Money laundering has long been an issue for economies across the globe, and tackling it is an increasing priority for governments.
The UK is no different. Often a target for money laundering, the government has implemented stringent regulations that are enforced across the regulated sector
Without these efforts, businesses such as banks, investment companies, and insurance companies, would quickly fall victim to money laundering.
With the UN’s estimate of $1.6 trillion worth of laundered funds, constituting 2.7% of global GDP in 2020, this risk is as extreme and serious as ever.
So, how does this impact the finance sector, and what does anti-money laundering (AML) mean to the businesses operating in this space? Take a look at our breakdown of the facts and figures, alongside how you can turn AML into a minute-long process, whilst maintaining compliance…
What is AML?
Money laundering in the financial sector involves making illegally obtained funds appear legal by introducing them into the legitimate financial system, moving them through various services and organisations.
Anti-money laundering is crucial for the industry to mitigate this risk, especially due to the high volume of transactions financial businesses mediate, making them much more vulnerable to financial crimes.
AML procedures include four key areas, designed to cover all bases and give businesses confidence in their compliance. These include:
- Know Your Customer (KYC)
- Customer Due Diligence (CDD)
- Customer and transaction screening
- Suspicious activity reporting.
KYC involves identifying and verifying a customer's identity, whilst CDD assesses a customer's profile for potential money laundering or terrorist financing risk.
Customer and transaction screening ensures that transactions do not involve sanctioned or banned individuals or entities, and suspicious activity reporting involves monitoring and reporting financial records for suspicious activity or inconsistency to law enforcement agencies.
AML Requirements for the UK Financial Sector
According to the Financial Conduct Authority (FCA), the following procedures are a requirement of the financial sector’s AML processes in the UK:
Incorporation of International Standards
Businesses must update the UK's AML regime to incorporate international standards set by the Financial Action Task Force (FATF).
Monitor High-Risk Factors
Companies must include new additional high-risk factors when assessing the need for enhanced due diligence. This includes seeking additional information and monitoring in certain cases, such as:
- Relevant transactions between parties based in high-risk third countries.
- Customers who are the beneficiary of a life insurance policy.
- Transactions related to specified items like oil, arms, precious metals, etc.
- Third-country nationals seeking residence rights or citizenship in exchange for transfers of capital or property.
Customer Due Diligence
Firms are required to update records related to beneficial ownership of corporate clients and have a complete understanding of the ownership and control structure of corporate customers. There should also be a clear record of any difficulties encountered in identifying beneficial ownership.
Reporting Discrepancies to Companies House
Businesses must report discrepancies between the information held on customers and the information held in the Companies House Register.
Duty to Respond to Requests for Information
Credit institutions and safe custody service providers must respond to requests for information via a central automated mechanism, including details related to accounts and safe deposit boxes.
Why is AML so Important in the Finance Sector
AML compliance programs in banks must include an AML compliance officer, AML training for employees, record keeping, a risk-based approach, customer identity verification, sanctions screening, and PEP status assessment.
Failure to comply with AML regulations can result in administrative fines, damage to reputation, and loss of customers for financial institutions.
So why is AML, and its broader collection of regulations, important enough to constitute such strict regulations and hefty fines?
It is because AML is exceptionally important in the UK finance sector for several reasons.
AML measures help prevent financial crimes such as money laundering, terrorist financing, and fraud. These crimes not only undermine the integrity of the financial system but also have broader societal impacts, including funding illicit activities and terrorism.
The financial sector also benefits from the increased public and corporate confidence that comes from having a secure and solid banking system that is safe to place their funds into.
This also extends to the global market, as the UK is a part of the global financial system. This means adherence to AML standards is crucial for maintaining international trust and cooperation as a whole.
Beyond the reputation issues and potential loss of business, AML measures will also protect customers from becoming unwittingly involved in illegal activities. By verifying the identities of their customers and monitoring transactions, financial institutions can detect suspicious behaviour and take appropriate action.
The introduction of regulatory compliance has laid down the expectations of regulated industries, including the financial sector. The necessary compliance emphasises the importance of AML measures and the severity of the repercussions of money laundering.
The Global Risk to the UK’s Financial Sector
The UK’s financial sector is a piece of the larger AML puzzle. The global banking system’s integrity relies on each country committing to fighting financial crime. Whilst most countries do have some form of AML processes, they vary in strength and in places corruption can easily bypass them.
Criminals exploit global financial networks for illicit funds from tax evasion, corruption, and drug trafficking. This cross-border financial crime persists, despite global financial system connectivity, leaving financial institutions and their countries vulnerable to money laundering.
This isn’t helped by the focus on domestic risks within national AML efforts, however, as analysis reveals the true impact on banks, credit risks, and liquidity of companies, the recommendations for AML measures have included a broader perspective for national regulators overseeing procedures.
To truly get this issue under control, there is a need for greater cross-border data collection and technological solutions to mitigate the risks. This includes deeper scrutinisation of non-resident risks and inter-border laundering countermeasures.
These risks have motivated the Financial Action Task Force (FATF) to divide international standards to prevent money laundering, influencing AML regulations worldwide, and within the UK’s financial sector.
In turn, new legislation is being implemented to reinforce this fight. For example, the Corporate Transparency Act was introduced in the US, requiring certain businesses to report information to the U.S. Department of the Treasury's Financial Crimes.
Other updates in AML regulations include the European Union's Sixth Anti-Money Laundering Directive (6AMLD), the AML 2020 Act in the United States, and new rules in Singapore, South Korea, Estonia, and other countries.
Maintain Compliance and Onboard Clients in Minutes with Red Flag Alert
The financial sector has to strike a fine balance between reaching legal requirements whilst managing time and resource demands.
AML measures require intensive work for compliance officers, demanding time for data aggregation, analysis, checks, processing, and further enhanced due diligence.
However, businesses are held back by incomplete or outdated data, hindering accurate risk assessments and due diligence checks, and putting them at risk for non-compliance and financial crime.
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