Financial Crime, the hottest trend in FCA enforcement?
The start of a new year is a good opportunity to look back and take stock of the FCA’s activity.
Now that January is behind us and the days are starting to get longer, we have looked back at the fines the FCA has imposed during the period from 2019 through 2022 inclusive and the shots the FCA has fired during the first month of 2023.
FCA fines – trends
In terms of overall amounts of fines involved, there is no clear trend, the total annual level of fines has varied significantly:
|Year||Total FCA Fines imposed|
Other than 2020, in most of the years we looked at, a significant proportion of the fines related to financial crime and anti-money laundering (“AML”) failures:
|Year||Fines related to Financial Crime/AML||Percentage of total FCA Fines imposed|
Financial crime and AML failures look set to continue to be an area of focus for FCA enforcement action and look like they could account for a substantial proportion of FCA fines in 2023. In January 2023, the FCA imposed two fines, which together totalled £11,695,400. Both fines related to financial crime/AML failures:
- A fine of £7,671,800 imposed on Guaranty Trust Bank (UK) Limited; and
- A fine of £4,023,600 imposed on Al Rayan Bank PLC.
Enforcement cases – common themes
We have reviewed the Final Notices the FCA published in respect of its financial crime/AML enforcement actions in 2022 and 2023 – 9 cases in total. Our aim was to see if we could identify any common themes that might assist firms in identifying particular aspects of their financial crime/AML systems and controls that might be particularly vulnerable to FCA scrutiny and potential criticism.
Some of the common themes we identified included:
- Failures of systems and controls continued over extended periods of time (often years) and in some cases, firms committed repeat offences despite previous intervention by the FCA or issues or systemic ‘red flags’ being identified by internal compliance functions.
For instance, in the case of Al Rayan Bank PLC (January 2023), the bank had identified cash transactions as a particular risk area but the FCA found that the bank failed to establish, implement and maintain appropriate and risk-sensitive policies and procedures in relation to handling and treatment of cash deposits, including whether they should be accepted or rejected if adequate information was not provided regarding source of funds.
- Continuing failures to implement external expert and, in some cases, FCA recommendations to improve financial crime and AML controls.
For instance, in case of Santander UK Plc (December 2022), the FCA found that Santander was aware of the deficiencies in its AML framework in December 2012 and, whilst some improvements were made, deficiencies remained until October 2017.
- Failures by firms to obtain sufficient information or understanding to enable them to effectively identify or manage risks associated with client relationships and transactions.
- Failures to properly scrutinise and, where appropriate, challenge information provided by clients, particularly in the context of customer due diligence, which meant that firms did not always have a proper understanding of the purpose of their business relationship with clients.
- Failures in relation to acquiring and scrutinising information seem to have been particularly acute in respect of offshore clients with complex ownership structures.
- Lack of ongoing monitoring of client information and financial crime and money laundering risk during the life of client relationships.
- Failures by firms to comply with and implement their own financial crime and AML policies and procedures with due skill, care and diligence.
- Failures of systems and controls in respect of relationships with third parties, in particular introducers.
- Inadequate training of staff on financial crime and AML requirements, in particular, inadequacies in terms of operational staff understanding of the AML regime and enhanced due diligence requirements.
- Delays in notifying the FCA of concerns identified, which is a breach of the FCA’s Principle 11.
An example of this failure is seen in Julius Baer International Limited (February 2022) in which the FCA identified a nineteen-month delay in the firm notifying the regulator of financial crime and AML breaches in circumstances where the firm possessed sufficient information to establish that a serious fraud might have been committed against its clients.
What does this mean for FCA-regulated firms?
Financial crime and AML failures have been and continue to be a particular area of focus for the FCA. In its 2022/23 business plan, the FCA identified “reducing and preventing financial crime” as one of its commitments within its “Reducing and preventing serious harm” area of focus.
It is important, therefore, that firms ensure not only that they are satisfied their financial crime and AML systems and controls are robust but that their workforce, in particular operational and customer-facing staff, understand the importance of financial crime and AML and that all staff are adequately trained to effectively implement the firm’s systems and controls. It is not enough to simply be able to point to comprehensive policy and guidance documents and shiny KYC software packages, firms must be able to demonstrate to the FCA that staff properly understand policy and guidance and that all available financial crime prevention and AML tools are being properly and effectively utilised.
One of the most striking themes we have seen is the failure of firms to act to improve and strengthen financial crime and AML systems and controls when issues and weaknesses have been identified (even when identified by the regulator itself!) We strongly recommend boards have effective oversight of their firm’s financial crime and AML processes and that board packs and management information should routinely include information concerning the operation of such processes and compliance with policies and guidance. Where material concerns or weaknesses in financial crime and AML processes are identified (whether by internal compliance functions during routine checks/supervision, as the result of incidents or if flagged by external parties (including the regulator)), firms should have in place clear reporting lines and processes to ensure such issues are rapidly escalated to board level and that adequate steps are taken quickly to address weaknesses and resolve issues.
The final area where firms seemed to have a particular blind spot was ongoing monitoring of financial crime and money laundering risk in the context of continuing client relationships. It is crucial that firms ensure staff are trained and understand when they should re-evaluate the risk presented by an existing client – such as sudden/unexplained/unexpected changes in a client’s transactional activity, individual transactions that do not seem to have a clear commercial purpose or sudden and unexplained increases in client wealth. This should be an “easy win” for firms as this is one area of financial crime and AML that is very much “common sense”.
How can our financial services team help?
The Freeths Financial Services Regulation team has extensive experience of advising FCA-authorised firms on their financial crime and AML responsibilities and regularly provides assistance in drafting and reviewing policies and procedures. The team also supports clients with staff training on financial crime and AML.
If you have any concerns about your firm’s financial crime or AML compliance and you would like to discuss how improvements might be made, please do not hesitate to contact Adam Edwards, Daniel Meyer or Daniel Seely for a confidential no-obligation discussion to review what support we can give you.
The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.
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