In April, the FCA took action against a fintech firm and demonstrated its capability and willingness to exercise its asset recovery powers.
Account freezing orders are a tool used for asset recovery
A fintech start-up consented to forfeit £2 million held in its name to the regulator, following claims the money was the proceeds of “illegal activity” connected with an alleged payment processing fraud in the United States.
This case has brought the use of account freezing orders to the fore – but what are they and what should other fintech firms take away from this action by the FCA?
The rise of the account freezing order
While this may be the first time we are aware of the FCA using an account freezing order, it should not be assumed that they are difficult to deploy. In fact, other enforcement agencies such as the NCA and HMRC have utilised them since they were introduced at the start of 2018. As a result, around £100 million is frozen by law enforcement annually, and this number is expected to trend upwards.
Introduced as part of the Criminal Finances Act, account freezing orders are a tool used for asset recovery. They are relatively simple to obtain and have little in the way of cost consequences if things go wrong for law enforcement. They give law enforcement the power to freeze funds held in bank accounts if the court is satisfied, on the balance of probabilities, that there are reasonable grounds to suspect that the funds in the account are the proceeds of crime, or are intended for use in unlawful conduct. The threshold for obtaining an account freezing order is suspicion based and therefore low, and there is no need for there to have been associated criminal proceedings or even an investigation.
In the case of the aforementioned start-up, the FCA alleged the £2 million was connected to criminal proceedings in the US, relating to an alleged conspiracy to commit wire fraud against banks, credit card companies and other financial services providers. The FCA did not allege that the start-up was involved in the alleged conspiracy.
Now that the funds have been forfeited, they are available to the UK government. The UK has in place an Asset Recovery Incentivisation Scheme (ARIS) which returns a proportion of recovered assets to those agencies who are involved in asset recovery, and the FCA is one such agency. As noted in the FCA’s announcement of the forfeiture, “The funds will now be used to assist the FCA and other authorities fight illegal activity.”
A time of greater scrutiny
As the financial sector evolves, so too must the regulatory approach. Challenger banks, crypto exchanges and fintech firms are increasingly going to face significant scrutiny, similar to that faced by financial institutions for many decades before them.
In this case, we don’t know what triggered the FCA’s knowledge of the start-up’s transfers. However, it seems likely it was a request for mutual legal assistance from the US, and possibly intelligence from suspicious activity reports filed by financial institutions. The FCA’s press release states that concerns were raised following the start-up’s application to be regulated by the FCA in March 2020 and it is likely that the FCA used its investigative powers once these concerns were raised. Perhaps unsurprisingly, the start-up subsequently withdrew its application to be regulated by the FCA.
The case is a timely reminder of the enforcement and intervention powers available to the FCA in connection with its regulatory objectives. From the perspective of fintechs, it also highlights the potential importance of considering the source of wealth and source of funds of investors, applying a risk-based approach.
A reminder for businesses
While fast-moving financial innovation brings benefits to consumers, it also presents new compliance-related challenges for businesses and regulators. As a business grows, it is critical that the compliance function keeps pace with the growth of the business. There will always be a slight lag, but if the lag is too great, then the business risks being unable to identify and mitigate compliance challenges, which may then expose the firm to regulatory scrutiny.
Meanwhile, regulators are likely to increasingly employ their asset recovery powers to deal with new and emerging risks. The FCA’s executive director of enforcement and market oversight Mark Steward indicated this in the press release associated with the forfeiture, stating that account forfeiture orders “are an important means of intervening and capturing illegal money and this action is a good example”. Given the low threshold for obtaining account freezing orders, they pose a risk to any firm which holds funds subject to regulatory interest.
