UK financial services firms weigh up legal and practical strategies for AML compliance

Businesses have faced a seemingly continuous stream of guidance, publications, consultations – from the Financial Conduct Authority (FCA), HM Treasury, the Payment Systems Regulator (PSR) and industry bodies – over the past year and they are increasingly seeking advice on issues around anti-money laundering (AML) in the financial sector.

Osborne's Clarke's Contentious Financial Services team recently hosted an invite-only roundtable to discuss, on a "Chatham House" basis, current trends in AML, using the framework of a "worked-example scenario" from the initial "transaction red flag" through to an FCA investigation being initiated.

Key areas of focus

The recent clarity – and in some cases lack of clarity – from the FCA over its expectations of financial services firms emerged as one of four principal areas of focus for UK financial service firms. The regulator is looking to balance its objectives of fighting financial crime and avoiding poor consumer outcomes to comply with the "Consumer Duty".

Another is the practical difficulties when reaching decisions on whether there is evidence of money laundering following a "red flag" being raised, as are the regulatory issues around commercial decisions to de-risk consumers and business.

There is also a desire for insight into the FCA's current approach to enforcement in relation to AML concerns and how firms should react to potential investigations.

FCA expectations

The FCA's expectations for firms remain high and this has been repeatedly emphasised over the past 12 months. That approach has been mirrored by the PSR (not least in its ambitious APP (authorised push payment) fraud reimbursement proposal), HM Treasury, and the creeping scope of the financial sanctions regime.

Recent industry reviews by the FCA have identified a broad range of widespread failings. While the FCA's attention is focused on seeing firms remedy key areas, there are a lot of potential issues that firms need to take into consideration and respond to: not least given the potential tension between the FCA's expectations that robust financial crime mitigation processes are in place and that there are no "poor outcomes" for consumers as a result of the processes being "over-calibrated".

Other areas of focus for the FCA and firms include:

• Appropriate risk assessments – from the level of individual client relationships up to the business-wide risk assessments.
• Senior management ownership – at all stages of compliance, from policy creation to implementation, monitoring, and revision, based on adequate management information and clear reporting lines.
• Continuous review – in response to new products, new classes of customer, or the compliance issues arising on the ground.
• Downstream oversight – the FCA expects firms to have powers in place to make information requests and audit oversight over outsourced third parties and counterparties to ensure that they are able to make enquiries and obtain the information they need.
• T&Cs – the importance of contractually being able to action any changes in risk assessments and appetites.

Practical compliance issues

The large volume of material published each year is often incremental or suggestive, rather than giving a clear statement of key developments or new requirements in a single convenient update. This can make it difficult for firms to ensure that resources are being deployed in a focused and timely manner or that their senior management have the bandwidth to keep on top of all of these developments as they arise – often, understandably, focusing on the current "big issue" rather than the "background noise" of minor adjustments.  Firms feel they are always "running to catch up" with FCA expectations. 

Almost all of the FCA's guidance is on its expectations for firms in terms of setting up their AML systems and controls. There is very little guidance on the FCA's expectations of how firms should respond to a potential instance of money laundering being flagged; in particular, when there is tension between processes and procedures ensuring that there is no risk of facilitating money laundering – usually involving accounts being frozen – and the FCA's expectations that firms should comply with the "Consumer Duty" and avoid "poor customer outcomes" (such as accounts being frozen following false positives or accounts being frozen for too long, while investigations are underway).

Standardisation under the spotlight

One area of discussion was the FCA's resistance to standardised and box-ticking compliance and the need for firms operating internationally to ensure that their compliance processes are tailored to the specific requirements of the UK AML regime.  At the same time, the FCA does not appear to apply a proportionate approach to its views of firm compliance resources, particularly given times of an economic crunch. The FCA is reluctant to provide tailored guidance to firms to assist them in meeting the FCA's expectations. 

Another was the FCA's expectation that firms have powers in place to have oversight on "downstream compliance" including on their own clients' customers (even where there is no obligation under the Money Laundering Regulations to conduct direct due diligence on these customers). Firms sometimes find it difficult to partner with overseas firms, who do not have awareness of the level of compliance required by the UK regime. Where such firms are complying with their own applicable, local requirements, there may be reluctance to achieve the higher standards required in the UK – which may restrict the UK financial market's international competitiveness.

There are also concerns that the FCA is taking a restrictive approach to the adoption of new technologies to drive more efficient compliance processes – particularly around artificial intelligence (AI). While there does need to be a balance between human intervention and technological assistance, a resistance to developments In AI, which could improve the speed, accuracy and cost of compliance, could restrict the UK's competitiveness internationally.

De-risking and account closures

Following the well-publicised closure of a number of high-profile individuals' accounts last year, the FCA conducted a limited review of the market to identify whether there were systemic concerns. That initial review did not raise any particular concerns, but the FCA has been continuing to carry out investigations into the reasons for account closures over the past year, the results of which remain to be seen.

However, there does appear to be a widening gap between the more permissive approach of the English courts to account closures and the more restrictive approach of the FCA and the Financial Ombudsman Service. Despite the increased scrutiny in this area, there appear to be a number of positive experiences of the FCA discontinuing enquiries as to the reasons for account closures when provided with the full evidence of the circumstances.

AML enforcement

The trend of AML enforcement over the past few years has demonstrated a number of clear themes. Despite imposing millions of pounds in fines on firms, none of the FCA's recent enforcement action has involved actual, identified money laundering.  Nor have they all identified any specific breaches of the Money Laundering Regulations, but have been based on a breach of the FCA's Principles for Business and the fact that the firms had failed to adequately mitigate the risk of money laundering.

However, there are a number of consistent themes raised by FCA's enforcement decisions that provide learning points for firms.

• Obtain and verify sufficient customer onboarding information.
• Monitor activity and conduct timely periodic reviews to ensure activity is consistent with the understanding of the business.
• Act promptly when customer flags are raised.
• Ensure there is effective ownership of AML risk.
• Address weaknesses comprehensively and in a timely manner.
• Sufficient resources – experienced and trained.
• Ensure processes in practice match policies.

There is also a clear indication from the FCA's practices that the gap between supervision and enforcement appears to be narrowing, with the FCA utilising its supervisory powers in a more pro-active way when it identified concerns.

Osborne Clarke comment

Participants at our anti-money laundering in financial services roundtable engaged in a wide-ranging discussion on and around these areas and were offered a great opportunity to share their day-to-day experiences with the FCA in a confidential setting – and gain insight into the legal and practical strategies for responding to the challenge of AML compliance.

We were really grateful to our attendees for their open contributions and are looking forward to holding a further session in the near future to ensure we can allow those who missed out on attending last week to engage with these issues.