Financial crime and increasing regulatory pressure

Financial crime incorporates a variety of illicit activities. These activities include money laundering (a process of washing money from illegal sources into the legal economy), terrorist financing, breach of economic sanctions, bribery and corruption, fraud, and market abuse. 

The Financial Conduct Authority (FCA) has tightened its financial crime supervision on regulated firms across the UK. In 2022/2023 the FCA opened 613 financial crime supervision cases, an increase of 65% from the previous year and an increase of 10% from the FCA’s 2020/2021 baseline figure of 548 cases . ‘Reducing and preventing financial crime’ is one of the FCA’s focus areas within its overall objective of ‘reducing and preventing serious harm’. Regulators are placing greater pressure on firms to take responsibility for tackling financial crime. 

This demonstrates the requirement for regulated firms to address financial crime guidance released by the FCA and the critical need for firms to respond by ensuring financial crime controls are compliant and fit for purpose. Financial crime is a key risk to businesses operating in the UK. In 2022 fines relating to financial crime made up 66.7% of the total fines issued by the FCA on regulated firms. For example, ADM Investor Services International Limited has recently been fined £6,470,600 for inadequate AML systems and controls. 

Key challenges for businesses

Through our work and exposure to a wide range of firms, we believe the following are the key challenges businesses are facing.

Staff turnover: The key to an effective AML framework is the continuity of staff members within firms’ front office, onboarding teams and compliance functions. Firms with high staff turnover can struggle to remain compliant with regulations due to strained resources, and changes in approach and management with a lack of succession planning. We help firms build strategies for retaining key staff members and provide firms with a variety of resource options to ensure staff turnover does not contribute to regulatory non-compliance. 

Enhanced due diligence: We often witness weak controls being exercised regarding the identification of the source of funds and source of wealth in client onboarding. This has been a key area of focus in our skilled person review. Firms frequently fail to differentiate between the two and accept evidence which is not verifiable. We assist firms by designing and implementing robust controls in respect of enhanced due diligence. Through file reviews, we can help firms identify where deficiencies lie and controls that can be enhanced. 

Management information (MI): Having effective MI is critical in analysing trends, forecasting future risks and monitoring that a firm remains within its risk appetite. Through our AML reviews, we have often found that MI is not being utilised to its full potential. We provide firms with greater insight as to how to optimise data and the format of reporting which is crucial in helping firms deter financial crime and their associated risks. 

Onboarding inefficiencies: Many firms have inefficient processes, systems, and controls for onboarding clients, which can require a large level of resources and therefore cost. Our industry-wide exposure enables us to advise clients on how they can efficiently navigate the client lifecycle remaining compliant with regulations, from onboarding to ‘off-boarding’. A number of our clients have conducted an analysis to identify delays in onboarding. 

Offboarding clients: This is a recent area of scrutiny by the government. The FCA expects firms to have a comprehensive documented process for terminating a client relationship. In the case of Commerzbank, which was fined £37,805,400, the firm needed to have a documented process and standard for distinguishing clients that present too high a financial crime to enable the firm to adopt a consistent strategy to offboarding clients in line with risk appetites. The government plans to clamp down on unfair bank account closures which will see: 
• new requirements on banks to protect freedom of expression; and
• new rules empowering consumers to challenge account closures. 
We have worked with a number of firms to assist them in modifying their MI and establishing as well as altering the remit of relevant committees to assess client management and where required client off boarding. 

Our experience

The RSM UK risk and regulation team frequently conducts regulatory compliance audits to help firms remain compliant with financial crime regulations such as the Money Laundering Regulations 2017 and the FCA’s ‘Financial Crime Guide’. 

We strive to help firms achieve industry best practices drawing on our breadth of financial crime experience within financial services across a variety of different sectors. We use wider guidance, such as the JMLSG, within our reviews to help clients achieve industry best practices. 

We have recently conducted 11 section 166 reviews, some with multiple stages relating to financial crime. Our team a deep understanding of the challenges which many firms face in tackling financial crime. 

How can we help?

We are experts in helping firms navigate a dynamic regulatory environment. 

Below, we outline how we can help you navigate increasing regulatory pressure.

• Conducting s166 reviews: Our excellent reputation with key regulators including the FCA and PRA means we are well placed to carry out these reviews. We have conducted reviews across a variety of sectors in financial services, from payment services to asset management. 
• Advising firms subject to s166 reviews: Having conducted our own s166 reviews, we are well placed to support firms subject to s166 reviews providing pragmatic advice throughout the process and helping firms close findings as and when they arise. 
• Conducting AML audits: We add value by helping firms remain compliant with core regulations and advising on examples of best practice. We are often on the list of major UK banks ‘preferred supplier lists’. We frequently conduct AML audits in the payment services space and have established long-term relationships with major players in this industry. 
• Review and enhancement of financial crime policies and procedures: We help firms develop frameworks which are both pragmatic and compliant with regulatory requirements. 
• Design of ‘Target Operating Models’: We advise clients on the design and implementation of financial crime functions, operating models, frameworks, and governance arrangements. 
• Identify of innovative technologies and vendors for enhancing financial crime controls and processes, such as identity verification: We help firms utilise new technologies to make their financial crime framework as efficient as possible.  
• Supporting clients with file remediations: We have recently conducted a large-scale file remediation involving a significant level of client outreach to ensure KYC files met the required standard. This involved ensuring that standards were met across multiple jurisdictions to ensure there was global compliance with applicable regulations. 

Through our tailored and proactive approach, we can help prevent and respond to incidents of financial crime. Every service we offer in this area will be aligned with the extensive regulatory and compliance demands your business faces.

Looking to the future

Beyond just looking at the guidance, Sarah Pritchard, executive director of markets highlights the need for firms to look to the future and conduct regular horizon scanning to combat the threat of financial crime. She notes that ‘As threats change, firms also need to change the way they respond to them. In our hyper-connected world, there is an unprecedented speed of change thanks to technology which brings both opportunities and risk’ . 

Technology is enabling firms to better identify and prevent financial crime. However, criminals have also developed new ways to conduct it, making it increasingly difficult for firms to identify it.