City Week 2021: financial crime – the latest regulatory and enforcement trends

On day 2 of this year’s virtual City Week event, I was joined by investigators and regulators to discuss the latest developments in financial crime. On the panel were:

• Ilana de Wild, Director for Organised and Emerging Crime at Interpol;
• Mark Steward, Executive Director of Enforcement and Market Oversight at the Financial Conduct Authority (FCA);
• Sara Lawson QC, General Counsel at the Serious Fraud Office; and
• Richard A. Powers, the Acting Assistant Attorney General at the US Department of Justice.

Cryptoasset concerns

Much of the discussion centred on cryptoassets. Panellists were concerned that the likes of bitcoin were being used to hide or launder criminal proceeds, particularly where de-centralised exchange services impede know-your-customer (KYC) and other checks on counterparties.

The recent recovery of roughly half the $4.4m in bitcoin paid to hackers following the ransomware attack on the Colonial Pipeline in the US shows that the enforcement authorities are getting better at tracing crypto transactions. But the discussion revealed some of the legal challenges authorities must grapple with when taking enforcement action against such assets, such as which jurisdiction applies to a transaction.

Unregistered risk

Under the UK’s anti-money laundering (AML) and counter-terrorist financing (CTF) rules, firms carrying out certain cryptoasset activities in the UK must register with the Financial Conduct Authority (FCA). However, many remain unregistered despite these requirements – because they have failed either to apply or to meet the FCA’s requirements. FCA-regulated entities dealing with unregistered firms face AML/CTF and regulatory risks.

In the longer term there is a question as to whether the FCA’s regulatory focus on AML and CTF is sufficient to protect against all the risks of cryptoassets, including the potential risks they present to consumers given their volatility.  

Transactional transparency

Crimes enabled by the latest digital technologies demand a response in kind. Financial firms are developing tools to prevent financial crime, such as enhanced KYC tools, while regulators are developing digital technologies that can track and identify suspicious transactions and trading patterns in real time across pools of data. The hope is that the transparency this technology brings will act as a significant deterrent to bad actors.

Antitrust actions

Antitrust regulators are concerned how emerging technologies can be used to effect (and conceal) anticompetitive conduct. For example, competitors could negotiate cartel arrangements using private encrypted messaging services or set agreed prices for certain customers using pricing algorithms.

Role reminders

Panel members stressed the importance of systems and controls. Financial firms need to ensure their staff are trained in, understand and follow the compliance processes in place. And senior management need to set the tone by regularly reminding staff about the role they have to play in preventing criminal activities on their watch.