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Compound Growth

9th March 2017

Financial Crime on the Regulatory Horizon for 2017

As we mentioned in one of our previous articles, ‘Lessons from 2016 and Your Compliance Agenda for 2017’, most firms will by now have reviewed any anticipated regulatory changes on the horizon and have planned to address them within their compliance and regulatory agenda for the year.

We have previously noted that one of the biggest areas of regulatory change last year was that in relation to financial crime.

Since the Fourth Money Laundering Directive (4MLD) is set to be implemented in June 2017, it seems that regulatory change in relation to financial crime developments is set to continue and increase over 2017.

Let’s take a quick look at what financial crime developments have taken place so far this year and what we know is on the regulatory horizon.

AML Fines in 2017

This year, whilst we are still only at the beginning of March, we have already seen the largest ever penalty issued by the UK regulator for AML failings.

On 30 January 2017 Deutsche Bank was fined £163 Million for serious failings in relation to its anti-money laundering (AML) control framework, with the largest regulatory fine ever for this area issued due to the severity of the Bank’s deficiencies.

We have previously summarised Deutsche Bank’s record AML fine and the significant deficiencies the FCA identified during its review. Deutsche Bank’s fine provides a timely reminder to all firms that they should pay close attention to their AML systems and controls. Firms should look at the reasons behind Deutsche Bank’s fine and then look at their own AML systems and controls to ensure they are proportionate, operate efficiently and are adequate for their business and regulatory requirements.

Regulatory Horizon 2017: Financial Crime Developments

This summer, one of the biggest areas for regulatory change will be the Fourth Money Laundering Directive (4MLD), a far-reaching piece of legislation which must be adopted in the UK and across the rest of Europe by 26th June 2017.

Brief Summary of 4MLD:

The Fourth Money Laundering Directive (4MLD) was adopted in May 2015 and is to be implemented in all Member States by 26 June 2017. For the UK to implement this, it means updating the existing Money Laundering Regulations (MLR) and the Proceeds of Crime Act (POCA). In addition we can expect the Joint Money Laundering Steering Group (JMLSG) to issue new guidance.

Key drivers for the new directive included global consistency, including the wish to have a consistent sanctioning of breaches along with a reinforced risk-based approach for the EU’s efforts of anti-money laundering (AML) and counter-terrorist financing (CTF).

With greater emphasis on undertaking a risk-based approach, improvements 4MLD will look to establish are:

Further defining ‘Beneficial Ownership’;
Introducing a revised definition of Politically Exposed Persons (PEPs);
Making suspicious activity reportable in all EU States;
Requiring that undertaking Simplified Due Diligence (SDD) rather than Enhanced Due Diligence (EDD) be justified; and
Introduction of a third-country equivalence regime.

Thus the key changes 4MLD will bring are those in relation to Enhanced Due Diligence, where the disapplication of EDD will need to be justified; Politically Exposed Persons will include ‘Local’ individuals; there will be a central register of beneficial ownership and application of the framework will be expand beyond EU borders.

4MLD Checklist:

For those in Regulation and Compliance departments that are planning for 4MLD, a high level checklist of what you should be looking to cover is as follows:

Ensure that a gap analysis is run and that you adequately plan to implement any required changes;
You should undertake a review of the financial crime prevention measures you have in place;
In addition you should undertake a review of your client on-boarding and Client Due Diligence procedures including when to apply enhanced and simplified due diligence procedures;
Consider if your current IT and security systems are adequate to prevent the threat of cybercrime;
Consider how 4MLD standards may be extending to other group entities that are based overseas;
Ensure that training on the new requirements is provided to all staff;
Undertake a review of you firm’s financial crime risk appetite and undertake a risk assessment;
Ensure that a risk-based approach is taken when implementing your systems and controls and that this approach is proportionate to your business.

Whilst 4MLD is set to be implemented this summer, there is already talk of when the Fifth Money Laundering Directive (5MLD) will be implemented, thus with so much on the financial crime regulatory horizon, firms must ensure careful planning in order to properly focus their efforts and target their resources.