China to set up a new court to deter foreign businesses from applying western sanctions, the UK regulator brings a rare criminal charge for money laundering against a UK bank, and US regulators impose the first fine for marijuana compliance violations.
We share our financial crime regulatory highlights from the week of March 22, 2021.
Chinese Court to Curb Foreign Sanctions
According to a recent report from the South China Morning Post (SCMP), China’s Supreme People’s Court has created a new financial court in Beijing specifically tasked with reviewing cases where Financial Institutions (FIs) and other businesses are alleged to have “damaged the legitimate interests” of Chinese investors by following the requirements of overseas sanctions.
The Beijing Financial Court is the second of its kind to be created in China, following the establishment of the Shanghai Financial Court in August 2018. Although the Supreme People’s Court has not yet published a full statute outlining the new court’s jurisdiction, its inaugural session is likely soon. In its statement on the development, the Supreme People’s Court said that the new court would have “centralized jurisdiction” over cases involving overseas-listed Chinese or foreign companies, and foreign FIs.
The Chinese authorities have presented the move as a direct counter to the actions of the US, which has increasingly used economic and financial sanctions against China and Chinese businesses as leverage in a range of disagreements over trade, the status of Hong Kong, and geopolitical issues in the region. Several major Chinese companies, such as the major chip producer SMIC, has already been designated by the US government because of reported links to the Chinese government and military, and non-Chinese FIs have been required to cease and desist from doing business with designated Chinese nationals and businesses.
The creation of the court is one of a succession of recent actions supporting China’s evolving ‘push back’ strategy against US measures. Last year, China amended its securities law to target overseas FIs that were perceived to have caused damage to Chinese investors, and similar clauses will appear in forthcoming laws on financial futures and commercial banking. In September 2020, the Chinese Ministry of Commerce also introduced an ‘Unreliable Entity List’, for “foreign firms and individuals who violate normal market transactions in China, interrupt deals with Chinese firms, or take discriminatory measures against Chinese firms.” Punishments for those added to the list could include economic and financial sanctions, and for individuals, travel restrictions. So far no company or company official has been added.
The creation of the court also comes at a time of increasing tension between China and the US and its allies. Despite the change of US administration from former President Trump to President Biden, the US has maintained a tough tone towards China, with the recent imposition of new sanctions against 24 Chinese officials alleged to have been involved in undermining Hong Kong’s autonomy. The US has also very recently coordinated with the EU, UK and Canada on the implementation of sanctions against Chinese officials and a security and construction organization alleged to have been involved in human rights abuses against the Uyghur population in China’s Xinjiang Uygur Autonomous Region. China has responded to the EU sanctions with the imposition of travel bans on 10 EU officials and four institutions.
These developments suggest that sanctions will continue to be ‘tools of choice’ for western countries seeking to influence China, especially as the EU now seems more willing to join the US in their application and the UK is pivoting towards a more critical view of Chinese behavior. Combined with this, of course, it also appears that China will be seeking to respond in kind with counter-sanctions of its own, generating an increasingly difficult landscape to negotiate for businesses with regional and global interests.
For such firms, this period of tit-for-tat designations will require not only that they keep fully up-to-date with the fluid character of western sanctions, but also understanding how the emerging Chinese response will affect their interests. A vital foundation for doing this will continue to be accessible to a source of constantly updated and curated risk information, combined with an ability to conduct rapid and accurate checks as sanctions lists grow. Firms can of course attempt to do this on their own, but in an increasingly complex world, it makes sense to work with those who know where – and how – to look.
UK Regulator Charges Bank with Money Laundering
The UK’s financial services regulator, the Financial Conduct Authority (FCA), has recently announced the start of its first criminal proceedings against one of the UK’s major high street banks, the NatWest Group, for offenses committed against the UK Money Laundering Regulations 2007 (MLR 2007). The bank, although privately managed, is still largely state-owned after a bailout in 2008 by the UK government.
The FCA stated that the offenses related to the bank’s failure between 11 November 2011 and 19 October 2016 to adhere to requirements that obliged the business to conduct risk-based Customer Due Diligence (CDD) on a specific business relationship and conduct ongoing transactions monitoring in order to detect potentially unusual activity.
The FCA further stated that the case had arisen from an investigation of the bank’s handling of funds deposited into business accounts held by a UK incorporated customer of NatWest. The FCA alleges that the bank accepted large cash deposits from this single customer, which escalated in value over time; in total, it claims that the deposits amounted to around £365 million, of which around £264 million were in cash.
The FCA alleges that NatWest’s Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) controls were insufficient to detect or mitigate these risks. No individuals have been charged, and representatives of the bank will appear at Westminster Magistrates’ Court on 14 April.
In response to the charges, the bank released a statement saying that it was working with the FCA’s investigation, and that “NatWest Group takes extremely seriously its responsibility to seek to prevent money laundering by third parties.” It also stated that it had “made significant, multi-year investments in its financial crime systems and controls.” The bank has also recently appointed a new head of financial crime compliance.
In separate comments to media outlets, the UK’s Crown Prosecution Service (CPS) said that the FCA case was linked to a further investigation of 13 individuals alleged to be involved in a UK-based money laundering ring that operated through a now-defunct gold dealership. The CPS case against these individuals is listed for trial in April 2022.
At this stage, it is not possible to say whether the harshness of the FCA’s approach reflects specific aspects of this individual case or a more aggressive enforcement strategy in general. The agency has a history of taking tough action but has consistently used civil fines, including a £38 million fine against Commerzbank in June 2020.
However, a pivot in approach might be emerging. The UK government has made it clear in its recently published Integrated Review of Defence, Security, Development and Foreign Policy that it sees tackling economic and financial crimes as a priority issue. The fight against these types of crime has been presented in the government’s Economic Crime Plan as opportunities for the UK to demonstrate global leadership, something which the UK is eager to do post-Brexit.
FIs based and operating in the UK should therefore keep a close watch on the developments over the next year, especially with regard to trends in FCA enforcement activity. Even if criminal charges remain a rarely used regulatory tool, there is little doubt that the FCA remains ready and willing to apply robust civil penalties which can generate significant financial and reputational costs for businesses. Those businesses within its regulatory orbit thus need to ensure that they have agile and appropriate CDD and monitoring solutions in place to avoid the kind of errors of which NatWest is currently accused.
Credit Union Fined for Marijuana Violations
According to a report in American Banker, Live Life Federal Credit Union, a financial services provider in Michigan, has recently become the first FI in the US subject to explicit regulatory action due to compliance failures in its relationship with the legal marijuana sector.
Following an investigation by the National Credit Union Administration (NCUA), the independent US federal agency responsible for the regulation of the credit union sector, Live Life has been required to stop opening new accounts with legal marijuana businesses, and to file missing Suspicious Activity Reports (SARs) with the US national Financial Intelligence Unit (FIU), the Financial Crimes Enforcement Network (FinCEN). The NCUA has also ordered Live Life to implement an automated transaction monitoring platform by the end of April this year, in order to detect inconsistent and suspicious behaviors by clients more effectively in the future.
Karla Haglund, Live Life’s Chief Executive Officer (CEO), told American Banker that she believed the firm was being used as an example by regulators. “I’m going to win the war and not this battle,” she said. “Somebody has to go through this. I guess it’s me.”
Nonetheless, she accepted that the company had made mistakes by relying on manual compliance processes, which had led to gaps in coverage and several late filings. She said that Live Life had seen a rapid expansion in its marijuana-related client base in the last year and that this had led to problems in the manual onboarding process. “The cannabis atmosphere is very fast-paced,” she remarked. “You have to be on your toes all the time…[and]…it can be very draining for staff. You have to work a lot of hours.”
Relevant federal regulations on servicing marijuana businesses have been lightly applied so far, despite marijuana remaining an illegal substance at the federal level, if not in all states. In 2014, FinCEN issued guidance to banks and credit unions that outlined their obligations to verify whether a marijuana-related business was licensed, and have appropriate CDD and ‘Know Your Customer’ (KYC) provisions in place to understand and monitor the marijuana provider’s activity. Prior to this enforcement action, moreover, only two other US FIs that have provided services for the industry have been censured for problems with their AML/CFT frameworks. One of these was the Millenium Bank of Illinois, which entered into a consent order with the Federal Deposit Insurance Corporation (FDIC) in 2016 over alleged violations of the Bank Secrecy Act (BSA).
Despite the relative inactivity of regulators in the recent past, however, experts believe that the action against Live Life could mark an inflection point in the federal regulatory approach. Talking to American Banker, John Geiringer, a lawyer specializing in AML at Barack Ferrazzano commented, “I think all regulators like to signal their priorities through enforcement actions.” He noted that such actions “focus the mind…[of]…everyone in the industry” and encourage them to “go back to the regulatory road map for how it should be done.”
For the US banks and credit unions currently banking marijuana-related businesses, there is thus clear encouragement to ensure that their AML/CFT frameworks are fit for purpose. As the experience of Live Life suggests, manual compliance processes are inadequate in a fast-growing sector, and short-term efforts to avoid investment are likely to reap longer-term problems with regulators. FIs need up-to-date information and reliable but flexible AML/CFT platforms to identify emerging financial crime concerns when servicing a new sector such as legal marijuana. Without them, the risks are significant.