Key Proposals in the Update

• Sanctions: Following Russia’s illegal invasion of Ukraine in 2022, the FCA has thoroughly evaluated firms’ sanction systems and controls and is planning to revise this section to incorporate the insights gained from both the FCA’s and the firms’ experiences. The CP outlines the FCA’s expectation that supervised firms should notify it if they are subject to sanctions, whether these sanctions apply directly or indirectly, as per Principle 11. Additionally, since firms must report major rule violations to the FCA, the CP suggests that firms should evaluate if breaches of sanctions, due to significant failings in their systems and controls for preventing financial crime, should also be reported to the FCA.
• Proliferation Financing: The FCA is looking to expand the existing guidance to introduce new sections addressing proliferation financing (PF) and to ensure it is in line with the 2022 amendments to the Money Laundering Regulations (MLRs) which mandates that firms carry out PF risk assessments.
• Transaction Monitoring: Updates to the Guide aim to offer enhanced insights on implementing and monitoring transaction monitoring systems, emphasising the role of adopting innovative technologies such as AI in supporting effective monitoring practices. The revised Guide will require companies to more rigorously assess the suitability of employing sophisticated analytical instruments to manage the increasing quantity and complexity of financial transactions. Moreover, it will require that firms prove their grasp of the monitoring’s effectiveness, particularly in the context of adopting novel technologies on digital platforms.
• Cryptoassets: The FCA proposes to make clear references within the Guide that cryptoasset firms should consult the Guide. The amendments to the Guide incorporate references of the travel rule within the existing segment on customer payments. Furthermore, the Consultation suggests enhancing the sections concerning risk evaluation, management of elevated risk scenarios and fraud. It also integrates observations of effective and ineffective methods observed in the application of blockchain analytics for the surveillance of transactions.
• Consumer Duty: In recognition of the evolving financial landscape, the FCA proposes to clarify within the Guide that firms should evaluate if their systems and controls are adequate and whether they meet their responsibilities under the Consumer Duty.
• Consequential Changes: The FCA intends to make consequential changes throughout the Guide, reflecting the post-Brexit regulatory environment and updating expired links and refreshing case studies to include recent enforcement actions.

Who should read this Consultation Paper

CP24/9 is relevant to all FCA Financial Crime supervised firms, and those firms under the MLRs, including cryptoasset businesses. It also holds value for individuals and organisations working with regulated firms and trade associations, as well as any other parties interested or involved in financial crime prevention.

Important to note is that the FCA emphasises that the Guide and its proposed changes do not impose new requirements but seeks to help firms assess and enhance their financial crime systems and controls. The FCA encourages firms to use their judgment in applying the guidance to ensure effective financial crime prevention measures are in place.

Next Steps

Stakeholders are invited to submit their comments on the consultation questions by the 27th June 2024. Following the comments and feedback, the FCA plans to publish the final amended text of the Guide in a policy statement.

The proposed updates to the Guide are a testament to the FCA’s proactive stance on financial crime prevention. By clarifying expectations and embracing technological advancements, the FCA aims to foster a robust regulatory framework that keeps pace with the dynamic nature of financial crime risks.

How Complyport Can Help

Complyport is a market-leading consulting firm supporting the UK financial services industry for over 22 years. We specialise in providing Governance, Risk and Compliance services to support the regulated financial services industry to raise standards and thrive.

Our expert financial crime team is able to assist your firm in developing and implementing robust and proven financial crime prevention controls and frameworks. In line with the proposed changes to the Financial Crime Guide, Complyport can assist you to develop and enhance your financial crime systems to ensure resilience against potential financial crime risk.

Complyport can conduct an audit of your firm’s sanctions framework, reviewing your systems and controls to ensure they are understood, fit for purpose and relevant to your business.

Complyport can help with

• Partnering with our affiliated regulatory reporting technology provider MAP FinTech to automate the reporting required under EMIR REFIT, MIFIR and SFTR;
  • This is a seamless processing via award winning Polaris technology to efficiently and effectively meet demanding reporting requirements;
  • Transaction data received on our Polaris platform is processed, enhanced, validated and subsequently submitted in the format prescribed by the TR, ARM, and/or NCA;
  • A team of specialists will setup the service and provide training on extracting the specific and relevant data needed;
  • You will have access to our Polaris portal dashboard to control, manage and monitor transaction reporting across multiple jurisdictions and transaction reporting requirements for EMIR, MiFIR, & SFTR reporting channels all in a single platform;
• Other technology reporting solutions include: ASIC, MAS, Canada, FATCA, CRS, DAC6 Reporting; and
• Other technology monitoring solutions include: Best Execution Monitoring, Trade Surveillance/Market Abuse Monitoring, KYC & AML Transaction Monitoring;
• We support our technology with a team of regulatory consultants, who will:
  • Offer advice on policies, controls and procedures relevant to transaction and trade reporting;
  • Offer customised health-check reviews to ensure compliance with transaction reporting and monitoring requirements;
  • Assist with structuring and carrying out proper reconciliations;
  • Advise on reporting errors and omissions and setup a remediation plan; and
  • Devise and recommend tailored and practical solutions to support your business.

With our expert and skilled support, our team can help you effectively mitigate the adverse effects of internal and external financial crime activity.

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The Joint Money Laundering Steering Group (“JMLSG”) has published revisions to sector 12: Asset finance and sector 17: Syndicated lending in Part II of its Guidance on the prevention of money laundering and the financing of terrorism for the UK financial services industry.

The revisions do not change the substance of the guidance provisions, but seek to describe in more current terms:

• the way the sectors work,
• how to assess the risks in the sector, and
• how to identify who the customers are.

The JMLSG Guidance provides a sound basis for firms to meet their legislative and regulatory obligations when tailored by firms to their particular business risk profile.

Departures from good industry practice, and the rationale for so doing, should be documented, and may have to be justified, for example to the Financial Conduct Authority.

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In a speech by Megan Butler, Executive Director of Supervision – Investment, Wholesale and Specialists at the Financial Conduct Authority (“FCA”), delivered at the Anti-Money Laundering TechSprint event on 22 May 2018, the FCA revealed that 2,100 firms, including all the major banks and life insurers, had responded to the annual financial crime data return by 31 December 2017.

The following were the key points:

• 2,117 terrorism related reports had been sent to the National Crime Agency;
• 13,000 restraint orders were in place to freeze customer accounts;
• 3,600 restraint orders had been made during the previous year;
• over 1,100,000 prospective customers were refused services amid financial crime concerns; and
• a further 370,000 existing customer relationships were exited for the same reason.

Smaller firms were not required to respond, so the figures do not cover all businesses the FCA supervises, nor does it include data from the many international businesses in the UK that are structured so their UK operations are regulated elsewhere.

Phishing and identity theft are cited by firms as the most widespread fraud risks they now face; cybercrime now accounts for nearly 50% of all recorded crime in the UK.

This comes after claims were made at the end of 2017 that the UK, particularly the London property market, is a destination of choice to launder the proceeds of overseas crime and corruption.

Latest official figures suggest £90bn in criminal proceeds is laundered through the UK each year and pressure group Transparency International believes up to £4.4bn worth of British property might have been bought with suspicious wealth.

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The Sanctions and Anti-Money Laundering Act 2018 received Royal Assent on 23 May 2018, creating a new sanctions regime for the UK after Brexit, needed to keep UK Anti-Money Laundering (“AML”) and Counter-Terrorist Financing (“CTF”) measures up to date.

The European Union (Withdrawal) Bill currently going through Parliament will freeze current sanctions regimes in effect on the date of the UK’s withdrawal from the EU. These regimes are largely dealt with through the European Communities Act 1972, which will be repealed.

The Sanctions and Anti-Money Laundering Act 2018 will:

1. enable the UK to continue to implement United Nations sanctions regimes and to use sanctions to meet national security and foreign policy objectives; and
2. enable AML and CTF measures to be kept up to date, continuing to align the UK with international standards.

It also introduces the requirement for annual reports to Parliament on progress towards a register of beneficial owners of overseas entities, with the intention of having such a register fully in place within by 2021.

Most of Part 1 of the Terrorist Asset-Freezing etc. Act 2010, which deals with terrorist asset-freezing, will be repealed by this Bill.

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A fifth revision of the Money Laundering Directive (“5MLD”) – the current European Directive 2015/849 is the fourth revision, which took into account the Financial Action Task Force recommendations of 2012 – was initially proposed in July 2016, adopted by the European Parliament in April 2018 and is to be adopted throughout Europe by July 2020.

This 5^th AMLD takes the form of an EU Directive rather than an EU Regulation, setting a goal that EU Member States must achieve while allowing them to devise their own laws on how to reach these goals.

It will enter into force 20 days following its publication in the Official Journal of the European Union (“EU”) and EU Member States will then have up to 26 months to adopt and publish the laws, regulations and administrative provisions necessary to comply with it.

The main changes to the 4^th AMLD are:

1. Improving transparency on the real owners of companies.
2. Improving transparency on trusts.
3. Better connection of the beneficial ownership registers.
4. Lifting the anonymity on electronic money products (prepaid cards).
5. Extending Anti-Money Laundering and Counter Terrorism Financing (“AML/CTF”) rules to virtual currencies, tax related services, works of art.
6. Improving checks on transactions involving high risk third countries.
7. Setting up centralised bank account registers or retrieval systems.
8. Enhancing the powers of EU Financial Intelligence Units (“FIUs”) and facilitating their cooperation.
9. Enhancing cooperation between financial supervisory authorities.

The main changes in more detail

• Improving transparency on the real owners of companies

The beneficial ownership registers for legal entities, such as companies, will be made public. The EU consider wider access to part of the beneficial ownership information will enhance public scrutiny and will contribute to preventing the misuse of legal entities for money laundering and terrorist financing purposes.

• Improving transparency on trusts

The access to data on the beneficial owner of trusts will be accessible without any restrictions to competent authorities, FIUs, the professional sectors subject to AML/CTF rules (banks, lawyers etc.) and will be accessible to other persons who can demonstrate a legitimate interest. In addition, when a trust is a beneficial owner of a company, access to this information can be requested via a written request.

• Better connection of the beneficial ownership registers

The national registers on beneficial ownership information will be interconnected directly to facilitate cooperation and exchange of information between Member States. In addition, Member States will have to put in place verification mechanisms of the beneficial ownership information collected by the registers to help improve the accuracy of the information and the reliability of these registers.

• Lifting the anonymity on electronic money products (prepaid cards)

Member States may allow the anonymous use of electronic money products only in two situations:

1. when customers use their prepaid instrument (such as prepaid cards) directly in a shop for a maximum transaction amount of EUR 150;
2. when customers carry out an online transaction with a prepaid card below EUR 50

• Extending AML/CTF rules to virtual currencies, tax related services, works of art

The AMLD will now apply to entities which provide services that are in charge of holding, storing and transferring virtual currencies, to persons who provide similar kinds of services to those provided by auditors, external accountants and tax advisors which are already subject to the 4th AMLD and to persons trading in works of art. These new actors will have to identify their customers and report any suspicious activity to the FIUs.

• Improving checks on transactions involving high risk third countries

Member States will have to ensure that the sectors dealing with countries presenting strategic deficiencies in their AML/CTF regimes listed by the European Commission apply systematic enhanced controls on the financial transactions from and to these countries. The list of checks is now harmonised to ensure there are no loopholes in the EU. In addition, the listing of the European Commission will include third-countries with low transparency on beneficial ownership information, no appropriate and dissuasive sanctions or which do not cooperate nor exchange information.

• Setting up centralised bank account registers or retrieval systems

Member States will be required to set up centralised bank account registers or retrieval systems to identify holders of bank and payment accounts, with the European Commission working on technical aspects to ensure the interconnection of such registers or retrieval systems.

• Enhancing the powers of EU FIUs and facilitating their cooperation

The FIUs will have access to more information through centralised bank and payment account registers or data retrieval systems. The European Commission expect FIUs from different EU countries will be able to cooperate more easily, as well as with other competent authorities.

• Enhancing cooperation between financial supervisory authorities

In light of the revelations of the Panama Papers in April 2016, the 5^th AMLD will further enhance the exchange of information and cooperation between financial supervisory authorities in full respect of their confidentiality rules, including with the European Central Bank.

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The Financial Conduct Authority (“FCA”) is consulting on changes to the Financial Crime Guide for firms (“the Guide”) to ensure the guide remains up to date, proposing to add a chapter to Part 1 of the Guide to cover insider dealing and market manipulation and make miscellaneous changes as a result of recent regulatory changes (see below).

As part of its responsibility to ensure the integrity of the UK financial markets the FCA requires all authorised firms to have systems and controls in place to mitigate the risk that they might be used to commit financial crime. Financial crime captures a broad range of criminal offences, including insider dealing and market manipulation.

Firms must satisfy the FCA that they have robust governance, effective risk procedures and adequate internal control mechanisms to manage their financial crime risk. Firms subject to FCA SYSC 6.1.1R should be aware that their obligation to counter financial crime risk extends to insider dealing and market manipulation, including considering what arrangements are in place to counter such activity.

The Guide does not currently provide firms with guidance in relation to countering the risk of insider dealing or market manipulation, so the FCA are assisting firms by adding, to Part 1 of the Guide, a new Chapter 8 entitled ‘Insider dealing and market manipulation’.

The new chapter will outline the FCA’s observations of good and bad market practice around the requirement to detect, report and counter the risk of financial crime, as it relates to insider dealing and market manipulation.

Julia Hoggett, Director of Market Oversight at the FCA, noted in her speech on 14 November 2017 that, where institutions have had repeated concerns about the trading behaviour of a client, it is legitimate for the FCA to ask whether the institution has properly considered its regulatory obligations to counter the risk of financial crime.

This Guidance Consultation (GC18/1) reiterates that message and provides an opportunity for firms to comment on FCA proposals on how they are expected to comply with the requirements of FCA SYSC 6.1.1R.

The FCA recognise that some firms separate their surveillance function from their financial crime or MLRO teams. Where firms adopt this approach it is important they ensure there is adequate communication between the two areas such that the firm can effectively counter the risk of insider dealing and market manipulation.

Part 1 of the Guide will become Financial Crime Guide: A firm’s guide to preventing financial crime (“FCG”), with all references to ‘Part 1’ becoming ‘FCG’.

Part 2 of the Guide will become Financial Crime Thematic Reviews (“FCTR”), with all references to ‘Part 2’ becoming ‘FCTR’.

Other amendments

Minor amendments are proposed to the Guide to reflect recent regulatory changes and ensure the Guide remains up to date. These are mainly to reflect the introduction of the Money Laundering Regulations 2017 on 26 June 2017, but also to remove outdated references in relation to the way the FCA refers to Sanctions in Chapter 7, including the deletion of 7.1.3 referring to sanctions against Iran and the insertion of a new 7.1.5A relating to The Office of Financial Sanctions Implementation (“OFSI”).

Significant other amendments are made to:

• 3.2.7 Handling higher risk situations: relating to politically exposed persons, family members and their known close associates, and when enhanced due diligence is appropriate.
• 3.2.11 Record keeping and reliance on others: Introduction of ‘information need not be kept beyond 10 years for any transaction during a business relationship even if the business relationship has not ended’.
• 3.2.13 Customer payments (section applies to banks subject to SYSC 6.3): Examples of good and poor practice.

Overall, Parts 1 and 2 (the FCG and FCTR) have been altered to a style more in line with the FCA Handbook, primarily by italicising items such as ‘FCA’, ‘SYSC’, ‘FSA’ and referencing paragraphs in FCG and FCTR with a ‘G’ suffix to signify that it is FCA Guidance; for example: ‘FCG 2.2.1G and FCG 6.2.1G and FCTR 9.3.1G’.

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The Financial Conduct Authority (“FCA”) has set out its key priorities for the coming year in its Business Plan for 2018/19, along with its annual Sector Views. Inevitably, the priority for its discretionary activity is preparing for and implementing the changes resulting from European Union withdrawal (“Brexit”).

Additionally, seven priorities cut across different financial sectors and the other priorities listed relate to the seven specific financial sectors the FCA regulates.

This year’s Business Plan reflects the high level of resource the FCA needs to dedicate to Brexit to carry out the following priorities:

• Working with the Government.
• Ensuring an appropriate transition for EEA firms.
• Working with regulated firms and monitoring the risks to FCA objectives.
• Working towards operational readiness.
• Cooperating with international partners.

In addition, the FCA intends to advance some aspects of work to introduce a new duty of care provision for firms, beginning with the launch of an initial Discussion Paper, Feedback Statement and final version of its ‘Our Approach to Consumers’ paper in summer 2018.

Cross-Sector Priority Areas

• Firms’ culture and governance which should drive behaviours and produce outcomes likely to benefit consumers and markets.
• High-cost credit, building on the significant impact already made in the market.
• Tackling financial crime, including fraud, scams and anti-money laundering to make the UK financial services sector a hostile place for criminals and a safe place for consumers.
• Data security, resilience and outsourcing since technology plays a pivotal role in delivering financial products and services.
• Innovation, big data, technology and competition which are driving change in markets.
• The treatment of existing customers to ensure that they do not get less attention or receive poorer outcomes than new customers.
• Long-term savings, pensions and intergenerational differences which reflects the changing UK population and their financial needs.

Sector Priority Focus

1. Wholesale Financial Markets

• Clarifying FCA approach to market integrity
• Reviewing money laundering in capital markets
• Monitoring firms’ compliance with new conflicts of interest requirements
• Addressing operational resilience
• Monitoring firms’ compliance with FCA rules on Initial Public Offerings
• Publishing final rules and FCA approach to industry codes of conduct for unregulated markets

2. Investment Management

• Finalising rule changes following the Asset Management Market Study
• Working with European Supervisory Authorities in the implementation and review of the Packaged Retail and Insurance-Based Investments Products Regulation (“PRIIPs”)
• Consulting on new rules and guidance on liquidity management
• Considering the extension of governance remedies to with-profits and unit-linked funds
• Assisting the Treasury in the development of a new prudential regime for investment firms authorised under the Markets in Financial Instruments Directive (“MiFID II”)
• Publishing research that explores the rise of passive investment

3. Retail Lending

• Assessing creditworthiness in consumer credit
• Launching a Market Study on Credit Information
• Publishing the interim report on FCA Mortgage Market Study
• Reviewing the commission between credit brokers and other firms
• Ensuring the debt management sector works well for consumers
• Reviewing the motor finance market
• Reviewing the retained Consumer Credit Act provisions

4. Pensions and Retirement Income

• Developing a joint pensions strategy with The Pensions Regulator
• Potentially extending the remit of Independent Governance Committees for workplace pension schemes
• Helping consumers avoid scams

5. Retail Investments

• Assessing the impact of the Financial Advice Market Review (“FAMR”) and the Retail Distribution Review (“RDR”)
• Reviewing high-risk and complex investments
• Evaluating FCA interventions on Contracts for Difference
• Publishing report on the Investment Platforms Market Study
• Raising awareness of fraud and scams

6. Retail Banking

• Continuing to help firms prepare for ring fencing
• Developing a payments sector strategy
• Delivering the revised Payment Services Directive (“PSD2”)
• Continuing FCA awareness campaign on the Payment Protection Insurance redress deadline

7. General Insurance and Protection

• Implementing the Insurance Distribution Directive (“IDD”)
• Publishing interim report from the Wholesale Insurance Brokers Market Study
• Concluding initial diagnostic work on general insurance distribution chains
• Publishing the findings from FCA Call for Input on access to travel insurance
• Evaluating the effectiveness of 2015 FCA rules on Guaranteed Asset Protection insurance

Sector Views 2018

The annual Sector Views issued by the FCA cover all the markets it regulates and give an overall view of how each sector is performing, based on the data held by the FCA and its view as at mid-2017.

The FCA describes the sector, the need the sector seeks to fulfil, the issues and developments the FCA are seeing and the impact of change, and are developed in three stages:

1. Understanding the sector.
2. Assessing how the sector is performing and what is driving change in the sector.
3. Identifying the key themes for consumers, firms and the sector more widely.

Data Protection and GDPR related issues

The FCA intends to review the use of data by financial services firms, including:

• machine learning analysis of big data pools;
• algorithmic trading; and
• the wider use of artificial intelligence.

It believes this will help them better assess both potential opportunities and harm and where they may need to intervene.

The FCA will also further develop its relationship with the Information Commissioner’s Office in anticipation of the General Data Protection Regulation (“GDPR”) coming into force in May 2018, with the intention of publishing an updated Memorandum of Understanding (first issued in 2014) setting out how the two organisations will work together in future.

While the ICO will regulate GDPR, complying with GDPR requirements is something the FCA will consider under, for example, the requirements in the Senior Management Arrangements, Systems and Controls (“SYSC”) sourcebook. Under SYSC, firms should establish, maintain and improve appropriate technology and cyber resilience systems and controls.

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The Financial Action Task Force (FATF) have issued additional guidance on Private Sector Information Sharing which aims to improve effective information sharing, one of the cornerstones of the FATF Recommendations.

Information sharing is crucial for combatting money laundering, terrorist financing and financing of proliferation, particularly as multinational money laundering schemes don’t respect national boundaries.

It’s important that information concerning financial activity with possible links to crime and terrorism is shared in a timely and effective manner between and with both the public and the private sectors.

Firms should therefore not be unduly prevented from sharing information, but a number of legal constraints and operational challenges may prevent effective exchange of information between different firms belonging to the same group. For example, data protection and privacy laws such as the forthcoming General Data Protection Regulation give individuals the right to privacy and to protect their personal data.

The UK’s Joint Money Laundering Intelligence Taskforce was established in February 2015 and is now a permanent part of the UK’s response to money laundering and terrorist financing, bringing together the government, the British Bankers Association, law enforcement and more than 40 major UK and international banks, providing an environment for the financial sector and government to exchange and analyse intelligence.

FATF is an inter-governmental body established in 1989 with the objectives to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.

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In addition to proposed changes (see Regulatory Roundup 86) to Part I of the Guidance issued by the Joint Money Laundering Steering Group (“JMLSG”) there are now changes to Part II (Sectoral Guidance) and Part III (Specialist Guidance) up for consultation.

As might be surmised, the changes are brought about by the publication by HM Treasury of the proposed new “Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations” (see Regulatory Roundup 86) which in turn implement the relevant Fourth Money Laundering Directive and accompanying Fund Transfer Regulations (“FTR”) (although the latter is a Regulation, and hence binding upon all Member States, Article 17 of the FTR requires Member States to set out rules on administrative sanctions and measures for breaches).

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The Joint Money Laundering Steering Group (“JMLSG”) is consulting on changes to Part I of the Guidance – the current version was last amended in November 2014. The proposed revisions reflect the draft Money Laundering and Transfer of Funds (Information on the Payer) Regulations 2017 published on 15 March 2017 (see the “Money Laundering: Politically Exposed Persons” article in this Regulatory Roundup).

Although there are changes throughout the Guidance, the JMLSG advises that there are ‘relatively extensive changes’ to Chapter 5 (‘Customer Due Diligence’).

The JMLSG invites comments on the proposed changes by 28 April 2017.

Access to both the consultative version and to a marked up copy (split into four segments) can be accessed via the link provided.

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