FCA’s latest financial crime risk findings and further proposed guidance Financial Crime Forum- 4 December 2014 By Richard Bostock, FLA

What the findings cover How small banks manage money-laundering and sanctions risk- Update (Thematic Review published in November) Managing bribery and corruption risk in commercial insurance broking – Update (Thematic Review published in November) Conclusions Proposed guidance on financial crime systems and controls (Guidance consultation published in November)

How small banks manage money- laundering and sanctions risk Key Findings: Follow-up work from the FSA’s AML review in 2011 to see how small banks have responded Review focused on high-risk customers and PEP’s. Also considered the adequacy of financial sanctions systems and controls FCA say considering the amount of work already carried out in AML they were disappointed to find continuing weaknesses in most banks’ AML systems and controls Although senior management engagement had improved, a third of banks had inadequate resources, staff often had weak knowledge of money laundering risks, and some overseas banks struggled to reconcile their group policies with higher UK requirements.

How small banks manage money- laundering and sanctions risk Key Findings: The FCA make point that this review is not only relevant for banks The findings and examples of good practice may be of interest to all firms within scope of our anti-money laundering provisions in SYSC 3.2.6A-J or SYSC 6.3 It may also be of interest to firms for whom FCA are the supervisory authority under the Money Laundering Regulations 2007 All firms are required to comply with the UK’s financial sanctions regime. FCA are responsible for ensuring that the firms they supervise have adequate systems and controls to do so These findings may therefore be of interest to all firms subject to the financial crime rules in SYSC 3.2.6R or SYSC 6.1.1R

Managing bribery and corruption risk in commercial insurance broking Key Findings: Again this follows earlier FSA work in this area. FCA looked at intermediaries’ bribery and corruption risk assessments and considered how this risk was controlled through intermediaries’ governance, due diligence and ongoing monitoring of individual relationships, payment controls, recruitment and remuneration, training and awareness, incident reporting and whistleblowing. Overall, most intermediaries in their sample did not yet adequately manage the risk that they might become involved in bribery or corruption

Managing bribery and corruption risk in commercial insurance broking Key Findings: More than half of the intermediaries in their sample had taken some steps to assess and manage bribery and corruption risk, but for the majority of these intermediaries, this work was still in progress and more had to be done before their anti-bribery and corruption systems and controls would be effective Again this review is not only relevant to wholesale insurance intermediaries. All firms subject to FCA’s financial crime rules in SYSC 3.2.6R or SYSC 6.1.1R may find this useful

Conclusions FCA found that many small banks and commercial insurance intermediaries fail to effectively manage financial crime risk. While the reviews found some firms had made good progress in addressing areas of weakness and saw examples of good practice, there were significant shortcomings at other firms. The FCA has proposed further guidance for all firms to ensure that expectations are clear “Firms must take their responsibility to reduce the risk of financial crime seriously. Significant improvements are still required in this area”…

Conclusions “To do that successfully requires firms to use their judgement and common sense. That is not about box ticking or wholesale de-risking. It is about firms getting the basics right – understanding their customers, the risks they pose and managing those risks proportionately and sensibly” FCA quotes from TM, FCA director of enforcement and financial crime. Despite extensive work over recent years to address key issues, there were significant and widespread weaknesses in most banks’ anti- money laundering systems and controls, and in some banks’ sanctions controls

Conclusions Although senior management engagement had improved, a third of banks had inadequate resources; staff often had weak knowledge of money laundering risks; and some overseas banks struggled to reconcile their group policies with higher UK requirements. Overall, most intermediaries’ controls failed to manage bribery and corruption risk effectively. While some intermediaries’ policies on remuneration, hospitality and training had improved since the last review, bribery and corruption risk assessments were often too narrow and many firms failed to take a rounded view of the risks associated with individual relationships.

Conclusions Half of the third party and client files reviewed were inadequate and senior management oversight was often weak.

Proposed guidance on financial crime systems and controls In light of these two reviews FCA are consulting on updating their Financial Crime: A guide for firms with examples of good practice The idea is for them to make their expectations clear Both reviews set out examples of good practice observed. FCA propose to include these examples in part 2 of their regulatory guidance (Financial Crime Guidance) They also propose to amend Part 1 of the Guide to clarify their expectations in some areas where they saw significant weaknesses persisting In particular, they propose to include or amend existing text boxes in Chapter 2 and 3 on management information, risk assessments and enhanced due diligence…

Proposed guidance on financial crime systems and controls Although the reviews focused on specific sectors, FCA believe that these amendments will help all authorised firms strengthen their financial crime systems and controls It will also help firms approach financial crime compliance in a more proportionate and risk-based way Responses by 6 February 2015 Key changes: They propose to introduce a new Box 2.1A on MI in their chapter on Financial crime systems and controls (in Part 1 Chapter 2)- see page 4- 5

Proposed guidance on financial crime systems and controls They propose to amend Box 2.3 on risk assessments (refer to page5) They propose to amend Box 3.7 in their chapter on money laundering and terrorist financing (refer to page 6). Further examples of Enhanced Due Diligence are given They also propose to introduce two new chapters referring to good practice around these two thematic reviews in Part 2