The wealth management sector has been identified as at risk of being used by crooks and criminal gangs for money laundering.

The report says: “Based on sector risk assessments, the FCA’s view is that retail banking, payments and digital assets, wholesale financial markets and wealth management remain particularly vulnerable to financial crime and pose the greatest risk of being exploited for money laundering.”

The wealth sector is one of several in financial services seen as susceptible to money laundering following a risk assessment exercise by the FCA. 

The Treasury Report published recently: ‘Anti-money laundering and countering the financing of terrorism: Supervision Report 2020-22', reviewed money laundering efforts in the two years up to April 2022. It warns that the Russian invasion of Ukraine has highlighted the need to stop illicit finance which can be used to hide criminal assets and support terrorism.

Regulators, including the FCA, have stepped up their regulatory activities in recent years to combat money laundering, the report said.

The FCA, the supervisory authority for approximately 21,500 firms, employed between 40 and 47 full-time staff over the two year period to April 2022 who were dedicated to anti-money laundering (AML) work and supporting CFT (countering the financing of terrorism).

Frequent AML breaches identified by the FCA included:

• Inadequate customer due diligence (CDD) procedures
• Inadequate enhanced due diligence (EDD), specifically in relation to Politically Exposed Persons (PEPs)
• Inadequate client risk assessments
• Inadequate firm-wide risk assessments
• Inadequate training of staff responsible for AML supervision
• Inadequate documentation of risk-assessments and measures taken to monitor risk

From April 2022, the FCA extended its REP-CRIM strategy (the annual financial crime data return) to approximately 4,500 additional firms, including cryptoasset businesses. The move enabled the FCA to keep closer track of financial crime risk.

It also introduced financial crime systems and controls in relation to specific risks over multiple firms at the same time. These enabled the FCA to monitor large amounts of data to identify, “hotspots, outliers, and emerging themes that drive supervisory attention to where risks are most likely to occur,” the report said.

The FCA has also engaged with firms on specific issues or risk identified by assessing firm-related data and intelligence.

From January 2020, the FCA became the AML supervisor for cryptoasset businesses. The report said at the registration ‘gateway’ for crypto businesses the FCA identified significant weaknesses in firms’ controls, resulting in almost 90% of firms withdrawing their applications or being rejected or refused by the FCA.

From February 2022, the FCA diverted resources to mitigate the risks arising from the Russian invasion of Ukraine. The FCA sent direct communications to over 10,000 regulated firms that were considered higher risk from a sanctions evasion viewpoint. All firms were instructed to report to the FCA any notifications made to the Office of Financial Sanctions Implementation (OFSI) regarding asset freezes, designated persons, and suspected breaches.

The FCA has also conducted work on developing supervisory processes to assess firms’ systems and controls around sanctions, as well as rolling out an automated sanctions screening testing tool to assess the adequacy of firms’ screening capabilities.

During the 2020-21 and 2021-22 reporting periods, the FCA carried out nearly 300 desk-based reviews (DBRs) of firms but did not conduct any onsite visits mainly due to Covid-19.

As part of the FCA’s data-led proactive AML supervision programme, it wrote to 643 firms regarding “significant turnover” in the firms’ Money Laundering Reporting Officer (MLRO) function over the last three years.

The FCA reported that of the firms subject to a DBR in 2020-21, 28% were compliant, 65% generally compliant, and 7% non-compliant.