FCA thematic review: next steps in AML and ABC policies and procedures for asset managers
February 2014 | LEGAL & REGULATORY | FRAUD & CORRUPTION
Financier Worldwide Magazine
The Financial Conduct Authority (FCA) uses thematic reviews as an integral part of its supervisory role in order to identify and assess risks in certain market sectors. During the thematic review process, a specialist team undertakes reviews and seeks insight from a cross section of a particular industry sector before publishing a detailed report of their findings. Whilst the report is based on a small sample of firms, the FCA expects that all participants in the industry will take action as a result.
The FCA has also published guidance on financial crime for all FCA-supervised sectors in April 2013. Importantly for wealth and asset management firms, fund administrators and platform firms (together ‘firms’) the FCA has recently completed a review of anti-money laundering (‘AML’) and anti-bribery and corruption (‘ABC’) systems and controls in the sector, having reviewed the practices of 22 firms in the industry. Results of the FCA investigation were published in October 2013.
The importance of all market participants taking action is illustrated by a range of enforcement actions taken by the FCA following previous thematic reviews. The FCA has previously placed the spotlight on commercial insurance intermediaries’ ABC policies (in 2010) and the management of AML risks by banks (in 2011) which ultimately led to significant fines such as:
Willis Limited(July 2011). Willis was fined £6.9m as a result of ABC failures related to risk assessments when dealing with overseas individuals and firms, which created an ‘unacceptable risk’ that payments totalling £27m, made to overseas parties who assisted Willis in winning and retaining business, could be used for corrupt purposes.
Coutts & Company(March 2012). AML failings that were described as “serious” and “systemic” in relation to high-risk customers led to a high-profile fine of £8.75m for Coutts. In line with the FCA’s findings in the Willis case, particular criticism was directed at the actions taken by Coutts in collecting due diligence at the outset of relationships, maintaining up-to-date customer information and scrutinising individual transactions.
EFG Private Bank(April 2013). The UK private banking subsidiary of Swiss based EFG Group was fined £4.2m for failing to take reasonable care to establish and maintain effective AML controls for high-risk customers. At the time, Tracey McDermott of the FCA stated that “while EFG’s policies looked good on paper, in practice it manifestly failed to ensure that it was addressing its AML risks.”
It is also important to note that individual Money Laundering Reporting Officers (‘MLRO’) have been sanctioned. For example, the MLRO of Habib Bank AG Zurich was sanctioned in May 2012 as a result of AML failings at the bank during his tenure.
Asset management thematic review
The FCA’s purpose in conducting the most recent review was to assess whether asset management firms are taking adequate steps to mitigate the money laundering, bribery and corruption risks they face. Following on from the introduction of the UK Bribery Act, the FCA’s general financial crime guidance and the banking and insurance thematic reviews, this is a further example of the increasing scrutiny being directed at AML and ABC systems and controls in the financial sector.
The ultimate conclusion of the FCA’s review was not that firms are failing to put appropriate policies in place, but that there were concerns about whether there was effective oversight and monitoring of business relationships. It is clear that the FCA expects a firm-wide approach to active and ongoing risk management.
Several key themes can be drawn from the FCA report which should be of particular interest:
Senior management involvement.The FCA has clearly expressed that ultimate responsibility for tackling money laundering, bribery and corruption lies with senior management. Detailed management information needs to be delivered in a timely fashion to senior firm members, so that informed decisions can be taken regarding current and anticipated risks. From a practical perspective, it is important to ensure that the presentation and discussion of these topics is recorded in the appropriate management and governance committee meeting minutes.
Ongoing risk assessment.Firms were criticised for failing to update risk assessments or to ensure that all relevant risks were fully considered. The FCA suggested both the regular use of a consistent methodology to categorise and identify AML and ABC risks, and collaboration between frontline business personnel and those in compliance functions. Annual risk assessments, which quantify the impact and likelihood of risks and feature input from various different functions within the firm, are also recommended. The results of these assessments should then be fed into existing AML and ABC policies.
High risk customers.The identities of all customers (and where appropriate their beneficial owners) should be verified and documented, but the FCA flagged a particular issue with the manner in which high-risk and politically exposed customers have their identities confirmed. It is important to ensure that policies for flagging higher risk subjects are clearly understandable to front-line staff, that identity information is ‘refreshed’ frequently, and that detailed records are maintained. It is also important to maintain transaction monitoring systems and to retain properly documented results of any ‘red flag’ incidents.
Staff involvement.The FCA expects that all members of the firm will engage with AML and ABC matters. As well as regular, effective and tailored training programs aimed at building staff awareness of the risks that they will personally be exposed to, it has been suggested that firms incentivise staff compliance with AML and ABC policies by incorporating compliance-related objectives into performance targeting and any associated financial rewards.
The FCA clearly envisages moving AML and ABC compliance increasingly away from the policy book and into a detailed practical application. Firms will be judged on the effectiveness of their risk management procedures, and the general message is that thorough, well-documented and repeated risk management practices are required from all members of the firm. In due course, given the previous FCA practice of taking enforcement action in the wake of a thematic review, it is likely that individual firms are going to come under scrutiny in the foreseeable future. Taking pre-emptive action to remedy any potential weaknesses in ABC and AML procedures at this stage could therefore prevent unwelcome exposure going forward.
Satnam Tumani is a partner and Sean Adams is a litigation associate at Kirkland & Ellis International LLP. Mr Tumani can be contacted on +44 (0)20 7469 2390 or by email: firstname.lastname@example.org.
© Financier Worldwide
Satnam Tumani is a partner and Sean Adams
Kirkland & Ellis International LLP