Friday 26 March 2021 8:01 am

Criminal case against NatWest tip of £90bn iceberg in 'money laundering capital of the world'

Yesterday it was reported that the recent money laundering charges against NatWest are linked to a separate case against 13 individuals based in cities around the UK.

The latest revelations followed the shock announcement, last week, that the Financial Conduct Authority had lodged criminal proceedings against NatWest for money laundering offences.

The watchdog – accusing NatWest of failing to monitor suspicious activities by a client that deposited about £365m in its accounts over five years – said the bank had failed to show risk sensitive due diligence and monitoring of its relationships with customers for the purposes of preventing money laundering.

In light of this, City A.M. looked at the wider issue of laundering dirty money in the Square Mile and the current conditions under which such activities can take place.

Roughly £90bn is laundered in the City, every year

Despite financial institutions paying around £598m in enforcement action penalties since the financial crash in 2008, the criminal prosecution underway is the first of its kind for a City-based bank since the introduction of the UK Money Laundering Regulations nearly 14 years ago.

Some observers believe the FCA’s move may be indicative of activity to come for financial institutions that are subject to regulatory activity and investigations, particularly since the UK is often cited as “the money laundering capital of the world,” with an estimated £90bn laundered through the City of London every year, according to figures from the UK’s National Crime Agency.

A central problem has been the use and misuse of anonymous companies – mostly LLPs and LPs incorporated through Companies House – by people with ties to corruption, crime and even terrorism.

To Rachel Woolley, global director of financial crime at regulatory compliance technology provider Fenergo, “joining the dots for financial crime is not an easy task and it’s not just financial institutions that have a role to play in detecting and preventing illicit activity.”

Woolley called out the case of Zamira Hajiyeva, who spent £16m at Harrods and was the subject of the UK’s first Unexplained Wealth Order, or the embezzlement and money-laundering trial against Africa’s richest woman, London-based Isabel dos Santos.

“It is clear the focus needs to be at the end of the chain, which may include legal advisors, accounting firms and professional organisations, art-dealers and the like,” she told City A.M.

“Do they really know where this money is coming from?”

The challenge of spotting criminal activities

The criminal proceedings against NatWest arose from the handling of funds deposited into accounts operated by a UK incorporated customer of a UK bank. 

The FCA alleged that large cash deposits of around £365m were paid into the customer’s accounts, of which around £264m was in cash.

The bank’s systems and controls unit is under fire for allegedly failing to monitor and scrutinise this activity.

“Financial institutions face significant challenges to identify financial crime, particularly when attempting to detect the illicit activity of organised criminal groups. ” Woolley said.

Organised criminal groups use many sophisticated methods to evade detection when trying to introduce illicit proceeds to the financial system.

Many stakeholders play a role in the process, and in some cases are complicit in the activity, including legal and accounting firms that help to create complex corporate structures to obscure beneficial ownership.

“Though financial institutions are a significant stakeholder in the fight against financial crime, there are others that need to be looked at more closely to ensure we are addressing the issue holistically. Financial institutions must ensure they play their part effectively, by introducing robust systems and controls,” Woolley explained.

Post-Brexit rules

The UK’s Money Laundering Regulations 2007 is largely a result of the EU’s Third Anti-Money Laundering Directive.

Since then, the EU has published a further three Directives with the UK adopting all but the latest, the 6th Anti Money Laundering Directive, generally known as ‘6AMLD’. 

Designed to fight money laundering and finance for terrorism, EU member states are required to transpose the directive into national law before 3 June of this year.

The UK is not obliged to comply with the 6AMLD as it is no longer part of the EU.

“However, the UK AML regime is largely consistent with many of the provisions included in the most recent EU Directive,” Woolley said. 

Even though is not known yet how the UK’s exit from the EU will impact the overall financial crime landscape, the UK does have a vested interest in continuing to align its AML regime with that of its global peers, she stressed, “not least to ensure that it is not seen as a weak spot in the fight against financial crime.”

“Any significant divergence from the EU’s approach to addressing AML concerns could inadvertently create a regulatory risk for financial institutions seeking to operate in the UK, particularly those with cross-border operations,” Woolley pointed out.

She added that “meeting onerous or conflicting compliance obligations may create an operational burden that is too risky to manage and may be a deterrent to new firms that want to operate across the EU and the UK.”

“As a result, we don’t expect the UK regime will stray too far from that of the EU when it comes to addressing money laundering and terrorist financing.”

Intelligence monitoring

As the risk of money laundering continues to be a significant concern for many countries and industry stakeholders, imposing stricter or different rules and regulations may not cut it.

According to Woolley, there seems to be a need for more intelligence monitoring and sophisticated solutions and systems in place to detect and prevent financial crime. 

“There’s an opportunity to collaborate as an industry more effectively, using better technology, more involvement with the regulators and the sharing of data on a global scale – within a web of connected organisations,” she said.

Woolley pointed at sector-specific initiatives to fight financial crime, such as a consortium of five Dutch banks – ABN AMRO, ING, Rabobank, Triodos Bank and de Volksbank – which established Transaction Monitoring Netherlands, “an innovative approach to a collective fight against money laundering and the financing of terrorism,” as she put it.

“The UK is at the forefront when it comes to financial technology and innovation so there is an opportunity for UK banks to follow suit. The question is whether the appetite is there to do something similar that advances our approach as an industry, rather than continuing in the siloed approach that isn’t working,” Woolley concluded.

NatWest declined to comment.