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Rapid Response Team: 0800 559 3500
Switchboard: +44 (0)203 947 1539
Rapid Response Team: 0800 559 3500
Switchboard: +44 (0)203 947 1539

Understanding FCA Investigations: A Deep Dive into 'Wash Trades

Author: Azizur Rahman  28 October 2013
5 min read

The Financial Conduct Authority (FCA) has produced its Anti-Money Laundering Annual Report 2012-13. It pulls no punches about the scale of the problem and has to be seen as a warning of the dangers of companies taking a do-nothing approach.


As you might expect from a newlycreated major organisation such as the FCA, its latest report is strong on objectives. Objectives are usually fairly easy to identify and not too diffi cult to explain to anyone who will listen. Achieving them is usually where the difficulties start.

This is why the FCA’s report cannot be taken as any clear guarantee of future anti- money laundering success. But it does at least give us an indication of what we can expect from it in the future – and an interesting snapshot of money laundering as viewed through the eyes of the authorities. In the case of the FCA, it views combatting money laundering as one of its major challenges, along with the breaching of financial sanctions, the financing of terrorism and investment fraud. With that in mind, its report makes it clear that it wants to be proactive in identifying the risks of financial crime, favouring early intervention and what it calls “credible deterrence’’ to seek out firms that areinvolved in such wrongdoing.

Such talk is similar to that which we heard when the creation of the FCA was originally announced. The idea of getting out there among the movers and shakers to build bridges in an attempt to identify problems early was the approach that the FCA’s founders were favouring. As from the end of this year, the FCA’s fi nancial crime supervision team will see its numbers increase from 17 to 22. The team’s job is to work with fi rms where the potential for money laundering and other financial crime has been flagged up – either by the firm itself, whistle blowers or other law enforcement agencies – to try and minimise that risk. This is called devising a systematic anti-money laundering programme (SAMLP). Any assessment of the effectiveness of such an approach may well take months or even years, depending on the results the FCA’s actions produce. But it is worth noting that the report also mentions in passing that money laundering will also be a priority for the National Crime Agency (NCA) when it starts work next month.

So the FCA is not the only new organisation with extensive powers looking to tackle money laundering. The FCA’s report talks at length of its cooperation with other agencies and organisations. It is clear the picture it will paint for its law enforcement colleagues will be one that places great emphasis on tackling money laundering. The section on compliance in the report begins by saying: “We supervise a large and diverse industry and cannot monitor all transactions in all fi rms, or even in a single fi rm. However, our risk-based supervisory techniques have led us to conclude that the level of anti-money laundering compliance in financial services firms is a serious concern.’’

The FCA’s breakdown of its review of compliance in banking makes for interesting reading:

• Three quarters of banks were not managing the risk of money laundering effectively.

• Around a third of banks appeared willing to accept very high levels of money laundering risk if the immediate and regulatory risk was acceptable.

• Over half the banks the FCA visited failed to apply “meaningful enhanced due diligence measures’’ in higher risk situations and failed to identify or record adverse information about customers.

• Around a third of them either dismissed serious allegations about their customers without adequate review or failed to identify customers as politically exposed persons (PEP’s).

• Three quarters in the FCA sample failed to take adequate measures to establish the legitimacy and source of funds to be used by customers.

• More than a quarter of the banks were too close to customers to be able to take an objective view of the business relationship; mainly because they were driven by the prospect of profits and new business.

• Half the banks had no clear policy for dealing with trade-based money laundering risks, leading to inadequate controls for identifying potentially suspicious transactions. The conclusions the FCA draws from its review are forceful. The report states: “The root cause of these problems is often a failure in governance of money laundering risk which leads, among other things, to inadequate anti-money laundering resources and a lack of (or poor quality) assurance work across the firm. This often focuses on whether processes have been followed rather than on the substance of whether good AML judgements are being made.

“The weakness we see in firms’ dealings with high risk customers and PEPs is a serious and persistent problem in firms of all sizes. However, this issue manifests itself in different ways in different types of firm. Small firms often fail to collect enhanced due diligence information, as required under the Money Laundering Regulations 2007. Large firms, including those that have been subject to SAMLP examinations, often collect adequate information but fail to assess it properly and/or make poor judgements about the money laundering risk this information exposes, particularly where potential profi ts are high. “We also find weaknesses in firms of all sizes when they should be establishing and corroborating high risk customers’ sources of wealth or funds. Too much reliance is often placed on customers’ own explanations, even when they are subject to serious and credible allegations of criminal activity.’’

The picture painted by the FCA, therefore, is not a rosy one. If its assessment of the scale of money laundering – or at least the potential for it – is believed by the NCA and other enforcement agencies, it raises the prospect of companies and other financial institutions coming under some very close scrutiny in the near future. In previous articles we have questioned the likely effectiveness of the FCA and wondered whether any of its talk of being proactive would lead to real results. Judging from its report, it is making the case for action clear to its own members and the enforcement agencies, individuals and other organisations it is likely to be working with to tackle money laundering. It would be surprising if the action did not follow soon.

Only time will tell if this report is of any real signifi cance. It could prove to be the catalyst for the newly-formed FCA and NCA to swing into action against money laundering and prompt other agencies to weigh in with more force than in previous years. Alternatively, it may come to be viewed as a strongly-worded snapshot of business crime that was largely ignored. However, for any person, company or organisation that senses even the slightest risk of money laundering, this has to be the time to make sure the correct checks and procedures are put in place to prevent such illegal behaviour. It would be very surprising if this report did not prompt at least some activity from the authorities.

As experts in the fields of both compliance and business crime, Rahman Ravelli Solicitors is regularly asked to advise on and instigate measures for clients to reduce the risk of money laundering and corruption. Bringing in the right expertise to analyse a company’s working and its vulnerability to money laundering and other business crime is essential if it wants to continue functioning without falling foul of the law. Being business crime specialists, you may feel that we are bound to say this. But the FCA says, in the final paragraph of the compliance section of its report: “It is important that firms are vigilant in all areas and continue to assess all the risks to their business model, not just those the regulator has focused on recently. It is also essential that senior management set the right tone from the top. Without the right culture in a fi rm, it is unlikely that it will be able to embed an effective anti-money laundering regime.’’

Azizur Rahman C 09369

Azizur Rahman

Senior Partner

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Aziz Rahman is Senior Partner at Rahman Ravelli and its founder. His ability to coordinate national, international and multi-agency defences has led to success in some of the most significant corporate crime cases of this century and top rankings in international legal guides. He is recognised worldwide as one of the most capable legal experts regarding top-level, high-value commercial and financial disputes.

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