Enforcement matters

Delegates at City & Financials financial crime conference (March 6 2014) were told that

• Two firms face enforcement action from the Financial Conduct Authority for anti-money laundering failures,
• While the regulator is considering such action against three [3] others.
• Last year the FCA [FSA] made six ‘early interventions’ in banks where it discovered serious weaknesses. The banks were told to remedy problems immediately
• The FCA, previously the Financial Services Authority, has fined a total of nine banks in the past five years for AML failings, and much of the recent focus has been on firms’ handling of PEPs. In 2011 the regulator launched a scathing review of failings in this area.

Governance matters

The FCA is also concerned about the quality of AML compliance across the board and is worried firms are ‘de-risking’ their client bases to avoid proper compliance.

Sharon Campbell, the FCA’s head of financial crime and intelligence, declined to name the firms facing enforcement but stressed the issues were not new.

The regulator is especially concerned with firms’ handling of high-risk customers such as politically exposed persons (PEPs).

• “The thing that surprises me, when it boils down to it, the things we are finding are not new issues…the management of high-risk PEPs is not a new thing,”

Campbell found the failings “depressing” and said in one of the settled cases a firm had an unemployed housewife as a client whose account had more than £1 million flowing through it over a period of time – She said

• “These are basic, simple principles,”.

• “The level of anti-money laundering compliance is a matter of concern.”

• “Some firms are not willing to make tough decisions if profits are at stake,”

Campbell added that some problems were serious and persistent and the regulator was worried the drive for profits was overriding the need to properly check high-risk clients.

It was noted

1. Larger firms tended to collect adequate information about the clients but failed to assess it properly or made poor judgements about the risks involved.
2. Smaller firms often failed to collect enhanced due diligence information,

De-risking

Over the past year or so, many firms, as a result of the big fines imposed in the United States for serious AML failings, have started to quietly drop clients perceived as risky. This has become an issue in the UK and the FCA is concerned, Campbell said.

Somali money service business (MSB) Dahabshiil won an injunction against Barclays, dropping it as a client in November, while HSBC, which was fined a record $1.9 billion in 2012, has jettisoned a number of longstanding embassy clients.

Campbell said ‘de-risking’ only worked if firms understood their risks properly and where they lay.

• “Avoiding risk is not demonstrating that risks are being managed,” she said.

She recognised the risk with MSBs because of the high volumes of cash used in transactions but said not all had poor quality controls.

Firms needed to understand which ones they could trust, she said. The regulator was mindful some firms might use ‘de-risking’ as an excuse to gain market footholds.

• “If firms are taking that ‘de-risking’ strategy because of competition [issues] we will have something to say on it,” she said.

Campbell said firms needed to take account of their risks across all areas, and not just the ones that had been the subject of recent regulatory focus. AML was no longer a back office function.

• “The tone needs to come right from the top of the tree,” she said.