United States: Financial Conduct Authority Publishes Thematic Review Of Asset Management Firms Anti-Money Laundering And Anti-Bribery Controls

Last Updated: December 23 2013
Article by Adam Greaves

The Financial Conduct Authority (FCA) has recently published its findings following a "thematic" review of 22 wealth and asset management firms.  This report follows highly critical reports by the FCA in other industries such as commercial banking and insurance broking on which we at the Bribery Library have blogged previously.

At the beginning of the report the FCA says:

"Tackling financial crime is a key part of our remit, a responsibility we took over from the Financial Services Authority (FSA) in April 2013.  Preventing financial crime is a vital element to achieving our objective of protecting and enhancing the integrity of the UK financial system...our document Financial Crime: A Guide for Firms, gives examples of good and poor practice covering all elements of financial crime.  We want firms to use this document to review these practices, assess them against their own firm and take actions where necessary..."

The FCA reminds us that specific risks will vary depending on the nature, scale and complexity of firms operations and some factors which may increase the risk of money laundering and bribery and corruption include:

  • Non face-to-face business, which can be attractive for money launderers hiding behind stolen or fabricated identities
  • Customers from, or with links to, countries that are considered high risk from a money laundering and/or corruption perspective
  • Wealthy and powerful clients, particularly where they insist on a high degree of confidentiality
  • The use of off-shore trusts and shell companies to distance beneficial owners from their funds
  • High value and/or unexpected transactions
  • Payments or inducements, without a clear business rationale, to third parties

The FCA's review focussed on the adequacy of firms':

  • Anti-money laundering (AML) systems and controls, including account opening, transaction monitoring and suspicious activity reporting to mitigate money laundering risks; and
  • Anti-bribery and corruption (ABC) systems and controls, including the use of business introducers, third party payments and gifts and entertainment arrangements.

The FCA's Findings

Although they found some good examples of money laundering and bribery and corruption risk management, they also found a number of common weaknesses across the firms in their sample of 22 firms.  The FCA states that, taking into account the communications they have already issued on AML and ABC, they had expected the industry to have done more to ensure that they had suitable systems and controls in place.

A summary of their findings is set out below.

  • Most firms had relatively well developed arrangements for the ownership of money laundering and bribery and corruption risks.  However, some firms could not provide evidence to demonstrate the effectiveness of senior management oversight and challenge.
  • AML and ABC issues were dealt with primarily as a compliance matter rather than as part of pro-active risk management.  Failure to properly identify and assess risk often led to weaknesses in customer due diligence and ongoing monitoring of business relationships.
  • Most firms had a comprehensive suite of AML policies and procedures approved by senior management.
  • Some firms had inconsistent or absent controls to assess, classify and record risks posed by new customers, which meant that enhanced due diligence and enhanced ongoing monitoring was sometimes not carried out for high risk customers.
  • There were weaknesses in how most firms acted on the outcomes of risk assessments.  Identified risks were often non-measurable and not actively monitored.  This impacted the extent to which appropriate controls were defined to mitigate those risks.
  • Some firms considered that the long standing nature of some business relationships alone was a satisfactory substitute for keeping customer due diligence information up to date.
  • Some firms failed to take adequate steps to establish, verify and document the legitimacy of the source of funds and source of wealth to be used in business relationships for high risk customers.
  • Most firms failed to demonstrate adequate systems and controls for assessing bribery and corruption risks in relation to dealing with and monitoring third party relationships, such a relationships with agents or introducers.
  • Most firms had well established AML and ABC training initiatives in place setting out relevant AML and ABC rules and regulations.  However the findings call into question the effectiveness of this training.  Firms should develop more "tailored" training material focussing on risks specific to their business.  Most firms had appropriate arrangements to govern training, including monitoring staff completion activity and incentivising staff to adhere to training requirements through performance management protocols.

The FCA's Conclusions

The FCA found that AML controls varied across the sector.  There were areas where some firms understood and met their obligations, and others where improvement was needed.  However, there is still work for most firms to do to ensure bribery and corruption risks are appropriately mitigated.

Given their strong regulatory focus and previous publications on AML and ABC, the FCA state that they expected firms to have taken more action to ensure that their control reduced the risk of money laundering and bribery and corruption.

Their findings were, they say, a particular concern where the firms were part of major financial groups which should have been aware of their expectations.  In some cases, the firms visited by the FCA were from groups that had been subject to previous regulatory attention, but they still found significant weaknesses.

The report, which is not very long, is well worth a read.  Lessons can be learnt for all sectors and all parts of the economy as the observations made are pertinent to every business.  It is interesting to note that even large businesses which are already heavily regulated and successful (i.e. have the resources to spend on compliance) have not got to grips properly with the FCA's rules on AML and ABC compliance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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