Banks to face increased scrutiny as regulator reveals money laundering compliance failures

Out-Law News | 03 Jul 2013 | 8:15 am | 3 min. read

The Financial Conduct Authority (FCA) is considering whether to take "further regulatory action" against a number of banks that lack proper procedures to protect against money laundering and terrorist financing.

It said that most of the 17 commercial banks reviewed as part of its study of the trade finance sector had "failed to adequately consider" money laundering and terrorist financing risks. Banks lacked clear procedures for dealing with these risks and many had not developed specific training for staff dealing with trade accounts, according to its report of its findings.

Trade finance involves banks acting in an intermediary role for companies importing and exporting goods, and is recognised as posing a high financial crime risk, according to the FCA. It said that without effective systems and controls, the UK's position as a major financial centre could be "severely impacted". However, its report said that banks had generally developed effective controls to ensure that they were not dealing with sanctioned individuals and entities as part of their trading activities.

"Banks and other financial organisations are in the front line regarding protecting against financial crime," said Tracey McDermott, the FCA's enforcement director. "We, and they, have a common interest in working in partnership to reduce the impact of financial crime both on the economy and more widely."

"Anti-money laundering measures and sanctions are in place to protect us from criminal activity. Financial institutions need to take this responsibility seriously and we will do whatever is necessary to ensure they do. We are considering whether further regulatory action may be required in relation to certain banks in the review," she said.

McDermott was speaking at a major financial crime conference organised by the regulator, and attended by around 400 delegates from financial services firms, government and law enforcement. During the conference, the FCA's enforcement team announced that it had handed out a record £321 million in fines last year while the number of consumers who had contacted the regulator to report investment fraud, such as 'boiler room' scams, had fallen significantly since 2011.

In a report setting out the results of its review, anti-money laundering procedures at "a number of banks" were "not well developed to identify unusual or higher risk specific transactions". This was usually either because banks had not thought the money laundering risk was significant or because they felt that they had managed the risk through other means, such as customer due diligence procedures.

"It was clear from our review that, at times, there can be a conflict between the commercial pressure to proceed with a transaction and a bank's duty to comply with relevant money laundering legislation and guidance," the report said. "Although banks will not want to reject transactions unnecessarily, they should ensure that sufficient attention is given to possible trade-based money laundering and that trade processing teams are given time to fully investigate potentially suspicious activity."

According to the report, seven of the banks reviewed did not require staff to consider money laundering risks when processing a transaction, while all but two of the other banks only required "brief attestations" from staff that money laundering risks had been considered. Some of the banks told the FCA that they only dealt "in documents" and were "under no obligation to investigate underlying trade transactions", the regulator said.

The report also identified weaknesses in staff training, use of 'red flags' to identify and escalate suspicious transactions and inadequate record-keeping. The FCA has set out examples of good practice that should be adopted by banks as part of their anti-money laundering procedures, as well as examples of poor practice that should be avoided. It has published these in a separate document for consultation.

"The FCA has underscored, just in case there was any doubt, that it is increasing its scrutiny of financial firms in the UK," said white collar crime expert Barry Vitou of Pinsent Masons, the law firm behind Out-Law.com. "This, combined with the disappointing results of a review of firms' financial crime systems and controls in the context of trade finance highlight that for many banks there is still much more work to do."

"Against a backdrop of increasing political and public demand for enforcement, all firms should take steps to ensure that they have robust anti-money laundering and anti-fraud systems and controls," he said.