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Harry Cassin
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Richard L. Cassin
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Elizabeth K. Spahn
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Cody Worthington
Contributing Editor

Julie DiMauro
Contributing Editor

Thomas Fox
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Marc Alain Bohn
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Bill Waite
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Shruti J. Shah
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Russell A. Stamets
Contributing Editor

Richard Bistrong
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Eric Carlson
Contributing Editor

UK Enforcement: FCA data reveals AML supervision risks

As we approach the anniversary of the Financial Conduct Authority’s first published set of aggregated results, it’s a good time to review what that means for risk managers across the UK and Europe.

Based on its annual financial crime survey (pdf) of over 2,000 firms, firms may find the insights helpful as the data enables a comparison of their own management information against industry-wide trends and averages reported in the survey. Since December 31, 2016, the FCA has required over 2,000 firms subject to the UK Money Laundering Regulations, including all UK banks and building societies, to submit an annual financial crime data return.

The report identified that the respondent firms had a customer base of approximately 549 million relationships in total. Of these 120,000 involved politically exposed persons (PEPs), just 0.02 percent of total customers, with 1.6 million other “high-risk customers” (an overall share of 0.29 percent of total customers). While these percentages may be a small share of overall relationships their importance should not be underestimated.

It is possible that the FCA could use this industry-wide data to target firms for additional supervision in terms of AML controls. For instance, the FCA could focus on an individual firm with high-risk or PEP customer shares exceeding these industry-wide averages, such as Wealth management firms or, on the other hand, target those falling significantly below what might be expected for a firm of that size (and therefore potentially evidencing inadequate identification of high-risk customers). Adequate identification and management of high-risk customers has remained a key focus in the FCA’s 2017/18 annual report. Enforcement activity taken in June 2018 against  is just one example.

The challenge then is one of multiple layers. As well as ensuring a culture of compliance there is the need to carefully apply budgets and resources to the high volume of clients and transactions that may become an issue as well as the high risk clients that need closer supervision.

The Money Laundering Reporting Officers within the surveyed firms handled 923,000 internally escalated suspicious cases in the 12-month reporting period. Following investigations, 363,000 suspicious activity reports (almost 40 percent) were then filed externally by firms with the UK National Crime Agency (the NCA), together with over 2,100 terrorism-related suspicious activity reports. Only a small percentage (approximately one percent) of SARs filed with the NCA resulted in the NCA taking enforcement action.

This perhaps indicates “over reporting” within the sector but the OECD has criticized the UK for the low level of corruption enforcement activity resulting from the current SARs regime. Given the large volume of SARs filed on a daily basis, and many being of “low quality,” investigation authorities face a challenge in detecting where the real risks lie.

In relation to country risk, the top five countries most often classified as “high risk” by surveyed firms based on the risk of financial crime were Iran, Panama and Russia, Iraq and Laos. The FCA emphasized that the industry rankings of country risk based on the survey results do not reflect the FCA’s views given that some firms may not have performed a risk assessment of certain jurisdictions. Despite this caveat, when viewed alongside other publicly available indexes such as Transparency International’s Corruption Perceptions Index, firms may find this useful guidance on the general views taken by their peers on country risk.

Rogue customers are perceived to be the principal perpetrators of crimes such as application fraud, insurance fraud, mortgage fraud and loan repayment fraud. Employees are similarly believed to be behind most expenses fraud and situations where fraud results from a person abusing a position of trust.

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