Contents review the risk posed to the company and

 

 

Contents
·        
Introduction (Page 2)
·        
Issues and Risks from the company incorrectly
identifying and dealing with PEPs. (Page 2)
·        
Proposed Action Plan to combat the risks from
the company incorrectly identifying PEPs. (Page 3)
·        
Issues and risks to the company from staff
misunderstanding “knowledge or suspicion” of Money Laundering. (Page 3)
·        
Proposed Action Plan to mitigate consequences
of negligence of training. (Page 4)
·        
Issues and Risks from unclear training
procedures in the event of a suspicion of money laundering. (Page 4)
·        
Proposed action plan to implement a clear, easy
to follow internal reporting procedure to combat the risks the company faces.
(Page 5)
·        
Issues and risks the company faces from having
inadequate training procedures in place. (Page 5)
·        
Proposed Action Plan to provide regular
assessed training plan to minimize the company’s exposure to risk. (Page 6)
·        
Issues and risks from inadequate resourcing of
the company’s AML division. (Page 6)
·        
Proposed Action Plan to assist senior
management in making sufficient resources available to the company AML
division. (Page 7)
·        
Conclusion. (Page 7)
·        
Bibliography. (Pages 8, 9 and 10)
 

·        
 
 

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Introduction.

 

At the request
of the company’s Money Laundering Reporting Officer (MLRO) I have drafted this paper
to highlight the areas of weakness identified during the recent regulatory
visit. In my report I will look at each issue separately, firstly reviewing the
regulatory standpoint and assessing any guidance given by the relevant
regulatory authorities, secondly I would like to review the risk posed to the
company and finally I aim to advise a cost effective solution to mitigate any
of the discussed risks. In this paper I wish to demonstrate how implementing a
comprehensive training policy and investing resources into the compliance team
would address all the regulators cause for concern.

The company I
work for is Morrow Money Transfers Limited, they are a UK based Authorised
Payment Institution in the financial sector regulated by UK Financial Conduct
Authority (FCA) and Her Majesty’s Revenue and Customs (HMRC).

 

Issues
and Risks from the company incorrectly identifying and dealing with PEPs.

 

The first point
the auditor brings up in his report states “The firm had no clear approach to
identifying and dealing with PEPs”. The implementation of the 4th
directive of money laundering regulations has required the FCA to issue new
guidance on the treatment of Politically Exposed Persons (PEPs) for money
laundering purposes. Within this guidance it states the company has an
obligation to have in place appropriate risk-management systems and procedures
to determine whether a customer or the beneficial owner of a customer is a PEP,
a family member of a PEP or a known close associate of a PEP and to manage the
risks arising from the firm’s relationship with those customers (1). The guidance also states that once a
company has identified a client as a PEP that client must be subject to risk
sensitive enhanced due diligence procedures (1).

PEPs may expose
the company to additional risks of money laundering. If a PEP customer is not
identified correctly the company may be subject to fines issued by the FCA. The
FCA have previously fined Barclays Bank PLC £72 Million for failing to apply
enhanced due diligence to PEP customers (2).
Fines of this nature will not only have a damaging effect financially it would
also damage the company’s reputation.

 

Proposed
Action Plan to combat the risks from the company incorrectly identifying PEPs.

 

I suggest to
rectify the issue the company subscribes to a third party managed database
which specialises in identifying PEPs which all clients will be screened
against to ensure none of the company’s current client base are identified as
having current PEP status. As well as the implementation of screening clients the
company will implement more comprehensive on-boarding procedures. The inclusion
of external media searches, searching online political databases and screening
against the subscribed PEP database during the initial on-boarding stage will
assist further in identifying if the client is a PEP. The company must also
provide clear training to ensure all staff understand the risks imposed by
dealing with PEPs and how to effectively establish if a client is a PEP at all
stages of the business relationship and not only the on-boarding stage. The FCA
guidance prescribes companies must not decline business purely on the basis the
client is a PEP (1), therefore once a
PEP is identified by the company staff must inform senior management who will conduct
a business wide risk assessment to establish the risk imposed to the company
whilst taking into consideration factors such as jurisdiction, level of
political corruption, purpose of payment and source of funds information to
establish if enhanced due diligence is required. In the United Kingdom and
other jurisdictions with a low risk of political corruption only the upper
echelon of PEPs should be subject to enhanced due diligence, so applying these
controls to our client base should not require substantial resourcing while
ensuring the company maintains a high standard of compliance.

 

Issues
and risks to the company from staff misunderstanding “knowledge or suspicion”
of Money Laundering.

 

The auditor
expresses his concern that staff were unclear as to what “knowledge or
suspicion” of Money Laundering meant. The provisions of the Proceeds of Crime
Act (POCA) not only apply to financial institutions, they also extend to
individuals working in the regulated sector therefore it is essential for staff
to understand the meaning of “knowledge or suspicion” of Money Laundering to
effectively fulfil their obligations under the POCA as advised by the National
Crime Agency (NCA) (3) and to
minimize the risk of personal liability. Individuals failing to meet the
obligations set out in POCA could result in prosecution and or a fine.

 

Proposed
Action Plan to mitigate consequences of negligence of training.

 

To effectively
combat the risk of imprisonment and or fine to individuals the company through
educational and training materials must ensure all staff understand the meaning
of knowledge and suspicion of money laundering and the serious risks they as
individuals are faced with for not following the company’s procedures and
policies to combat money laundering. A clear understanding of the definitions
of both “knowledge” and “suspicion” is critical when relying on the company’s
internal reporting controls. The meaning of the word “knowledge” is clear and
means without doubt therefore an employee must have irrefutable evidence of
money laundering. The meaning for “suspicion” however has previously been
questioned. In the landmark case Crown versus Da Silva (2006), judges concluded
that in order to hold a valid suspicion, a person “must think that there is a
possibility, which is more than fanciful, that the relevant facts exist. A
vague feeling of unease would not suffice.” (4).
A clear understanding of this will assist individuals when meeting their
reporting obligations. The company must ensure employees understand the meaning
so they can effectively report suspicions of money laundering.

 

Issues
and Risks from unclear training procedures in the event of a suspicion of money
laundering.

 

Reporting obligations
set out in the POCA are applicable to all financial institutions in the UK,
these obligations state nominated officers and staff working in the regulated
sector have a duty to report all “suspicions” of money laundering. The risk to
the company in a failure to disclose a money laundering offences is possible
fines resulting in financial and reputational damage. Under section 330 of the
Proceeds of Crime Act 2002 (POCA) offences are created for people who have a
knowledge or suspicion of money laundering but fail to disclose it (5). The risks to
employees who fail to disclose knowledge or suspicion of money laundering is up
to 5 years imprisonment, a fine or combination of both an example of this is in
2002 a solicitor, Mr Jonathon Duff was jailed for failing to report money
laundering (6).

 

Proposed
action plan to implement a clear, easy to follow internal reporting procedure
to combat the risks the company faces.

 

To effectively
mitigate the risks the firm must have in place a clear internal reporting
policy that all staff must be made aware of. The policy must make it easy for
staff to report their findings. In cases of “suspicion” staff must report to
the company’s nominated officer who will immediately investigate the
transaction and supporting documents and decide if a Suspicious Activity Report
(SAR) will be made to the National Crime Agency (NCA). To remain compliant the
nominated officer must keep a record of all internal reports including his rationale
behind his final conclusion. If the decision is made to report a SAR the
nominated officer and all staff must be aware of “tipping off” provisions in
section 333A of the POCA(7) as it is
also a criminal offence to reveal any information that may hinder any law
enforcement investigation.

 

Issues
and risks the company faces from having inadequate training procedures in
place.

 

The regulators
report highlighted an area of weakness in the company’s AML training process.
The risks imposed by inefficient training are severe and could not only result
in the company being used as a vehicle to launder illicit funds, the company
may also face prosecution or regulatory sanction as set out in the UK’s Primary
legislation, POCA.

Guidance on the
Money Laundering Regulations (MLR) issued by HMRC state financial institutions
have a specific duty to maintain written records of training given to relevant
employees and all individuals that undertake training must be assessed to
ensure they have understood the training provided and training records must be
kept by the company’s MLRO (8). Further
to this, guidance issued by the Joint Money Laundering Steering Group states under
regulation 24 it is a successful defence of money laundering by a staff member
for not having adequate training arrangements in place (9), this means the company could be at risk to
any impending prosecutions or sanctions if training procedures are not
adequate.

 

Proposed
Action Plan to provide regular assessed training plan to minimize the company’s
exposure to risk.

 

Training is
crucial for the company to comply with the POCA and MLR. To successfully
mitigate the imposed risks I suggest a new training procedure is introduced
immediately where all current and new staff are required to complete a multiple
choice assessment after receiving training to acknowledge they have understood
the materials provided to them. Compliance staff within the company should
frequently be trained at a higher level in order to maintain their knowledge
and a high standard of compliance. Ongoing training is as important to the
company as initial training. The implementation of an annual re-assessment
period ensures all staff remain diligent in the company’s approach to combat
money laundering and terrorist financing.

 

Issues
and risks from inadequate resourcing of the company’s AML division.

 

In the recent
audit the regulator was critical about the effectiveness of the AML division
due to cuts made by senior management to the AML budget. It is required by law
that a company’s anti money laundering department is adequately resourced to
allow compliance to the required standard. A properly resourced compliance team
is mandatory as it is an offence under the MLR not to have appropriate policies
and procedures in place to prevent money laundering (regardless of whether or
not money laundering actually takes place) (10).
The Joint Money Laundering Steering Group have also provided guidance on
resourcing to financial institutions, within their guidance it states FCA
regulated firms who appoint a MLRO are also required to supply the MLRO with
adequate resources to counter the risk that they may be used for financial
crime (11). Failure to comply with
the MLR risks imprisonment of up to two years and/or a fine, depending on the
nature and extent of any such failure, it may also attract regulatory sanction.

 

 

 

 

 

Proposed
Action Plan to assist senior management in making sufficient resources
available to the company AML’s division.

 

To reduce the
risks imposed on the company the compliance department must be adequately
resourced to ensure the firm remains compliant with current regulations. A risk
assessment detailing possible liabilities, risks of regulatory sanctions and
the affect the impact the recent cuts has had on the AML divisions efficiency
would assist the senior management in making their AML budget decision. The
company must also provide the compliance department with sufficient levels of
staff, IT resources and third party verification tools to combat all aspects of
financial crime.

 

Conclusion.

 

In the ever
evolving regulatory environment compliance must be invested heavily in all
areas of the business especially training to minimize the company’s risk to financial
crime and money laundering. The financial and regulatory risks emanating from
the regulators report can be effectively managed by implementing a
comprehensive AML training presentation and assessment for all members of the
company to undertake. In the report, 4 out of 5 points highlighted by the
regulator originate from lack of training or staff not understanding the
training that has been provided to them. The final point in the regulators
report relates to systems and controls, senior management of the company must
realise their obligations and allocate sufficient resources to the company’s
AML division. The additional resources made available to the company’s AML
division such as third party PEP identification tools and updated IT systems will
greatly assist the company’s compliance department meet required standard of
customer due diligence. I believe implementing the above changes would have a
positive effect on the culture within the organisation while ensuring the
company provides an effective compliance regime and maintains a positive
attitude towards the required systems and controls needed to comply with
current regulations.

 

 

 

 

Bibliography.

1.       Title:
FCA PEP Guidance

Author: Financial
Conduct Authority

Name of Web Page:
FCA

Date of Publication:
06/07/2017

URL: https://www.fca.org.uk/publication/finalised-guidance/fg17-06.pdf

 

2.       Title:
FCA press release regarding Barclays fine

Author: Financial
Conduct Authority

Name of Web Page:
FCA

Date of
Publication: 26/11/2005

URL: https://www.fca.org.uk/news/press-releases/fca-fines-barclays-%C2%A372-million-poor-handling-financial-crime-risks

 

3.       Title:
National Crime Agency – Legal basis for reporting SARs

Author: National
Crime Agency

Name of Web Page:
National Crime Agency – Legal basis for reporting SARs

Year of
Publication: Unknown

URL: http://www.nationalcrimeagency.gov.uk/about-us/what-we-do/economic-crime/ukfiu/legal-basis-for-reporting

 

4.       Title:
British and Irish Legal Information Institute Website

Author: British
and Irish Legal Information Institute

Case No: 2005 02160 B1

Case Title: Crown vs Da Silva, R

Hearing Date:
19/05/2006

URL: http://www.bailii.org/ew/cases/EWCA/Crim/2006/1654.html

 

5.       Title:
Proceeds of Crime Act 2002 (section 330).

County: United
Kingdom

Year of
Publication: 2002

URL: https://www.legislation.gov.uk/ukpga/2002/29/section/330

 

6.       Title: Solicitor jailed for failure to
report money laundering

Author: Andrew
Towler

Name of Web Page:
Law Gazette

Date of
Publication: 26/07/2002

URL: https://www.lawgazette.co.uk/news/solicitor-jailed-for-failure-to-report-money-laundering/37513.article

 

7.       Title:
Proceeds of Crime Act 2002 (section
333A).

County: United
Kingdom

Year of
Publication: 2002

URL: https://www.legislation.gov.uk/ukpga/2002/29/section/333A

 

8.       Title:
Guidance – Money Laundering Regulations: your responsibilities

County: United
Kingdom

Author: HM Revenue
& Customs

Year of
Publication: 2013

URL: https://www.gov.uk/guidance/money-laundering-regulations-your-responsibilities#record-keeping-requirements

 

9.       Title:
Joint Money Laundering Steering Group Guidance – Part 1 (Chapter 7 – 7.15)

County: United
Kingdom

Author: The Joint
Money Laundering Steering Group

Year of
Publication: 2017

URL: http://www.jmlsg.org.uk/download/10015

 

10.   Title:
Joint Money Laundering Steering Group Guidance – Part 1 (Preface Point.8)

County: United
Kingdom

Author: The Joint
Money Laundering Steering Group

Year of
Publication: 2017

URL: http://www.jmlsg.org.uk/download/10015

 

 

 

 

11.   Title:
Joint Money Laundering Steering Group Guidance – (Chapter 1 – 1.46)

County: United
Kingdom

Author: The Joint
Money Laundering Steering Group

Year of Publication:
2017

URL: http://www.jmlsg.org.uk/download/10015