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FCA warning of poor controls in capital markets sparks reactions
The Financial Conduct Authority (FCA) still sees examples of poor controls in capital markets, said Megan Butler, director of supervision – investment, wholesale and specialists. Her concerns about the threat of escalating money laundering, financial crime and market surveillance have prompted reactions from the industry. AML
An issue Butler raised in her speech last week was firms’ assessment of how effectively their market surveillance function worked alongside their money laundering reporting officer. Consultants said that firms could do more.
“Financial firms are still grappling with new technology, products and markets, which make the detection of financial crime progressively more difficult. Market abuse in particular remains difficult to identify and there is a greater need for more sophisticated technology to detect abusive behaviour. This includes statistical analysis and more complex algorithms in trade and market surveillance systems,” said Terry Sahathevan, Partner, banking, investments and lending at Bovill.
Consultants have found market abuse to be the most difficult area to identify, and agree with Butler that market surveillance working alongside money laundering reporting officers effectively is a main concern.
Colin Darby, Managing Consultant, financial crime, payments and technology at Bovill, said the rapid transfers of asset ownership or asset form possible in capital market products and services were attractive to criminals seeking to obscure true ownership or funds.
“In some cases, a suspicious transfer from transaction from a market surveillance perspective could also give risk to suspicions of money laundering. Market misconduct can involve fraud and, where firms suspect market misconduct, they should be mindful of handling the proceeds,” he said. “Market surveillance and financial crime functions can work together by sharing intelligence, investigation techniques and risk control design ideas to move towards more holistic financial crime risk management.”
Sanctions
Butler said policymakers were continuing to look at restrictions in capital markets, like those that restricted access to EU capital markets for certain Russian state-owned institutions, and this was a theme that would continue, she said. “Financial crime systems and controls in your firm need to be resilient to implement these types of measures,” she said.
Bovill’s Darby said firms could do more to identify and manage their indirect exposure to sanctions risk by considering factors such as a client’s counterparties, suppliers and buyers, or taking advantage of intelligence on persons associated with designated individuals or entities.
“As sanctions lists are public, designated individuals and entities typically know they are listed so look to circumvent banks’ controls through complex ownership structures, use of mules or fronts and multi-leg transactions or deals,” Darby said.
The introduction of the Russian sectoral sanctions in August 2014 had brought a new angle to the compliance challenge, he said. It has required firms to focus more on the nature of a client or counterparty’s business and the transactions involved to determine whether the activity falls foul of the sanctions.
AML technology
Butler said the FCA had a keen interest in the quality of AML systems and controls at firms. Deutsche Bank’s £163 million fine in January 2017 by the FCA was probably the most high profile example of poor controls in capital markets, she said.
Bovill’s Darby said more AML technology options were becoming accessible to firms. Some have already adopted remote or digital identity verification tools. Others have invested in self-learning transaction monitoring. One of the biggest areas for use of technology is in data analytics to improve risk identification and support the investigation of suspected money laundering and terrorist financing.
“As good as technology can be, firms must ensure they fully understand the operation of their technology solutions, calibrate them to their respective risk appetites and deploy appropriate technology governance,” Darby said.
There is much at stake. Butler said in her speech that she agreed with the finding of the government’s recent national risk assessment update of money laundering and terrorist financing risk that capital markets, unlike in the 2015 report, are a significant emerging risk.
“We agree with this assessment. We also take a view that the size and complexity of the market, and its cross-border nature, mean the problem could potentially extend well beyond recent, high-profile cases,” Butler said.
“Getting effective AML controls throughout the capital markets is a key part of achieving the FCA’s objective of ensuring that the UK financial system is a hostile sector for money launderers,” she said.
Dec 11, 2017 Alex Davidson, Regulatory Intelligence
Alex Davidson is senior editor, AML/financial crime, in London for Thomson Reuters Regulatory Intelligence.
Source: Thomson Reuters Regulatory Intelligence
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