The Importance of Purposeful Anti-Money Laundering Controls

Mark Steward, Executive Director of Enforcement and Market Oversight at the Financial Conduct Authority (“FCA”), has recently discussed the importance of purposeful anti-money laundering (“AML”) controls as well as the recent actions taken by the FCA. The key priorities of the FCA remain detection, investigation and prosecution where necessary.

Two of the biggest sanctions imposed by the FCA in the last 12 months were due to failures in addressing financial crime and anti-money laundering risks. There are currently 42 investigations ongoing into suspect firms and, in the last 12 months, the FCA has increased its surveillance of the growing number of online investment promotions targeting retail clients.

Recently the FCA commenced with its first criminal proceeding against a bank (NatWest) under the Money Laundering Regulations 2007. The FCA alleges that NatWest failed to adhere to requirements within the regulation put in place to prevent money laundering. System and control failures affect how suspicious activity is identified; this, in turn, can provide invisible, illicit cover for criminal activity that affects the wider community.

Recent Action taken by the FCA

In recent times, the FCA has taken action against Commerzbank AG’s London branch, with a fine of £37.8 million being imposed. For over 5 years the bank failed to demonstrate effective policies and procedures to identify, assess, monitor and manage money laundering risks. More specifically, it was found that there were no clear processes or criteria for identifying risks associated with Politically Exposed Persons (“PEPs”), nor was there a clear process for terminating customer relationships. In addition, there was a significant backlog in the conducting of Client Due Diligence (“CDD”) Checks prior to onboarding new clients. These failings resulted in additional issues due to automated systems lacking up to date relevant information which meant that they became less reliable and effective.

In the second case, together with the PRA, the FCA imposed a fine of £96.6 million on Goldman Sachs in relation to three bond transactions which Goldman Sachs arranged for 1MDB, a Malaysian state-owned entity associated with serious embezzlement allegations. Throughout the transaction process, Goldman Sachs failed to assess and explore easily recognisable red flags. This meant significant reputational and financial crime risks were effectively ignored and not considered properly in the approval process. A significant failure, in this case, involved the absence of proper record keeping of personal identification, management information and assessment of the risks involved in the transaction.

Consequences of a poor AML Process

Both cases demonstrate the importance and challenge of maintaining effective systems and controls. Yet, there is a balance that needs to be kept, as at Laven we have also witnessed systems that have become overly complicated. This can similarly leave companies vulnerable as complex systems are hard to maintain and staff may lose a sense of why these systems are needed.

Click here if you’d like to speak to Laven about your AML policies and how they can be improved.

Emerging AML Risks

The FCA has also issued alerts on its Warning List concerning over 1,000 firms, an increase of over 100% since 2019. The Warning List is designed to prevent retail clients from dealing with firms that present themselves as legitimate financial institutions but are either not authorised by the FCA or are a scam. The FCA has stated that they would like to see the Warning List be actively used, not only by retail clients but also by authorised firms.

AML considerations for Cryptocurrency firms

Since 10 January 2021, the FCA has become the AML supervisor of cryptocurrency firms. These firms are required to be registered with the FCA and to comply with the Money Laundering Regulations. The FCA has also developed a version of the Warning List, called the Unregistered Cryptocurrency Businesses List, which aims to be used in the same way as the Warning List by retail clients.

In summary, the FCA has made it clear that the aim of AML regulation is not to catch anyone out, but to set high standards to maintain the integrity of the financial system and to encourage participants in the system to behave as custodians and guardians of the public interest in preventing money laundering.

Laven Consultants are specialists in Cryptocompliance; click here to find out more about how we can help implement robust AML policies in the light of increased regulatory scrutiny.

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