FCA finds culture the main issue in capital market AML review

FCA has published its thematic review of money laundering risks in the capital markets. The review covered 19 firms representing a broad range of market segments and participants and focused on secondary markets.

FCA found some risks specific to the markets which were not effectively mitigated by the nature of the firms involved, and a lack of understanding of some of the risks.  One of the key elements of the feedback firms gave to FCA was that they would appreciate more examples of risks they face. Many had used the Deutsche Bank Final Notice of 2017 as a basis of their own risk assessments. FCA has now provided typologies  and questions for firms to consider.

In principle, the key to risk reduction in the sector is risk assessment and CDD. Transactions tend to involve many participants in the chain and it is key that all firms meet their obligations. FCA highlighted the Linear Investments case as highlighting the need for firms to have effective surveillance in place and not just rely on others.

Among other findings were:

  • the primary driver of ML risk is the customer, a risk exacerbated by the fact that orders are routed through multiple firms with no-one being able to see the full chain are more responsible than them for preventing money laundering;
  • firms appreciate the need to understand the customer’s business model but nevertheless in the chain of orders there is the risk that the ultimate beneficial owner will not be understood, and there is evidence that some firms believe others in the chain have more responsibility for AML than others – FCA stresses also that reliance is not about relinquishing responsibility. Generally, communication between firms in a chain could be a lot better;
  • the importance of keeping CDD up to date and also having appropriate oversight of who can instruct trades on behalf of customers;
  • that firms were focused on reporting market abuse and did not always understand when they needed to make SARs – and were more likely to understand the different obligations that may be triggered if they had a lead relationship manager or contact;
  • the accountability and ownership of money laundering risk in the first line of defence needs improvement;
  • firms that use a mixture of automated and manual transaction monitoring were likely to be better able to spot suspicious activity than those using only automated systems;
  • FCA found conduct in some firms akin to that which had caused issues at Deutsche Bank – training and awareness needed significant attention in these firms; and
  • FCA considered also the primary market – firms generally thought risks were lower than in secondary markets largely because of the involvement of so many regulated entities at so many levels.  But FCA warns firms against becoming complacent.

The review finishes with 7 typologies and questions firms should ask themselves.

Emma Radmore