In the first anti-money laundering annual report published by the FCA yesterday, the FCA has concluded that the level of anti-money laundering compliance in financial services firms is a "serious concern".
The report explains the FCA's obligations relating to anti-money laundering, its approach to carrying out those obligations and current and emerging trends in relation to those firms which it regulates. The report focuses on money laundering, financial sanctions breaches and terrorist financing.
The FCA is due to publish a review of anti-money laundering and anti-bribery and corruption controls in asset management firms later this summer.
I set out below a summary of the FCA's key findings:
Sources of financial crime
The most important financial crime risks come from money laundering, breach of the UK's and other countries' financial sanctions, terrorist financing, investment fraud (boiler rooms and similar frauds) and bribery and corruption.
FCA's approach to anti-money laundering
The FCA aims to be proactive in solving any problems it finds. It concentrates on identifying current and emerging financial crime risks and ensuring firms are aware of their implications and how to mitigate them. This means the FCA can ensure firms maintain and enhance their systems and controls against financial crime.
No different to its general approach, the FCA states its approach is intensive and intrusive with an emphasis on early intervention and credible deterrence where serious risks are identified.
Levels of compliance, current trends and emerging risks
The FCA's findings based on its thematic review in 2011 include:
- failing to manage the risk effectively (accepting very high levels of money laundering risk if the immediate reputational and regulatory risks are acceptable);
- failing to apply meaningful enhanced due diligence measures in higher risk situations and so failing to identify or record adverse information about the customer;
- failing to put effective measures in place to identify customers as politically exposed persons;
- failing to establish the legitimacy of the source of wealth and the source of funds to be used in the business relationship;
- inadequate safeguards to mitigate conflicts of interests;
- no clear policy or procedures and risk assessment for trade-based money laundering risks; and
- failing to implement adequate controls to identify potentially suspicious transactions.
The FCA highlights the root cause of these problems is often a failure in governance of money laundering risk which leads to inadequate anti-money laundering resources and a lack of assurance work across the firm. The FCA states it is essential that senior management set the right tone from the top otherwise an effective anti-money laundering regime will not be embedded.
The FCA's Enforcement team is currently investigating three banks in relation to weaknesses in anti-money laundering controls.
The FCA highlights that emerging risks arising directly in FCA-authorised firms include in relation to: (i) the e-money sector: and (ii) cybercrime.
What does this mean for insurers?
Whilst the Money Laundering Regulations 2007 do not apply to most Lloyd's Managing Agents and general insurers, they are required to take reasonable care to establish and maintain effective systems and controls to counter the risk that they might be used to further financial crime. This includes ensuring their systems and controls: (i) enable them to identify, assess, monitor and manage the risk that they will be used to further money laundering; and (ii) are comprehensive and proportionate to the nature, scale and complexity of their activities.
For insurers and Lloyd's Managing Agents (currently subject to a review by Lloyd's in relation to sanctions and financial crime compliance), the findings of this report, albeit largely in relation to the banking sector, provide a good indication of the types of issues which they should consider when assessing the adequacy of their systems and controls.