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Navigating new regulations to fight financial crime

Steve Donaghy Steve Donaghy

Financial crime fighting has always required vigilance from firms and law makers alike. Financial services legislation is strict and in recent years firms have experienced ever tighter regulatory requirements relating to the prevention and detection of financial crime.

But now, law makers and regulators with newly sharpened teeth are considering an extension beyond financial services. Following the UKs Financial Action Task Force visit in 2018, and in the context of the UK’s impending exit from the European Union, there is renewed vigor to ensure that the UK does not become an easy “landing point” for the proceeds of crime. With the creation of the National Economic Crime Centre and the UK’s 2019 economic crime plan, comes the prospect of further extensive regulatory change in this area.

Regulators are branching out

Some regulations, such as the anti-money laundering requirements enshrined in the Money Laundering Regulations, have been applicable for some time. Increasingly the other complexities governing financial services are being applied to businesses beyond the sector. This is likely to impact the level of scrutiny firms are accustomed to, with regulators and authorities paying closer attention to how firms identify, investigate and remediate misconduct.

Currently, a key aspect of regulation is the Senior Managers and Certification Regime which aims to deter misconduct by improving individual accountability and awareness of conduct issues across firms. The changes are a positive move as increased accountability should, in time, lead to more robust application of anti-financial crime procedures, and the FCA is said to have around 70 ongoing investigations into individuals where they are poised to use the regime.

How would this approach affect a non-Financial Services firm?

Transparency International has suggested that the Senior Managers and Certification Regime would be an improvement to governance, but since it would require primary legislation, it isn’t likely to happen in the near future.

A more likely change in the short-term is the long-mooted ‘failure to prevent economic crime offence’.  The offence in this case is similar to that for bribery and corruption and tax evasion. A firm would be required to demonstrate that it had ‘adequate procedures’ in place to prevent economic crime. Legislation to this effect is widely expected to be implemented in the next few years and so it’s important that firms are prepared for and understand the requirements of the law. However, there is a difficulty in defining the term ‘economic crime’ in a way that makes the response manageable.

Broad terms with big impacts

Another broad term that creates a degree of uncertainty relates to where firms are required to inform regulators of matters that could have a ‘significant adverse impact’ on the firms reputation, under SUP 15.3. Again, definition becomes problematic, and there is an on-going debate around the broad meaning of ‘significant’ and what can be done before regulators become involved. An incorrect assumption can lead to fines or regulator-led investigations, and significant disruption to ‘business as usual’. In the case of this new law being implemented, non-financial services companies will need to upskill their teams in respect of their interaction with regulators, to ensure that any response to a regulatory enquiry is adept.

Are you ready?

Legal teams, compliance roles and any departments liaising with regulators will need to be informed, up-to-date and in compliance with laws as and when they change. Responding to regulators might be new territory for your firm and it’s important to handle these enquiries carefully.

Five broad principles everyone should follow when faced with regulators.

1 Be authentic - trust is essential to any regulator relationship so make sure communications are cooperative and honest. For comparison, financial services firms have a regulatory requirement of “honest and open cooperation with regulators”

2 Understanding - ensure you have fully understood what is being asked, and get clarity if needed

3 Timely reporting – there is a balance to be struck between speed of reporting and accuracy of what is being reported, ask for deadline extensions if needed and be sure that what you are reporting is accurate

4 Take advice - contact external experts when you need to

5 Dedicate resource - asses the risk and dedicate proportional resources

Manage and mitigate risks

There will always be benefits in a proactive response to legal changes that may affect how your firm operates. Shoring up processes to ensure against economic crimes is obviously best practice. It’s also wise to make sure you’re aligned on any regulator conversations taking place to ensure the most timely and appropriate response. Regulator-led investigations take the process out of your hands and can result in long, expensive and reputation damaging results. A rapid and appropriate response to identified problems is always advisable. The best response is one which allows you to take the lead and conduct your own independent investigation to remediate issues without the need for full regulatory intervention.

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