UK FCA issues warning to banks over financial crime systems and controls

In a ‘dear CEO’ letter sent to retail banks in May (6 page / 142KB PDF), and published in July, the FCA said its recent assessment of retail banks’ financial crime systems and controls had found common weaknesses in firms’ governance, risk assessments, due diligence and transaction monitoring frameworks.

The FCA reminded firms that the Senior Managers and Certification Regime (SMCR) placed a responsibility on all senior management to carry out their duties to counter financial crime. It said all retail banks should, by 17 September 2021, carry out a gap analysis against each of the common weaknesses identified and take “prompt and reasonable steps” to close any gaps. Senior managers holding the financial crime function should have sufficient seniority to ensure the gap analysis is carried out effectively, and acted upon.

White collar crime expert David Hamilton of Pinsent Masons, the law firm behind Out-Law, said the FCA’s emphasis on individual accountability was unmistakeable and the regulator clearly intended to hold senior managers responsible where things went wrong.

“In particular, the FCA will continue to monitor and assess senior managers’ competence and capability, considering whether they possess the required skills, knowledge and experience to discharge their functions effectively. Chief among these functions is ensuring that the financial crime control framework is appropriately calibrated to meet the risks the business actually faces, demonstrating that senior managers have thought carefully about their products, customers, delivery channels, transactions, and jurisdictions (among others) and have built up a comprehensive picture of their risk profile,” Hamilton said.

“While SMCR enforcement has experienced slow beginnings, the FCA has a long track record of taking action against senior individuals for failings within their businesses. Managers would be well advised to examine this latest shot across the bows and consider how their firms shape up,” Hamilton said.

White collar and tax fraud expert Andrew Sackey of Pinsent Masons said the letter reflected the view of the FCA and other law enforcement authorities that private enterprises are the first line of defence against money laundering, and that porous or inadequate controls presented a significant threat that financial systems will be abused by criminals.

“Increasingly, whether the risk be money laundering, bribery and corruption or the facilitation of third-party tax evasion, risk assessments and suspicions activity reporting are reoccurring themes that regulators insist businesses demonstrate that they’ve put in place. Investing time and corporate effort into a suite of policies, procedures and controls without the documented foundations of a proportionate risk assessment is unlikely to persuade authorities that your business has visibility of the subjective threats that it faces,” Sackey said.

“The timing of this letter and the imposition of a date for the completion of a gap analysis coincides with the Crown Prosecution Service revising its prosecution guidance and confirming that regulated businesses need to submit suspicious activity reports even in cases where ‘there is insufficient evidence to establish that money laundering was planned or has taken place’. This is a clear, and possibly coordinated, toughening of the enforcement position on the obligations on the regulated sector in respect of appropriate levels of reporting,” Sackey said.