As 2021 draws to a close, we look ahead to the trends and new requirements that we may see over the next twelve months for financial institutions (FIs) in the white collar crime sphere as regulators, legislators and individuals continue to adapt to the pandemic and prevailing public opinion.
1. An increase in fraud-related investigations
The pandemic has caused a rise in fraudulent behaviour in both the public and private sector. Fraudulent claims for government schemes could result in losses of more than £5bn for the UK taxpayer, while phishing, text scams and other small-scale fraudulent behaviour, targeting the British public, were up 285% in the first half of 2021.
This has been reflected in an increase in prosecutions – the number of company directors convicted of criminal activity since the start of the pandemic has risen 205%. 2022 is likely to see this trend continue as more cases are brought to trial.
FIs may be required to assist with ongoing investigations and will be expected to have in place measures to detect and prevent money laundering and other fraudulent activity.
2. Need to adapt working practices to deal with hybrid working
The new hybrid working model utilised by the majority of FIs poses major regulatory issues, particularly with regard to mobile data and communications.
During investigations, regulators often request “data dumps”, which include compelled requirements for mobile device data. However, work-related communications on unapproved platforms are frequently not preserved in accordance with regulatory requirements leading to difficulties in complying with regulators’ requests. For example, on 17 December 2021, J.P. Morgan was fined US$200 million because of its employees use of WhatsApp, text and personal email and other platforms to discuss investment strategy, client meetings and securities matters, and its consequent breach of federal record-keeping laws.
FIs need to train employees not to use unauthorised methods of communications and create tailored communications platforms that allow them to archive communications data so that they can comply with such requests. The SEC Chair has stated that, “As technology changes, it’s even more important that registrants ensure that their communications are appropriately recorded and are not conducted outside of official channels in order to avoid market oversight.”
FIs should also regularly update their data maps to understand where their data is stored and by whom, and whether employees’ laptops and devices can be accessed remotely, in particular in the event of a dawn raid. Specific focus should be on sensitive legally privileged material to ensure that it can be isolated if necessary.
3. A more aggressive regulator focus on corporate crime
The US Department of Justice (DOJ) has announced a renewed crack down on corporate wrongdoing by companies. This is likely to have a knock-on effect in the UK and lead to new investigations being opened by the Serious Fraud Office and Financial Conduct Authority in tandem with the DOJ and other international regulators (in particular, given the focus on international cooperation announced in the Biden Administration’s strategy on countering corruption and the Organisation for Economic Co-operation and Development’s (OECD) recommendations).
In addition, the Law Commission expects to publish its report on corporate criminal liability in early 2022. This may result in proposals to reform the ‘identification principle’ – the principle that only the acts of a senior person representing a company’s “controlling mind and will” can be attributed to the company – to try and facilitate easier prosecutions of large companies.
4. Increase in whistleblowing complaints
Since the pandemic began there has been a rise in the number of whistleblowers. This is only likely to increase with the enactment of the EU Directive on Whistleblower Protection, three draft bills on whistleblower protection making their way through the UK Parliament, and the recent announcement in the Biden Administration’s strategy on countering corruption on the need to broaden whistleblower protections.
5. Anti-money laundering (AML) legislative developments
HM Treasury recently conducted a consultation regarding proposed amendments to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs). According to HM Treasury, the proposed amendments are required: (i) to ensure that the UK continues to meet international standards set by the Financial Action Task Force; and (ii) to strengthen and clarify how the AML regime operates. The amendments will be made in Spring 2022 and a full review of the UK’s AML and counter-terrorist financing regimes will be published by HM Treasury by 26 June 2022.
Further, following the recent prosecutions of NatWest and HSBC for money laundering, we can expect to see greater focus from the FCA on FIs compliance with the MLRs, especially given the recent Chatham House report that highlighted the failure to prevent money laundering in the UK.
6. Environmental, social, and governance (ESG) requirements
Over the course of 2022, FIs will face two new ESG disclosure requirements. First, the FCA’s ‘comply or explain’ requirement in respect of climate-related disclosures is going to be rolled out to all companies on the LSE’s main market from January 2022.
Second, the EU Sustainable finance disclosure regulation (SFDR), a set of EU rules which aim to make the sustainability profile of funds more comparable and better understood by end-investors, will come into force in June 2022. The SFDR will apply to any UK FI operating in the EU or transacting with EU-based clients. It will require FIs to disclose to the market their impact in two initial areas of a Sustainable Finance Taxonomy: (i) climate change mitigation; and (ii) adaptation. Four further areas will follow.