The debate about the presence of Russian oligarchs and their vast assets in the UK after the Putin regime’s invasion of Ukraine has pushed the problem of money-laundering up the political and regulatory agenda.
An estimated £88bn is laundered each year in the UK, according to research by Credas Technologies, a specialist in ID verification software. Based on data from the OECD, its figures indicate that only the US (£217bn) is home to more money-laundering. The UK’s figure is well above that of France (£55bn) and Germany (£51bn). Yet there is evidence that even before this sudden – and, many would say, overdue – concern in the UK about the scale of criminal activity, the authorities were already starting to take a tougher line on the issue.
The Financial Conduct Authority (FCA) has started using its power to mount prosecutions on top of imposing regulatory penalties and civil fines against money-launderers. The regulator was granted this capability in 2007, but it was only in October 2021 that it secured its first conviction. NatWest was fined £264.8m for failing to properly monitor the activity of a commercial customer, Fowler Oldfield, a jewellery business based in Bradford. During the time that NatWest served as the firm’s bank, approximately £365m was deposited with it, of which about £264m was in cash, even though their original business arrangement did not cover the management of cash.
Even though some employees at the bank reported their concerns, no appropriate action was taken. According to the FCA, the ‘red flags’ included significant numbers of Scottish bank notes deposited throughout England; notes arriving with a distinctly musty smell; and individuals acting suspiciously when paying cash in at branches. In some cases, the money arrived in bin sacks. NatWest admitted to three offences under the Money Laundering Regulations 2007 (MLR).
“Tackling financial crimes including money-laundering and financing terrorism is a priority,” says an FCA spokesman. “Financial crimes harm society and the wider economy, eroding confidence in the UK financial system. It’s imperative that the UK, as an international financial hub, has an effective regime to counter them. The FCA is committed to making the UK banking sector a hostile environment for money-launderers.”
The regulator has 42 other anti-money-laundering probes into firms and individuals in the pipeline, but only three of these are criminal investigations. The extra effort needed to mount a successful prosecution is significant.
Giving evidence to the Treasury select committee, Nikhil Rathi, the authority’s CEO, revealed that the Fowler Oldfield case had required 30,000 hours of staff time, interviews with 85 witnesses and forensic reviews of 300,000 documents, as well as 350 separate exchanges of legal correspondence with the bank. Not surprisingly, criminal prosecutions under the MLR are warranted only in “the most egregious cases”, according to the FCA.
The government needs to massively increase budgets, so (enforcement agencies) can devote the same attention to attacking illicit wealth as its owners put into defending it
James Alleyne, legal counsel at law firm Kingsley Napley, previously worked in the FCA’s enforcement division. He notes that “the successful prosecution of NatWest for offences contrary to the MLR is new territory for it. This reflects an increasingly aggressive and creative approach to the treatment of serious misconduct.”
Unusual though it might be, the Fowler Oldfield case should spur banks and other regulated businesses to review their anti-money-laundering practices and ensure that their ‘know your customer’ activities are fit for purpose. A call for evidence by the government in July on the regulatory and supervisory regime also suggests a greater desire in Westminster to pursue criminal prosecutions wherever possible.
While enforcement investigations and financial penalties seek to punish previous misconduct, they don’t aim to mitigate the ongoing threats posed by weak controls against financial crime. According to Alleyne, there’s little doubt that the FCA is adopting an increasingly assertive approach to the supervision of regulated businesses. This, he says, follows the report by Dame Elizabeth Gloster into the collapse of investment firm London Capital & Finance, which left 11,000 people fearing the loss of their life savings.
“Firms with ongoing weaknesses in their financial crime defences can expect increasingly intrusive supervision by the regulator, including the imposition of requirements on the FCA’s own initiative,” Alleyne explains. “These can prevent a firm that’s undertaking any activity – regulated or unregulated – from taking on new clients or serving existing clients.” This can result in “significant costs and disruption” to the businesses concerned.
Other observers have broadly welcomed the FCA’s tougher approach but would like it to go further. Oliver Bullough, author of Butler to the World: how Britain became the servant of tycoons, tax dodgers, kleptocrats and criminals, points out that billions of pounds are “laundered through the City every year. These funds are the fruits of kleptocracy, fraud, tax evasion, drug dealing, people trafficking and more.”
Bullough argues: “If this country wants to put an end to such crimes, it needs to make laundering their proceeds risky – and right now it’s not doing that. To fight financial crime, law enforcement agencies need three things: resources, information and support. To help them, therefore, the government needs to massively increase their budgets, so that they can devote the same effort to attacking illicit wealth as its owners put into defending it.”
In some countries, extra investments in anti-money-laundering enforcement have produced a healthy return, as fines are imposed and profits are properly taxed. Bullough and other campaigners are calling for political support for those involved in a highly complex and sometimes risky area of law enforcement that can cause embarrassment for the rich and powerful.
“There are many factors that make London an excellent centre for money-laundering. The total shambles of our law enforcement system is just one of those,” Bullough argues. “Solving a problem this big will take years of careful, dedicated work, rather than just one case. I hope this is the start of that process, rather than an isolated spasm.”
