natwest bank branch

UK financial watchdog has shown it will use criminal rather than just civil regulatory powers to go after a bank that has fallen short on compliance.

UK bank NatWest is currently awaiting sentence at Southwark Crown Court in London, after pleading guilty last month to criminal charges carrying a fine of up to £340m. The first ever prosecution for breaches of the Money Laundering Regulations 2007 by the UK Financial Conduct Authority (FCA) shows that, when the wrongdoing is serious enough, large retail institutions cannot expect an easy ride.

Monitoring failures

The FCA’s case against NatWest revolved around just one client, Fowler Oldfield, a Bradford-based gold dealer. In 2012, Fowler Oldfield began banking with NatWest, declaring its predicted annual turnover was £15m. However, it then proceeded to deposit £256m in cash between 2012 and 2016 and in total more than £365m moved through its accounts.

However, it was not as if this conduct was carried out in secret. The bulk of the money was dropped off at NatWest branches in bags of cash. Indeed, at its height, Fowler Oldfield was depositing up to £1.8m daily. As all banks will know, money laundering is often a sophisticated process involving complex layers of transactions that can be extremely difficult to detect even with the best compliance measures. In this case, however, it seems that NatWest had no such excuse. 

Big banks are in a position where they are generating a huge amount of money laundering risk with no unified and simple rulebook telling them how to manage that risk

The specific offence charged by the FCA was a failure to conduct “ongoing monitoring of a business relationship”, through the “scrutiny of transactions undertaken throughout the course of the relationship… to ensure that the transactions are consistent with the relevant person’s knowledge of the customer, his business and risk profile”. This describes, in prosaic legal language, a spectacular failure by the bank to ask basic questions about money laundering happening right under its nose.

Although Fowler Oldfield’s conduct may have been obvious, the case nevertheless raises the question of how any financial institution of NatWest’s size, with such a high volume of transactions, can be expected to ensure they are following the law at all times. The current version of the regulations offers only an overview as to what constitutes compliance, so banks looking for more detail need to refer to the Joint Money Laundering Steering Group guidance for practical steps. This guidance is lengthy, complex and definitely not user-friendly for larger institutions.

It leaves big banks in a position where they are generating a huge amount of money laundering risk with no unified and simple rulebook telling them how to manage that risk. If the FCA has a newly discovered appetite for criminal sanctions carrying enormous potential fines, then the NatWest case becomes a cautionary tale for any large bank looking to ensure that it is conducting effective monitoring of transactions across the board.

A new precedent?

The case raises the question of how aggressively the FCA’s power to bring criminal prosecutions will be used going forwards. The FCA’s primary objectives for use of its enforcement powers will always be deterrence and public confidence, but that allows for a huge margin of discretion.

Will the FCA now bring prosecutions even when the sums involved, or the methods used, are less egregious than they were here? Or will the FCA revert to dishing out civil regulatory fines as it did to Deutsche Bank in January 2017 (£163m), Standard Chartered in February 2019 (£102m), Commerzbank in June 2020 (£38m) and Credit Suisse in October 2021 (£147m)?

Another notable feature of this case is that no individual within NatWest was prosecuted. That will come as a relief to money laundering reporting officers. However, it is not clear why the FCA chose not to prosecute any officers of the company when it was at liberty to do so. Can real deterrence and public confidence be achieved if there is negligible risk of senior bankers facing criminal prosecution where money laundering controls have been inadequate? The FCA may be keeping its powder dry for a future case, but if it will not prosecute individuals when a retail bank receives £365m in the proceeds of crime, then when will it?

A tough stance

The FCA has shown that it has the intent and the will to use criminal rather than merely civil regulatory powers to go after a bank that has fallen sufficiently short on compliance. The court looks likely to impose a very significant fine on NatWest; a figure of more than £300m would dwarf not only previous regulatory penalties, but also the total of the fines the FCA has handed out so far this year (which was, at the time of writing, just over £238m).

However, it is unlikely that we are entering a new phase of aggressive FCA enforcement action. The facts of the case were so serious that the FCA could hardly not use the biggest weapon in its armoury. The fact that the FCA chose to prosecute is as much about maintaining public confidence as it is about the regulator adopting a tough new stance to drive up compliance standards in retail banking.

Nick Vamos is a partner at law firm Peters & Peters.


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