By Jo Priestley, Head of Financial Crime Expertise · Efficient Frontiers International

According to the NCA, money laundering has the potential to become a national security issue due to London’s role in the global financial system[i].  It is not being taken lightly. 

Before, perceived deficiencies in anti-money laundering (AML) systems and controls would result in a substantial fine of a financial institution (FI). Over the last 15 years, the UK’s financial regulator has been given more power to pursue criminal prosecutions against FIs.

UK regulators handed down a record level of AML penalties to banks in 2021 – more than tripling from $206 million in 2020, according to research by  Fenergo.

The rising cost of AML defence 

The harsher stance from the Financial Conduct Authority (FCA) follows on from their commitment to reduce and prevent serious harm as outlined in their 2022-2025 business plan. 

The battle between banks and criminals is like an arms race, with each side developing new measures and countermeasures. 

Criminals have always found ways to look for and exploit weaknesses in systems and controls. It’s a daunting prospect for internal compliance teams, especially where the money launderer seeks to hide in plain sight and to take over legitimate businesses or use unwitting or complicit individuals as part of their network to place and layer cash.

Today, AML compliance costs firms £28.7bn annually[ii] – which is half of the entire UK defence budget. The costs dwarf law enforcement and intelligence agency budgets. 

Detecting and deterring money laundering is an important policy position in law enforcement: if a criminal cannot use their cash that acts as a deterrent to crime. FIs  must continue to work with law enforcement on criminal typologies, information sharing and improved capabilities to prevent and detect the proceeds of crime and terrorist financing in the banking system. 

Despite the growing cost of AML defence to FIs, the practice continues to evolve, and the actors continue to breach and exploit systemic controls with innovative approaches. 

Increased sophistication 

One example of this concerns identity verification of foreign beneficial ownership of UK property. This is one of the main requirements of the Economic Crime and Corporate Transparency Bill. 

However, identifying beneficial ownership today is fraught with complexity. EFI’s research, ‘KYC Report 2022: The State of Compliance’, revealed this was the biggest challenge for 62% of the senior banking professionals surveyed. 

When nominee companies are used to obfuscate the true owner’s identity within sophisticated structures, it is difficult to identify the true beneficial owner in isolation, e.g., how can you tell whether they are the true owner or a nominee?

Meanwhile, documentation and verification issues remain an issue within the KYC and AML process at many institutions. This lack of transparency leads to an opportunity for companies to hide ownership. 

This risk of these types of identity verification breach is exacerbated for businesses that are growing and/or innovating. If the internal compliance functions of these companies burden the growing business too much, loopholes around identity and beneficial owner concealment will be developed and exploited. 

As a business expands, it is inevitable there will be something of a delay, but the approach to compliance must be carefully managed and appropriately resourced.

The options for financial institutions

As the spectre of illicit finance continues to loom large. financial institutions are likely to continue to invest and innovate. 

However, there are some basic cost-effective steps financial institutions can take.

An important step is to understand the risk that is posed and consider the targeted controls that are needed to manage risk. Risk management is not a one size fits all approach; more is not necessarily better – an appropriate and considered approach is the right way. 

Operational teams must understand the risk that is being managed. Managing financial crime is more than ticking boxes and looking for red flags – it is crucial to understand and document the customer’s risk profile.

It will also be important for compliance teams to closely follow the developments of the upcoming Economic Crime Corporate Transparency Bill as this requires stricter verification with Companies House.

A cost-effective guidance for how banks and institutions can help reduce loophole potential and ensure financial institutions stay ahead of the criminals by utilising external independent expertise to work in tandem with their existing framework. 

The arms race itself has no end in sight. FIs are therefore under constant intense pressure to keep ahead of criminals in every way possible – and the requirement to deliver is more crucial than ever.

[i]  https://www.nationalcrimeagency.gov.uk/what-we-do/crime-threats/money-laundering-and-illicit-finance

[ii] https://www.mondaq.com/jersey/money-laundering/1140424/how-regulated-firms-can-successfully-navigate-the-aml-landscape