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Small firms do not effectively manage financial crime risks

21 November 2014

Small firms do not effectively manage financial crime risks - Read more

The Financial Conduct Authority (FCA) has found that small firms do not manage financial crime risks effectively.

The findings, a result of the FCA’s predecessor, the Financial Services Authority, have been published as part of two reviews by the current regulator, alongside with further guidance for all firms to ensure that expectations are clear.

Small banks and commercial insurance intermediaries were found to have significant shortcomings. Most banks’ anti-money laundering systems and controls had significant and widespread weaknesses. These weaknesses extended to sanctions controls for some of the banks.

According to the FCA, although senior management engagement had improved, a third of banks had inadequate resources; staff often had weak knowledge of money laundering risks; and some overseas banks struggled to reconcile their group policies with higher UK requirements.
Since the FCA’s review, several banks have replaced their Money Laundering Reporting Officers; four firms have temporarily restricted their business while they correct the weakness in their controls; and the FCA has instructed three banks to undertake an independent review of their systems and controls (a skilled person’s review); and two firms have been referred to the enforcement division for investigation.

Most intermediaries controls failed to manage bribery and corruption risk effectively. While some intermediaries’ policies on remuneration, hospitality and training had improved since the last review, bribery and corruption risk assessments were often found to be too narrow and many firms failed to take a rounded view of the risks associated with individual relationships. Half of the third party and client files reviewed were inadequate and senior management oversight was often weak.

Tracey McDermott, FCA director of enforcement and financial crime, said: ‘Firms must take their responsibility to reduce the risk of financial crime seriously. Significant improvements are still required in this area.

‘To do that successfully requires firms to use their judgement and common sense. That is not about box ticking or wholesale de-risking. It is about firms getting the basics right – understanding their customers, the risks they pose and managing those risks proportionately and sensibly.’

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