The financial crime outlook for 2017 – Key developments to keep on your radar

Posted: 19th January 2017

The UK’s financial services sector faces a unique set of challenges when it comes to tackling financial crime.

As a global financial centre, UK markets attract significant investment as well as significant amounts of criminal activity. This criminal activity not only results in losses for businesses, but can impact consumers too. Additionally, if the proceeds of crime go undetected, these funds could then be used to finance illegal or violent acts such as terrorism.

When the real consequences of financial crime are laid bare, it becomes clear that legislators, regulators and firms themselves must all be actively engaged in managing this risk.

So when it comes to your firm’s financial crime priorities in 2017, what activities are at the top of your board’s agenda? Which pieces of legislation or regulation do you feel will have the greatest impact? Here, we look at four areas we think firms should be focusing on.

1.   REP-CRIM FINANCIAL CRIME reporting

On the 31st of December 2016, the FCA Handbook was updated to reflect new financial crime reporting requirements.

Firms must submit annual data on their operating jurisdictions, customers (including their country of residence, the number of politically exposed persons (PEPs) and the number of customer relationships refused or exited for financial crime reasons), suspicious activity reports (SARs), prevalent fraud typologies and the number of staff working within financial crime roles.

This will impact more and more firms as we move through 2017, and some key considerations include:

• Which aspects of your firm / group will be subject to the requirement and what are their applicable submission dates?
• Is the required data currently available? Will it need to be requested from third-party anti-money laundering (AML) service providers? How accurate is this data?
• How can your existing reporting processes be utilised / augmented to deliver on the new requirement?
• Who is responsible for completion and sign-off of the new reporting process?
• How will data be used internally to inform your business on an ongoing basis? Can aggregate data from FCA reports be utilised? Will it inform your financial crime risk assessment?

2.   The Fourth Money Laundering Directive (4AMLD)

Compliance with 4AMLD will be required by mid-2017, and the Directive will bring the following to the AML space:

• Global consistency on AML and counter-terrorist financing measures in an increasingly connected world
• The incorporation of a wider range of criminal offences linked to money laundering
• Implications for a wider range of businesses with regards to AML
• Consistency on beneficial owner checks
• A review of suspicious reporting rules

The sheer variety of methods by which individuals and terrorist organisations attempt to defraud institutions and launder money means that a proportionate reaction is key if governance is to be effective.

4AMLD clarifies where senior management approval is required, for example, with regards to ultra-high value or high risk transactions, and  both addresses and reiterates the principles of outsourcing; namely that the responsibility to manage money laundering risk falls ultimately to the regulated entity.

Have you considered how your firm monitors outsourced decisions? For example, when it comes to the level of customer due diligence taking place, or the embedment of changes to PEPs rules to include individuals trusted with public functions domestically. Are you obtaining effective and insightful management information (MI) as part of your agreement? Being more intrusive in the monitoring of third parties may be necessary to avoid regulatory or legal implications in the future.

3.   The corporate offence of failure to prevent Economic Crime

With the law looking set to change, (and the precedent set by 2016’s Corporate Failure to Prevent the Criminal Facilitation of Tax Evasion offence), firms should seek to assess the potential impact of the same model being applied to the area of economic crime.

When examining your approach, you should bear in mind the principles behind Section 7 of the Bribery Act 2010 – this is the same model being used for tax evasion, and will likely be the same model used for the economic crime equivalent of the offence.

This is significant in that the only defence a firm has, if found not to be complying, is to prove they had adequate procedures in place designed to prevent the conduct in question. Have you reviewed your procedures, are there any gaps, and how will you effectively evidence compliance?

The six principles underpinning the Bribery Act are:

• Proportionate procedures
• Top-level commitment
• Performing risk assessments
• Effective due diligence
• Effective communication and training
• Stringent monitoring and review

For more detail on these principles and how to apply them in this area, read our blog ‘Failure to prevent’ economic crime - how should firms respond to this shake-up in corporate law? 

4.   Financial Action Task Force (FATF) Recommendations

In February 2012, FATF revised their 40+9 recommendations to provide governments with stronger tools and to address new priority areas such as corruption and tax crime. These, together with their interpretative notes, provide the standards for combating money laundering and the financing of terrorism and proliferation.

The recommendations convey 5 key messages:

• The importance of accurate customer identification
• The need to have robust policies and procedures in place for the management of risk
• The imperative need to report suspicious transactions
• The need to ensure staff are trained effectively
• The importance of record keeping

As regulation and legislation is focusing ever closer on the management of financial crime risk, firms should digest the available information and ensure they have incorporated these five tenets into their approach.

A mutual evaluation examining the UK’s adherence to the recommendations is due to be completed by the FATF in 2018. Firms should continue to stay abreast of any developments relating to the review and consider their impact.

rising to financial crime challenges

Going forward, there’s no doubt that mitigating the ever-evolving risks of financial crime – in a way that is both robust and proportionate – will continue to be a key priority for not only financial services firms, but also regulators and law enforcement agencies.

Firms who are able to implement this risk-based approach will reap many benefits; including safeguarding their reputation, reducing financial loss, protecting consumers and meeting regulatory expectations.