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Insights and News /

20 March 2019

Brexit and its impact on UK financial crime regulation

Olivia Goldberg

Olivia Goldberg
Senior Consultant | Finance, risk and compliance | London

With days to go until the UK’s planned departure from the EU, significant uncertainty remains around whether a post-Brexit deal is reached, let alone what the details of that deal might be. Many factors will impact the UK’s post-Brexit financial crime regulation, much of which is dependent on the details and timelines of the Withdrawal Agreement. This article explores the changes likely to influence the UK’s approach to financial crime regulation post-Brexit and the potential impact on UK-based financial services (FS) firms.

Changes to trading patterns

A likely outcome of Brexit will be increased trade between UK businesses and companies based outside the EU. FS firms will need to ensure controls are proportionate and can manage risks that increased trade with these jurisdictions will pose. The National Crime Agency is concerned that uncertainty surrounding Brexit could see criminals take advantage of changes to trading regulations, particularly around the implementation of a new UK customs union, using any uncertainty to further their aims. This may result in new money laundering typologies against which firms must monitor. Consequently, there will likely be additional costs for firms to ensure that their financial crime controls are sufficiently robust to handle the changes to trading patterns.

Information sharing with European counterparties

A significant change to be introduced by the 5th Anti-Money Laundering Directive is increased transparency of beneficial ownership, whereby EU Member States will have wider access to each States’ register of corporates’ beneficial ownership. For UK-based firms, the extent of their involvement in information sharing will depend on the terms of the UK’s Brexit transition period. If exempt from the Directive, UK-based firms will likely incur increased costs compared to their EU counterparties, due to lack of access to shared information. Furthermore, the efficiency and effectiveness with which firms with EU and non-EU entities identify and respond to financial crime may be reduced as a result of a fragmented approach to information sharing between the UK and EU.

Sanctions and AML Act 2018

To ensure the UK actively manages sanctions post-Brexit, Parliament passed the Sanctions and AML Act 2018. The act does not make material changes to the existing AML regulatory framework and according to the UK government, businesses will not need to make significant process changes in order to ensure compliance; the scale of change is expected to be small and related to staff upskilling. However, the bill does allow the UK government to add or remove designated individuals from its sanctions lists. Firms operating across multiple jurisdictions could therefore see an increase in compliance costs to ensure adherence to relevant sanctions regulations, including additional reporting requirements.

Post-Brexit compliance

Whilst details of the UK’s withdrawal from the EU remain unclear, it is not possible to conclude how Brexit will influence the UK’s approach to financial crime, or how this will impact FS firms. Any changes to the UK’s existing approach will mean that FS firms operating across both the UK and EU member states must contend with regulatory divergence and is likely to lead to increased compliance costs. Firms will need to balance opportunities afforded by operating with EU and UK-based entities with increased regulatory complexity that it will likely bring.

In the meantime, firms should follow negotiations closely to assess how evolving regulations and changes to customer trading habits will impact them. They should ensure that their controls are sufficiently robust to respond to change efficiently and effectively to achieve compliance and safeguard against resulting changes to financial crime risk.