From Dear CEO letters to an increased Levy – more reasons for MLRO to stay up at night

10.21.2021 | By Mark Speyers

The banking industry is no stranger to money laundering regulations, whether it be new regulations, revised standards, regulatory priority letters or Dear CEO letters, they all seek the same goal – to enhance the anti-money laundering (AML) regime.

And the latest letter issued by the Financial Conduct Authority (FCA) to retail banks in early September 2021 didn’t disappoint, laying out their concern and expectations regarding money laundering through trade finance. Couple that with the Treasury’s proposed draft legislation also issued in September, to raise £100 million in levy funding from financial intuitions starting 2024, it looks like there are more reasons keeping money laundering reporting officers (MLROs) up at night.

Our recent report on The Global State of Anti-Money Laundering revealed 62 per cent of compliance professionals are finding it harder to identify crime – almost two thirds of compliance officers admit that criminal activity has become harder to spot in the past year. The pandemic has created a trail of struggling businesses, trades and supply chain problems, which has prompted a rise in trade based money laundering (TBML).

According to the Financial Action Task Force, TBML is the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimise their illicit origins. Techniques range from simple fraud, such as the misrepresentation of prices, quantity or quality of goods on an invoice, through to complex networks of trade and financial transactions.

Many TBML schemes use financial transactions to launder funds. Institutions, such as retail banks and supply chain financers, offer financial instruments and products that are used by companies to facilitate domestic and international trade and commerce – i.e. trade finance. For example, a bank or provider may issue lending lines of credit to help both importers and exporters.

Dear CEOs …

I empathised with CEOs of retail banks when news broke last month that the FCA and Prudential Regulation Authority (PRA) had sent a Dear CEO letter which fired something of a broadside at firms operating in the trade finance sector – an area which is often seen as high risk for financial crime given its global scope, complexity and the fact it involves large volumes of trade flows and currencies.

Referring to a number of scandals which have prompted unwelcome headlines over the past 18 months, the regulators used the letter to cite what they described as the “failures of commodity and trade finance firms” to rectify “significant issues relating to both credit risk analysis and financial crime controls.” Firms were also instructed in the letter to conduct a sweeping financial crime risk assessment in order to enhance their controls and systems to better deal with AML and fraud in trade finance.

Given that the regulators went on to warn that they may ask to see the assessments and any follow-up action taken, it’s clear that firms – and their MLROs – have much to be getting on with. But there’s more.

A new tax levy to fund an enhanced AML regime

At last year’s Budget, the UK government announced a new levy to raise £100 million per year from the AML-regulated sector to tackle money laundering and help fund reforms outlined in the government’s 2019-2022 Economic Crime Plan.

According to draft legislation published this September, this levy establishes a new tax called the Economic Crime (Anti-Money Laundering) Levy that the commissioners for Her Majesty’s Revenue and Customs (HMRC), the FCA, and the Gambling Commission will be responsible for the collection and management of this tax. Firms subject to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 will pay an annual fixed tax, with the first payment collected in 2023-24 and the levy varying on the size of the firms affected.

Policymakers have just concluded a technical consultation which aimed to ensure the legislation operates as intended, but they have not been clear on how the levy will be used. One thing is clear -the levy shouldn’t be a substitute for what’s already in place, it needs to go towards improving financial crime data sharing, outcomes, and effectiveness.

Next steps

As my colleague Enda Shirley has rightly pointed out, strengthening AML efforts is not just a case of throwing more money at the problem – it’s also about greater collaboration and assembling the right resources and intelligent tooling to better detect indicators of offences.

In practice, this needs to involve systems, data and people.

We know C-suites pay more attention now to financial compliance controls and effective systems that drive outcomes and manage risk, not generate false positives. This means they need to know where they have control gaps, if their risk assessments are picking up the right risks for their business and crime typologies, and where they should calibrate and enhance controls to get the most of their technology when it comes to effective detection, prevention, and alerting to meet internal risk appetite and regulatory expectations/reform.

We also know both regulators and C-suites are keen to work with fintechs/regtechs/innovators to experiment with data and solutions that help them work smarter not harder while enhancing compliance and preventing crime. Banks should continue to partner with other banks and the public sector (regulators and law enforcement) to disrupt crimes, by leveraging data-driven solutions. One would also hope this is an area where the new levy can help collaboration and information sharing.

People remain a key component in striking a balance between the technology and resources needed to manage an effective compliance AML programme. If anything, the broader challenge concerns retaining highly skilled and experienced people and ensuring they do not get lured away by other departments or competitors.

Unfortunately, money laundering continues to evolve and fluctuate, shift and develop. In response to its seemingly relentless advance, the immediate priority facing regulators, law enforcement officials and MLROs is to seek to strengthen and demonstrate the effectiveness of their AML regimes – this is no time to press pause.

It won’t be easy. But if they succeed in doing so, they will make a real impact on society as a whole. Now that’s a reason to get up every morning – even if sleep often proves hard to come by.

As evolving pressures on UK banks pummels the anti-money laundering landscape, Charmian Simmons takes a look at recent announcements and examines how the right combination of systems, data and people offers the best way towards enhanced compliance and crime prevention

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