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Financial Crime Overview
Financial crime prevention is one of the fastest growing areas of compliance. New technology has seen financial crime develop rapidly in recent years, creating new risks that need to be addressed. The FCA has stressed the importance of organisations developing anti-financial crime ‘architecture’ with systems and resources to match. The FCA will continue to use many of the tools it does today to ensure financial institutions are meeting their regulatory obligations in relation to financial crime. In addition to these tools, they have been developing a programme of intensive and intrusive supervision of some key financial crime risks in a group of very large banks.
The reduction of financial crime risk is one of the legal duties of the FCA, and the regulatory framework aims to reduce ways in which financial sector firms can be used by criminals for purposes connected with financial crime, including money laundering, fraud and terrorist financing.
In addition, UK legislation requires all financial businesses to comply with rules to prevent money laundering and terrorist financing. International industry bodies such as the Joint Money Laundering Steering Group (JMLSG) provide guidance on compliance with the legislation.
Money Laundering (ML)
ML is the process by which criminals attempt to conceal the proceeds of criminal activity. The ability to launder the proceeds of criminal activity through the financial systems of the world is vital to the success of criminal operations.
Although money laundering is often associated with drug trafficking, it applies to the proceeds of all types of crime, including corruption, fraud, tax evasion and organised crime, irrespective of where the crime was committed.
It includes handling the proceeds of crime such as fraud, theft or tax evasion, banking or investing proceeds (known as ‘placement’), withdrawing or reinvesting them in a series of transactions (known as ‘layering’), and mingling them with other funds such as the proceeds of a legitimate business, in order to hide the true origin of the funds and turn the money into a legitimate asset (known as ‘integration’).
Such activities are often characterised by: fabrication of records, or lack of appropriate records; frequent transactions with no obvious purpose; cash transactions; overly complex ownership or business structures; payments to, or from, apparently unconnected sources.
The use of the money to finance terrorism is another activity in which financial institutions may unwittingly become involved. Whilst terrorist financing may not be from illegal or criminal activity (the fund raising may be from fully legitimate sources) – fund raising for terrorist activities is itself illegal.
The ‘Core Financial Crime Programme’, will focus on the anti-money laundering, countering terrorist finance (AML/CTF) and financial sanctions risks of a group of the highest impact banks in the UK. The FCA says:
“The FCA now propose to include anti-bribery and corruption (ABC) risks in this programme from the middle of next year. We have piloted the programme successfully, and it will now be rolled out across the group of banks selected. Continuing with our intensive and intrusive approach to supervision, we will be focusing on the inherent risks in each bank’s business model. Once we have undertaken an initial assessment of each bank, we expect there to be a four-year rolling cycle for the programme, where each institution will have two business units, plus any associated central functions, examined at each cycle. The programme will help the FSA, and in future the FCA, to carry out its financial crime mandate effectively; and assist us in assessing regulated firms’ compliance with UK legislation on AML, wire transfers, terrorist finance, sanctions regimes, and bribery and corruption.”
The UK Legislation governing the prevention of financial crime includes:-
Proceeds of Crime Act 2002
Terrorism Act 2000 (as amended by the Anti–terrorism, Crime and Security Act 2001)
Money Laundering Regulations 2007 (amended 2012)
Counter Terrorism Act 2008
The 4TH EU Directive