Financial Crime Battle Plan: FCA’s Strategies
Introduction
According to the National Crime Agency , it is likely that hundreds of billions is laundered through UK corporate structures, or financial institutions annually. On 8th of February 2024, the FCA published an update on their progress in reducing and preventing financial crimes as they passed the mid-point of their 3-year strategy, in order to assist firms in these institutions.
The FCA specifies firms to ensure that systems and controls keep up to date with technological changes in order to combat the increased sophistication of perpetrators, particularly with respect to fraud, money laundering, sanctions evasion, and terrorist financing. In doing so, the FCA recognises there is a necessity for collective effort involving regulated firms, government entities, law enforcement agencies, regulators in tackling the risks faced to the financial services sector.
The FCA reflects on the work that has been delivered by them over the last 18 months and identifies 4 key areas of focus where further collaborative effort can help advance the efforts of reducing, and preventing, financial crime.
Effect on Wider Regulatory Environment
To combat financial crime, the financial services sector should prioritise effective prevention as the rationale of their strategy against fraud and broader financial crimes. All firms should collaborate with relevant partners such as consumer bodies, industry regulators, and other stakeholders to actively work to ‘design out’ potential avenues where there is a risk of financial crime being carried out.
Additionally, the financial services industry should anticipate increased investigations and robust enforcement actions against firms and individuals to punish those who dishonestly abuse their regulated status.
Firms should proactively assess and fortify their financial crime controls, ensuring they are proportionate to the nature and scale of their business activities. Failure to establish adequate controls may result in regulatory repercussions, including restrictions on firms, fines and other enforcement actions. Notably, recent trends indicate a heightened focus by the FCA on adherence to anti-money laundering regulations at the authorisation gateway, as evidenced by the rejection, withdrawal, or refusal of a significant number of applications under the Money Laundering, Terrorist Financing, and Transfer of Funds Regulations 2017 (MLRs).
Potential Impact on Firms
1. Data and Technology
A firm’s ability to detect fraud and money-laundering is evolving with technological advancements, yet the proliferation of cyber fraud, cyber-attacks, and identity fraud presents an ever-growing challenge. With the increasing prevalence of artificial intelligence (AI), criminals are leveraging the technology to target both consumers and firms, employing sophisticated tactics to evade robust controls.
In response, firms are advised to focus on the following strategies:
Take a proactive approach in understanding the ways in which criminals utilise new technology to target customers and businesses and maintaining a process for staying abreast of emerging techniques and typologies.
Ensuring adherence to best practices and invest within technology and data solutions that address both firm-specific and customer-related financial crime risks.
Developing systems and controls to effectively measure the outcomes achieved in combating financial crime.
Considering the adoption of third-party technology solutions for detection purposes, with appropriate resources calibrating controls to the firm’s specific risks and customer base.
2. Collaboration
Collaborative efforts between stakeholders are key in successfully mitigating financial crime. Criminals can discover ways to target and exploit the most vulnerable firms and sectors, making the sharing of data and intelligence a crucial tool in circumventing their efforts.
Firms are encouraged to focus on the following strategy:
Engage in data sharing initiatives with cross-sector partners and explore the latest advancements in data sharing technology to enhance collaboration, as this would result in a more informed view of economic crime threats.
3. Consumer Awareness
Fraudsters are now increasingly targeting consumers directly, to persuade them to release funds for seemingly legitimate purpose and so raising consumer awareness is essential in combatting financial crime.
According to the UK Finance Annual Fraud Report, in 2022, due to advancement in fraud detection technology, the industry was collectively able to prevent 61.5p in every £1 of attempted unauthorised fraud from occurring. Consequently, fraudsters are focusing efforts directly on consumers, and so efforts in supporting and educating consumers on spotting the signs of a fraud is crucial.
To achieve this objective, firms are advised to focus on the following strategies:
Raise awareness among customers regarding the specific fraud risks associated with the business that is conducted with them.
Align communication approaches with those recommended by public bodies or industry associations.
Solicit and utilise feedback to evaluate the effectiveness of these efforts.
4. Metrics – Measuring Effectiveness
Measuring the effectiveness of systems and controls for fraud and money laundering prevention allows firms to clearly assess the impact of their interventions.
Through increased transparency, tangible outcomes and meaningful metrics, consumers can have greater confidence in the anti-fraud efforts of the financial services industry.
To this end, firms are advised to focus on the following strategies:
Develop systems for measuring the effectiveness of financial crime prevention efforts with an outcomes-based approach. Additionally, explore how these interventions can contribute to an overall reduction in financial crime rates.
Assess the metrics provided to the firm’s Management Body regarding the firm's performance in combatting financial crime.
Conclusion
As part of FCA’s objective to enhance market integrity of the UK financial markets, all authorised firms, or firms registered for money laundering purposes, are required to have systems and controls in place to manage their risks of being used to commit financial crime.
Financial services firms may often act as the gateway for criminals, and so must make use of new systems, processes, and available data to keep up with emerging risks.
Additional resources
To learn more about how Khepri can assist with reviewing your financial crime systems and controls, please reach out to us at info@khepri.com
