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FCA Amendments: Guidance on Financial Crime

Money Laundering & Terrorist Financing

30 April 2015

Money Laundering & Terrorist Financing

The Financial Conduct Authority has now published their revisions to the Firms Guidance on Financial Crime that came into effect on 27th April 2015. The regulator amended various sections including Chapter 2 on Systems & Controls (affecting Management Information and Risk Assessments) and Chapter 3 on Money Laundering and Terrorist Financing. In particular, their revisions to Chapter 3 focused upon source of wealth and source of funds as well as Enhanced Due Diligence (EDD) and the handling of higher-risk situations.

Summary of Chapter 3 Revisions:

Source of wealth and source of funds

Determining the source of funds and the source of wealth can help firms establish if the level and type of business and transactions are consistent with the firm’s knowledge on the customer and is helpful for due diligence and ongoing monitoring. This also must be determined where the customer is a Politically Exposed Person (PEP).

• Source of Wealth: Describes how a customer or beneficial owner obtained their wealth.
• Source of Funds: Points to the origin of the funds that are concerned in the transaction or business relationship and refers to the activity that generated those funds and the means through which the funds were transferred.

The Joint Money Laundering Steering Group’s (JMLSG) guidance allows that in circumstances where the risk of money laundering and/or terrorist financing is very low, (and subject to certain conditions), firms may assume that payments drawn on an account in the customer’s name with a regulated credit institution (within the UK, EU or equivalent) is sufficient to satisfy standard Client Due Diligence (CDD) requirements.

Often this is referred to as ‘Source of Funds Evidence’, however it should be clear that this is wholly separate to ‘Source of Funds’ for the purposes of Regulation 8 and Regulation 14 of the Money Laundering Regulations 2007 and with regards to the FCA’s Guidance on Financial Crime, although it should be said that nothing in the FCA’s Guide prevents the use of Source of Funds Evidence in appropriate circumstances.

Enhanced Due Diligence & Handling of Higher-risk situations

In circumstances where a higher risk of money laundering is depicted, firms must apply Enhanced Due Diligence measures, designed to provide firms with a greater understanding of the associated risks concerned with their customer than just undertaking Standard Due Diligence.

The aims of Enhanced Due Diligence (EDD) should:

• Provide more certainty that the customer and/or beneficial owner is who they inform they are
• That the purposes of the business relationship are above board; and
• Increase opportunities to identify and deal with any concerns that may have arisen with the information provided.

The degree of Enhanced Due Diligence must be proportionate to the risks associated with the transaction or business relationship, however, in majority of cases, firms can decide which aspects of Client Due Diligence to enhance. The firm’s decision would depend upon the reason why the customer was classified as high risk.

Examples of Enhanced Due Diligence (EDD) could be:

• Gathering additional information about the customer’s and/or beneficial owner’s business
• Acquiring stronger verification of the beneficial owner’s identity from reliable and independent sources
• Obtaining a cleared understanding of the customer/beneficial owner’s reputation and/or role in public and considering how this might affect the level of risk associated with the relationship
• Undertaking searched on the Customer’s directors and other individuals, exercising control to comprehend whether their business or integrity affects the level of risk associated with the customer
• Determining how the customer and/or beneficial owner obtained their wealth so that the firm is satisfied it is legitimate
• Determining the source of funds of the customer/beneficial owner to be satisfied that they are not from the proceeds of crime.

Click here to view a Summary of the FCA’s Amendments to their Financial Crime Guidance - Chapter 2:Financial Crime Systems & Controls.