Report Highlights Key Anti-Money Laundering Risk Areas

Financial services institutions must formalise their Anti-Money Laundering (AML) processes to remain fully compliant and stave off money laundering attempts, a report by Belfast headquartered financial services compliance company fscom has warned.

Based on audits of the AML frameworks of 60 financial services firms, fscom's Fincrime Compliance Report 2023 examines the challenges banks and financial institutions are exposed to, outlining their compliance responsibilities on areas including Sanctions, Politically Exposed Persons (PEPs), Suspicious Activity Reporting (SARs) and Customer Risk Assessments.

The report found the top five AML risk areas in the year to June 2023 to be Compliance Monitoring, Customer Risk Assessments, Transaction Monitoring, Customer Due Diligence, and Enhanced Due Diligence.

While the audits suggested that institutions have increased their vigilance and understanding of the regulatory environment, in part due to the increased scrutiny on banking sanctions following Russia's invasion of Ukraine which led to enhanced screening processes, it concluded that many AML frameworks still do not provide an adequate level of assurance.

When compared with fscom's 2022 Fincrime Compliance Report, new and emerging concerns were identified around insufficient AML training; a lack of evidence of high-risk client sign off by senior managers; customers being permitted to make transactions before enhanced due diligencemeasures were applied; insufficient transaction monitoring rules and inadequate investigation of screening hits.

Another issue is a lack of robust customer risk assessments, in particular failing to treat customers or transactions with associations to high risk third countries (HR3Cs) appropriately. As regulations stand, firms must apply enhanced measures to any business relationship or transaction with a person established in a high-risk third country.

Covering the period July 2022 to June 2023, the AML audit reviewed the financial compliance processes of 60 institutions, including Electronic Money Institutions, Authorised Payment Institutions, Virtual Currency Exchanges and Bureau de Changes.

The audit process consists of four elements, starting with an internal review of policies against regulatory obligations; ‘side-by-side' walk throughs to assess the firm's operational efficacy; customer due diligence file testing; and staff interviews with employees to gauge their knowledge of the legislation behind their AML framework.

The majority of institutions sampled were UK based, however firms in Ireland, Switzerland, Jersey, Singapore, Lithuania and the Cayman Islands were audited in line with local legislation and regulatory guidance.

Completed annually by fscom's team of financial crime compliance consultants and led by fscom Manager Richard Dunlop, the report provides wider industry with a series of best practice recommendations to address compliance issues and stay ahead in the ever-evolving financial services landscape.

fscom Director Philip Creed said: "We are pleased to share our Fincrime Compliance Report 2023 with wider industry. Though it features the most striking findings, it identifies the new and emerging risks that all financial institutions should be aware of and should serve as a valuable example of the standard required to meet the recommendations of the regulator. Financial services firms are at a constant and evolving risk of money laundering as financial crime actors grow more sophisticated; therefore, we advise them to not only meet their regulatory obligations but to strive for industry best practices."

To download the Fincrime Compliance Report 2023, visit: blog.fscom.co/fincrime-compliance-report-2023