Money Laundering Risks in the Pandemic
Amongst the array of challenges that businesses are currently facing in the wake of the COVID-19 pandemic, changes to how individuals work have opened up new avenues and channels through which criminals may be able to launder money. What does this mean for businesses regulated in the UK, and how will they adapt and respond to this risk?
Experience has taught us that in times of crisis and economic downturn, illicit finance continues to flow through entities in the UK. After the financial crash of 2008, there were even reports that some unspecified banks on the brink of collapse were supposedly only able to stay afloat due to the drug money funneled through them. As a result, existing anti-money laundering legislation was, and continues to be, strengthened through various iterations. Further, enforcement agencies have increasingly targeted regulated firms that can be exploited to facilitate money laundering, thereby becoming complicit to the offence. The UK's regulators, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority, aim to ensure that the financial markets are honest, fair, and effective.
Unfortunately, the pandemic has created new opportunities to flout anti-money laundering regulations. Employees are working remotely, conducting fewer face-to-face meetings, and potentially operating with reduced IT security. In response, on May 6, 2020, the FCA released guidance reminding firms to maintain effective controls and systems and to remain vigilant to new threats of money laundering and terrorist financing. Although it acknowledged the operational challenges that COVID-19 has created, it stated that firms should not alter their risk appetite. It recognized that certain controls would need to be delayed or reprioritized, but stated that changes to any controls should be assessed according to risk, with clear plans to return to business as usual as soon as possible.
Compliance failures are not the only risk such entities face. The FCA also acknowledged that because most work is currently conducted remotely, firms face a heightened risk of falling victim to identify fraud. In the absence of more traditional methods to identify customers, such as physically travelling to them, the FCA suggests alternative methods of client identification. Most of the approved methods, including the acceptance of scanned documentation and reliance on third-party verification, are already available to firms. Firms will have to assess whether the controls they have in place are sufficient to mitigate against specific risks that will undoubtedly become apparent as business continues.
Though the FCA's guidance is welcome, putting it into practice may be fraught with operational challenges. Whilst this is acknowledged in the guidance, the overarching message from the regulator is that firms must not resort to weakening their controls. It is too soon to predict how compliance failures during this period will be enforced, and firms are therefore best advised to clearly document any operational changes they implement to curtail any backlash from regulators later down the line.
If you have any queries, or would like further guidance on how to assess and respond to current risks, please get in contact with us.
For further information about the various guidance released by the FCA on issues arising from COVID-19, please refer to our June 2020 UK Enforcement newsletter.
© Arnold & Porter Kaye Scholer LLP 2020 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.