In the following article Richard Sallybanks and Umar Azmeh look at whether recent AML and insider dealing prosecutions herald an increased willingness on the part of the Financial Conduct Authority to use its criminal enforcement powers.
Much has been written about the Financial Conduct Authority’s (‘FCA’) recent decision to commence criminal proceedings against National Westminster Bank PLC (‘NatWest’) for offences under the Money Laundering Regulations 2007 (‘MLR’). However, given that the FCA also started two insider dealing prosecutions in February 2021, does this signal an increased willingness on the part of the FCA to flex its muscles as a prosecutor in the criminal courts?
With an annual budget well in excess of half a billion pounds, and a wide range of criminal, civil and regulatory powers under a number of Acts of Parliament, the FCA is a core plank of the regulation of the United Kingdom’s financial services sector, regulating nearly 60,000 businesses. The FCA’s Enforcement Division works in conjunction with its Authorisation, Supervision, Strategy and Competition Divisions, along with law enforcement and other regulators, and seeks to “identify and act early when enforcement action is necessary.” However, despite its long-established powers to bring criminal cases, it has in recent years appeared to prefer to take action against misconduct in the areas for which it has responsibility through its civil regulatory regime. Although civil penalties can have a significant impact on a company’s or a person’s financial position, ability to carry out regulated activity and reputation, they do not carry the stigma and consequence of a criminal conviction. Further, so far as individuals are concerned, they do not have the deterrent effect on others of seeing that this type of misconduct is likely to result in imprisonment and significant financial orders whose quantum can far exceed any profits made from the wrongdoing.
On 11 February 2021, the FCA announced that it had charged two individuals – Stuart Bayes and Jonathan Swann – with various offences of insider dealing under the Criminal Justice Act 1993 (‘CJA’). The alleged offending took place in the spring of 2016 and concerned trading in shares in British Polythene Industries PLC ahead of an announcement of its acquisition by RPC Group PLC. The profit from the alleged insider dealing was just under £140,000.
Less than a week later, on 16 February 2021, the FCA announced that it had charged two brothers – Mohammed Zina and Suhail Zina – with six offences of insider dealing under the CJA in respect of trading in the shares in six companies between July 2016 and December 2017, resulting in profits of approximately £142,000. One of the defendants had been employed at Goldman Sachs International as an analyst in their Conflicts Resolution Group, and the other as a solicitor at Clifford Chance LLP. In addition to the insider dealing charges, the alleged wrongdoing also concerns fraudulently obtained loans totalling £95,000 from a commercial bank that were allegedly used to fund the insider dealing. Charges have been brought under the Fraud Act 2006 alleging fraud by misrepresentation (in that the loans were stated to be for the purposes of home improvements), an example of how the FCA can, and will in appropriate cases, pursue criminal charges beyond those relating to misconduct in the markets it regulates.
Then, on 16 March 2021, the FCA announced that it had “commenced criminal proceedings against National Westminster Bank Plc in respect of offences under the Money Laundering Regulations 2007”. Specifically, the allegation is that NatWest failed to adhere to regulations 8(1), 8(3) and 14(1) of the MLR which required the bank to determine, conduct and demonstrate risk-sensitive due diligence and ongoing monitoring of its customer relationships in order to prevent money laundering. These alleged offences arose from large deposits amounting to £365 million (of which £264 million was in cash) into the account of a corporate customer, deposits that were allegedly not adequately monitored and scrutinised by the bank’s systems and controls.
Significantly, the prosecution of NatWest is the first time that the FCA has brought a prosecution under the MLR, and indeed it is the first ever prosecution of a bank under the MLR. However, that the FCA would bring a criminal case under the MLR had been trailed for a number of years, such that it was only a matter of time (albeit perhaps longer than expected) before the theory became reality.
That said, it is likely that prosecutions under the MLR will be infrequent, and reserved only for those cases where the alleged offending is considered so serious that civil penalties (even significant penalties such as the £37.8 million fine levied on Commerzbank AG in 2020) are considered insufficient sanction: as Mark Steward, the FCA’s Executive Director of Enforcement and Market Oversight, has previously stated, “… we need to enliven the jurisdiction if we want to ensure it is not a white elephant and that is what we intend to do where we find strong evidence of egregiously poor systems and controls and what looks like actual money-laundering.”
The FCA has recently publicly stated that it is currently conducting a number of investigations concerning financial crime and anti-money laundering (‘AML’) controls. In March 2021, Mark Steward gave a speech in which he highlighted the range of activity presently being undertaken through investigation and enforcement, noting that there were 42 ongoing investigations that concern financial crime and AML. While making it clear that the detection, investigation and prosecution, where necessary, of breaches of financial crime regulation were “key priorities”, it will remain to be seen whether the NatWest prosecution will be the first of a number of criminal cases brought by the FCA under the MLR, or whether it will stand as an isolated example of criminal enforcement in this area.
In relation to insider dealing, the two prosecutions launched in February are both scheduled for trial at Southwark Crown Court in April 2022. These will be the first insider dealing trials since that of Fabiana Abdel-Malik and Walid Choucair. They were originally tried in the winter of 2018 when the jury could not reach a verdict, and subsequently convicted after a re-trial in June 2019 when both were sentenced to three years’ imprisonment in respect of five charges of insider dealing. Abdel-Malek had been employed as a compliance officer at UBS investment bank and Choucair, a family friend, was a day trader whose profit as a result of the insider dealing was approximately £1.4 million.
This hiatus of almost three years in insider dealing trials between their retrial and the two trials scheduled for next April demonstrates how criminal prosecution of insider dealing is infrequent. However, the prison sentences imposed on Abdel-Malik and Choucair, and the ancillary orders imposed on the latter, also demonstrate that a successful prosecution can send a serious deterrent message.
Following the Court of Appeal upholding the convictions in December 2020, Choucair was made the subject of a confiscation order in the sum of approximately £3.9 million, and was also ordered to pay approximately £400,000 in prosecution costs to the FCA (Abdel-Malik was also made subject to a confiscation order, in the sum of £34,194.53). The confiscation regime under the Proceeds of Crime Act 2002 (’POCA’) is rarely referenced without the description ‘draconian’ being applied, and the confiscation order made against Choucair appears to be an example of how the POCA ‘criminal lifestyle’ assumptions can produce a result where the amount ordered to be confiscated significantly exceeds the profit from the crime. Profits from other share trading were also taken into account, with the consequence that a £1.4 million profit from the offences for which Choucair was convicted has resulted in an order to pay £3.9 million – with the threat of an additional five years’ imprisonment in the event of non-payment.
It is interesting to note that, compared to previous activity, the recent prosecutions initiated by the FCA for insider dealing represent a positive flurry of activity; these are the first insider dealing charges since June 2017. In fact, notwithstanding that the CJA came into force in 1993, the first insider dealing convictions were not until 2009, and there have now been a grand total of 36 insider dealing convictions in cases brought by the FCA and its predecessor entity (the Financial Services Authority), activity that may rightly be characterised as sporadic.
What is also notable about the FCA’s recent activity in this area is the comparatively low profits alleged to have been unlawfully gained, certainly when set against the profits made by Choucair. This may indicate that the FCA is now willing to prosecute in ‘smaller’ cases (certainly when compared, for example, to its Operation Tabernula investigation which resulted in five convictions), as opposed to dealing with such cases through its civil (market abuse) regime.
The FCA (and its predecessor) has consistently championed the concept of “credible deterrence”, which comprises focused and effective enforcement against senior managers, rather than bland financial penalties,, and has all the statutory tools to achieve its mission of protecting consumers, ensuring integrity, and promoting effective competition. Only time will tell if these developments represent the start of increased and consistent use by the FCA of its powers to bring criminal cases, or whether these prosecutions will represent the exception rather than the rule.
 Mark Steward speech at GIR 2019 Live (4 April 2019) – https://globalinvestigationsreview.com/mark-steward-speed-not-the-only-measure-of-success
 It is right to note that civil or regulatory action is cheaper and less risky for the FCA, or indeed most regulators, than criminal prosecution, which is likely to be very costly and more time-consuming.