Combatting Financial Crime: The Imperative for Vigilance and Collaboration

In the world of finance, where vast sums of money change hands every day, the battle against financial crime is an ongoing struggle. Recent cases serve as stark reminders of the need for vigilance, cooperation, and a proactive approach to identifying and addressing suspicious activities. The Financial Conduct Authority (FCA) in the United Kingdom has emphasized the gravity of financial crimes and urged financial institutions to play their part in safeguarding markets, consumers, and the integrity of the financial sector.

One such case that highlights the critical importance of robust anti-money laundering (AML) practices involved a bank in Walsall. Astonishingly, black bin liners filled with £700,000 in cash failed to trigger a suspicious activity report within the bank. This oversight resulted in severe consequences, with NatWest, the bank in question, facing hefty fines totaling £265 million and a criminal conviction.

In contrast, the National Crime Agency acted swiftly when alerted to potential fraudulent activity related to personal protective equipment (PPE) during the COVID-19 pandemic. The agency arrested an individual suspected of orchestrating a fraudulent scheme that aimed to profit from PPE shortages.

A different yet equally concerning scenario unfolded when HSBC uncovered a romance scammer who had created a deceptive online dating profile. Although this type of financial crime may appear less severe, it can have devastating consequences for the individuals targeted, often leading to significant financial losses.

The FCA's message is crystal clear: financial crime is never a victimless act. It exacts a toll on both corporations and consumers and erodes the integrity of financial markets, ultimately undermining international competitiveness.

While it is encouraging to note an eight percent reduction in the total amount lost through fraud in the past year, the FCA asserts that there is still much work to be done. Fighting financial crime is a top priority for the regulator, and they are determined to take an outcomes and data-led approach to make a meaningful impact.

One of the key pillars of the FCA's strategy is the expectation that financial firms act as the first line of defense against financial crime. They must possess a deep understanding of their unique risks and calibrate their controls appropriately and proportionately. The FCA underscores that the checks carried out by these firms can disrupt serious criminal activities and protect the public.

Furthermore, the regulator emphasizes that taking early action can save millions in fines down the line, as well as safeguard the reputations of firms. It is crucial to remember that fraud accounts for a staggering 40% of all crime. While some may mistakenly assume that because banks can reimburse victims, no one truly loses out, the reality is quite different. The costs of covering these crimes are inevitably passed on to all customers, effectively penalizing the innocent.

Moreover, financial crime, including fraud and money laundering, often has more sinister links to human trafficking, terrorism, and child exploitation. It is imperative to understand the far-reaching consequences of these illicit activities and the imperative to combat them effectively.

However, not all risks are created equal, and the FCA recognizes that one-size-fits-all solutions are inadequate. The regulator acknowledges that catering exclusively to extreme cases can lead to impractical and inefficient regulations. The battle against financial crime and the establishment of effective controls should not rely on rigid and inflexible systems designed solely for worst-case scenarios. Instead, a nuanced, risk-based approach is needed—one that is sensitive to the unique characteristics of each situation.

To calibrate risk accurately, financial institutions must have a comprehensive understanding of their clients. They must be able to identify the types of transactions that are typical for each client and have systems in place to flag any suspicious activity. The FCA has made efforts to provide guidance in this regard, and they have published reports on sanctions, where both good and bad practices are identified.

In a notable example, leading up to Russia's invasion of Ukraine, some firms demonstrated commendable anticipation of geopolitical developments. They formulated contingency plans, ready to spring into action should the situation escalate. The FCA expressed its satisfaction with the preparedness exhibited by these firms.

However, the regulator also encountered instances where firms were less proactive, creating backlogs that they struggled to manage. Additionally, relying solely on off-the-shelf technology solutions was seen as insufficient. The FCA underscored that outsourcing risk calibration to third parties and relinquishing all responsibility for staying on top of it to external entities is a perilous approach.

Financial institutions must understand their risks, both high and low, and adopt a proportionate, risk-based approach to deal with them effectively. The FCA is stepping up its efforts to test firms' risk-based systems, leveraging data and technology as key tools in its regulatory arsenal. Recent tests of firms' compliance with sanctions were data-driven, with firms asked to evaluate their own controls against a sample dataset. Those firms that failed to detect what the FCA expected were subject to further scrutiny.

The FCA acknowledges that the utilization of artificial intelligence (AI) can significantly enhance their toolkit for identifying potential financial crimes. AI has the potential to revolutionize the way institutions monitor transactions, flagging suspicious activities more effectively and efficiently. The regulator emphasizes that this is an example of taking a risk-based approach, not a mere tick-box exercise, and they expect financial institutions to follow suit.

In their testing, the FCA identified clear disparities between good and bad practices among firms. The "good" firms exhibited an in-depth understanding of their client base and the entities they were dealing with. Importantly, they had calibrated their sanctions alerting systems to align with both UK and international sanctions lists.

Conversely, the "bad" firms displayed a lack of understanding of their corporate client base's corporate structures. They left the screening process to outsourced entities and had not appropriately calibrated their monitoring systems to adhere to UK sanctions requirements.

In summary, those who adhere solely to a tick-box compliance approach should not be surprised to find a surprise visit from the FCA. The regulator encourages financial institutions to scrutinize their risk calibration, ensuring it is proportionate and aligned with their unique circumstances.

Individuals working in the frontlines of financial crime prevention should recognize the "golden thread" connecting their activities to the protection of the public from serious crimes. They must not hesitate to question whether their firm's risk calibration is appropriate, whether it is too high or too low. Vigilance is key, and they should always be prepared to act robustly and proportionately.

The FCA intends to place a heightened focus on whistleblowing in high-risk sectors. They expect employees on the frontlines of defense to raise awareness of the whistleblowing process and its benefits for organizations and society at large. Whistleblowing has proven to be a vital tool in addressing various issues, such as consumer mis-selling of loans, unauthorized firms engaging with customers, and internal failures in firms' own whistleblowing procedures.

It's important to note that the transition from whistleblowing to enforcement must be evidence-led and outcome-focused. Moving directly to enforcement can have unintended consequences, including the potential compromise of the whistleblower's anonymity, reduced chances of bringing a case to court, and the possibility of wrongdoers covering their tracks and evading capture.

Just like their other initiatives, the FCA emphasizes that the move from whistleblowing to enforcement should be driven by evidence and outcomes, with the ultimate goal of preserving the integrity of both the firm and the financial markets.

The FCA's commitment to eradicating financial crime extends to a review of the Politically Exposed Persons (PEPs) regime. This review aims to strike the right balance between robustness and proportionality when assessing the risk of domestic PEPs. The regulator acknowledges that applying PEP rules inappropriately can lead to individuals and their families being unfairly excluded from financial products or services. Therefore, they are actively engaging with PEPs, firms, and other stakeholders to assess whether improvements are needed in how the regime operates in the UK.

However, the FCA is adamant that firms must calibrate their risk levels appropriately. As an intelligence-led organization, the FCA emphasizes that if they find firms persistently struggling to manage their risk levels, they will take action. Moreover, individuals have the opportunity to raise concerns with their financial institutions and the Financial Services Ombudsman, further emphasizing the importance of collective vigilance.

In conclusion, the FCA's approach is outcome-focused, data-driven, and proactive. They are committed to strengthening financial crime systems and controls through various initiatives, including data testing, technology deployment, and regulatory enforcement. They take pride in their role as one of the world's most prolific enforcers of anti-money laundering rules, having issued more than one billion pounds in penalties since 2010.

Their actions speak volumes. In 2022, they removed more than 8,500 misleading advertisements, demonstrating their commitment to protecting consumers. They also conducted 352 proactive assessments of sanctions in the last financial year, nearly quadrupling their efforts from the previous year. Utilizing synthetic data sets to test the effectiveness of firms' sanctions controls, they opened more than 610 financial crime supervision cases during the same period, a significant increase from the previous year.

Collaboration is a cornerstone of the FCA's approach to combating financial crime. They emphasize the importance of public and private partnerships and are dedicated to sharing the results of their work, including examples of both good and bad practices. This transparency extends to data on firms used for payment fraud, which will be published in the autumn.

Furthermore, the FCA actively supports the UK's public-private economic crime plan and the nation's first national fraud strategy. Through the Consumer Duty, which came into effect in July, they are focusing on achieving positive outcomes for consumers. They will examine how firms operate their financial crime systems in alignment with the Consumer Duty's principles.

The importance of eradicating financial crime cannot be overstated. It benefits not only consumers but also all participants in the investment sector. It ensures that investors can have confidence in the integrity of the market and the firms and individuals to whom they entrust their pensions and investments.

However, as an outcomes-focused regulator, the FCA emphasizes that it is essential for firms to play their part. They must be attuned to the ever-evolving landscape of financial crime risks. Risk calibration is paramount, and while technology plays a crucial role, it cannot replace a comprehensive understanding of clients, their risk levels, and the need for proportionate actions.

The message from the FCA is crystal clear: financial crime risks vary, but their consequences are far-reaching. To protect consumers, firms, and clean markets, all stakeholders must remain vigilant and take robust, proportionate actions in the ongoing fight against financial crime.

By fLEXI tEAM