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Banks face uptick in money-laundering fines following COVID-19 delays

The value of money-laundering fines issued to banks globally is likely to land at 2019 levels despite lockdown-driven delays to enforcement activity earlier in the year, with experts also seeing scope for a rise in pandemic-related penalties further down the road.

In the next six to 12 months, regulators such as the Financial Conduct Authority in the U.K. and the Justice Department and Securities and Exchange Commission in the U.S. are likely to announce investigations related to misconduct during the pandemic, said Philip Annett, a partner with Baker McKenzie's financial services regulatory team in London, and previously a senior lawyer in the FCA's enforcement division.

By the end of July, authorities globally had issued fines worth $5.6 billion to banks for noncompliance with anti-money laundering, know-your-customer and sanctions regulations, 30% less year over year, according to research by Fenergo, a provider of regulatory technology.

Coronavirus-related disruptions earlier in the year led to delays in investigations by regulators and enforcement agencies, including the issuance of penalties, said Rachel Woolley, global director of financial crime at Fenergo, in an interview.

Nevertheless, as authorities have adjusted to new working conditions, the number will likely pick up towards the end of 2020, with Woolley expecting that total fine levels globally will be "more or less on par, if not ahead of the figures from last year."

Total global penalties for anti-money-laundering, know-your-customer and sanctions violations reached $8.4 billion in 2019, according to Fenergo.

UK regulators in spotlight

Regulators that were particularly active last year but have not yet issued many penalties in 2020 will be especially interesting to watch, Woolley said. The U.K. is one such example, with regulators there having issued only two fines for anti-money-laundering or sanctions breaches in the first seven months of 2020, valued at $72.9 million, according to Fenergo. This includes a fine from the Office of Financial Sanctions Implementation to Standard Chartered PLC in April, and one from the FCA to Commerzbank AG in June.

In comparison, U.K. regulators issued five fines worth $224.8 million in the full year of 2019, according to Fenergo.

Annett, who represents banks under investigation by U.K. authorities, also expects to see outcomes from investigations come through later in the year, in light of regulators now being "up and running again."

"It's taken the FCA and the other regulators, as would be expected, a number of months to get up to speed with, for instance, conducting interviews remotely, which has a number of challenges," he said in an interview.

The Financial Times of London reported in September that the FCA had discontinued seven of its 14 criminal investigations into money-laundering breaches since January, and that it is yet to bring a single prosecution under the U.K.'s money-laundering regulation.

Annett said that while it is difficult to read what drove the discontinuation of cases, the move could indicate a reallocation of priorities toward existing investigations and to bring down the time it takes to complete them. The FCA spends on average 23.9 months on an investigation, according to its 2019-2020 annual report, an increase from 17.5 months a year earlier.

With fewer open investigations, the FCA could have "more available resources to focus on active live cases and possibly achieve a greater number of outcomes," Annett said.

Pandemic-related penalties

Looking beyond 2020, banks can also expect to see investigations and financial penalties in relation to misconduct during the coronavirus pandemic, according to the experts who spoke to S&P Global Market Intelligence.

Large-scale fraud cases related to contracts for medical supplies, masks and other pandemic-driven orders are one area that regulators are likely to focus on, said Joydeep Sengupta, a Paris-based counsel in law firm Mayer Brown's compliance, investigations and regulatory practice.

In one such example released by Interpol in April, fraudsters had cloned a Dutch supplier's website in order to secure an €880,000 payment from German health authorities for an order of 10 million face masks that did not exist. Cases like this will prompt attention from regulators to the anti-money-laundering controls among banks that have facilitated such money transfers, Sengupta said in an interview.

Regulators will likely also be investigating cases related to the approval of fraudulent applications for government emergency funds, which have brought into question the effectiveness of banks' control systems, Woolley said.

Outside of money laundering and sanctions, Annett expects banks to face investigations around market abuse and manipulation, similar to cases brought by U.S. and U.K. authorities in light of the 2008 financial crisis.

"We saw lots of cases coming out of that period, some of them market manipulation cases where you had traders effectively disguising losses," he said. "[Those are] the types of issues that we may see coming out of this period, where the markets have been very volatile."

Even though authorities such as the Office of Foreign Assets Control in the U.S. have indicated that the coronavirus crisis could be a mitigating factor in future sanctions cases by regulators, there is "no doubt that penalties will come," Woolley said. She expects regulators will initiate the first bank-targeted investigations relating to the pandemic in 2021.

Regulators may be "more lenient" when it comes to activities that happened in the early, "unpredictable" phase of the pandemic, said Sengupta. But banks that are found to be involved in scandals beyond this period will face a "high risk of regulatory enforcement," he added.