FCA highlights anti-money laundering compliance gaps in UK capital markets

The Financial Conduct Authority (FCA) chief executive Nikhil Rathi's reply letter to the prime minister and chancellor in January, which addressed new approaches to the UK growth agenda, highlighted the ongoing dialogue between the UK financial regulator and government about the correct balance between the burden of compliance and the risks of deregulation.

As the regulator and government look to find ways to collaborate over the UK growth mission, it remains "business as usual" for the FCA, which continues to publish regular guidance and reports on its expectations across the financial sector for anti-money laundering (AML) compliance.

Most recently, the FCA published its money laundering through the markets (MLTM) report on the review of the compliance of regulated firms with AML obligations in the capital markets sector. This was built on the findings of its earlier thematic review of money laundering risks in the sector that was published in 2019.

The content of the MLTM report will be familiar to firms and compliance officers across the financial sector, who have been on the receiving end of similar guidance in recent "Dear CEO" letters and other similar reports. However, the MLTM report is noteworthy for its detailed guidance and its focus on the need for information sharing and appropriate reporting within the industry.

Detailed guidance

With the recent reform of the listing rules and the proposed changes to the prospectus regulation rules, it was perhaps inevitable that the capital markets sector was due for AML scrutiny. 

However, the FCA's approach to this report goes into more detail than other recent guidance and provides granular examples and detailed feedback, particularly in relation to transaction monitoring and information sharing. While the report addresses specific concerns around issues identified in the capital markets sector, the additional detail is likely to be of interest and use to firms more broadly across financial services that are looking to review their AML compliance.  

New approach to compliance?

The FCA has also focused on the need for information sharing and appropriate reporting within the industry to help tackle financial crime. In particular, the MLTM report highlights the new information sharing provisions under the recently enacted and expresses the FCA's disappointment that more firms are not already using these powers to share information to counter money laundering. 

The focus mirrors statements made by the FCA in other recent publications, in its reporting on the use of the National Fraud Database and in relation to "money mule" account detection.  This suggests that the FCA is going to be looking to the industry in the capital markets and beyond to share proactively information between themselves. This would represent a marked change from the current standard and is likely to require firms to reassess their approach to compliance.

Findings and guidance

Business-wide risk assessments

The FCA noted that some firms still failed to assess fully their financial crime-related risks, adopting a generic and off-the-shelf approach that reflected a lack of understanding about the ways their business could be used to launder the proceeds of crime. It re-emphasised the need for firms to fully assess and document the risks specific to their business.

Customer risk assessment

Although the FCA acknowledged increased use of weighted factors and appropriate country assessments, it still identified inadequacies in the approach of firms. For example, firms often do not distinguish between domestic and foreign politically exposed persons. The FCA also found that firms were not doing enough to document and record the assessments that were taking place.

Over reliance on third parties

While the FCA observed that onboarding customer due diligence and "know your customer" processes have generally improved, there remained an inappropriate reliance on others in the market to complete due diligence. It noted a commonplace assumption that other firms in the transaction chain will have carried out appropriate checks. The FCA is clear that firms must ensure they take positive steps to confirm and record the appropriate information to meet their own checks.

Governance and oversight

It found that firms are developing tailored approaches to governance, with better management information reporting on clients, risk ratings and surveillance "hits". However, some firms lack sufficient senior management engagement in identifying and mitigating financial crime risks.

Transaction monitoring

The report identified significant ongoing challenges in transaction monitoring  (TM). Firms must consider how best to use TM as part of an integrated process of financial crime systems and controls. They should incorporate tailored TM controls and alerts and encourage and facilitate collaboration between TM, trade surveillance and front- and middle-office teams.

Improved suspicious activity reporting

The report highlighted a trend of poor suspicious activity reporting (SAR) to the National Crime Agency when suspicions of money laundering were raised and a need to improve the quality of the content of these reports. The FCA found that many firms were not aware that there was a specific SAR glossary code "XXMLTMXX" for reporting suspicions of money laundering in the capital markets sector. It noted that this code should be used appropriately. 

The report serves as a critical reminder for firms in the capital markets sector to improve continuously their AML frameworks and collaborate effectively to mitigate the evolving threat of money laundering. The FCA expects all relevant firms to consider their own systems and controls against the review's findings.

Osborne Clarke comment

Given the focus around the FCA's expectations on transaction monitoring and strengthened data sharing practices – areas that have traditionally proved more difficult to comply with – firms should be making proactive efforts to assess what more they could be doing to ensure their compliance efforts are appropriate, identifying and correcting any gaps, to avoid subsequent investigation and enforcement by the FCA.

If you are considering a review of your AML processes as a result of the FCA's report, or any concerns about these issues, please contact our experts.