Our new anti-money laundering regime
On the 1st September 2006, the FSA deleted its Money Laundering Sourcebook and replaced it with high level provisions in its Senior Management Arrangements Systems and Controls Sourcebook. This action is in line with the FSA's 'better regulation agenda', and its pursuit of a more risk-based anti-money laundering (AML) regime.
The risk-based approach to AML is about developing and managing a firm’s business processes for fighting money laundering. It is a tool that needs to be used both by the regulated and the regulator. Firms need to act in risk-based ways over AML, and their supervisors need to be attuned to this in terms of what they expect.
This change to the FSA Handbook coincides with the release of the latest JMLSG Guidance. The JMLSG is an industry body which has been producing detailed guidance for the industry on the implementation of money laundering legislation for over 15 years. The JMLSG's revised Guidance (which is available to firms for free on the JMLSG website) was endorsed by the Treasury in February. The FSA was closely involved in the development of the Guidance.
With this new framework in place, there exists an excellent opportunity for FSA-regulated firms to deliver a more risk-based regime that produces real benefits to them and their customers. The responsibility for delivery of this regime now lies with the financial services industry and, in particular, firms' senior management.
What does the new regime mean for firms?
The new regime does not mean that the FSA is going soft on money laundering. The FSA prioritises resource based on risk to its objectives. Money laundering is naturally a high priority for the FSA because it involves the illegal profits of acquisitive crimes such as people and drug trafficking and fraud which cause great harm to society as a whole. The risk-based approach is not necessarily the cheapest or easiest approach to money laundering, but it is the most cost-effective, proportionate and flexible.
The new regime places greater emphasis on senior management responsibility for managing money laundering risk and ensuring that systems and controls are used in a risk-based manner with an increased focus on higher risk customers and products. This is a regime that is focused on results and not inputs, it is therefore important that firms' AML tools are used as a means to an end. The framework in place empowers firms to be innovative and creative in their mitigation of money laundering risk so that they may meet their obligations while minimising the cost and inconvenience to themselves and their customers.
One key area of change is customer identification. The FSA has worked hard with the JMLSG to ensure that the industry's ID requirements were appropriate to the risk presented by the customer in question. Firms are of course required by law to identify their new customers but it is up to them to decide how much customer ID is appropriate above a basic minimum level. Firm's identification procedures should be flexible and fit for purpose so as to ensure customers are identified effectively but are not unnecessarily and unreasonably burdened or denied access to the financial system.
Firms are not obliged to implement the new Guidance, but if they have ever to justify their actions to the FSA or a court then whether they have acted in accordance with the Guidance will be taken into account. Under SYSC 3.2.6E G ‘The FSA, when considering whether a breach of its rules on systems and controls against money laundering has occurred, will have regard to whether a firm has followed relevant provisions in the guidance for the UK financial sector issued by the Joint Money Laundering Steering Group.’ Similar provisions are included at other parts of the Handbook, e.g. DEPP 6.2.3 G.
If firms do not align their processes with the JMLSG’s, they will need to find and demonstrate effective alternative ways of managing their money laundering risks.
What does the new regime mean for consumers?
The new money laundering regime is about encouraging firms to be more flexible in their relationship with customers, including with regards to identification. The law still requires that firms maintain identification procedures that enable them to satisfactorily identify their customers but there now exist a far greater array of ways in which compliance with this requirement can be achieved. For more information on why firms require identification and what types of identity documentation are likely to be required for personal customers under the new regime please see the FSA Factsheet 'Checking Your Identity' [PDF].