FCA's Final Warning To Crypto Firms On Marketing and Money Laundering

The UK's Financial Conduct Authority has issued a "final warning" to all firms marketing cryptoassets to UK consumers, including firms based overseas, that it will strictly enforce the new 'financial promotions' restrictions that take effect on 8 October 2023. Among the FCA's concerns, in particular, is the fact that overseas firms with UK customers have failed to engage with the process of introducing the restrictions. Of 150 overseas firms surveyed by the FCA, only 24 responded. The FCA has updated its Warning List accordingly. In addition to criminal prosecutions for breaching the restrictions, the FCA envisages actions to recover the proceeds of crime from those who receive money from offending firms, as well as prosecutions for related money laundering offences. I've summarised the FCA's concerns below for information purposes. This note does not constitute legal advice. If you need advice on any of the matters raised, please get in touch.

What is a financial promotion?

A 'financial promotion' basically means any invitation or inducement to engage in a regulated activity. This could be a feature of any customer communications, marketing activity, social media posts, advertising or part of sponsorship arrangements, for example. 

What is the main restriction?

Firms lacking the appropriate authorisation or registration must only communicate to UK residents financial promotions that either fit an exemption or have been approved by an FCA authorised firm (who have to comply with their own financial promotions rules). 

The FCA expects authorised firms who are considering approving cryptoasset financial promotions to notify the FCA before doing so.  

Depending on the type of product and related activity involved, there may be different promotional rules that the approving firm must check that the promotion complies with before giving approval.

Crypto firms which cannot legally communicate financial promotions to UK consumers will be expected to have robust processes to prevent UK consumers accessing and responding to their financial promotions, including geo-blocking UK consumers, clear statements that their services are not available to UK residents, on-boarding and KYC/AML checks for UK addresses, preventing the use of UK-based payment methods, and ongoing monitoring. 

What happens if there's a breach?

Breaching the financial promotions restrictions is a criminal offence. 

In turn, the FCA considers that any benefits obtained from illegal financial promotions could be criminal property, so anyone receiving or dealing with such proceeds of crime may be implicated in money laundering. Some may also commit an offence where they breach requirements to report suspicious activity. In this context, the FCA will be looking at funds flows such as: 

• the fees generated by app stores, social media platforms, search engines and domain name registrars from hosting illegal financial promotions; 
• investments made due to illegal financial promotions; 
• receipt of payments under advertising, co-marketing and sponsorship deals; and 
• fees charged by payments firms or other intermediaries for services to unregistered cryptoasset businesses that generate income through illegal financial promotions. 

The FCA would likely begin its enforcement activity with an alert on the FCA website and by seeking to remove or block offending promotions, in addition to targeting intermediaries, social media platforms, search engines, app stores, domain name registrars, hosting providers and payment service providers who support the activities of offending firms.

What if I have UK residents as customers right now?

The FCA explains that firms who are at risk of non-compliance may communicate with their existing UK consumers for a limited time but only to allow those customers to transfer, withdraw or sell their existing assets, which must be communicated in a way that does not breach the financial promotion requirements and clearly explain how consumers can use each option and any associated fees, costs and charges. The FCA considers it unsustainable for unregistered cryptoasset firms to maintain a longer-term relationship with UK consumers who cannot be shown financial promotions. 

This note does not constitute legal advice. If you need advice on any of the matters raised, please get in touch.

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