FSA Financial Crime Conference
Speech by Callum McCarthy, Chairman, FSA
The Congress Centre, 28 Great Russell Street, WC1
15 November 2005
Introduction
Mr Chairman, Attorney, Sir Stephen, Commissioner, Ladies and Gentlemen, I am delighted to be the first speaker at this important conference, and to know how many distinguished speakers follow me on today's programme.
When I say important, I mean both that the issue of financial crime is important to us all, as members of society, and that it has a particular importance for the FSA, given that the reduction of financial crime is one of our four statutory objectives. As many of you will know, there are three themes to the FSA's work: promoting efficient, orderly and fair markets; helping the retail consumer of financial services to get a fair deal; and making the FSA itself more efficient and hence easier to do business with. Reducing financial crime sits squarely within the promotion of orderly markets. But it also helps retail consumers get a fair deal. After all, there's nothing fair about finding that a criminal has stolen your identity and emptied your bank account.
So we should always remember why we are working to reduce financial crime. Too often we see the bureaucratic and administrative measures involved in fighting crime. But the fight against financial crime is not about a firm making sure it meets what it thinks are its legal obligations, or our regulatory requirements, by making its customers produce a utility bill before they open an account. It is about us all playing our part in the fight against drug and people trafficking, terrorist financing and other only too real social problems. It's about the social consequences of those crimes. It's about fighting the harm on our streets that affects all members of society – including the financial services sector. In my speech at the Mansion House in September I spoke of the challenge we all face from the threat of terrorist activity, a threat brought home to us so vividly by the dreadful events of 7 and 21 July. I spoke then of the importance of learning the lessons of those events, and stressed the implications for business continuity. But there is also the contribution that can be made to making terrorist activity more difficult by impeding or preventing the flow of illicit funds. That applies to the very great efforts I know the industry has made to assist law enforcement in their investigation of those crimes as to the question of financial stability.
As citizens, we are also all conscious of the deeply damaging effects which what I perhaps have to call "ordinary" crime can have, both directly on the victim, and more widely on society. We shall hear a good deal about that today, which will help to remind us why our work on financial crime matters. The Attorney General will be speaking shortly about the Government's current initiatives on fraud. Sir Stephen Lander will be speaking about the new and creative ways in which the Serious Organised Crime Agency plans to tackle serious organised crime when the Agency becomes operational next year. James Hart will be giving us the law enforcement perspective on fraud, including current and emerging trends.
None of this means that the FSA, or the industry we regulate, is being conscripted into law enforcement. It does mean that we have important responsibilities in this field. I speak here today to emphasise the importance we at the FSA attach to delivering the FSA's financial crime objective. I expect the CEOs of our firms to give it similar importance. We expect firms to recognise that financial crime risk is one aspect, and an important aspect, of business risk, and to manage it accordingly. That means senior management ensuring that their firm identifies the financial crime risks associated with the type of business they do, the parts of the world where they operate, and those specific to the firm itself. It means senior management ensuring that they have systems and controls in place to mitigate the risks they have identified, with clear accountabilities for the day to day management of those risks, and appropriate reporting to top management and the board. And it means senior management ensuring that the firm has a strong "anti-crime" culture, as part of its overall culture, with a clear and consistent lead being given from the top.
Regarding financial crime risk as something to be dealt with entirely by your compliance function is unlikely to achieve this. Financial crime is a risk like any other. It needs to be managed properly - and it is senior management's responsibility because they – you here today – are in a position to make the real difference to their firms' risk management; you can ensure that each firm puts resources where they will have greatest effect. I recognise the role the Money Laundering Reporting Officer has to play. It is a key part. But the MLRO will achieve proper effectiveness only if he or she has the consistent and visible backing of top management.
What the FSA has been doing
I want to say something now about the FSA's work on money laundering and fraud over the past year. Philip Robinson will be talking about this in more detail later. But there are some key points I want to emphasise:
Money laundering: the risk-based approach
I spoke in my Mansion House speech about the importance we attach to risk based regulation. We are keen to see this principle adopted when international regulatory initiatives are proposed. So, for instance, we have been very pleased to see the risk sensitive approach in the text of the Third Money Laundering Directive. And, of course, we want to see firms taking this approach too. I think we can fairly argue that the UK approach to anti money laundering controls has always been risk based in practice, even if the phrase has come into common and international use more recently.
A truly risk based approach now informs all our thinking on AML. That was what led us to look again at the AML provisions in our Handbook. The specialist Money Laundering Sourcebook underpinned our efforts in the early years to set requirements and raise standards in firms, at a time when implementation of the necessary standards across the industry was patchy. But the Sourcebook does not fit today's needs. It gives firms some very specific requirements in areas such as customer identification and training, yet is silent over the use of other tools such as monitoring and Know Your Customer. It also has little to say explicitly about the assessment and mitigation of risk. And it is largely a duplication of the legislation and the Joint Money Laundering Steering Group's Guidance.
We see the time being right to change the rules, to underline, as I said earlier, that it is senior management's responsibility to comply with the law, to manage your risks well, and to do so in the right way for your firm's circumstances. In our Consultation Paper published in July we argued that replacing our Money Laundering Sourcebook with high level principles on money laundering risk management was the best way to fight money laundering effectively, and in a proportionate and economical way. We are currently reviewing your responses. But it is clear already from what you have told us that, whether or not we replace the specialist Sourcebook, the time has come to look again at our Rules: to ensure that they give more emphasis to the role of senior management and the risk-based approach.
I cannot prejudge the outcome of the consultation process (the deadline for comments on our proposals was only two weeks ago). But, whatever the outcome, let me make clear that our concern has not been and is not to downplay the importance of anti money laundering measures, but to make them more effective. To those concerned about what our proposals imply for the FSA's interest in firms' AML activity, let me say, as simply and clearly as I can:
- we are as committed as ever to the fight against money laundering and terrorist finance;
- the FSA continues to expect firms to take seriously their responsibilities for helping to fight money laundering and terrorist financing – and to deliver on them;
- our supervisors will continue to check that you are;
- and, while we recognise that firms, like humans, will not always avoid error, we will use our enforcement powers in appropriate cases if we find evidence of serious failings. We showed this only last week with our enforcement action over significant failures on anti-money laundering systems and controls.
Money laundering: what we said we would do
Let me turn now to what we said we would do ourselves.
Defusing the ID issue
We have stressed in our public statements over the last year that we intended to deal with the fear factor in the industry, where firms felt compelled to be over-cautious in fulfilling their AML obligations because they feared regulatory action if they didn't. At the same time, we want to tackle the related concern of consumers that they were being unnecessarily inconvenienced by unduly burdensome identification requirements when they tried to use financial services.
We have given – repeatedly and I hope clearly – the message that we expect firms to manage their money laundering risks effectively by placing less emphasis on ID and using the full range of AML tools. At the same time, we understand very well that this will change firms' behaviour only if we also ensure that our supervision and enforcement staff are taking the same approach. We are therefore adapting the training for our own FSA staff accordingly.
Training
We have invested a great deal of time and effort in the past few months into creating a new financial crime training package for our own people. The first phase is being rolled out at present. This will give all our staff an improved understanding of what financial crime is, and how it affects what we and the firms we regulate have to do. We will shortly be rolling out in-depth workshops on fraud and money laundering for our supervisory staff. Our aim is to bring about a step change in our understanding of the financial crime risks in firms, and how they should be managed. A specially adapted version of the computer based element of our training package will also be available to firms, for those who wish to use it as part of their own staff training.
Fraud
16. Our new training suite covers fraud as well as money laundering. We are working through a substantial programme of projects on financial crime, particularly on fraud, seeking to enhance our understanding of fraud risks in different parts of the industry, and to identify examples of good and poor practice to help improve our staff's understanding and knowledge. One major project is looking at fraud governance across the industry. When the report of that project is published, probably early in the New Year, it will give us a much better understanding on which to base our anti-fraud work. It will also help firms to benchmark themselves against their peers.
Other FSA achievements
Other projects include working with industry groups on the issue of staff fraud, an issue highlighted as a growing risk by law enforcement in recent months. Many of us will have read press stories about approaches made by criminal gangs to staff. There is increasing evidence that organised criminal groups are placing their own people in financial services firms so that they can increase their knowledge of firms' systems and controls and thus learn how to circumvent them to commit their frauds. There are links that need to be made here too between the work we do, the work firms do and the work of law enforcement. There are also issues for Government. At our financial crime conference last year, a very senior Home Office official invited the industry to tell the Government about potential barriers to fighting financial fraud. The work on staff fraud has highlighted concerns about whether data protection rules make data sharing unnecessarily difficult, and we will be involved in seeking a resolution to the problem.
We have continued to work closely with Government on a range of issues. I won't go into them all now. But I want just to mention the two recent reviews that the Government has announced, one on fraud and the other on the money laundering reporting system. First, the fraud review, announced by the Attorney General last month, and which is due to report next spring. We see this as a key step towards the development of a national fraud strategy, by helping to create a better understanding of the scale and nature of the problem. I hope the Attorney will be saying more about that shortly. Secondly, there is the review of the Suspicious Activity Reporting regime announced by the Chancellor of the Exchequer in July. This is an opportunity to re-engineer the reporting system so that it can have the maximum impact on crime at a proportionate cost to all involved. Sir Stephen Lander has our full support as he leads this review.
In addition, our business plan for this year commits us to working with law enforcement to develop intelligence on criminal money flows. We have enhanced our intelligence capability to deliver on this promise and are now more closely engaged with our partner agencies. You will hear more detail from Philip Robinson on this work, which is important to our understanding of the threat to our industry.
All this is aimed to make financial crime less likely: to deter. But we are also concerned to take effective enforcement action when offences do occur, whether of market abuse or of money laundering – or indeed, in any financial crime context. I should bring two cases to your attention. The first is the case of Rigby and Bailey, former directors of the software firm AIT, both of whom received custodial sentences and have been required to contribute from their own pockets to the prosecution costs and to compensate those affected by their actions, where for the first time the FSA secured a criminal conviction for market abuse. We are grateful for the assistance of the City of London Police in this case and it is possible the confiscation order which formed part of the sentence will have a wider application. As our Director of Enforcement, Margaret Cole said at the time, directors can expect to be held personally responsible for the announcements they make to the market. The second is that enforcement action against Investment Services UK Ltd last week. This was the first time that we have fined an approved person for money laundering failures.
Next steps
There is still a great deal on the financial crime agenda for us all. In all the ways I have described, we remain determined to develop and improve the FSA's work to combat financial crime. Philip Robinson will speak further about our plans later. We expect firms to do the same. Firms will soon have important decisions to make over how they fight money laundering. The new Guidance from the JMLSG is coming out early next year. It will be very different from what we have at the moment. There will be more emphasis on risk; on the role of senior management; and on the use of the full range of tools for fighting money laundering, not just ID. We look to firms to rise to the challenge and embrace the risk-based approach: to put their efforts where they will make the most difference; to change the way they carry out ID; to think about what they do in a risk-based way. If you do this, you will be making the difference we all want to make, making life more difficult for the criminal, and improving society by reducing the effects of crime. I have set out what we expect of you; and what we at the FSA will be doing, to make this happen. The objective is clear. Together, we can achieve it. It is important we do so. Today's discussions will help us on our way.