Financial Crime Summary Q1 2018

11th April 2018

Summary of Relevant Output on Money Laundering and Financial Crime

Period 1st January 2018 to 31st March 2018

 

Sites Reviewed for this bulletin:

Financial Conduct Authority (FCA)

Prudential Regulation Authority (PRA)

British Bankers’ Association (BBA)

European Securities and Markets Authority (ESMA)

Commodities Futures Trading Commission (CFTC)

Financial Action Task Force (FATF)

HM Treasury (HMT)

Joint Money Laundering Steering Group (JMLSG)

National Crime Agency (NCA)

Transparency International (TI)

Deloitte Forensic Centre (DFC)

Credit Industry Fraud Avoidance System (CIFAS)

Financial Fraud Action UK (FFA)

International Compliance Association (ICA)

Emerald: Journal of Financial Crime (JFC)

Financial Fraud Action, Police: The DCPCU

BBC Business

Telegraph Finance

Financial Times

New York Times

Economist

Bloomberg

 

Introduction

Each quarter, CPA Audit looks at the most interesting, relevant and pressing financial crime news, in order to engage your interest and open your eyes to potential risks your firm might face. Some of these cases you may have heard about on the news, whilst others may be more obscure.

The aim of this summary is to give you a picture of financial crime events and development across the first period of 2018 – the cases below demonstrate the vital importance of having systems and controls in place to protect against financial crime potentially impacting your business.

Binary Options and CFD’s

The recent focus in the regulatory environment has concerned the sale of binary options and CFD’s to retail investors who have increasingly been targeted by investment scams.

An FCA press release published earlier this year urged the public to be vigilant to the threat of online fraud. Fraudsters promote themselves online and via social media channels, such as Facebook, Instagram and Twitter with the typical promise of high returns. This resulted in investors losses of £87,410 per day last year due to website price distortions, people tied in with extreme pay-out clauses and even accounts being closed with a refusal to pay back money.

A potential crackdown had been in the pipeline when UK firms offering binary options were required to be authorised by the FCA from 3rd January 2018. This opens the door to the Financial Ombudsman Service for individual complainants and eligible consumers having access to the Financial Services Compensation Scheme. Firms not authorised beyond that date will be acting in breach of section 19 of the Financial Services and Markets Act 2000 (FSMA), which is a criminal offence.

The European Securities and Markets Authority (ESMA) announced in March its intention to prohibit the sale of binary options to retail investors and to place restrictions on the sale of contracts for differences (CFDs) with measures that go further than the FCA.

  • A prohibition will be applicable on the marketing, distribution or sale of binary options to retail investors;
  • Contracts for differences will have a restriction on the marketing, distribution or sale of CFDs to retail investors which will consist of leverage limits on opening positions; a margin close out rule on a per account basis; preventing the use of incentives by a CFD provider; and a firm specific risk warning delivered in a standard way.

Studies from various EU jurisdictions show that between 74% and 89% of retail investors lose money on their investments in CFDs with average losses ranging from €1,600 to €29,000. Based on these statistics it would seem that restrictions of some form or another are here to stay.

Unexplained Wealth Orders

Prevalent in the financial crime sphere this quarter has been the implementation of UWO’s which are an attempt by the authorities to tackle the problem of money laundering in the UK.

It is estimated that £90bn of illegal cash is laundered in the UK each year. Transparency International for example has estimated that UK property worth a total of £4.4billion should be subject to UWO’s.

The new power will enable UK authorities to obtain a court order which require a persons to explain how they obtained an interest in property. In simple terms, a UWO is a way for authorities to put people they suspect of money laundering “on the spot” by making them account for the source of their wealth.

On 31 January 2018 section 1 of the Criminal Finances Act 2017 (the ‘Act’) had the effect of heavily amending the Proceeds of Crime 2002 (POCA) to introduce these new orders.

The National Crime Agency announced on 28th February that it had secured UWO’s on two properties valued at £22m, whose ultimate owner was a “politically exposed person”. These are the first such orders granted and represent the first time such legislation will be tested through the court. The orders relate to two properties, one in London and one in the South East of England.

Only “enforcement agencies” can apply for an Unexplained Wealth Order. In England and Wales these include the National Crime Agency (NCA), HM Revenue and Customs (HMRC), Serious Fraud Office (SFO) and the Financial Conduct Authority (FCA). Arguably UWOs are the most aggressive option available to authorities within the power of seizure under The Proceeds of Crime Act 2002 if the individual is unable to explain how assets such as a house were lawfully acquired.

Donald Toon, Director for Economic Crime at the NCA, said, ”Unexplained wealth orders have the potential to significantly reduce the appeal of the UK as a destination for illicit income. They enable the UK to more effectively target the problem of money laundering through prime real estate in London and elsewhere. We are determined to use all of the powers available to us to combat the flow of illicit monies into, or through, the UK.”

Before making an UWO the Court must be satisfied that:

  • The collective value of the property named in the UWO is greater than £50,000; and
  • There are reasonable grounds for suspecting that the known sources of your lawfully obtained income would have been insufficient for the purpose of enabling you to obtain the property; and

Either:

  • You are a Politically Exposed Person (‘PEP); or
  • There are reasonable grounds for suspecting that you are or have been involved in serious crime: or
  • A person connected with you is, or has been so involved.

UWOs will continue to prove controversial over the coming months as authorities do not have to prove the person’s assets are the proceeds of crime. A UWO assumes criminal activity and makes it the responsibility of the subject to prove that is not the case. As UWO’s are a civil device rather than a criminal one, when it comes to applying to the court the authorities only have to show that a crime was committed on a balance of probabilities which is the civil standard of proof rather than beyond reasonable doubt which is the criminal standard. The wide implementation of the legislation has enabled UWO’s to have the potential to be utilised extensively. Proper scrutiny by the court of each application is therefore all the more important to ensure that the power afforded by unexplained wealth orders is not abused by UK law enforcement agencies.

We have seen a more cautious approach from the SFO in light of comments made by the Director, David Green, and the Joint Head of Bribery and Corruption, Camilla de Silva that the SFO’s powers will be used once it has the “right case”.

Proposed guidance on financial crimes systems and controls

In a potential development due over the horizon the FCA has proposed to add a new chapter on insider dealing and market manipulation to its Financial Crime Guide. This will outline the FCA’s observations of good and bad practice regarding firms’ systems and controls in relation to the requirement to detect, report and counter the risk of insider dealing and market manipulation.

The new guidance is expected to come into effect on 1 October 2018 focusing on criminal insider dealing and market manipulation under the Criminal Justice Act 1993 and the Financial Services Act 2012, rather than the civil offences under the Market Abuse Regulation (MAR)

Conclusion

The Financial Conduct Authority said it supported ESMA’s measures in relation to binaries and CFD’s and is expected to consult on applying them on a permanent basis in the months ahead.
The scope of UWO’s could prove to be wide and far-ranging but the agencies who have the power to seek them do not always get it right and they may be challenged.

Next steps

CPA Audit’s compliance team is highly experienced and has engaged in extensive correspondence with the FCA concerning authorisations, anti-money laundering frameworks and other compliance-related issues.
Our team are able to assist in a wide variety of ways in relation to the above, including (but by no means limited to):

  • Bespoke Anti-Money Laundering training & audit;
  • FCA Authorisations;
  • Variation of Permission applications;
  • General advice and assistance on regulated activities and their scope

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