The future of financial crime in the UK after Brexit

     

    It’s still not clear what is really going to happen with Brexit. Will the United Kingdom leave the European Union with some sort of agreement, will there be a No Deal Brexit, or will Article 50 be extended even further? What will be the impact of Brexit on financial services? Whatever happens, one thing’s for sure: there are growing concerns about the UK’s financial wellbeing after leaving the safety blanket of the EU. As well as potential economic instability, there’s also the question of the UK’s post-Brexit financial crime regulations.

    Depending on the terms of the UK’s withdrawal, there are various legal mechanisms relating to fighting financial crime that are set to be dismantled. FCA Chair Charles Randall has warned that the UK may be unable to manage the risks of financial crime under a no-deal Brexit, emphasising the critical role played by cross-border data-sharing agreements with EU member states. From uncertainty about alignment in AML and sanctions regulations between the UK and EU post-Brexit to what it means for data sharing, when it comes to financial crime, the Brexit waters are pretty muddy. 

    Current rules and regulations                                                                                                                             

    When it comes to fighting financial crime, everyone is trying to combat the same things: money laundering, terrorist financing, sanctions, and human trafficking, to name but a few. But every regulator has its own way of trying to solve these problems. Up until now, the EU has had a uniform set of rules that are implemented across all of its member states, providing a pretty effective means of fighting financial crime within Europe. 

    However, such rules and regulations don’t yet exist internationally – and when the UK leaves the EU, they will no longer have to enforce rules imposed by the EU, leaving a question mark above the issue of financial crime. After Brexit, the United Kingdom essentially has three choices about what to do with the current rules and regulations:

    1. Keep the regulations the EU has implemented the way they are now;

    2. Use the EU’s regulations but tone down enforcement actions;

    3. Come up with a different set of rules

    When it comes to existing rules and regulations, the first option is the most likely. But what about when it comes to implementing new rules and regulations? Again, there are a few options:

     

    1. The UK can establish its own rules

    2. They can copy the EU’s legislation and adjust it as they see fit

    3. They can copy legislation developed by another country and adjust it according to their requirements

     

    There’s no saying which of these options the UK will choose - but whatever happens, these uncertain times are likely to have a knock-on effect on financial crime. Let’s take a look at what this will mean for the financial services industry… 

     

    Changes to trading platforms         

                                                                                                                           

    One of the most likely outcomes of Brexit will be increased trade between UK businesses and companies based outside of Europe. For financial services firms, it’s integral that they ensure the necessary controls are in place and that they can manage any risks that come with this increased trade. The National Crime Agency is concerned that uncertainty surrounding Brexit could see criminals take advantage of changes to trading regulations, particularly around the implementation of a new UK customs union. Essentially, financial criminals will use any uncertainty to further their aims.

    In May, the NCA stated that UK-based companies who are looking to increase trade with countries outside of the EU are more likely to come into contact with corrupt markets, particularly in the developing world. This may result in new money laundering schemes which firms must monitor (more on that below!). In addition, there will likely be extra costs for firms to ensure that their financial crime controls are sufficiently robust to handle the changes to trading patterns.

    Information sharing                                                                                                                                                         

    Brexit will also have a huge impact on information sharing. A significant change to be introduced by the 5th Anti-Money Laundering Directive is increased transparency of beneficial ownership, whereby the EU Member States will have wider access to each States’ register of corporates’ beneficial ownership. For UK-based firms, their involvement in information sharing will depend on the terms of the UK’s Brexit transition period.

    This impact of Brexit on financial services could mean increased costs compared to other EU states, due to a lack of access to shared information. Not only that, but the efficiency and effectiveness with which firms with EU and non-EU entities identify and respond to financial crime may be reduced as a result of a fragmented approach to information sharing between the UK and EU. All of this again creates more opportunities for criminals to take advantage.

    Money laundering                                                                                                                                                               

    Money laundering is critical to funding criminal activity such as drug and human trafficking, and terrorist financing. The National Crime Agency predicts that money-laundering opportunities will increase following Brexit. Not only that, but the uncertainty surrounding the UK’s future outside of the EU could be exploited by financial criminals. According to the National Crime Agency (NCA), British businesses are at risk of being drawn into corrupt practices once the UK leaves.

    Currently, the UK is part of a collaborative fight against money laundering and financial crime. One of the main benefits of this is that EU member states can trace suspicious money across borders through access to the Europol Information System (EIS). This essentially means that different countries within the EU can currently exchange criminal intelligence, making it much harder for criminals to cover their tracks. However, after Brexit, the UK may no longer be part of this intelligence sharing practice. This could give money launderers and criminals the perfect opportunity to take full advantage of any uncertainty.

    Compliance                                                                                                                                                                        

    Whilst details of the UK’s withdrawal from the EU remain unclear, it is not possible to definitively conclude the impact of Brexit on financial services across the country or how it will influence the UK’s approach to financial crime. One thing’s for sure, though: firms operating across both the UK and EU will most likely be looking at increased compliance costs due to increased regulatory complexity. As a result, firms operating across multiple jurisdictions could see an increase in compliance costs to ensure adherence to relevant sanctions and regulations, including additional reporting requirements.

    Be prepared!     

    If businesses want to be prepared for Brexit in whatever form it comes, they will need to take actions in the following areas to ensure they adhere to national financial crime legislations:

    • Draft new or update existing financial crime policies and procedures

    • Conduct business-wide risk assessments

    • Establish a financial crime compliance function, including governance structures, recruitment of staff, three lines of defence, culture, risk appetite and reporting lines

    • Carry out additional staff training

    • Regulator engagement

    • Develop new suspicious activity reporting processes

    As the countdown to Brexit intensifies, fears surrounding the security of the UK are mounting. This means it’s vital that businesses become tougher in their fight against financial crime by following negotiations closely to assess how evolving regulations and changes to customer trading habits will impact them and ensuring that their controls are sufficiently robust to respond to change efficiently and effectively. Businesses must also ensure that they are extra vigilant and prepared with efficient monitoring systems to spot and prevent suspicious activity.

    The terms of Brexit are still unclear, but one thing is for certain – the fight against financial crime is going to become tougher and it’s more important than ever that businesses are suitably prepared with the right systems in place and the best people on board. As experts in financial crime recruitment, if you’re looking to find the right people to ensure your business is protected against financial crime post-Brexit, we’re here to help.

     Twenty84