Expert Opinion: financial crime

Jemma Urquhart from financial services regulatory consultancy, Bovill, discusses the findings of the FCA’s thematic review of anti-money laundering responsibilities. The level of Anti-Money Laundering compliance is a serious concern to the Regulator.

bovill-logoEach month in our Expert Opinion series we’ll be featuring insights into hot topics in the financial services industry from our clients’ point of view.

This month, Jemma Urquhart from financial services regulatory consultancy Bovill, discusses the findings of the FCA’s thematic review of anti-money laundering responsibilities.

AML: Fresh Focus on Financial Crime

handful with coins in the palm of handsIn July 2013 the FCA published its first annual report explaining the new Regulator’s responsibilities on Anti-Money Laundering (AML), their approach to carrying out AML duties, and the current and emerging trends they have observed within regulated firms.

The most important risks that financial crime poses to the FCA’s objectives are money laundering, financial sanctions breaches and terrorist financing, hence these are the key areas of focus for the annual report.

FCA thematic review findings

High-level findings from the 2011 thematic review of banks’ management of high money laundering risk and the recent publication of the thematic review of banks’ control of financial crime risks in trade finance are outlined within the report (as summarised below), concluding that “the level of AML compliance in financial services firms is of serious concern to the Regulator”.

2011 thematic review of banks’ management of high money laundering risk 2013 thematic review of banks’ control of financial crime risks in trade finance
Money Laundering Risk
  • Three quarters of the banks reviewed, including a large number of major banks, were not managing this risk effectively.
  • Most banks, including a number of major UK banks, were not giving adequate attention to money laundering red flags in trade finance transactions.
  • There was an inconsistent approach to risk assessment and only a few banks had conducted specific trade finance money laundering risk assessment.
Customer Due Diligence & Enhanced Due Diligence (EDD)
  • Over half of the banks the Regulator visited failed to apply meaningful EDD measures in higher risk situations and so failed to identify or record adverse information about the customer or the customer’s beneficial owner.
  • Around one third of the banks visited dismissed serious allegations about their customers without adequate review.
  • More than a third of the banks visited failed to put effective measures in place to identify customers as Politically Exposed Persons (PEPs).
  • Trade processing staff in most banks made inadequate use of customer due diligence information gathered by relationship managers or trade sales teams.
AML Judgements
  • At more than a quarter of banks visited, relationship managers appeared to be too close to the customer to take an objective view of the business relationship. Many were primarily rewarded on the basis of profit and new business, regardless of their AML performance.
  • Poor quality assurance work often focuses on whether processes have been followed rather than the substance of whether good AML judgements have been made.
Policy & Procedure
  • Three quarters of the banks visited failed to take adequate measures to establish the legitimacy of source of wealth or funds to be used in the business relationship.
  • Around half of the banks had no clear policy or procedures document for dealing with trade-based money laundering risks. As a result, some banks failed to implement adequate controls to identify potentially suspicious transactions.

What does this mean for firms?

The findings from the thematic work demonstrate that similar AML themes continue to be replayed despite an elapsed 2 year period between the thematic reviews. This indicates that there is likely to be continued, specific focus for firms on the following areas to meet current and future regulatory requirements:

  • Governance: The FCA notes within the annual report that “the root cause of the problems is often a failure in governance of money laundering risk, which leads, among other things  to inadequate AML resources and a lack of (or poor quality) assurance work across the firm”.Firms must have a defined governance structure with senior management who monitor and manage effectively the risks in their business, including an MLRO who is FCA approved and has responsibility for the firm’s AML systems and controls.Furthermore, adequate resourcing levels within the firm are required to address the money laundering risks, with absolute clarity of staff roles and responsibilities and an appropriate remuneration/reward structure for relationship managers which takes account of any failings related to AML compliance.
  • Risk assessment: There is a continued focus on identifying whether firms have a clear understanding of the real risks within their business, that they have articulated these as part of an enterprise-wide AML and sanctions risk assessment, and that their current AML and sanctions policies and procedures are in line with this risk profile.
  • Handling higher-risk situations – EDD: There is continued focus on ensuring that the firm has carried out EDD measures in higher risk situations. In particular, high risk customers and PEPs are described as a “serious and persistent problem in firms of all sizes” within the annual report. Collecting and providing proper assessment of customer information (e.g. establishing and corroborating high risk customers’ source of wealth or funds) is an important process in determining any exposure to money laundering risk.Furthermore, providing appropriate enhanced ongoing monitoring for these higher risk situations.
  • Assurance: Ensuring the performance of quality assurance over the financial crime control process. This should include regular, comprehensive and timely independent testing by the firm’s Internal Audit function.

With further thematic findings to be published this autumn from the FCA’s review of asset management firms and further thematic work planned (e-money/new payment methods and follow-up work on AML controls over high risk/PEP customers in smaller banks), it will be interesting to note whether these weaknesses will remain as priority areas of focus.

– Jemma Urquhart, Bovill

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