FCA steps up anti-money laundering spot checks

UK watchdog changes fincrime head amid speculation AML spot visits increasing because of critical FATF review

Crime

The UK’s Financial Conduct Authority (FCA) is stepping up its programme of anti-money laundering (AML) compliance spot checks on financial firms, senior lawyers say – a move that may have been prompted by criticisms in a December 2018 review from the Financial Action Task Force (FATF).

The report from the FATF – a supranational body that internationally combats money laundering and terrorist financing through a system of mutual evaluations of member countries – gave the UK a passing grade, but suggested the country’s regulators and law enforcements agencies could do a better job of monitoring compliance at smaller firms, ensuring intelligence is being shared and proactively seeking to prosecute failures.

It has also emerged that the FCA has reshuffled its financial crime unit in recent weeks, with the head of department, Rob Gruppetta – a financial crime veteran with more than two decades’ experience at the regulator – moving into a role overseeing claims management, with his prior role split in two.

Senior lawyers for banks and other financial firms say the FCA has markedly intensified its scrutiny of AML compliance in recent months, including an increase in spot checks – something they attribute to the FATF’s recommendations.

“The FATF report says [UK government taxation department] HMRC and the FCA’s central risk understanding is strong, but they did not demonstrate the ability to develop an accurate picture of risks at the firm-specific level. So they’ve been told to get busy on supervising firms and get a better understanding at the firm level,” says John Binns, a specialist in business crime and money laundering at London-based BCL Solicitors.

Regulatory scrutiny of AML compliance across Europe has increased dramatically following a series of high-profile money laundering incidents last year. Well-publicised scandals at Danske Bank and Nordea, which resulted in hefty fines, as well as levies on the likes of Societe Generale and ING, led to Europe matching the US for AML sanctions during the first three quarters of 2018. The European Banking Authority recently announced it had opened an investigation into the quality of AML supervision at the Estonian and Danish regulators following the Danske revelations.

Gruppetta’s previous role at the FCA is being split between: Clive Gordon, who will be responsible for financial crime supervision; and Jennifer Long, who will oversee the Office for Professional Body AML Supervision and economic crime areas. A spokesperson for the FCA confirms the move, adding that Gruppetta’s reassignment is part of a series of broader management changes.

Founded in January 2018 and housed within the FCA, Opbas is described by the FCA as “a regulator set up by the government to strengthen the UK’s AML supervisory regime and ensure the professional body AML supervisors provide consistently high standards of AML supervision”.

Financial Conduct Authority

The FATF’s report praises the UK for its efforts in tackling money laundering and terrorist financing. But it also urges UK regulators to improve their supervisory efforts by modernising reporting procedures and devoting more resources to sharing financial intelligence.

In particular, the report flags concerns that the FCA could have a limited understanding of the money laundering risks facing smaller UK banks and financial institutions. The FCA is working on the issue, it says, having introduced its proactive AML programme (PAMLP) at the end of 2016, which includes regular two- or three-day spot visits of all firms with more than £5 million ($6.6 million) in revenues.

However, the report flags issues with the systematic use of risk assessments among smaller firms – something the FCA may now be asking firms to rectify during spot checks, lawyers speculate.

“Where weak controls are identified within PAMLP firms, risk assessments continue to be an issue. The limited scope of the PAMLP suggests these issues may be more widespread. The money laundering regulations introduced in June 2017 now contain a clear requirement to undertake risk assessments, and firms [had] until June 2018 to apply these requirements,” says the report.

The FATF is right to identify limitations, says another financial lawyer. “Firms might do a lot of work upfront on ‘know your customer’ and digging into trustee ownership and so on, but they sometimes fall down on ongoing monitoring,” says Ian Mason, partner and head of UK financial services regulation at Gowling WLG, and a former head of department in the enforcement division at the UK’s former Financial Services Authority.

Questions have also been raised by the industry regarding the FCA’s use – or lack of use – of criminal powers. A freedom of information (FOI) request made by Ruth Paley, a financial and regulatory specialist at London-based law firm Eversheds Sutherland, revealed that the FCA had not made a single prosecution for money laundering in the past year.

“Why are the criminal powers not being used?” she asks. “The power to bring prosecutions was, obviously, deliberately written [into the latest money laundering regulations]. The powers are there for a reason. The FOI request raises more questions than it answers.”

Why are the criminal powers not being used? The powers are there for a reason. The freedom of information request raises more questions than it answers

Ruth Paley, Eversheds Sutherland

“The FCA flagged in their 2017 business plan that AML was going to be a priority, including the potential use of their criminal powers to prosecute failings in relation to AML,” notes Michael Ruck, a partner at UK law firm TLT and a former member of the FCA’s enforcement division.

In its section on risk-based supervision, the FATF report argues the FCA “should consider increasing its AML/[combating the financing of terrorism] enforcement activity to bolster the deterrent effect of its sanctions”. The regulator currently has 75 enforcement cases in the pipeline, the report notes. For those cases resulting in sanctions being applied, the report adds, the FCA could consider levying other penalties, such as “business restrictions”.

The report’s strongest criticisms were levelled at the UK Financial Intelligence Unit, the body within the National Crime Agency that processes suspicious activity reports (SARs). SARs are the primary method by which a financial institution can draw regulatory attention to dubious behaviour. Firms are required by the NCA to submit an SAR to the unit as soon as they notice a transaction that suggests money laundering could be taking place.

But, says the report, the system is not working as intended. It concludes that the UKFIU suffers from a dearth of resources, lacking the staff and IT infrastructure to properly deal with the volume of SARs it receives. The report goes on to state that the intended analysis role of the UKFIU, as well as its remit to co-operate with other national financial intelligence units, is not being properly fulfilled as a result. It calls for the human resources available to the UKFIU to be “substantially increased”.

The FATF was established at the Group of Seven summit in 1989, and comprises 38 member jurisdictions, including the US, China, Russia and most of Europe, plus two regional organisations, the European Commission and the Gulf Cooperation Council. Its goal is to internationally combat money laundering and terrorist financing, via the issuance of regular recommendations to its members as well as reviews of their respective regulators. Most recently, the task force issued evaluative reports on the UK and Israel.

Increasingly, regulators are not limiting their anti-money laundering responses to penalties alone, but also offering proactive advice for firms on bolstering their own AML defences. In 2018, regulators in the US encouraged banks to adopt more advanced approaches to suspicious transaction monitoring, including the use of machine learning tools. Gruppetta himself discussed the extent to which artificial intelligence and related tools could be put to use in a 2017 speech.

Editing and additional reporting by Tom Osborn

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