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PEPs and EDD: Charlotte Hill on the FCA’s annual AML report

The UK’s Financial Conduct Authority issued its second anti-money laundering annual report in July, emphasizing obligation to prevent financial crime and enhance AML systems and controls in specific ways.

I spoke to Charlotte Hill, a partner in Covington Burling’s London office, and a former lawyer in the enforcement department of FCA’s predecessor, IMRO.

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JD: The FCA’s focus in its rules and guidance as outlined in the report is on a financial firm’s customers, vendors, suppliers — or some mix of the three? The entities with whom firms are dealing can vary quite a bit, depending on the nature of the business, I would think.

CH: The FCA’s focus is on firms’ financial business customers, not vendors or suppliers. In particular, it is concerned that some firms are neglecting their obligations with regard to customers who are Politically Exposed Persons (PEPs). Those are the customers who may require Enhanced Due Diligence (EDD) before they can become customers.

In some cases, due to the nature or circumstances of the customer or the jurisdiction they come from, the EDD requirements can be almost impossible to fulfill. This sometimes leads to firms “dropping” such customers — an outcome the FCA has stressed is undesirable, as it deprives those customers from access to financial services.

JD: What can a firm do to make sure it has sufficient AML systems and controls to make sure it can cover itself when dealing with these more risky customers?

CH: Firms are required to take a “risk-based approach” — developing the systems, controls and processes that meets the needs of its business and the level of risk it must mitigate. A small, low-risk firm can just have one Money Laundering Reporting Officer (MLRO) dealing with all of the AML and financial crime matters. But a global bank will have teams of people, each of whom specializes in just one aspect of risk and its mitigation,

Most firms are well-aware of the need to have strong, well-resourced AML and financial crime systems, controls and procedures. Problems tend to arise because of the sheer size of organizations, their global reach and the impossibility in many cases of being able to fulfill the customer take-on procedures in relation to PEPs and customers requiring EDD.

JD: What are the MLRO’s obligations — and other senior executives’ duties — in making sure their firms are keeping pace with these these rules and guidelines?

CH: The MLRO has to have sufficient influence to ensure compliance in his or her firm, and that generally means seniority within the organization. A senior manager in the role can ensure there is a formal training program for all staff, committees dedicated to AML and strict board-reporting requirements.

Apart form the problems I mentioned regarding PEPs and EDD customers, problems also arise in firms with poor culture and bad corporate governance.

What the FCA calls the “tone from the top” is vitally important in ensuring corporate-wide compliance.

The FCA is also going to be more proactive. It is introducing what it calls the “new supervisory approach” to firms that present a higher risk of money laundering and financial crime. The FCA will introduce a tiering or grading system for all firms, according to money laundering risk, and those graded in the higher risk categories will receive the most intensive scrutiny and intervention.

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The FCA’s 2013/14 Anti-Money Laundering Annual Report is here.


Julie DiMauro is the executive editor of FCPA Blog and can be reached here.

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