The Financial Conduct Authority (FCA) has recently conducted a thorough review of Payment Account Providers and their systems and controls against money mules uncovering good practices. The FCA has also identified areas of interest that require enhancement.
Money mules have emerged as an essential part of counterfeit schemes, enabling offenders to launder the proceeds of their illegal activities. The review is part of a broader attempt to tackle this matter and safeguard the financial industry and the wider public.
The FCA review uncovered several issues with the use of money mules and found that they are often exploited by organised crime groups. According to the review, money mules were often recruited without their knowledge or consent and granted very low levels of financial compensation.
What is a money mule?
There are two types of money mules, which can be categorised into:
1. Unknowingly involved money mules:
Individuals who are deceived by fraudsters into engaging in illegal transactions. They typically believe they are working for a legitimate company or helping someone in need and are unaware of the true nature of their involvement.
2. Knowingly involved money mules:
These individuals knowingly help criminals quietly move money across borders. A money mule may be someone who simply helps move money between two accounts, or someone who helps launder money or otherwise commit fraud. These people often enjoy financial gain or benefits from their involvement in criminal activity.
What are the FCA's key findings from the 'detecting & preventing money mules' review?
Systems & controls:
Some firms are using technology to identify risk associated with money mules, using a risk-based approach to detect and prevent fraud. These technologies include facial recognition, device profiling, and geolocation which can flag suspicious activities, enabling firms to identify potential money mules. A combination of machine learning and tactical rules can provide a robust anti-fraud system.
Data sharing & intelligence:
Many businesses are using data sharing initiatives to combat money mule activities. These collaborative efforts with law enforcement agencies and data sharing initiatives have improved the detection and prevention of these activities. These external bodies include CIFAS, UK Finance, NECC and Fintech FinCrime Exchange. This allows firms to be able to share their findings and their preventative measures to mitigate a specific fraud typology.
To reduce the risk of financial crime and fraud, a business should train its staff on the various types of fraud and the prevention techniques. Additionally, the business should have a process in place to report any suspected fraud or theft.
What are the FCA's areas for improvement from the 'detecting and preventing money mules' review?
Governance & risk assessment:
Firms with a higher number of reported mule accounts often lack senior management oversight and fail to report Management Information (MI) to address the risk effectively. Involvement of senior management is crucial for regulatory compliance and customer trust.
Some firms rely on subsequent monitoring to detect potential money mule-related activities, while others conduct fewer checks during customer onboarding. Robust controls during onboarding are necessary to detect potential red flags and money mules. Capturing additional information during onboarding, such as salary or turnover details, can help reduce transaction monitoring alerts.
Inbound monitoring can help identify unusual transaction patterns and account behaviour changes, common characteristics of money mule behaviour. Firms should consider adopting systems like device profiling, geolocation, and behavioural biometrics learning machine to disrupt money mule networks effectively.
Firms must report money mule activity promptly through relevant reporting systems, such as the National Fraud Database. Timely reporting is crucial for disrupting and closing mule networks. Receiving firms must act on alerts from notifying institutions swiftly and raise Suspicious Activity Reports (SARs) as necessary to help law enforcement investigate and prosecute criminals.
Some firms would benefit from dedicated resources for actively investigating money mule activities. This ensures timely detection, monitoring, and reporting.
Communication and awareness:
Firms should improve their communication strategies and awareness initiatives to educate customers about the risks associated with money mule activities. Public awareness is vital in combating financial crime and protecting consumers.
What firms does the 'detecting & preventing money mules' review apply to?
- Payment service providers
- Electronic money institutions
- Building Societies
- Payment Firms
Which staff within the above firms does the 'Detecting and preventing money mules' review apply to?
- Money Laundering Reporting Officers (MLROs)
- Senior AML analysts
- Senior Fraud Specialists
- Senior Fraud Investigators.
- Financial Crime Analysts
- Fraud and Transaction Monitoring Analysts
How can Newgate Compliance can help?
Newgate has a dedicated financial crime team that can assist your firm with reviewing your onboarding and KYC processes and can provide a brief audit to assess how your firm mitigates against financial crime.
Newgate is regularly appointed for financial crime reviews in the UK and can provide support on regulatory and operational issues faced by a range of investment firms within the financial services industry.
For more information on the services provided by Newgate Compliance, Joe French, Managing Director and Toby Dyke, Senior Compliance Consultant will be attending The Finance Magnates London Summit between 20-22 November 2023.
About the authors | Meet our compliance experts
Joe French, Managing Director – Newgate Compliance
Joe heads up the team providing compliance advisory services to a broad range of authorised and licensed clients globally. Joe began his career working for the Royal Bank of Scotland in a variety of back office operational roles before moving to the Financial Services Authority in early 2001 where he spent a number of years working within the pensions review team.
An accredited Counter Fraud Specialist, Joe has an in-depth knowledge of Anti-Money Laundering and Counter-Fraud frameworks having subsequently spent 14 years working in the Law Enforcement arm of HM Revenue & Customs (HMRC). While with HMRC, Joe held a number of senior positions leading numerous large-scale complex; fraud, cybercrime and money laundering investigations both nationally and internationally.
Joe's experience has helped build a strong understanding on the practical requirements firms need to have in place to guard against being used for financial crime. He also has detailed knowledge of implementing regulatory frameworks for clients inducing AIFMD, MIFID II, MAR, SMCR, GDPR, MIFPRD and a variety of money laundering directives.
Toby Dyke, Senior Compliance Consultant – Newgate Compliance
Toby has 13 years' experience in the foreign exchange industry, building up a book of over 300 clients as a private client dealer at a large foreign exchange broker. Furthermore, Toby then moved into the non-deliverable industry as a Compliance officer at various brokers, building up a wealth of experience in client onboarding, know your client (KYC), Anti-Money Laundering (AML) and transaction monitoring, upholding standards to ensure compliance with FCA requirements.
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.