What just happened?
The Financial Conduct Authority (FCA), an independent financial regulatory body, contend that National Westminster Bank PLC, commonly referred to as NatWest, failed to adhere to certain clauses of the Money Laundering Regulations Act 2007 (MLR 2007). The FCA alleges that “NatWest’s systems and controls failed to adequately monitor and scrutinise” [1] suspicious transactional activity between November 2011 and October 2016, and so were remiss in their duty to prevent money laundering.
What does this mean?
The MLR 2007 stipulates that financial institutions must apply and adhere to measures of customer due diligence, entailing the verification of identity using reliable documents, as well as “obtaining information on the purpose and intended nature of the business relationship.” [2] Regulation 8 of the act also requires that institutions should monitor and scrutinise transactions, through the implementation and maintenance of effective anti-money laundering systems and controls. This is to ensure that transactions align with the customer’s business relationship, and to identify any suspicious activity of money laundering and terrorist financing.
Under regulation 45, any institution failing to adhere to the regulations enumerated in the act are guilty of a regulatory offence and are liable to a fine and/or imprisonment. [3] It is under regulation 45 that the FCA have commenced criminal proceedings against NatWest, alleging that the bank’s failure to maintain adequate risk controls and scrutinisation, and their subsequent offence of due diligence, means they are in breach of anti-money laundering policy.
Criminal proceedings under the MLR 2007 are unprecedented, therefore the outcome of NatWest’s case remains unpredictable; despite this, the criminal proceedings are likely to lead to the eventuality of penalisation. Not only will a potentially unlimited fine affect the bank’s capital, but their reputation too could be damaged. Although NatWest’s shares have fallen by only 1.5%, [4] the fact that they are the first bank to be prosecuted under the MLR act may further detriment their position in the retail and commercial banking landscape.
How does this impact the legal sector?
Although the proceedings are only just underway, many financial institutions will take heed of NatWest’s offence, perhaps reviewing their own anti-money laundering procedures, systems, and controls, with internal or external legal counsels providing corporate governance support.
Customer due diligence may be more important now than ever, since the impact of COVID-19 has meant that transactional behaviours have changed. There are increasingly more people, including the financially vulnerable, using online and electronic services and third-party mandates allowing non-account holders to transact on their behalf.
The MLR 2007 itself stipulates that when a customer is not physically present or their identity is unestablished, customer due diligence should be enhanced due to an increase in risk. [5] This is especially relevant during the pandemic since the protective wearing of face masks has made physical identification harder, introducing more risk. Due to this, legal counsels to financial institutions should ensure that they maintain adherence to due diligence regulations by adjusting or increasing anti-money laundering controls in the circumstance of a pandemic.
Financial institutions have already recently been criticised for not taking enough responsibility in protecting their customers from falling victim to scams, with funds going to illegitimate businesses and fraudsters. [6] Many institutions have subsequently implemented new scam prevention clauses in their services as well as probing customers to ensure their transactions are reasonable and the recipient of funds is genuine, further strengthening their customer due diligence.
Written by Jasneet Bansal
Assessing Firms:
#ABRSolicitors #BrightLineLaw #JanesSolicitors #JMWSolicitors #KingsleyNapley #LewisNedasLaw.
References:
[1] FCA, ‘FCA starts criminal proceedings against NatWest Plc’ (FCA, 16 March 2021) <https://www.fca.org.uk/news/press-releases/fca-starts-criminal-proceedings-against-natwest-plc> accessed 18 March 2021.
[2] The Money Laundering Regulations 2007, SI 2007/2157.
[3] IBID
[4] Nils Pratley, The FCA's criminal prosecution of NatWest could cause real damage’ The Guardian (London, 16 March 2021).
[5] IBID[#2]
[6] Philip Gates, ‘Banks 'not doing enough to prevent cyber-related fraud'’ (Insider, 6 December 2017) <https://www.insider.co.uk/news/banks-cyber-fraud-mps-criticism-11646619> accessed 18 March 2021.
Disclaimer: This article (and any information accessed through links in this article) is provided for information purposes only and does not constitute legal advice.