Economic Crime Act: too little, too late?

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Economic Crime Act: too little, too late?
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Targets range from the state, to oligarchs and businesses, with the impact already being felt by everyday consumers and workers. 

Since the invasion, the UK has been particularly active in its targeting of Russian oligarchs who have used the country as a place to store wealth and mask the facilitation of illicit activities.

While successive governments have been made acutely aware of such activities, the action to monitor and deter has fallen well short of the mark until now.

The events leading up to the passing of the Economic Crime (Transparency and Enforcement) Act on March 15 reflects the broader challenge the UK must now contend with.

The formative stages of the act can be traced back to December 2019 when the Treasury Committee identified regulatory and legislative failings in how economic crimes were tackled.

This was followed by an inquiry into economic crime, which concluded that economic crime is both on an upward trend and not a priority for law enforcement. 

Previous action had been taken, instigated by Russia’s annexation of Crimea in 2014, which first led to questions around the UK as a safe haven for assets held by oligarchs.

> The action to monitor and deter has fallen well short of the mark until now

In 2018 the Sanctions and Anti-Money Laundering Act was implemented, which allowed for sanctions on the grounds of human rights abuse. 

The Economic Crime Act has also not been without its controversies.

In January 2022, a minister publicly resigned in response to what he perceived to be the government’s lacklustre attempts to tackle fraud, claiming his colleagues were planning on delaying the bill for another year. Evidently, the Russia and Ukraine conflict has rapidly sped up the legislative process. 

The problem is that while the legislation does plug relevant gaps, the process of ensuring legislation is adequately upheld by public bodies, banks and businesses is falling well short of what is needed in relation to the scale of the problem.

According to global anti-corruption organisation Transparency International, at least £1.5bn of UK property is owned by Russian nationals with either close ties to the Kremlin or who have already been accused of financial crime in the past. 

The question beckons: is the Economic Crime Act a case of too little, too late? 

Moving beyond policy rhetoric 

The success of the Economic Crime Act, and indeed all financial sanctions placed on Russia, will boil down to how they are effectively implemented.

The onus lies on banks and financial institutions as much as it does government bodies to make sure they are doing everything in their power to monitor and flag transactions that could breach sanctions. 

There are already questions over whether the act actually delivers the reform needed.

Criticism has been directed towards the 18-month grace period for registering beneficial ownership, the low level of fines and loopholes that still exist.

There is also criticism over the current weaknesses of Companies House when it comes to verifying company information listed on its database. 

Finally, experts are seriously concerned by the ability of authorities to actually enforce the act.

Law enforcement agencies face shrinking budgets and a reliance on outdated IT systems that are simply not equipped to deliver the level of monitoring required.

> The onus lies on banks and financial institutions as much as it does government bodies

This is a challenge not only being faced by government authorities; major banks also find themselves in a similar predicament. 

Banks have long since struggled to effectively counter the exploitation of their financial systems.

In the EU, law enforcement officials estimate that professional money launderers have a 99 per cent success rate in running criminal profits through the existing financial system.

In the US, 1 per cent of financial proceeds of crime is recovered each year.

HSBC was fined £64mn by British regulators for failings in its anti-money-laundering processes spanning eight years in December 2021. NatWest also pleaded guilty to three offences under UK money-laundering regulations in October 2021. 

One would hope that the Ukraine-Russia conflict provides the impetus needed to address the issue around enforceability. Positively, we are already seeing banks spending more resources trying to limit risk linked to money flows. 

A global reset to counter financial crime 

If the UK, and the west more broadly, wants to seriously tackle financial crime, a global response is needed.

The financial system is truly globalised, with cross-border transactions continuously rising in volume and frequency. As a result, part of the response will also have to come from the adoption of technology.

Similarly, with the advances in modern money-laundering techniques, those looking to exploit financial systems will continuously develop new methods to avoid detection.

The challenge for banks is identifying and countering these evolving techniques – a difficult feat when so many large institutions rely on manual or outdated detection processes. 

This can only be achieved through the adoption of a broad 'know-your-data' approach, which makes use of the vast amounts of data already available to financial institutions.

> If the UK wants to seriously tackle financial crime, a global response is needed

Banks need to have sophisticated detection processes that go beyond manual monitoring of transactions, towards a more comprehensive approach that can analyse what in some cases will involve millions of data points. Different banks will also need systems that are adjusted to their specific levels and types of risk exposure.  

By employing this process, banks (and other financial institutions) are better positioned to identify risky customers, patterns, and institutions with high levels of risk exposure.

These solutions exist, it is now up to banks to find and invest in these tools so they can manage such risk. 

Max Heywood is head of public sector at financial crime risk platform Elucidate