Reshaping financial crime measures across retail banking

“Although we have observed examples of effective control frameworks and good practice, we are disappointed to continue to identify, across some firms, several common weaknesses in key areas of firms’ financial crime systems and control frameworks. […] The consequences of poor financial crime controls in a high-risk sector such as retail banking are significant. It can lead to criminals abusing the financial system to launder the proceeds of crime, supporting further criminal activity and damaging the integrity of the UK financial market.” (FCA’s Dear CEO Letter to Retail Banks, May 2021[1])

It is estimated that the proceeds of crime as a result of money laundering are more than £100 billion per year in the UK alone, with an acknowledgement that this amount could be understated due to large volumes of money laundering going undetected (National Crime Agency, 2019)[2].

In May 2021 the FCA issued a “Dear CEO” letter, addressed to all UK retail banks, to tackle the common failings identified in money laundering and terrorist financing control frameworks across the industry. The letter shares common themes arising out of the FCA's recent assessments of retail banks' financial crime systems and controls and reinforces senior management accountability for financial crime risk mitigation. The FCA have requested that all retail banks undertake a gap analysis of their financial crime controls by 17 September 2021 in order to understand areas of weakness and help them strengthen their control framework.

What does this mean for UK Retail Banks?

As highlighted in its letter, the FCA has deemed that compliance controls and processes are areas in which retail banks have been underperforming. All too often, these controls are too generic, and not tailored to the specific financial crime risks faced by an organisation—they may help to demonstrate compliance, but they are not effective at reducing financial crime.

While the controls put in place meet regulatory requirements, these may not be aligned to the risk profile of the bank and its customers. As these controls are not fit-for-purpose, they may attempt to identify, or manage risks that simply do not exist, thus creating waste, whilst potentially failing to mitigate true financial crime risk.

Failure to ensure appropriate controls are in place may result in the proceeds of crime flowing through the bank and/or facilitation of the financing of terrorism, both of which can lead to substantial fines and significant reputational damage.

Where are the gaps?

By now, most retail banks would have undertaken their gap analyses and identified any weaknesses within their compliance framework.

Through our experience of undertaking gap assessments across the retail banking sector, we have identified a number of common failings across the industry, which are in line with the requirements (and findings) of the FCA. Most of these gaps come from organisations putting controls in place to appear “compliant” without necessarily tailoring these to fit their risk exposure.

Becoming compliant by design

Retail banks need to ensure that they have a risk-first approach in order to manage gaps in their financial crime control framework and align to FCA requirements. In summary, this can be achieved through:

1. Better understanding how financial crime is actually carried out – the typologies and associated red flags
2. Understanding which of these typologies can be carried out through your organization and, therefore, constitute genuine inherent risks
3. Using these risks as the basis for your FC program and designing controls which can tackle them head on

As the prevalence of financial crime continues to grow regulators are demanding more than just the appearance of compliance. A smarter approach needs to be taken to effectively deter and detect financial crime, inhibiting the ability of criminals to abuse banking services and profit from illicit gains.

If you would like to find out more about how we can help you, please contact Victoria Kelly.

[1] https://www.fca.org.uk/publication/correspondence/dear-ceo-letter-common-control-failings-identified-in-anti-money-laundering-frameworks.pdf (PDF, 142 KB)

[2] https://www.nationalcrimeagency.gov.uk/news/national-economic-crime-centre-leads-push-to-identify-money-laundering-activity