Major bank becomes first British lender to admit AML offences

• United Kingdom

• Financial services disputes and investigations
• Fraud and financial crime
• Financial services

08-10-2021

NatWest pleaded guilty yesterday at Westminster Magistrates Court to breaches of stringent UK anti-money laundering (AML) regulations which facilitated the laundering of around £365m through its accounts. In doing so, it became the first British bank to admit such an offence.

The charges were brought under the Money Laundering Regulations 2007 (MLR 2007),  and centred upon what was described as inadequate monitoring of accounts belonging to a UK incorporated customer between 2012 and 2016.

In setting out the charges, the FCA said that ‘increasingly large cash deposits’ were made into the customer’s account, in breach of controls required by both the MLR 2007, as well as agreements made between the client and NatWest. Clare Montgomery QC, instructed on behalf of the FCA, told the Court that when the client was taken on by NatWest, its predicted turnover was estimated to be £15m each year. Instead it deposited £365m over the space of nearly five years. Whilst it had been agreed at the outset of the relationships that the bank would not accept cash deposits, that the customer managed to deposit around £264m in cash over the five year period, which, at its peak, saw the customer placing up to £1.8m a day into the accounts.

The prosecution told the court that the bank’s offending fell into the ‘medium culpability category’ and the bank could expect a ‘very large’ fine up to £340m. The total fine will be determined by a judge when the bank is sentenced at Southwark Crown Court in early December.

Commentary

The sentencing exercise (currently scheduled to take place in December) will be a difficult one for any judge. As this is the FCA’s first prosecution under the MLR 2007, there is no precedent for the level of fine. No doubt regard will be had to previous decisions under the FCA’s civil enforcement process such as Commerzbank and Standard Chartered, both of whom received significant fines in 2020 for regulatory breaches of the MLR. The bank’s early guilty plea may well result in a discount to the overall fine of up to 30% and, in addition the bank will also likely want to highlight the cooperation it gave to the police in relation to the wider money laundering investigation, and the fact that it proactively notified its regulator, the FCA. The package of financial orders to be imposed could include a confiscation order as well as a fine, as has occurred in recent cases pursued by the Serious Fraud Office against corporate entities. If the FCA decides to pursue a confiscation order, a proportion of which may flow back to it as the investigating and prosecuting authority, (unlike fines, which are paid to HM Treasury), there may be significant debate as to the amount of the bank’s “benefit” from the breaches of the MLR 2007.

Under the MLR 2007 (and successor legislation, the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017) (together 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.

As we noted late last year, the FCA has long been on the lookout for a test case to underline its commitment to fully utilise its criminal enforcement powers under the UK’s AML regime.

Whilst acknowledging that criminal prosecutions under the MLR would be rare, Mark Steward, the FCA’s Director of Enforcement said at the GIR Live event in April 2019, talked of the ‘need to enliven the jurisdiction if we want to ensure it is not a white elephant’. He went on to say that such prosecutions would occur ‘where we find strong evidence of egregiously poor systems and controls and what looks like money laundering’. 

We do not consider it likely that this case will be followed by a wave of further criminal prosecutions of financial institutions. 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:

• only one single track criminal investigation into breaches of the MLR was at that time ongoing
• The FCA was at that stage investigating six dual track investigations into breaches of the MLR 
• five single track criminal investigations and two dual track investigations into breaches of the MLR had been discontinued since January 2020

The FCA’s preference for using its regulatory powers, rather than its criminal powers, can be explained by the civil standard of proof being 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 criminal prosecutions will only be brought by the FCA in the most serious 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 having occurred.

Despite the assurances that this case is likely to be the exception rather than the rule, the prosecution represents a significant scalp for the FCA, and will no doubt send something of a chill down the spine of compliance teams in financial institutions – and other regulated entities –  up and down the land. To that end, 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.