FinCEN revelations.

HSBC said

  • It does not comment on suspicious activity reporting,
  • But added that the revelations related to a period before the bank struck a $1.9 billion deferred prosecution agreement with the U.S. Department of Justice.

Barclays said:

  • “We believe that we have complied with all our legal and regulatory obligations including in relation to U.S. sanctions.”

Standard Chartered said that it took its anti-money laundering responsibilities

  • “Extremely seriously” and had invested “substantially” in compliance.

Yet critics still line up to beat the banks.

  • “There are many banks that now need to consider how they are operating, what operational changes they may need to make in the future and how some of them have failed spectacularly to comply with the obligations on them,” Rahman says.
  • “It is ironic that there is in place a system for banks to flag up their concerns about the origins and movement of money — and yet the activities of the banks themselves are arguably the biggest concern.”


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