22nd June 2010

Compliance tip June - The small firms financial crime review

The Financial Services Authority recently published their report into the financial crime systems and controls in small firms. The review undertook visits to 159 small firms across the retail and wholesale sectors. It covered three main areas: Anti-money laundering and financial sanctions; Data Security; and Fraud Controls.

The key findings of the review were:

• Few firms had appropriate due diligence systems in place to identify or deal with higher risk customers or situations.
• The majority of firms relied on policies and procedures that had been prepared by consultants, which in a number of cases were not tailored to their business.
• Many small firms did not have appropriate formal vetting and referencing procedures for staff, at the initial recruitment stage or on an ongoing basis.
• Small firms need to do more to meet their fraud risk obligations in order to mitigate the risk that their business might be used to facilitate fraud.
• Generally, small firms remain weak in their knowledge and implementation of the UK financial sanctions regime.

Although Mortgage Brokers and General Insurance Firms are not directly subject to the Money Laundering Regulations they are subject to the higher-level requirements from the FSA to counter financial crime.

There are a number of ways your firm could be affected by financial crime, for example:

• a criminal using your firm's services to disguise the source of illicit funds;
• a customer defrauding your firm;
• a customer being defrauded by a third party because of your firm's actions (for example unintentionally allowing the customer's details into other people's hands);
• helping a customer to defraud a third party, such as HM Revenue & Customs, knowingly or not; and
• a staff member defrauding your firm

If you know about or suspect money laundering or terrorist financing, it should be reported to the Serious Organised Crime Agency (SOCA)

Key Action Points

Firms should therefore undertake the following action to reduce the risk that the firm can be affected by financial crime:

• Ensure they have assessed the financial crime risks their firm faces,
• Have proportionate risk management systems and controls in place to address the risk of financial crime,
• Be able to demonstrate that the risk assessment is reviewed regularly,
• Senior managers should understand the identified risks and take appropriate and proportionate action to mitigate them.

In a world where financial crime is on the increase firms must not under-estimate the responsibilities both they and individuals working therein have. Failure to act not only exposes the reputation of the firm but can also lead to both regulatory and criminal sanctions for all parties involved.

Help

Full details of the review can be found at
http://www.fsa.gov.uk/smallfirms/pdf/financial_crime_report.pdf and the FSA has also released a one-minute guide on 'anti-money laundering' and updated their 'financial crime good and poor practice' on the small firm's website. Also available from the website is existing material on data security and financial sanctions.

If this is an area you would like further assistance with, or indeed if you have any queries on this subject please contact your usual Consultant or the Resources Compliance London office on 020 7422 7780.

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