The financial services industry is one of the most highly regulated business sectors in the UK when it comes to money laundering.
The critical importance of the financial sector to the UK’s economy means that money laundering, particularly high-end money laundering, can threaten the UK’s national security and prosperity and undermine the integrity of the UK’s financial system and international reputation. As a result, controls are tight.
What is AML for Banks?
Money laundering involves taking proceeds that have been obtained from a criminal source (also known as ‘dirty money’) and disguising its origins so that it appears to have been acquired legitimately.
While it is difficult to know the exact figures, it is estimated that at least £88 billion of dirty money is laundered through the UK every year. Fraud and tax evasion are the most common source of criminal proceeds, along with bribery, cybercrime, human trafficking, and illegal drugs.
To combat this, the UK Government has implemented Anti-Money Laundering (AML) policies to deter criminals from integrating illicit funds into the financial system.
In this article, we look at some of the existing AML controls that are in place in the UK’s financial services industry and consider what financial institutions can do to minimise their risk.
Why is AML Important for Banks?
Banks are one of the largest institutions in the field of finance and can handle millions of high-value transactions every day. For this reason, banks and other financial institutions are at considerable risk of being the victims of financial crimes and putting in place an effective AML policy is crucial.
Implementing and enforcing AML procedures can:
- Help prevent the financing of terrorism and other illegal activities.
- Help stop crime.
- Preserve business reputation.
Several regulatory bodies and auditors ensure that banks and other financial institutions comply with the relevant AML requirements. Non-compliance can result in hefty fines and significant reputational damage.
What do Banks and other Financial Institutions in the UK need to do to prevent Money Laundering?
There are four key areas banks in the UK must address with their AML compliance programmes:
- Know Your Customer (KYC). This is a mandatory process for banks and other financial institutions to identify a customer or client’s identity when opening an account. This information must also be verified periodically over time.
- Customer Due Diligence (CDD). This involves conducting background checks and undertaking a risk assessment of potential and existing customers. Minimum CDD checks include:
- Full name.
- Residential address.
- Date of birth.
- Photo ID.
- Customer and transaction screening. This involves overseeing customers’ banking activity to check for any suspicious activity.
- Suspicious activity reporting. Banks and other financial institutions must make a Suspicious Activity Report (SAR) to alert the relevant authorities to any potential instances of money laundering or terrorist financing. Reports can be submitted online through the National Crime Agency’s SAR online portal.
Who Regulates AML Compliance for Banks in the UK?
The Financial Services and Markets Act 2000 (FSMA) is the primary regulation for all financial services in the UK. This law enacts the Financial Conduct Authority (FCA) as the main AML regulator and provides guidelines for its duties.
The FCA oversees compliance with AML regulations and can investigate financial crimes in the UK and enforce AML regulations. It does this in conjunction with several other agencies, including:
- HM Revenue & Customs (HMRC)
- The Crown Prosecution Service (CPS)
- The Serious Fraud Office (SFO)
- The National Crime Agency (NCA)
According to the FCA, the aim of AML regulation is not to catch anyone out, but rather to set high standards of probity and scrutiny to inhibit illicit money flows in the financial system. The FCA states that its intention is to encourage participants in the system to behave as custodians and guardians of the public interest in preventing money laundering.
The FCA is responsible for supervising the anti-money laundering controls of financial institutions that offer certain services, including, for example, money broking, consumer credit, trading and financial leasing.
All banks and financial institutions in the UK must register with the FCA.
You can find a full list of the services regulated by the FCA on its website by clicking here: https://www.fca.org.uk/firms/money-laundering-terrorist-financing/registration.
What is the main AML Legislation for Financial Institutions in the UK?
The Proceeds of Crime Act (POCA) is the UK’s primary AML legislation. It came into force on 1 January 2003 and defines the offences that constitute money laundering. The POCA also sets out the AML controls that banks and other financial institutions must put in place to detect money laundering and includes a range of reporting requirements that they must comply with.
Other UK legislation that covers AML requirements includes:
- The Terrorism Act. This was first introduced in 2000 and imposes counter-financing of terrorism obligations on banks and financial institutions, such as customer due diligence, transaction monitoring and reporting obligations.
- Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. The MLR 2017 sets out the additional responsibilities of private sector firms working in areas of higher money-laundering risk, including the banking sector. It requires professionals to take a risk-based approach to AML operations.
- The Money Laundering and Terrorist Financing (Amendment) Regulations 2019 sets out the amendments to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs). Changes to the Financial Crime Guide, which reflect amendments to the MLRs, also came into effect on 1 October 2020.
The UK Government further tightened AML controls at the start of 2020 when changes to Money Laundering Regulations came into force. These changes update the UK’s AML regime to incorporate international standards set by the Financial Action Task Force (FATF) and to transpose the EU’s 5th Money Laundering Directive.
What do UK Banks need to do to ensure Compliance with AML Regulations?
Banks and other financial institutions must undertake a risk assessment of their business practices and introduce the appropriate AML response. Every AML programme should include the following measures:
- Effective AML Training. Banks must ensure that all employees know their AML obligations and receive the training necessary for an effective response.
- Money Laundering Reporting Officer. Every firm must appoint a Money Laundering Reporting Officer to oversee their firm’s AML compliance programme.
- Reporting obligations. Firms must comply with reporting obligations and submit suspicious activity reports to the NCA when potential money-laundering activity is detected.
Regulation and Compliance Services for Banks and Lenders
Due to the nature of Banks and Lenders, and the sector being highly regulated, is it essential to be independently assessed to confirm compliance with the range of legislation and regulations that impact on such organisations.
With financial sanctions and fines for non-compliance being significant, the drive to ensure an organisation does not fall foul with compliance is a priority.
Whilst most Banks and Lenders will have internal Compliance departments with experienced staff, there remains a need for independent assessment and audit to challenge the internal compliance regime.
Working within the requirements of the Financial Conduct Authority is not optional, but a primary concern for all Banks and Lenders.
As an independent body, AML & Compliance can fulfil this function, not only providing general support but also an independent audit function to assist in overall compliance strategy.
We have developed our services and solutions to provide Banks and Lenders with support through responding to all needs and demands.
Our services for Banks and Lenders include:
- Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) compliance
- GDPR and Data Protection compliance
- Bribery Act 2010 compliance
- Treating Customers Fairly compliance
- Employment Regulations compliance
- Complaint investigations, management and handling
- Financial investigations