A Month in Review - March 2024:

What's In This Months Edition

• Industry Press and News: Rogue Companies House Filings called out, Dentons AML Case Dimissed and Azerbaijan Laundromat assets frozen
• Regulatory Updates: Including a summary of the FCA Business Plan for 2023/2024 and the FCA's Dear CEO Letter sent in early March
• Think Piece: Crypto, AI and the Regulatory Debate by Genevieve Edusei

?? ?? Industry Press and News

???? Rogue Companies House Filings Called Out

UK banks have been placed on high alert following a surge in fraudulent filings at Companies House, the UK national business register. Criminals are exploiting vulnerabilities in the system to impersonate legitimate companies and subsequently open bank accounts for illicit purposes.

UK Finance, the banking trade association, warned its members that approximately 800 forms relating to the discharging of financial liabilities were submitted at Companies House late last month.

Rogue filings are being used to create false corporate identities, which are then leveraged to set up bank accounts to facilitate fraud, money laundering, and other financial crimes. These findings have only strengthened the calls for stronger identity verification checks and improved information sharing between Companies House, banks, and law enforcement.

The ease with which criminals can misuse the public register highlights weaknesses in the UK's corporate transparency framework. Experts argue that urgent reform is needed to enhance the integrity of the system and close loopholes that enable financial criminals to operate. Addressing this vulnerability is crucial to protect the banking sector and the broader economy from fraud and money laundering risks.

?????? Dentons AML Case Dimissed

The Solicitors Disciplinary Tribunal (SDT) has dismissed a case brought by the Solicitors Regulation Authority (SRA) against the law firm Dentons over alleged anti-money laundering failures. The SRA had alleged that Dentons had failed to carry out proper client due diligence, but the SDT ruled that the regulator had not proven its case.

The SDT's decision not only clears Dentons of any wrongdoing, but also leaves the SRA facing a significant costs bill. The tribunal criticised the SRA's handling of the case, stating that it had failed to properly investigate and build a robust case against the firm.

The outcome provides relief for Dentons, which had faced potential reputational damage and regulatory sanctions. It also raises questions about the SRA's approach to enforcement, particularly in highly complex cases involving large law firms. The ruling underscores the need for regulators to ensure they have a strong evidential basis before pursuing disciplinary action.

???? Azerbaijani

Laundromat Asset Freeze

A UK court has upheld a National Crime Agency (NCA) freezing order on the ￡50 million property portfolio belonging to Azeri politician Javanshir Feyziyev and his wife. The property portfolio is linked to the Azerbaijani Laundromat scandal, thus the NCA claims were bought with the proceeds of crime. The funds were frozen as part of the NCA's investigation into the money laundering scheme, which allegedly involved the transfer of over $2.9 billion from Azerbaijan to the West. The High Court rejected a challenge to the freezing order, ruling that there were reasonable grounds to suspect the money represented the proceeds of criminal conduct. The decision strengthens the NCA's ability to disrupt financial flows linked to the Azerbaijani Laundromat and similar large-scale money laundering operations.

??????? Regulatory Updates

????? FCA Business Plan for 2023/2024

The Financial Conduct Authority (FCA) publishes an annual business plan that outlines its key priorities and activities for the upcoming year. This years plan has been published, and is summarised as per the below:

1. Strategic Priorities: The FCA has identified three key strategic priorities: transforming consumer outcomes, delivering effective regulation, and promoting healthy markets. These priorities reflect the FCA's ongoing focus on protecting consumers, strengthening its regulatory approach, and maintaining the integrity and stability of the UK financial system.
2. Transforming Consumer Outcomes: This is a central focus of the FCA's plan, with initiatives targeting vulnerable consumers, financial resilience, and access to financial services. The FCA aims to ensure that all consumers, regardless of their circumstances, are treated fairly and can access the financial products and services they need. This aligns with the FCA's broader mandate of promoting consumer protection and market integrity.
3. Delivering Effective Regulation: The FCA recognises the need to strengthen its regulatory framework and enhance its data and intelligence capabilities to become a more agile and effective regulator. This includes initiatives to improve operational efficiency, streamline regulatory processes, and leverage technology to better identify and address emerging risks. By enhancing its regulatory approach, the FCA aims to build trust and confidence in the financial sector.
4. Promoting Healthy Markets: The FCA will continue to monitor and address emerging risks in financial markets, with a focus on areas such as crypto-assets, operational resilience, and sustainable finance. This reflects the FCA's role in ensuring the stability and integrity of the UK financial system, as well as its commitment to addressing new and evolving market challenges.
5. Enabling Innovation: The FCA acknowledges the importance of supporting the development of innovative financial products and services, while ensuring appropriate consumer safeguards are in place. This suggests a balanced approach, where the FCA aims to foster innovation and competition within the financial sector, while maintaining robust consumer protection measures.
6. Strengthening International Cooperation: The FCA's plan highlights the importance of enhancing its collaboration with international regulatory bodies to address cross-border challenges and promote global financial stability. This reflects the increasing interconnectedness of financial markets and the need for coordinated regulatory responses to address systemic risks.

?? ? FCA Warning Over AML Failings

The Financial Conduct Authority has written to CEOs of Annex 1 firms concerning findings from recent assessments on their compliance with money laundering regulations. An FCA's data-led review uncovered issues such as discrepancies between firms registered activities vs. actual activities, inadequate financial crime controls amid business growth, insufficient risk assessments, and a lack of resources and oversight in respect of financial crime issues.Annex 1 firms are urged to evaluate their financial crime controls within the next 6 months and promptly address identified shortcomings to align with FCA expectations.

????Think Piece

??????? Crypto, AI and the Regulatory Debate

In February 2024, CoinTelegraph reported that a new service was being provided which allowed users to bypass Know Your Customer (KYC) and Anti-Money Laundering (AML) checks on crypto exchanges via Artificial Intelligence (AI) produced KYC identification documents. The service, provided by a site called OnlyFake, used AI to generate realistic fake driver's licenses and passports from 26 countries for $15 each. It is understood that these AI-created IDs have been able to bypass KYC checks on multiple crypto exchanges, raising concerns about potential misuse for illicit activities such as money laundering. The availability of such a service capable of producing convincing forged documents at low cost poses a significant challenge for regulators and financial institutions attempting to combat fraud and enforce KYC/AML policies in the crypto space.?

The rapid ongoing rise of cryptocurrencies and other digital assets is of an ongoing concern for regulators worldwide, grappling with how best to approach this emerging financial frontier. However, on investigation, there is an argument, from those who subscribe to the grassroots of cryptocurrencies that, in terms of identification, they should be entitled to retain anonymity.?

One of the fundamental features of cryptocurrencies is “Decentralisation”. The vision being that cryptocurrencies would create a decentralised, peer-to-peer financial system that would operate outside the control of traditional centralised authorities like governments and banks. Many take this to mean that crypto should be independent of regulation, and users should not need to identify themselves. It is noted that on looking into the service provided by OnlyFake and KYC in crypto in general, there are a number of online crypto communities not only offering advice on how to circumvent KYC, but also lamenting those who provided their “real” ID when going through KYC checks.?

That said, digital currency in its current form, is used for illicit purposes and whilst the use and prominence of cryptocurrencies continue to grow at an exponential rate, so will the risks. Its therefore hard to argue that identification of users of crypto and those sat behind transactions should be forgone in respect of privacy. Aside from the financial crime and AML risks, proportionate regulation can provide much-needed stability, consumer protection and, by default, legitimacy. On the other hand, there are concerns that as well as being in conflict with the concept of Decentralisation, heavy-handed rules could stifle growth, progress and innovation. As policymakers strive to strike the right balance, let's examine some of the key pros and cons of crypto regulations.?

Pros of Crypto Regulations:?

1. Anti-Money Laundering and Counter-Terrorist Financing (CTF): Regulatory oversight can enforce strict AML/CTF measures to combat the use of digital assets for illicit activities.??

1. Financial Stability: Regulating cryptocurrencies as a new asset class can help mitigate systemic risks and prevent the sector from posing a threat to the broader financial system.??

1. Investor Protection: Robust regulations can shield investors, particularly retail consumers, from the risks of fraud, market manipulation, and excessive volatility that have plagued the crypto space.?

1. Legitimacy and Mainstream Adoption: Clear regulatory frameworks can lend more legitimacy to cryptocurrencies, potentially accelerating their acceptance by mainstream financial institutions and consumers.?

1. Legal Clarity: Regulations can provide much-needed legal clarity around the classification, taxation, and treatment of digital assets, reducing uncertainty for businesses and investors.?

Cons of Crypto Regulations:?

1. Centralisation of Power: Regulators wielding excessive control over the crypto ecosystem could lead to a concentration of power, undermining the decentralised ethos of many digital assets.??

1. Regulatory Uncertainty: The rapid pace of technological change in the crypto space means that regulations may struggle to keep up, leading to an uncertain legal environment.??

1. Compliance Costs: Stringent rules and reporting requirements can impose significant compliance costs on crypto firms, potentially pricing out smaller players and startups.??

1. Stifling Innovation: Heavy-handed regulations run the risk of impeding the development of cutting-edge financial technologies and blockchain-based applications.?

1. Jurisdictional Arbitrage: Overly restrictive regulations in one country could drive crypto businesses to seek friendlier regulatory environments elsewhere, fragmenting the global market.?

Ultimately, the path forward will require an adaptive, flexible approach that can keep pace with the rapid technological changes in the crypto space. Ongoing dialogue and collaboration between regulators, industry players, and the crypto community will be essential to develop a regulatory framework that fosters innovation while also protecting consumers and maintaining financial stability. As the crypto ecosystem continues to evolve, this balancing act will remain a key challenge for policymakers worldwide.?