The Financial Conduct Authority (FCA) has released their Anti-money laundering (AML) Annual report for 2017/18. This was published alongside the FCA’s Annual Report and Accounts 2017 / 18, Annual Diversity Report, Annual Competition Report and Annual Enforcement Performance Account.
In this year’s AML report, the FCA notes that the size and global nature of the UK financial industry is at significant risk of money laundering. Therefore, financial crime prevention and AML remain key priorities for the regulator. The report also covers recent policy developments, the first year of the Office for Professional Body Anti-Money Laundering Supervision (OPBAS), findings and outcomes from the year’s work and an overview of financial crime data returns.
In 2017, AML legislation was overhauled to implement the EU's Fourth Money Laundering Directive. A policy statement was issued on the 20th of July 2017. The FCA have since consulted on changes to the Financial Crime Guide to address these policy changes, with a response due in August 2018.
Also in 2017, the FCA published guidance on the treatment of politically exposed persons (PEPs). The guidance highlighted that a large number of UK customers would be unlikely to meet the current PEP definition and that UK PEPs should be treated as lower risk in comparison to PEPs from countries with higher levels of corruption.
The regulator is continuing to explore how technology can help with the regulatory obligation to detect and prevent money laundering, such as the TechSprint initiative. An area of interest is how machine learning can identify suspicious activity.
The FCA has worked alongside UK Finance, developing principles to improve communication between banks and their customers when they are unable to offer, or continue offering, banking facilities as a result of ‘de-risking’. UK Finance are expected to publish these principles in late 2018.
In March 2018, assessors were noted to have arrived from the Financial Action Task Force (FATF), the global standard setting body on AML, to review the UK's AML regime. A report on the findings from this review is likely to be published by the end of 2018.
OPBAS was created in 2017 to oversee professional body supervisors (PBS), ensuring that a robust and consistent standard of AML supervision is enacted across the legal and accountancy sectors. On the 1st February 2018, a sourcebook for PBSs was published, setting the expectations for effective AML supervision. An approval process will be established for those who wish to be supervised by OPBAS moving forwards.
The FCA’s approach to AML supervision is a risk-based approach utilising information from the National risk assessment of money laundering and terrorist financing and the financial crime data return.
The FCA has three proactive programmes for AML supervision:
1. Systematic AML programme (SAMLP)
A regular programme to scrutinise 14 major retail and investment banks operating in the UK. Overall, there have been significant improvements for AML since their first visits. However, weaknesses were identified, such as:
- Client risk assessments were only considered on a limited number of factors
- Failure to record the justification of decisions when adopting a risk-based approach
- Limited focus on anti-bribery and corruption (AB&C). It was suggested that many firms had a high focus on AML controls and less focus on their AB&C framework. The FCA highlighted the importance of ensuring that all financial crime risks are managed and mitigated
2. Regular AML inspections of other high-risk firms
The regular AML inspection programme covers other firms that present an inherent risk of money laundering with an aim to visit 150 firms over a four-year cycle. The programme highlighted good senior management engagement, improved AML culture and generally good policies and procedures with firms taking a risk-based approach. The areas of weakness were found to be:
- Deficiencies in AML controls within smaller overseas banks
- Ineffective enhanced due diligence (EDD) combined with poor identification and monitoring of high-risk customers and PEPs
- The design of processes and allocated responsibilities (e.g. customer-facing staff had limited training to help them assess money laundering risks)
The FCA has launched four formal investigations and has appointed skilled person reviews for seven firms in order to assess their systems and controls.
Financial Crime Risk Assurance Programme
This programme is the newest proactive AML supervision programme. The programme includes AML and sanctions visits, as well as 100 desk-based reviews from sectors that pose a lower risk of money laundering.
The FCA has considered nearly 150 referrals with action taken on 7o cases. These have originated from many sources, including whistle-blowers and law enforcement partners.
There are around 75 firms and individuals under investigation for AML issues. Many of these investigations concern the Financial Services and Markets Act and Money Laundering Regulations (MLRs) 2017.
Financial crime data return
Firms that are subject to MLRs 2017 (excluding firms with a revenue of less than £5m) are subject to the financial crime data return requirements.
The data collected forms part of the FCA's AML risk assessment processes and helps to focus on the higher money laundering risk factors. The data already returned continues to be analysed in order to understand how a firm's risk profile changes over time. The data includes vital metrics for 2,000 of the FCA's largest firms, the percentage of internal suspicions and customers' geographic locations.
CONSIDERATIONS FOR FIRMS
AML will remain high on the agenda for the FCA. We have certainly seen enforcement action for systematic AML failings in this past financial year. All firms should ensure that their AML systems and controls are effective at delivering an understanding of customers. Firms that can assess their customers in real-time are able to comply with regulations more easily and, by causing fewer disruptions, enhance their customer’s experience at the same time. However, firms should be cautious not to miss other financial crime regulatory risks, such as AB&C.
Firms should seek to understand the current state of their financial crime compliance programmes to ensure their continued effectiveness given the wave of regulatory and environmental change over the past year. The financial crime landscape will continue to change, so understanding your firm’s strengths and weaknesses is key to maintaining vigilance.