The Financial Conduct Authority (FCA) sets out to conduct regular testing of new business models when they operate in the UK as part of the review of financial crime controls. In a recent announcement on their website, the FCA indicated that such an undertaking was completed at several challenger banks and some concerns were raised. Challenger banks can be defined as smaller retail banks which aim to compete in the same market as larger, national banks. According to the FCA, the National Risk Assessment of money laundering and terrorism financing (NRA) highlighted the risk of criminals being interested and attracted to the relatively quick onboarding processes, advertised by challenger banks, especially when creating money mule networks.
The term “money mules” refer to individuals who unknowingly have been recruited by criminals as money laundering intermediaries. Their role includes the transfer of illicit funds between various accounts, in different countries, on behalf of other people. The fact that the challenger banks, to attract customers, advertised accounts which can be opened relatively quickly, created significant risk of potentially overlooking or failing to identify high risk clients. As a result, the FCA reviewed a sample of challenger banks in the market during 2021, regarding the strength of their financial crime controls for their own assessment purposes noting that the review was completed prior to the expanded sanctions against Russia.
The FCA indicted that although their primary focus was not on sanctions itself, the main financial crime and money laundering controls that were examined included firms’ ability to manage sanctions effectively, especially because some firms are used as vehicles to try and circumvent sanctions. According to the FCA, their review focussed on relatively new challenger banks in the market that offered quick and easy application processes for product offerings that are similar to traditional retail banks. The review sample of six banks primarily consisted of digital banks, with a combined base of more than eight million customers but excluded e-money and payment services providers. The review covered the following aspects: Governance and management information. Policies and procedures. Risk assessments. Identification of high risk / sanctioned individuals or entities.
Due diligence and ongoing monitoring. Communication, training, and awareness. The FCA added that the specific challenger banks, where material challenges were identified, implemented remedial programmes to address these challenges which may result in a larger number of new customers being rejected during the onboarding process. Also, according to the FCA, when banks review their existing customer base it might also result in terminating some of their customer relationships. The FCA further indicated that by publishing their findings it raises awareness of the financial crime risks in the financial industry, as part of their broader strategy.