Brexit - How will it affect the compliance industry?

2

Introduction

June 23rd 2016 will go down as one of the most important chapters in the modern history of Britain, as the country will vote in a referendum on whether it will remain a member of the European Union. There has been a lot of coverage on what the effects of a British exit would mean for the economy and public services, but we can’t help but wonder what the implications will be for the UK’s growing compliance sector. Let’s explore the possibilities.

Before even attempting to analyze the potential effects on the industry or regulatory environment, it is important to understand that outcomes will depend on how Britain will negotiate its relationship with the EU after a Brexit scenario. Some potential models are:

- The Norwegian model (UK becomes a non-EU member of the European Economic Area)- The Swiss model (UK becomes a non-EU member of the European Free Trade Association)- The Canadian model (UK signs a bilateral trade agreement with the EU)- The WTO model (UK trades with Europe under WTO rules)

Table of Contents

02 Introduction

03 The industry

04 Current EU regulation

04 The regulatory environment

04 Sanctions

05 Theeffectivenessofthefightagainstfinancialcrime

3

The industry

A large proportion of the UK’s economy relies on the financialservicesindustry.AreasonthatmanybanksandservicescompaniessetbusinessintheUKinthefirstplace,is Britain’s business-friendly environment and the fact that theEUpassportingagreementmeansthatUK-basedfirmscan freely operate across Europe. Currently over 2000 UKfirmsuse this passporting arrangement. Freedomofmovementalsomeans thatfirmscanbuildmulti-lingual,high-skilledteamsintheUKwithlowervisarequirementswhichiswhymanyfirmsbasetheirEMEAaccountsteamsin London.

As you can see from the graph, freedom of movement would be retained under the Norwegian Model so it isunlikelythatrecruitmentofstaffwouldbemoredifficultinthisscenario,butotherarrangementsmightpushofficestorelocatetomakerecruitmentmoreconvenient.

Under the Swiss Model, free movement arrangementswould have to be agreed with the EU: Switzerland signed aFreeMovementofPersonsAgreementwiththeEUthat

imposes some immigration quotas, but in practice hasmuch higher EU immigration than the UK.

Canada’s free trade agreement with Europe does not includefreemovement,butmakesitsomewhateasierforEuropeanandCanadiancitizenstoworkabroad.

Large investment banks, such as JP Morgan, have warned that thousands of jobs might need to be moved toEuropeintheeventofBrexit - thiswould likely includethe increasingly specialized compliance and financialintelligence teams, especially regional hubs for EMEAaccounts, which already struggle to recruit sufficientnumbersofskilledstaff.ForbanksthatremainoperativeintheUKafterBrexit,thecompliancefunctionwouldlikelyshiftasnationalregulatoryrequirementswilldivergefromEU standards, increasing demand for jobs in the sector to cope with the regulatory complexity.

PotentialmodelsafterBrexit

Norwegian Swiss model

Canadian WTO model

model model

PayintoEUbudget

Accesstosinglemarket Partial

Free movement for EU citizens

Most Dependent on

negotiation

Bankpassportingrights

Dependent on

negotiation

Mustcomplywithbulkof

Dependent on Dependent on

EUfinancialregulation negotiation negotiation

Canblockoramendnewregulation

Harmonized sanctions

and export controls

Can easily share data and intelligence

Dependent on Dependent on Dependent on

EU assessment EU assessment EU assessment

WorkwithEuropol Dependent on Dependent on Dependent on

negotiation negotiation negotiation

Civil judicial cooperation through Eurojust Dependent on Dependent on

negotiation negotiation

4

Current EU regulation

Brexit could result in a de-harmonization of regulation within Europe as the UK would work towards theirown interpretation and implementation of the FATF Recommendations. Furthermore, any UK government may decide to implement compliance-relevant laws that are different and stricter than a joint EU proposition where regulation is designed to be harmonious and applicable in all Member States. If this constraint in policy-makingand Cameron continues to ride on an anti-corruption agenda this might mean tougher regulation and lone-standing policies that could align the UK closer with the US regulatory environment.

A prominent piece of EU legislation currently undergoing the process of being implemented into national law is the FourthEUAnti-MoneyLaunderingDirective, which is going to have wide-ranging effects on the need for enhanced due diligence , cash thresholds andPEPdefinitions and risk-based approach. It is up to this point whether there would be a grandfathering clause and whether the proposed amendments to the Directive following the recent ParisattacksaimedatwideningthescopeoftheEDDforhigh-riskcountriesorvirtualcurrencieswouldalsobeadoptedin the case of Brexit.

The regulatory environment

Changes in the UK’s regulatory environment would again strongly depend on the model of the UK’s relationship with EuropeafterBrexit.ManyEUdirectivesapplyautomaticallytoEEAcountries,sotheNorwegianModelwouldseeUKfinancialinstitutionsstillgovernedbythevastmajorityofEU regulations.

The main change under all Brexit models would be the UK’s involvement in defining the direction for financialregulation: British institutions were heavily involved in definingfinancialregulationssuchasSolvencyIIandMiFIDII inawaythatworksforUKfirms.Exitcouldseefurtherregulatory changes drafted to better suit other European financialcenters,suchasFrankfurt,ParisandAmsterdam,furthersqueezingtheindustry.

Sanctions

The current UK Sanctions and export control regime is closely intertwined with the EU Council’s Foreign Policyand External Affairs policies. The UK play a vital role in the joint designation process and creation of consensus amongst whom to sanction and whom not. The process has to be balanced between the 27 Member Statesmeaning that effective designations are influenced bystates’ self-interests and sanctioned entities represent the least common denominator.

With Brexit, the UK could be empowered as an independent sanctioning body and designate further entities or individuals that wouldn’t have made the EU list after joint deliberation.HMTreasuryalreadypublishes independentsanctions that are added on to the designations of the UNandEU,andthisisascenariothatwill likelyintensify,creatingmore compliance risks or potential prohibitionswhen doing business in the UK.

Norway and Switzerland have had to decide whether or not to implement European sanctions programs, e.g. those against Russia. Norway eventually chose to do so, while Switzerland held off imposing sanctions. This decision, however,putSwiss institutionsatriskoffacingpenaltiesimposed by the EU and US for circumventing sanctions, and led to diplomatic criticism by European nations.

5

The effectiveness of the fight against financial crime PM Cameron with his anti-corruption speech and blog post last year, has positioned himself as a leader in the internationalfightagainstfinancialcrimeandhaspushedinitiatives on international as well as local level, the latest of the former being the international anti-corruption summit recentlyheldlastyearandthelatterbeingtheworkonUK’sbeneficialownershipregistry(or: “Registerofpeoplewithsignificantcontrol”asthebillcallsit).

Cameron was in a position to champion this topic because ofLondon’suniqueplace(andresponsibility)astheworld’sfinancialhub,butalsobecausehehasapolicy forum infromtheworld’s largest free tradezone -wherefinancialregulation - once implemented, will affect the way we trade anddobusinessfromThessalonikitoReijkavik.

There might be another side effect for Cameron’s remaining internal annoyanceon theway to a unifiedUBO register- the Brexit campaign and support in admittedly gives power to independence campaign movements and their argumentation to not be regulated by a foreign entity in vitalissuessuchaseconomicaffairs.MuchlikeScotlandisentertainingtheideaofIndyref2,Cameronmightfindit(even because it’s already pretty hopeless) harder to elicit concessions from British overseas and offshore territories who fundamentally see their livelihood and business model at stakewhenever the UK governmentwants to expandthe reach of anti-money laundering provisions and relating corporate governance rules.

Many of the existing steps taken by the government,such as setting up registers of foreign property owners, are independent of EU-based anti-corruption measures. Financial crime, however, is a global operation, so multilateral measures and cross-border information sharingisvitaltotacklecriminalactivity.

Again, the European Union would be an effective arena for the United Kingdom to set new standards in corporate transparencyanddemandsimilardisclosurerequirementsacross the continent. Stepping out of a harmonized regulatory framework coupled with a shrinking financialservices sector could push future governments to choose to repeal transparency measures in an effort to attract investment from less scrupulous overseas partners.

There are several non-EU multilateral organizations in whichtheUKandUKfirmscancontinuetoworktotacklefinancial crime and corruption, including the FATF, the Egmont Group, the Wolfsberg Group and the G20 and G7. In practice though, much of the activity of combating financialcrimedependsondataand intelligencesharingagreements, which are conducted through an EU framework.Tocontinuetodothis, theUKwouldneedtosignuptoEU-defineddataregulationswithoutbeingableto help shape them.

Brexit could also lose the UK access to cross-border civil judicial co-operation measures through Eurojust, operational links to Europol, and access to the FIU.netCFT and AML network, unless specific measures wererenegotiated.