Calls for mandatory electronic AML checks following FCA’s thematic review of money laundering risks in the Capital Markets

This week, the FCA published its thematic review “Understanding the Money Laundering Risks in the Capital Markets” where it aimed to identify money-laundering risks and vulnerabilities in the capital markets.

The FCA visited 19 participants covering different segments of the market including investment banks, recognised investment exchanges, trade bodies, a custodian bank, clearing and settlement houses, inter-dealer brokers and trading firms.

The report found that many firms in the capital markets sector have no visibility of their customer’s customer or the ultimate beneficial owner of assets being traded. SmartSearch says this is worrying and highlighted the importance of using electronic AML checks rather than manual.

John Dobson, CEO of SmartSearch said: “The FCA’s thematic review has raised some very important points about the money laundering risks and vulnerabilities in the investment sector.

“The FCA has identified that one of the main risks is that many organisations in the sector have “no visibility of their customer’s customer or, for example, the ultimate beneficial owner of the asset being traded and that “effective customer risk assessment and customer due diligence (CDD) are key to reducing the opportunities for money laundering.”

This lack of visibility – whereby the ‘ultimate beneficial owner’ can be very difficult to identify – is an issue in other sectors too, but is problematic in the Capital Markets says the FCA as “trading chains often have multiple layers, involve complex products with many players and are often cross-border.”

In the Regulations, there is no obligation to know your customer’s customer, but that does mean firms are reliant on each firm in the chain to correctly fulfil their due diligence obligations for its own customer.

Dobson continues: “It is in response to increasingly complicated issues, like this, that we have created our anti-money-laundering electronic verification platform. It can carry out identification checks on businesses and individuals quickly and efficiently.

“And this year, due to the increasing problems with ultimate beneficial owners, and the way complicated businesses structures are being used by money launderers to target organisations like those working in capital markets, we have launched Ultimate Business Owners checks.”

“Electronic identification is the most reliable, secure and efficient source of information for identity solutions,” says Dobson, “and if all checks were done electronically, it would remove the risk of errors as a result of manual checks.”

The 5th Money Laundering Directive stipulating that electronic identification should be used wherever possible, it is widely believed that by 2020, electronic verification will become mandatory.

He concludes: “The FCA says that in light of this report, it expects firms to “consider their approaches to identifying and assessing the money-laundering risks they are exposed to. It is therefore prudent for all regulated firms to look at electronic solutions now in preparation for the inevitable.”

The new service means that where there is a complicated corporate structure i.e. a parent company and multiple subsidiaries – SmartSearch will be able to identify every subsidiary and who is at the top of the corporate tree quickly and easily.

This cuts out all those multiple stages and gives users of the system the peace of mind that they have met all their anti-money laundering, KYC and DD obligations.