
Strengthening Financial Crime Defences: Key Insights on Reducing Money Laundering Risks
The FCA has released an updated analysis titled Assessing and Reducing the Risk of Money Laundering Through the Markets (MLTM). This report examines how capital markets can be exploited to launder illicit funds and offers guidance to firms on strengthening their defences against such activities.
While the report focuses on capital markets, there are several key takeaways relevant to the insurance sector. Below, we highlight these findings and explore steps firms can take to safeguard against financial crime.
Key Areas of Assessment for Wholesale Brokers
The FCA’s review identified seven critical areas requiring improvement in wholesale market brokers’ systems and controls:
Business-wide risk assessment (BWRA)
- Tailored risk assessments were lacking; generic risks were common.
- Updates to assessments often did not account for scenarios like terrorist financing risks.
- Senior management frequently lacked understanding of their firms’ financial crime risks.
Customer risk assessment (CRA)
- Firms frequently failed to document CRA methodology or customer risk rationale.
- Some automatically assigned low risk to certain business models without considering other factors.
- Few firms differentiated between domestic and foreign Politically Exposed Persons (PEPs).
Know Your Customer (KYC) and Customer Due Diligence (CDD)
- Many firms did not record the nature and purpose of accounts during KYC.
- Over-reliance on third parties for due diligence was common.
- Identity verification and source of funds checks were inconsistently completed.
Governance and Oversight
- Larger firms demonstrated robust governance through MLRO reports and MI reporting.
- Smaller firms struggled with independent SMF roles and financial crime knowledge.
Transaction Monitoring (TM)
- Firms faced challenges in identifying suspicious activity due to trade volume and transparency issues.
- TM alerts were often not analysed in conjunction with KYC information.
- Collaboration between trade surveillance and TM teams required improvement.
Investigations and Suspicious Activity Reporting (SAR)
- Limited use of the MLTM glossary code was noted.
- Few external SARs were submitted, and the quality of investigations needed improvement.
Training, Resourcing, and Policies and Procedures
- Many firms provided annual financial crime training, though proactive firms tailored this to business risks.
- Resource levels in AML and financial crime functions were often inadequate.
What Firms Should Do
The insurance sector must take the opportunity to review this report and assess whether their existing systems and controls adequately address the risk of money laundering.
While ML risk may be perceived as lower in insurance, criminals are continually evolving their methods. The FCA expects firms across all sectors to proactively address financial crime risks and adopt relevant findings from reports like this.
How Padda Consulting Can Help
If you need assistance in interpreting how these findings apply to your firm, we can provide expert guidance to ensure your practices align with regulatory expectations.
We have extensive experience conducting financial crime gap analyses to identify improvement areas and ensure firms manage these risks effectively.
Our partnership with Ever Comply also offers innovative solutions to help firms meet financial crime compliance requirements. If you would like a demo or want to discuss how our solutions can support your business, contact info@padda-consulting.co.uk.