Publication
International arbitration report
In this edition, we focused on the Shanghai International Economic and Trade Arbitration Commission’s (SHIAC) new arbitration rules, which take effect January 1, 2024.
United Kingdom | Publication | 3月 2023
The Financial Conduct Authority (FCA) has stated that fighting financial crime underpins its priorities and that, in light of this, it is taking action at pace in a number of different areas across the financial crime landscape. The FCA expects firms to have robust governance, effective procedures and adequate internal mechanisms to manage their financial crime risks. These systems and controls should not be static – they need to keep evolving as the financial crime threats evolve. Most recently, there have been changing risks as a result of the cost of living crisis, with an increase in, amongst other things, scams, such as loan fee fraud and ghost broking. Systems and controls also need to be updated to take into account incoming changes to regulation and guidance.
To assist firms in managing their financial crime risk and meeting regulatory expectations, we provide an update below on some of the key recent and upcoming changes in relation to anti-money laundering (AML) and market abuse to be aware of for the rest of 2023 and beyond.
AML remains a key regulatory priority for the FCA and the Russian invasion of Ukraine last year brought the need to stymie the flow of illicit finance through the UK’s financial system to the forefront of the government’s and regulators’ minds even further. Firms must dedicate adequate resources to combatting money laundering to ensure they can meet their regulatory obligations in this area.
1. MLR update
In our last outlook briefing, we noted that the proposed amendments to The Money Laundering, Terrorist Financing, and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) were due in 2022, which were aimed at taking into account the responses to HM Treasury’s Call for Evidence and consultation of 2021. In line with this, in June 2022, HM Treasury issued its response document to its consultation and the proposed changes to the MLRs set out in the response document were made through The Money Laundering, Terrorist Financing (Amendment) (No.2) Regulations 2022 (2022 Regulations) which were published in July 2022. The main changes are designed to ensure that the UK continues to meet international standards on AML and counter-terrorist financing (CTF), whilst also strengthening and clarifying how the UK’s AML regime operates. The 2022 Regulations come into force in stages, with the majority of the amendments having come into force on 1 September 2022.
The key changes include:
2. Proceeds of Crime Act 2002
From 5 January 2023 the threshold amount in section 339A of the Proceeds of Crime Act 2002 (POCA), which sets out the threshold for a bank or similar firm to be able to carry out a transaction in operating an account for its customer without committing a money laundering offence, has been increased from £250 to £1,000. The government states in its explanatory memorandum that the change aims to improve the SAR regime and “free up law enforcement resource to focus on opportunities that lead to asset seizure and deliver cost savings to the regulated sector”.
3. Economic Crime and Corporate Transparency Bill
The Economic Crime (Transparency and Enforcement) Act 2022 (ECA) received Royal Assent on 15 March 2022. The ECA made a number of reforms including establishing a Register of Overseas Entities to help crack down on foreign criminals using UK property to launder money and reforming and strengthening the UK’s Unexplained Wealth Order regime to better support law enforcement and investigations. Our note on the key components of the ECA can be found here.
Following on from the ECA, further enhancements targeting financial crime are expected through the Economic Crime and Corporate Transparency Bill (ECTB). Amongst other things, the ECTB includes provisions for:
Currently, the above are proposals and the ECTB is being considered in Parliament. Until finalised, we will not know which elements will come into force and which will not.
4. Register of Overseas Entities
The Register of Overseas Entities (Verification and Provision of Information) (Amendment) Regulations 2022 (Amendment Regulations) came into force on 12 January 2023. The Amendment Regulations address practical difficulties that were identified in the verification regime set out in section 16 ECA.
The Amendment Regulations provide for, amongst other things:
5. Second Economic Crime Plan
The UK government’s second Economic Crime Plan was scheduled for publication in September 2022 but is now expected to be available in spring 2023. The plan is anticipated to include an enhanced policing response to guard against the threat of economic crime amid growing concern on the escalating levels of fraud and money laundering in 2022.
6. Sanctions
Sanctions compliance continues to be a key priority for firms. As highlighted in our blog, in February 2022, the FCA published a new webpage concerning its expectations of firms in light of the UK’s sanctions on Russia. This has since been updated to include additional measures being taken against Belarus. The key message from the FCA remains that it expects firms to have established systems and controls to counter the risk that they might be used to further financial crime and this includes compliance with financial sanctions obligations.
Firms need to understand their sanctions exposure by considering what sectoral sanctions might be relevant, screening clients/ counterparties against the Office of Financial Sanctions Implementation’s Consolidated List and understanding if there are any sanctioned entities in the holding structure which may impact the sanctioned status of their clients/ counterparties. Firms need systems and controls to carry out this assessment on an ongoing basis. The introduction of the ECA adds further complexity for firms when assessing their sanctions compliance and exposure which is covered in more detail here.
For further updates in this area please see our Beyond Sanctions resource hub.
7. Continuing enforcement focus on AML systems and controls
In terms of enforcement action, there have been a number of notable FCA enforcement decisions relating to AML over the last 12 months and we expect this to remain a key area of enforcement focus for the FCA for the rest of this year. AML investigations by a regulator are often complex because they are rarely transactional and require a systemic understanding of how a firm operates, its governance controls, cultural habits and the nuts and bolts of sometimes opaque systems. As a result, any AML investigation by the FCA is likely to be intrusive, not to mention costly, and so firms should look to learn lessons from previous enforcement actions to improve their own systems and controls. Some of the lessons learned from the cases include:
Preventing, detecting and punishing market abuse remains a high priority for the FCA, which it sees as important in fulfilling its statutory objectives of protecting consumers, enhancing market integrity and promoting competition. As noted in its June 2022 update in this area, the aggregate picture from the FCA in relation to market abuse is one of increasing intensity, in which criminal prosecution is one of several strategies being used.
1. Surveillance
There has been a continued focus by the FCA on market abuse surveillance arrangements and it remains crucial that firms have effective arrangements, systems and procedures in place to detect and report suspicious activity, which should be appropriate and proportionate to the scale, size and nature of their business activities. In May 2022, the FCA published Market Watch 69 which discusses firms’ arrangements for market abuse surveillance, drawing on its observations from engaging with small and medium-sized firms. In it the FCA states that while the topics covered apply to all firms subject to surveillance requirements under Article 16(2) of the UK Market Abuse Regulation (UK MAR), they may also be particularly relevant for firms with less complex business models. Some of the key observations made by the FCA for firms to take into account include:
2. Unlawful disclosure - areas of risk for issuers
In Primary Market Bulletin 42 (Bulletin), published in December 2022, the FCA looks at a number of points in relation to UK MAR that issuers and directors should be aware of. We have published a briefing covering the FCA’s discussion of areas that repeatedly crop up in enquiries by the Primary Market Oversight department and which it considers to present a particular risk of unlawful disclosure of inside information as well as its comments on shareholder engagement and on written policies and procedures for handling inside information. As noted in our briefing, the themes highlighted by the FCA are unsurprising, but they serve as an important reminder of areas in which to exercise particular vigilance in relation to disclosures.
3. EU regulatory framework for crypto-assets
Formal adoption of a first EU-wide legislation introducing a comprehensive anti-market abuse framework for the crypto-asset markets is expected later in 2023. The relevant rules are contained in a regulation on markets in crypto-assets (MiCA), which was agreed by European co-legislators in June 2022, and its formal approval and publication in the EU Official Journal is expected in Q2 2023. MiCA’s market abuse framework for crypto-assets will only apply to those crypto-assets that are admitted to trading on a trading platform for crypto-assets, or for which admission to trading on such trading platform has been made. That said, the relevant prohibitions will also apply to any transaction order or behaviours in relation to the crypto-assets in scope of the market abuse regime, taking place either in the EU or in a third-country, regardless whether or not such transaction, order or behaviour takes place on a trading platform.
The basic structure of the MiCA regime for the prevention and prohibition of market abuse involving crypto-assets is not dissimilar to the regime applicable to financial instruments and as set out in Regulation (EU) 596/2014 on market abuse (MAR). Accordingly, MiCA defines “inside information” as it relates to crypto-assets, as well as introduces rules governing disclosure of inside information and prohibition of insider dealing. MiCA also prohibits market participants from engaging or attempting to engage in market manipulation and sets out examples of practices that would be considered market manipulation. Operators of MiCA-authorised trading venues for crypto-assets will have to have in place market surveillance systems and procedures to prevent and detect market abuse or attempted market abuse. MiCA will also require any person professionally arranging or executing transactions in crypto-assets to have in place effective systems, procedures and arrangements to monitor and detect market abuse, as well as to report suspicious orders and transactions to competent authorities. Further details regarding the relevant arrangements, systems and procedures, together with the reporting templates, will be set out in a secondary legislation.
Once formally approved and published in the EU Official Journal, the framework will apply 18 months later, which is expected to be Q4 2024. It is worth noting that with recent market developments, the European regulators – both at national and EU level – are likely to apply closer scrutiny to activities in crypto-assets markets, with a particular focus on potential market abuse.
In the UK, firms carrying activities in crypto-assets must be registered with the FCA and they must have in place appropriate systems and controls to prevent financial crime. On 1 February 2023, the government published its consultation on a broader set of regulations for the crypto-asset sector, which includes proposals for a cryptoassets market abuse regime based on elements of MAR. For further information regarding the consultation, please see our briefing here.
4. Continuing enforcement focus on market abuse
As with AML enforcement, there have been a number of enforcement actions by the FCA in relation to market abuse over the past year, including in relation to systems and controls failures in this area, as well as market manipulation and insider trading cases. We expect this area to continue to be an enforcement focus throughout 2023. Lessons learned from the cases in relation to market abuse systems and controls include:
With regards to inside information, we have published a briefing in relation to the FCA Final Notice concerning Sir Christopher Gent, the former non-executive Chairman of a global medical products and technologies company who was fined £80,000 for unlawful disclosure of inside information in August 2022. As set out in our briefing, the FCA’s decision in this case contains a number of key takeaways that will be of interest to issuers, those who regularly have access to inside information and those who advise on the circumstances in which disclosures should be made by listed companies.
Finally, artificial intelligence and machine learning (AI/ML) is increasingly being used by firms to improve the effectiveness of their financial crime compliance and risk management arrangements. In December 2022, the Wolfsberg Group (WG) published its guidance for firms using AI/ML in their financial crime compliance programmes. The guidance sets out five elements for firms to consider that would promote the ethical and responsible use of AI/ML. These are as follows:
Firms should consider any potential impact of the above developments on their business and adapt their risk and compliance frameworks as required to meet their legal and regulatory obligations. To assist with this, firms should continue to:
Publication
In this edition, we focused on the Shanghai International Economic and Trade Arbitration Commission’s (SHIAC) new arbitration rules, which take effect January 1, 2024.
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