The UK’s financial regulator has told the heads of all retail banks it is “disappointed” to have found several weaknesses in many institutions’ financial crime controls, giving the sector until mid-September to address the issue.

The Financial Conduct Authority (FCA), which supervises banks’ compliance with anti-money laundering and counter-terrorist financing controls, says some firms continue to show “common weaknesses in key areas”, including ­­around governance, due diligence and transaction monitoring.

It says banks’ business-wise risk assessments are generally “poor” or lacking in detail, while customer-specific assessments are “often too generic to cover different types of risk exposure which are relevant to different types of relationships”.

“For example, we don’t always see firms differentiate between money laundering and terrorist financing risks, or the differing risks presented by a correspondent banking relationship as compared to a customer undertaking trade finance activity,” it says.

The FCA adds that banks’ financial crime controls are often centralised within a group’s head office, covering branches and overseas subsidiaries.

“Whilst this is an acceptable practice when done well, we have found that firms are often reliant on ready-made controls, frameworks, and products,” it says. “For example, using centralised sanctions screening or transaction monitoring capabilities and alert handling.”

In some cases, when transactions are flagged up, banks have failed to compare that activity against the general profile of the customer and its source of funds.

“In one example we saw, a firm failed to do this despite adverse media allegations that funds had been obtained through illicit means, and that failure placed the firm at significant risk of facilitating money laundering,” it says.

The comments are made in a “dear CEO” letter sent to all UK retail banks in May and made public by the regulator at the end of June. It follows a sector-wide assessment of financial crime systems and controls, the FCA explains.

The authority has instructed banks to carry out a “gap analysis”, comparing their own practices to the common weaknesses found, before September 17 this year.

“We expect the senior manager holding the financial crime function to have sufficient seniority to be able to carry it out effectively and to ensure that the gap analysis is promptly completed and its findings shared internally and acted upon as appropriate,” it says.

If banks’ responses are considered inadequate, the FCA says it will “consider appropriate regulatory intervention to manage the financial crime risk posed”.


Increasing focus

Michael Ruck, a partner in K&L Gates’ investigations and enforcement practice, says a “dear CEO” letter should be considered “a clear indication of an area of focus for the FCA”.

In this case, he says it suggests “that enforcement action is either already underway or is likely to follow very shortly, in particular, for those firms and senior individuals who do not heed the steps set out in the letter”.

Ruck, who has previously worked in the FCA’s enforcement division, tells GTR that a lesson from the letter is that banks’ financial crime controls – including transaction monitoring and sanctions screening systems – “must be tailored to each individual firm, each office of each individual firm and, in many circumstances, each specific workstream of each office of each individual firm”.

“The FCA has also made it clear that senior individuals with the relevant responsibilities for financial crime prevention must understand any technology which is being used in this space,” he adds.

If a bank’s headquarters is overseas, the lawyer says senior management must “fully understand” how its approach is tailored to the requirements and risks in the UK market.

The warnings come as several financial crime bodies around the world increase their focus on money laundering through the international trade system.

The Financial Action Task Force, a global standards-setting organisation, says trade-based money laundering (TBML) has emerged as “one of the primary means that criminal organisations use to launder illicit proceeds”.

Overall transnational crime could be worth as much as US$2.2tn, much of that facilitated by TBML, researchers have suggested.

Lenders have been urged to watch for complex corporate structures or trade flows, circular payment arrangements and inconsistencies in trade finance documentation.

Andrew Sackey, a partner at Pinsent Masons, points out in a legal blog that the FCA letter also coincides with guidance from the Crown Prosecution Service issued at the start of June – a “clear, and possibly coordinated, toughening of the enforcement position” around transaction reporting, he says.

That guidance says firms can be prosecuted for failing to report suspicious activity “even though there is insufficient evidence to establish that money laundering was planned or has taken place”.

The FCA issued specific financial crime guidance to the trade finance sector in 2018, after finding that “most banks had inadequate systems and controls” in some areas during a review five years earlier.