Strengthening the UK’s approach to anti-money laundering (AML) is cited as one of the key areas of work for the FCA in its annual report 2017-18 published this week.

Financial Crime and Anti-Money Laundering is one of the FCA’s cross-sector priorities. In looking back over the year in terms of key priorities the report confirms that: “Our aim is to make the UK financial markets hostile for criminals. We also want to ensure the UK’s financial system is resilient against their activities and a safer place for customers.”

The report sets out how the size and global nature of the UK financial industry mean that both money laundering, and the criminality that requires money to be laundered present “significant risks to the UK and undermine the integrity of the UK financial system”. To that end a separate report on the FCA’s Anti-Money Laundering work for this period is presented.

Financial crime cannot have a home here

The Anti-Money Laundering report reminds us that money laundering harms society by enabling criminal activity and can affect the reputation of the UK financial system. The FCA sets out that the safeguards in place to prevent financial crime are designed to make the UK and the financial services sector “a hostile place for criminals, a safe place for consumers, and ensure we meet latest international standards.”

2017-18: an overhaul of the UK’s AML regime

The report highlights some of the areas where the UK’s approach to AML has been strengthened this year, including:

  • The overhaul of the UK’s AML regime via the Money Laundering Regulations 2017 implementing the EU Fourth Money Laundering Directive – including FCA Guidance on Politically Exposed Persons (PEPs).
  • The overarching supervisor of supervisors housed in the FCA the Office for Professional Body Anti-Money Laundering Supervision (OPBAS). The report confirms that OPBAS is designed to ensure a robust and consistently high standard of AML supervision across the legal and accountancy sectors.
  • Exploring how technology can help firms comply with their obligations to detect and prevent money laundering and how it is engaging with the financial technology sector.
  • Financial Crime Data Return.

A risk based approach

A risk-based approach promulgated under the Fourth Money Laundering Directive is a key theme for this year. The report confirms that: “we continue to take a risk-based approach to AML supervision. We keep our approach under continuous review to ensure we target our resources most effectively on the firms and sectors that present the highest money laundering risk.”

That said though, the report confirms that good AML standards are expected “in all the firms we supervise”.

At a supervisory level, in terms of OPBAS, the report confirms that introductory visits to the Professional Body Supervisors (PBS) have been conducted with an initial round of visits to all PBSs to assess their approach to supervision. “Action will be taken where we find weaknesses”. What comes next is a risk-based approach with the FCA: “focusing our time and resources where there is the most potential for harm.

Close co-operation

The report confirms that the FCA continues to collaborate with law enforcement agencies, Government and other regulators to support investigations, develop operational and strategic analysis, and identify risk in relation to money laundering. (See our related blogs).

Though there is no specific reference to Brexit in the money laundering report the FCA confirms it works closely with international partners to “build our knowledge of key money laundering threats and increase our understanding of different national responses.” A major speech on preparing for Brexit – “The FCA’s approach to Brexit: our preparations and our vision for the future” - was delivered on the same day and the Annual Report cites preparing for EU Withdrawal as the first of its key areas of work for the year.

Significant improvements in AML controls – though more work to do

The Anti-Money Laundering report identifies the “Systematic AML Programme (SAMLP)” as a key tool for the FCA’s “proactive firm-specific supervision work.” The SAMLP, launched in 2012, is a programme of scrutiny of 14 major retail and investment banks operating in the UK. It also includes those overseas operations which have higher risk business models or are strategically important.

Through this programme the FCA can assess how individual firms’ financial crime controls have changed, what improvements they have made and how they are implementing them.

The report confirms that “overall we found that firms have made significant improvements in their AML controls since our first visits”. Whilst changes to their control structures are recent “they are well designed”. Where control structures have been implemented “firms are identifying and mitigating risks effectively”.

Some weaknesses were identified including client risk assessments - which considered only a limited number of factors - which could result in inadequate risk-based due diligence and monitoring. A further trend identified was that firms appeared to be focused on their AML controls to the detriment of other frameworks such that relate to anti-bribery and corruption. The report states that “we made clear to them that they must ensure they manage and mitigate all their financial crime risks at all times”.

Overall the conclusion drawn was that some firms have more work to do to comply fully with the changes in the MLRs 2017 and that “we expect firms to assess the impact on their business of any regulatory or legal changes and implement the necessary changes in a reasonable timeframe.”

AML investigation and enforcement

The FCA confirms that it is currently investigating “around 75 firms and individuals for AML issues.” Many of these investigations are using both civil and criminal powers under the Financial Services & Markets Act and the MLRs 2017. The report sets out how the recent increase in the number of AML investigations “represents a change in our overall approach to opening investigations earlier and more quickly where we suspect serious misconduct.

It will be interesting to monitor the outcome of these investigations as to date there have been no published criminal outcomes or criminal prosecutions resulting from a use of the powers under the MLR 2017 despite continued talk of the FCA using its criminal powers to address AML systems and controls failings. (See our related blog).

The year to come

Despite the seemingly low level of enforcement action in relation to AML in the last year firms and individuals should not rest easy. The FCA confirms that over the next year improving the UK’s defences against money launderers will be one of its key priorities. “From what we see of developments around the world, this will continue to be a complex and difficult task”.