The Financial Conduct Authority’s (FCA) review of financial crime controls at challenger banks concludes that new providers need to do far more to identify and manage the risks associated with financial crimes such as money laundering.

The FCA’s 2022 review highlighted the need for improvement across many areas including: customer risk assessment and due diligence; transaction monitoring; and suspicious activity reporting.

Experts have branded the revelations of anti-financial crime deficiencies at challenger banks “deeply troubling”. They also voiced concern that the report does not go far enough and fails to expose the full extent of the sector’s problems in tackling financial crime.

Rodrigo Zepeda, CEO of Storm-7 Consulting, said the report excludes e-money issuers and payment service providers – a large sector that criminals are known to exploit for the purposes of money laundering.

Furthermore, as the review pre-dates the significant expansion of sanctions against Russia following its invasion of Ukraine, Zepeda believes this greatly impacts the relevance of the findings.

In addition, sanctions monitoring frameworks are often not fully integrated with anti-money-laundering (AML) frameworks, as they are highly complex and require additional time-consuming and expensive processes and technologies.

Weaknesses in customer due diligence

The FCA found weaknesses in most challenger bank’s customer due diligence (CDD) processes, such as not obtaining details about income and occupation, resulting in an incomplete assessment of the customer’s relationship with the bank.

Zepeda found this is also worrying because “if a bank does not obtain these details, this is not an ‘incomplete assessment’, it is a total failure. It has no way to monitor that customer and subsequently assign them a realistic money laundering risk rating.”

This means that if the customer starts receiving a regular income into the account, the bank does not know if this income is realistic based on the customer’s stated occupation. Historically, traditional banks have been fined heavily for AML failures such as these.

Inconsistencies in enhanced due diligence

The FCA also reported that some challenger banks are not applying enhanced due diligence (EDD) consistently, nor documenting it formally, such as when managing politically exposed persons (PEPs). Traditional banks have often incurred heavy fines for failing to apply EDD procedures, especially with regard to PEPs.

“It is difficult to see why traditional banks should be investigated and fined for these failures, but challenger banks should not and only receive a slap on the wrist,” commented Zepeda.

The FCA uncovered many examples of ineffective transaction monitoring alert management, citing inadequate rationales for discounting alerts. It also said some challenger bank’s customer risk assessment frameworks are woefully underdeveloped and lack sufficient detail. Some did not even have a customer risk assessment in place at all.

Zepeda said: “This makes me cringe. Not having a customer risk assessment is breaking the law under Money Laundering Regulations (MLR). It means banks cannot add red flags or detect money laundering in an account – a complete failure. Again, traditional banks have been fined for this.”

How challenger banks can address these issues

Some of the main problems at challenger banks derive from people, controls and technologies and they need to address these areas without delay.

To oversee the frameworks mentioned above requires highly experienced AML personnel. Yet many challenger banks have hired personnel with insufficient experience and as a result, do not know how to implement frameworks properly. They may have simply accepted internal AML frameworks without reviewing their suitability, simply because they don’t know how to.

The review highlights that challenger banks need to review internal AML controls and policies. They often have new operating models and structures, so may have failed to implement comprehensive AML defence models internally. For example, the “three lines of defence” model provides governance and oversight by different departments and functions with multiple perspectives.

Without such a model, internal AML controls may be run by a single department with no higher accountability or oversight of rules, policies, procedures, controls, and decisions.

Another issue is that the speed and convenience of challenger bank apps means people use banking services more often. This makes internal AML transaction monitoring much harder, and therefore customer due diligence, risk assessment and profiling even more important. These are huge challenges for banks with millions of new customers.

Challenger banks must not ignore the findings

Dev Odedra, director at Stratagem Consulting, warned challenger banks to pay attention to the FCA report as many had failed to note the findings in a similar report on traditional banks’ money laundering risk management.

“Challenger banks should not make that mistake now their time has come. They should review this new report carefully, consider the many findings, how they manage their risk, and what they need to change.”

The FCA noted challenger banks’ innovative applications of technology, such as how they use data for customer identification and verification. But Odedra says banks can go further.

“Data held by banks is teeming with intelligence, and they can use it to improve their understanding of customers and transactions, Facebook based its whole business model on customer data. Banks have equally valuable information, and they should be using it. If they can build financial crime risk into the design and development of technology-based products, it could help mitigate some of these risks.”

Technological solutions can provide the answers

Many new AML technologies are available to help challenger banks tackle these problems.

They enable banks to develop new, more cost-effective and efficient approaches to AML by speeding up onboarding and improving and streamlining internal control frameworks.

In contrast, many traditional banks have much larger and more expensive legacy AML systems and may not have fully modernised these systems.

So, if challenger banks can bring their AML processes to a more appropriate and compliant level, they have another opportunity to gain competitive advantage.

RiskScreen is up to the challenge

It is now crucial that challenger banks embark on a more proactive, risk-based approach to combatting money laundering.

RiskScreen offers flexible, scalable, and auditable solutions to ensure challenger banks consistently maintain an effective and efficient AML process, all while keeping abreast of an ever-changing regulatory environment.

The RiskScreen AML platform provides a complete end-to-end solution designed to meet both existing and future challenges. 

To add to its appeal, this intelligent solution offers a range of modules that cover key areas such as screeningonboardingin-life monitoring, and adverse media. And with flexibility in mind, it offers individual modules to cover specific areas or the complete package for a fully integrated solution.

Whatever your requirements, you can rest assured that your anti-money laundering (AML) and know your customer (KYC) processes will be immediately transformed, with full scalability in order to future-proof your compliance functions.

To discover more about how RiskScreen can help you to meet existing and future challenges, contact us today.

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