Financial Crime Outlook: 2022 and beyond

Anti-Money Laundering

 Anti-Money Laundering is an area that has evolved significantly in recent years, and continues to do so. With the developments in this space, firms are expected to dedicate adequate resources to combat financial crime.

1. MLR update 

The proposed amendments to The Money Laundering Regulations, Terrorist Financing, and Transfer of Funds (Information on the Payer) 2017 (MLRs) are due in 2022, which take into account the responses to HM Treasury’s Call for Evidence and Consultation of 2021.

The Call for evidence and Consultation included thoughts and responses about the following: 

• The scope of the MLRs: The proposal is to exclude Account Information Service Providers (AISPs), Bill Payment Service Providers (BPSPs), and Telecom, Digital, and IT Payment Service Providers (TDITPSPs) from the scope of the MLRs. 
• Suspicious Activity Reports (SARs): The proposal will amend the MLRs to include a provision which grants Anti–Money Laundering (AML)/Counter Terrorist Financing (CTF) supervisors’ legal permission to directly access and view the content of SARs submitted by their supervised firms upon request.
• Definition of Credit and Financial Institutions: The proposal is seeking to clarify the definition of Credit Institutions and Financial Institutions by aligning them with the defined terms under the Financial Services Markets Act 2000 (FSMA) and the Regulated Activities Order (RAO). 
• Proliferation Financing Risk Assessment: To align with international standards, the proposal is to amend the MLRs to require a risk assessment which identifies, and assesses the risks of potential breaches, non-implementation or evasion of the targeted financial sanctions related to Proliferation Financing (PF). In addition, the relevant persons will be required to take appropriate steps to identify and assess the risks posed by PF and establish and maintain policies, controls and procedures to mitigate and manage these risks effectively. HM Treasury has also proposed including the Financial Action Task Force (FATF) definition of PF within the MLRs.
• Reporting Discrepancies: To further enhance the accuracy and reliability of company registers, the proposal is to expand the scope by introducing an ongoing requirement to report discrepancies in beneficial ownership information that a relevant person becomes aware of.
• Information Sharing & Gathering: The proposals are to:
  • make minor amendments to improve the effectiveness of the intelligence and information sharing gateway to allow protected sharing between relevant authorities and supervisors; 
  • expand the list of ‘relevant authorities’ recognised in the MLRs to explicitly include other government agencies, such as Companies House; and
  • amend the MLRs to give further supervisory powers to the FCA to enable them to better supervise Annex 1 financial institutions.

• Transfers of cryptoassets: FATF Recommendation 16 (R.16) (also known as the “travel rule”) requires that countries ensure that financial institutions send and record information on the originator and beneficiary of a wire transfer exceeding GBP 1,000, and that this information remains with the transfer or related message throughout the payment chain. The FATF has confirmed that this should apply to cryptoasset exchange providers and custodian wallet providers.

Currently, the above are proposals and the Statutory Instrument is in draft. Until finalised, we will not know which elements will come into force and which will not.

  2. Companies House: Corporate Transparency and Register Reform

In December 2021, it was announced that the powers and roles of Companies House will be reformed to improve business transactions and tackle economic crime. The Economic Crime (Transparency and Enforcement) Act 2022 has now come into force. This seeks to establish a Register of Overseas Entities (Register) that would, as per the explanatory notes to the Bill, “deliver transparency about who ultimately owns and controls overseas entities that own land in the UK.” In addition, the Register is intended to act as a deterrent to those who would seek to hide and launder the proceeds of bribery, corruption and organised crime in land in the UK. The Register, to be operated by the Companies House registrar, becomes the third register of beneficial ownership in the UK. The other two are The People with Significant Control (PSC) Register for companies and trusts.

Further enhancements to Companies House are expected, including:

• Filing accounts with the government only once, instead of making separate filings to Companies House, HMRC and other relevant agencies;
  
• Providing small companies with filing options;
  
• Requiring all companies to file accounts digitally with Companies House; and 
  
• Allowing Companies House to carry out additional checks on accounts filings.
  

   3. Sanctions

Given the new financial sanctions measures recently in relation to Russia, sanctions compliance is currently an utmost 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. The key message from the FCA is 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 should screen against the UK Sanctions List and the Office of Financial Sanctions Implementation (OFSI) list of asset freeze targets to meet the financial sanctions obligations. Firms are legally obliged to report to OFSI if: they know or suspect that a breach of financial sanctions has occurred;  a person they are dealing with, directly or indirectly, is a designated person; they hold any frozen assets; or, knowledge or suspicion of these come to the firm while conducting business. For further updates in this area please see our Beyond Sanctions resource hub.

  4. MLR Registration for Cryptoasset Service Providers and the Temporary Registration Regime (TRR)

From 10th January 2020, the FCA became the anti-money laundering and counter terrorist financing (AML/CTF) supervisor for cryptoasset exchange providers and custodian wallet providers, and as such these firms were required to be registered with the FCA by 10th January 2021. The FCA implemented a Temporary Registration Regime (TRR) for existing businesses cryptoasset firms which submitted an application which was under consideration by the FCA. The TRR ended on 31 March 2022 but remains open for a small number of firms where it is strictly necessary to continue to have temporary registration (for example, where they may be pursuing an appeal or may have particular winding-down circumstances).

On 30 March 2022, crypto asset firms’ reporting obligations via the FCA’s RegData platform commenced (namely, the “Annual Financial Crime Report” in the form specified in Annex I within the Requirements document). Firms are expected to have registered prior to the commencement date and information on how to register for RegData can be found here.

Firms which began operating as a cryptoasset exchange or custodian wallet providers after 10th January 2020 must have obtained full registration with the FCA before conducting business, even if they are authorised by the FCA for regulated business. 

  5. Implementation and Practical Implications of the “Travel Rule” for Cryptoasset Providers 

The FATF has confirmed that the “travel rule” applies to cryptoasset providers. There have been concerns about the practical implications of applying the travel rules to cryptoasset providers. The main concerns are in relation to the suitability of the terminology used in the FATF recommendation, and the process of transferring cryptoassets being significantly different to the transfer of funds. HM Treasury have made efforts to address these concerns by proposing to amend the MLRs to include provisions specific to cryptoasset providers.

  6. Continuing scrutiny on AML systems and controls

In terms of enforcement action, firms continue to face scrutiny regarding the extent to which they have addressed AML risks effectively and we expect this to remain a key area of enforcement focus for the FCA this year. Last year the FCA brought its first criminal prosecution under the MLRs which was successful. One of the lessons learned from the published cases is not only undertaking periodic reviews to check that procedures are clear, but also ensuring that there is evidence that they have been understood, followed and are achieving the desired outcomes. 

Further, in the FCA’s 2022/23 business plan, the FCA highlighted that they will continue to use their enforcement powers to disrupt, pursue and sanction those committing financial crime, and their enablers. 

Market Abuse

Market abuse can be a forgotten area of “financial crime” and firms tend to treat it as a standalone topic. However, there are a number of developing themes due to both market changes and FCA statements, which firms need to consider and incorporate into their risk assessments and risk appetites over the course of 2022. 

1. Mobile Apps

Over the past couple of years, there has been an increasing use of mobile apps by retail clients to access the stock markets. The firms that provide these platforms, either through white label agreements or via proprietary platforms, are required to maintain effective arrangements, systems and procedures to detect and report suspicious orders and transactions. There is growing concern by the FCA in relation to the gap in surveillance measures and the ability of firms to monitor all their orders to detect potential market abuse.  On the basis of the Market Watch 68 publication, the expectation is that the FCA will be proactively engaging with firms to understand their surveillance arrangements, including the scope and nature of these arrangements, to identify whether they cover all relevant transactions and are sufficiently tailored. 

In this context, all firms are reminded of the FCA’s expectations to have in place a comprehensive risk assessment, systems and controls for monitoring potential market abuse, as well as appropriate governance and escalation arrangements. 

2. Forums and social media platforms

The use of forums and social media platforms by individuals to influence other users’ investment decisions is becoming increasingly popular and has been seen to be capable of having a significant effect on share prices. Many regulators across the world have warned users of the risk of market manipulation when using these platforms. In particular, the risk of “pump and dump” behaviour is pronounced, and other concerning behaviours such as collusion and the sharing of inside information. 

Given the impracticality of visibility into all communications within forums and social media platforms, it is very difficult for firms to monitor such behaviour directly, and the regulators are still establishing how they will tackle this behaviour going forward. 

3. FX Code

 In November 2021, the FCA confirmed its recognition of the Global FX Code (the FX Code). The FX Code establishes guidelines for FX market participants, and provides principles for such market participants to follow when establishing control frameworks to monitor for market abuse within the spot FX market.

Consequently, behaviour in line with the FX Code will be recognised as consistent with obligations under the Senior Managers & Certification Regime (SMCR) for those firms and individuals that are subject to SMCR. Conversely, those firms and individuals who do not act in a manner consistent with the FX Code will have questions raised as to why that is the case, which may lead to concerns about compliance with the FCA’s conduct rule of “maintaining proper market conduct”. 

The FCA has also specifically identified in its statement confirming recognition that certain last look practices, and pre-hedging activities are inconsistent with FX Code principles. As a result, firms may need to re-examine their arrangements in this regard.  

  4. Impact of events in Ukraine and Russian sanctions

We have previously seen a higher incident of potentially abusive behaviour whenever markets have experienced particular periods of volatility and therefore, given recent developments, firms should be on heightened alert for market conduct issues including market manipulation. Market volatility creates significant tests and issues for firms, such as high volumes of monitoring alerts which cannot be processed in a timely manner and difficulties in making decisions in respect of what is legitimate behaviour. 

As noted in our blog posted in March 2022 in response to the events in Ukraine and the sanctions imposed on Russia, the FCA issued a statement on its website reminding issuers of securities admitted to UK trading venues of their disclosure obligations under the UK Market Abuse Regulation. The FCA states that it will continue to monitor the market carefully to ensure these obligations are met in full.

  5. Market cleanliness - a continuing enforcement focus 

We expect market cleanliness to be a continuing enforcement focus for the FCA, in particular given recent market volatility. We’ve seen signs of a possible increase in spoofing cases in the UK, following activity in this area in the US, with a Warning Notice Statement published last September against three bank traders in this area. In terms of insider dealing, we expect to continue to see the FCA bringing criminal proceedings where relevant, as it did last year. More generally, we anticipate a continued enforcement focus on individuals. In October last year, the FCA published a Warning Notice Statement against a member of a Board of directors, who the FCA states negligently engaged market abuse by disclosing inside information (concerning an anticipated company announcement) to a senior individual at each of two of the company’s major shareholders, outside the normal exercise of his employment. Firms may want to consider what support can be offered to relevant individuals in terms of ongoing training, as well as additional steps such as internal reviews.

  6. EU regulatory framework for crypto-assets

Adoption of a first EU-wide legislative framework for measures to prevent market abuse in crypto-assets markets is expected in the course of 2022. The relevant rules are contained in a proposed regulation on markets in crypto-assets (MiCA), which was published by the European Commission in September 2020, and legislative review of which is expected to be finalised this year. Once formally adopted, MiCA prohibitions and requirements will apply to any acts carried out by any person concerning crypto-assets that are admitted to trading on a trading platform for crypto-assets operated by an authorised crypto-asset service provider, or for which a request for admission to trading on such a trading platform has been made. The structure of the regime is similar to the well-established rules of the Market Abuse Regulation (MAR). To this end, issuers of crypto-assets will be subject to rules concerning disclosure of inside information. MiCA will also set out general prohibitions concerning crypto-assets, including prohibition of insider dealing, prohibition of unlawful disclosure of inside information and prohibition of market manipulation.

The new framework will be one of the first to address market abuse in crypto-assets so it is expected that there will be a number of challenges in trying to enact the rules, specifically in relation to implementing an appropriate monitoring framework, understanding what constitutes inside information in the context of crypto-assets, and the types of market manipulation that may be prevalent in crypto-assets. It is currently estimated that the framework will become applicable in mid-2025.

Next steps for firms

It is of paramount importance for firms to consider any potential impact of the above developments: both changes in legislation and latest areas of regulator focus on their business. This will assist firms to establish a robust compliance framework and meet both their legal and regulatory obligations. It is likely that further changes may take place along the way and therefore firms are encouraged to:

• Conduct open, transparent and meaningful communications with any relevant regulators or authority to ensure a clear and accurate understanding of any changes;
• Revisit and maintain updated compliance frameworks that will allow the implementation of any changes in the law, allowing firms to update their systems and controls in a timely manner and make sure they are acting within scope;
• Seek independent assurance where necessary to ensure an appropriate gap analysis has been carried out to effectively identify and act upon any new regulatory requirements, as well as to determine how the effects of the pandemic may require further work; and
• Allocate time and resources to better understand any new money laundering or market abuse threats on their business.