Money laundering risks are quietly creeping into the heart of the UK’s dealmaking world, as a new FCA review warns that many corporate finance firms, crucial players in raising capital and advising on mergers and acquisitions, may be failing to meet basic anti-money laundering (AML) standards to prevent financial crime.
A recent FCA Financial crime controls in corporate finance firms survey found that while some corporate finance firms have built solid compliance frameworks, most others (about two-thirds of respondents not required to submit financial crime returns) are falling short of minimum requirements, leaving potential blind spots in the UK’s efforts to safeguard its financial system. The findings raise questions about how well the sector is managing the risks that come with its pivotal role in the country’s capital markets.
In this study, the FCA surveyed 303 corporate finance firms (CFFs) that are not required to submit financial crime data returns to assess how well these firms are meeting anti-money-laundering (AML) and financial crime obligations under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs). Of those, 270 (89%) responded.
The study results highlighted major areas of corporate finance representatives’ weakness in the AML field:
- 11 % of firms reported they had no documented business-wide risk assessment (which is a fundamental requirement).
- 10 % of firms said they did not retain documented evidence of customer due diligence (CDD).
- Among principal firms (those with appointed representatives, ARs):
- 29 % said they did not assess the financial-crime risk of their ARs.
- 6 % stated they had not monitored their ARs’ compliance with financial-crime rules or conducted on-site audits/visits.
- Overall, around two-thirds of respondents may be non-compliant with one or more elements of the MLRs.
On the bright side, 97 % of respondents said they regularly report financial crime concerns to senior management. Many corporate finance entities update business-wide risk assessments to reflect emerging risks, and use detailed management information (MI) to strengthen controls.
The results are a bit alarming, since corporate finance firms play a vital role in the UK’s capital markets, connecting businesses to investors and lenders. Weak financial-crime controls in this sector pose systemic risks to market integrity.
The fact that a substantial minority of firms are missing core AML controls (risk assessments, CDD evidence, oversight of ARs) also signals that regulatory minimums may not be consistently met in the CFF sector.
From a compliance perspective, the findings act as a wake-up call for firms to review key elements: documented risk assessments, CDD file completeness, oversight of ARs, and senior-management escalation of financial-crime issues.
In many areas of MLR compliance, AI automation may serve the companies. However, at present, there is no public evidence of a large number of CFFs fully automating all their financial-crime controls, though some of the UK regtechs start implementing AI in financial crime detection.
