Proliferation Financing, crypto, art and rock ‘n’ roll

One could reasonably argue that 21st century cultural history is reflected as much by financial crime legislation as it is by pop music or cinema. In much the same way as John Lennon supplied the soundtrack to the end of the Vietnam war, with a million people marching on Washington singing “Give Peace A Chance”, so the Suspicious Activity Reporting requirements of the Terrorism Act 2000 and Proceeds of Crime Act 2002 materialised in the immediate shadow of 9/11 and heralded the declaration of the “War On Terror”. Eight years later, the Bribery Act 2010 reflected growing international concerns over the impact of corruption on developing countries. Later still, the Criminal Finances Act 2017 provisions criminalising companies facilitating tax fraud were drafted following public outrage at the publication of the Panama Papers, which revealed widespread abuse of the tax system by legal and accountancy firms operating in offshore financial centres.

Even by 21st Century standards, the last couple of years have seen a bumper crop of financial crime legislation. Much of this was motivated by the international reaction to Russia’s invasion of the Ukraine. The Economic Crime (Transparency and Enforcement) Act 2022, which had allegedly been sat on a dusty shelf in the Home Office since 2015 (next to a Mark Ronson CD, I like to imagine), was hurried through Parliament with a scattergun set of measures to bolster the sanctions regime and improve transparency of overseas owners of UK land and property, with a second bill due later in 2023 aiming to deliver further modernising reforms to Companies House and strengthen intelligence gathering and enforcement powers in relation to financial crime.

Perhaps the zeitgeist is most evident in the UK’s money laundering legislation. The Money Laundering and Terrorist Financing (Amendment) (No. 2) Regulations 2022 introduced further changes to the regulations around cryptocurrency exchange, only brought into the regulatory regime in 2019 as a result of the EU 5th Money Laundering Directive. More curiously, the regulation of “art market participants” developed along the same timeline, as new risks were identified associated with a far older business model. It is easy to imagine the challenges faced by legislators and law enforcement authorities in having to respond swiftly to the financial crime risks posed by ever-more complex emerging technologies. It is perhaps more difficult to understand how the concept of storing value in criminally acquired works of art slipped under the radar until 2019, with well-documented controversies dating back at the very least to the plunder of Jewish art by the Nazi party in the 1930s and 40s.

Another arguably late addition to the regulatory regime brought in by the “… (Amendment) (No. 2) Regulations” is the requirement for regulated firms to “…establish and maintain policies, controls and procedures to mitigate and manage effectively the risks of proliferation financing”. Rather like the sanctions regime, which has existed in some form for many years but only gained real traction following the Ukraine war, there has been little awareness until now of international counter-proliferation efforts among regulated firms, who tend to focus on where the money used in a transaction has come from, rather than what it might be used to pay for in the future.

Proliferation financing is the funding of military projects in rogue states, particularly the DPRK (North Korea) and Iran. Counter-proliferation efforts are targeted at the control of chemical, biological, radiological and nuclear weapons and materials (CBRN) as well as “dual-use” goods with both a civilian and a military purpose. Identifying and managing proliferation financing risk is complex and challenging, with supply chains often obscured by opaque offshore company structures and facilitated by diplomatic staff or ex-pat communities based in more sympathetic or less well-regulated third countries. For many firms, risk management will amount to carrying out standard money laundering due diligence and trying to ensure that staff are aware of vulnerable sectors (such as defence, shipping, new technology and research) and high-risk clients (such as individuals and companies directly or indirectly linked to rogue states or sanctioned entities). As with terrorist financing, the stakes are high, with international security reliant on maintaining effective counter-proliferation controls, and the penalty for any non-compliance is likely to be severe.

If you were hoping to draw breath when the music stops, you might have a long wait. The government has just published the UK’s second Economic Crime Plan for 2023-26, undertaking to recruit 475 new financial investigators, create a new “Crypto Cell” and expand the existing “Combatting Kleptocracy Cell”, build stronger partnerships with the private sector and implement “ambitious reform of the UK’s [money laundering] supervisory regime”, most likely with the emphasis on fewer supervisors with more powers applied more aggressively to enforce compliance and penalise non-compliance. With the ongoing Ukraine conflict and a more assertive, potentially combative China on the political landscape, and AI dominating the technological agenda, it is hard to see the pace of legislative change slowing any time soon.

Like pop music, the financial crime landscape is constantly changing, and UK firms cannot afford to be left behind. To borrow a line from a song, the alternative is to “…pray, pray, pray that everything will be okay, while you’re making all the same mistakes”. Legislation and regulation continues to move inexorably in One Direction… best make sure you are not left behind.