Financial Crime Guide: A Firm S Guide To . - FCA Handbook

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Financial Crime Guide:A firm’s guide tocountering financialcrime risks (FCG)

FC ContentsFinancial Crime Guide: A firm’s guide to counteringfinancial crime risks (FCG)FCG 11.11.21.31.4FCG 22.12.22.3FCG 33.13.23.33.4FCG 44.14.24.34.4FCG 55.15.25.35.4FCG 66.16.26.3FC–iIntroductionWhat is the FCG?How to use the FCGFormat of the FCGFurther financial crime informationFinancial crime systems and controlsIntroductionThemesFurther guidanceMoney laundering and terrorist financingIntroductionThemesFurther guidanceSources of further informationFraudIntroductionThemesFurther guidanceSources of further informationData securityIntroductionThemesFurther guidanceSources of further informationBribery and corruptionIntroductionThemesFurther guidancewww.handbook.fca.org.uk Release 6 Apr 2021

FC Contents6.4Sources of further informationFCG 7Sanctions and asset freezes7.17.27.37.4IntroductionThemesFurther guidanceSources of further informationFCG 8Insider dealing and market manipulation8.18.2IntroductionThemesFCG Annex1 Release 6Common termsCommon terms Apr 2021www.handbook.fca.org.ukFC–ii

FC ContentsFC–iiiwww.handbook.fca.org.uk Release 6 Apr 2021

Financial Crime Guide: A firm’s guide to countering financial crime risks (FCG)Chapter 1Introduction Release 6 Apr 2021www.handbook.fca.org.ukFCG 1/1

FCG 1 : IntroductionSection 1.1 : What is the FCG?11.1What is the FCG?1.1.1FCG provides practical assistance and information for firms of all sizes andacross all FCA-supervised sectors on actions they can take to counter the riskthat they might be used to further financial crime. Its contents are drawnprimarily from FCA and FSA thematic reviews, with some additional materialincluded to reflect other aspects of our financial crime remit.1.1.2Effective systems and controls can help firms to detect, prevent and deterfinancial crime.FCG provides guidance on financial crime systems andcontrols, both generally and in relation to specific risks such as moneylaundering, bribery and corruption and fraud. Annexed to FCG is a list ofcommon and useful terms. FCG Annex 1 is provided for reference purposesonly and is not a list of ‘defined terms’. Where a word or phrase is in italics,its definition will be the one used for that word or phrase in the Glossary tothe FCA Handbook.1.1.3FCTR provides summaries of, and links to, FSA (now the FCA) thematicreviews of various financial crime risks and sets out the full examples of goodand poor practice that were included with the reviews’ findings.1.1.4We will keep FCG under review and will continue to update it to reflect thefindings of future thematic reviews, enforcement actions and other FCApublications and to cover emerging risks and concerns.1.1.5The material in FCG does not form part of the Handbook, but it does containguidance on Handbook rules and principles, particularly: SYSC 3.2.6R and SYSC 6.1.1R, which require firms to establish andmaintain effective systems and controls to counter the risk that theymight be used to further financial crime; Principles 1 (integrity), 2 (skill, care and diligence), 3 (managementand control) and 11 (relations with regulators) of our Principles forBusinesses, which are set out in PRIN 2.1.1R; the Statements of Principle for Approved Persons set out in APER 2.1A.3R and the conduct rules set out in COCON 2.1 and 2.2;and in relation to guidance on money laundering, the rules in SYSC 3.2.6 to SYSC 3.2.6 IR and SYSC 6.3 (Financial crime).FCG 1/2www.handbook.fca.org.uk Release 6 Apr 2021

FCG 1 : IntroductionSection 1.1 : What is the FCG?Where FCG refers to guidance in relation to SYSC requirements, this may alsobe relevant to compliance with the corresponding Principle in our Principlesfor Businesses and corresponding requirements in the Payment ServicesRegulations and the Electronic Money Regulations.1.1.6Direct references in FCG to requirements set out in our rules or other legalprovisions include a cross reference to the relevant provision.1.1.7FCG contains ‘general guidance’ as defined in section 139B of the FinancialServices and Markets Act 2000 (FSMA). The guidance is not binding and wewill not presume that a firm’s departure from our guidance indicates that ithas breached our rules.1.1.8Our focus, when supervising firms, is on whether they are complying withour rules and their other legal obligations. Firms can comply with theirfinancial crime obligations in ways other than following the good practiceset out in FCG. But we expect firms to be aware of what we say where itapplies to them and to consider applicable guidance when establishing,implementing and maintaining their anti-financial crime systems andcontrols. More information about FCA guidance and its status can be foundin our Reader’s Guide: an introduction to the Handbook; DEPP 6.2.1G(4) and EG 2.9.1G – 2.9.6G.1.1.9FCG also contains guidance on how firms can meet the requirements of theMoney Laundering Regulations and the EU Funds Transfer Regulation. Whilethe relevant parts of the guide that refer to the Money LaunderingRegulations may be ‘relevant guidance’ under these regulations, it is notapproved by HM Treasury.1.1.10The Joint Money Laundering Steering Group’s (JMLSG) guidance for the UKfinancial sector on the prevention of money laundering and combatingterrorist financing is ‘relevant guidance’ and is approved by HM Treasuryunder the Money Laundering Regulations. As confirmed in DEPP 6.2.3G, EG 12.1.2G and EG 19.15.5G, the FCA will continue to have regard towhether firms have followed the relevant provisions of JMLSG’s guidancewhen deciding whether conduct amounts to a breach of relevantrequirements.1.1.11FCG is not a standalone document; it does not attempt to set out allapplicable requirements and should be read in conjunction with existinglaws, rules and guidance on financial crime. If there is a discrepancy betweenFCG and any applicable legal requirements, the provisions of the relevantrequirement prevail. If firms have any doubt about a legal or other provisionor their responsibilities under FSMA or other relevant legislation orrequirements, they should seek appropriate professional advice. Release 6 Apr 2021www.handbook.fca.org.uk1FCG 1/3

FCG 1 : IntroductionSection 1.2 : How to use the FCG11.2How to use the FCG1.2.1.Who should read this chapter? This paragraph indicates the types of firm towhich the material applies. A reference to ‘all firms’ in the body of thechapter means all firms to which the chapter is applied at the start of thechapter.1.2.2Each section discusses how firms tackle a different type of financial crime.Sections open with a short passage giving context to what follows. In FCGwe use: ‘must’ where provisions are mandatory because they are required bylegislation or our rules ‘should’ to describe how we would normally expect a firm to meetits financial crime obligations while acknowledging that firms may beable to meet their obligations in other ways, and ‘may’ to describe examples of good practice that go beyond basiccompliance.1.2.3Firms should apply the guidance in a risk-based, proportionate way takinginto account such factors as the nature, size and complexity of the firm. Forexample: We say in FCG 2.2.1G (Governance) that senior management shouldactively engage in a firm’s approach to addressing financial crimerisk. The level of seniority and degree of engagement that isappropriate will differ based on a variety of factors, including themanagement structure of the firm and the seriousness of the risk. We ask in FCG 3.2.5G (Ongoing monitoring) how a firm monitorstransactions to spot potential money laundering. While we expectthat a global retail bank that carries out a large number of customertransactions would need to include automated systems in itsprocesses if it is to monitor effectively, a small firm with lowtransaction volumes could do so manually. We say in FCG 4.2.1G (General – preventing losses from fraud) thatit is good practice for firms to engage with relevant cross-industryefforts to combat fraud. A national retail bank is likely to have agreater exposure to fraud, and therefore to have more informationto contribute to such efforts, than a small local building society, andwe would expect this to be reflected in their levels of engagement.FCG 1/4www.handbook.fca.org.uk Release 6 Apr 2021

FCG 1 : IntroductionSection 1.3 : Format of the FCG11.3Format of the FCGFinancialcrime: a guide for firms.1.3.1FCG looks at key aspects of firms’ efforts to counter different types of crime.It is aimed at firms big and small; material will not necessarily apply to allsituations. If guidance is specific to certain types of firm, this is indicated byitalics.Self-assessment questions: These questions will help you to consider whether your firm’sapproach is appropriate. (Text in brackets expands on this.) The FCA may follow similar lines of inquiry when discussingfinancial crime issues with firms. The questions draw attention to some of the key points firmsshould consider when deciding how to address a financial crime issueor comply with a financial crime requirement.Examples of good practiceExamples of poor practice This list provides illustrativeexamples of good practices. This list provides illustrativeexamples of poor practices. Good practice examples aredrawn from conduct seen infirms during thematic work inrelation to financial crime. Poor practice examples arealso drawn from conduct seenduring thematic work. We would draw comfort fromseeing evidence that thesepractices take place. Some show a lack of commitment, others fall short of ourexpectations; some, as indicated in the text, may breachregulatory requirements or becriminal offences. Note that if these practices are lacking it may not be aproblem. The FCA would consider whether a firm hastaken other measures to meetits obligations.These do not identify all caseswhere conduct may give riseto regulatory breaches or criminal offences.Casestudies and other information.1.3.2 Release 6Most sections contain case studies outlining occasions when a person’sconduct fell short of the regulatory expectations, and enforcement actionfollowed; or information on topics relevant to the section. Apr 2021www.handbook.fca.org.ukFCG 1/5

FCG 1 : IntroductionSection 1.4 : Further financial crimeinformation11.41.4.1Further financial crime informationWhere to find out more: Most sections close with some sources of further information. This includes cross-references to relevant guidance in FCTR. It also includes links to external websites and materials. Althoughthe external links are included to assist readers of FCG, we are notresponsible for the content of these, as we neither produce normaintain themFCG 1/6www.handbook.fca.org.uk Release 6 Apr 2021

Financial crime systems and controlsChapter 2Financial crime systems andcontrols Release 6 Apr 2021www.handbook.fca.org.ukFCG 2/1

FCG 2 : Financial crime systemsand controls2.1Section 2.1 : IntroductionIntroduction2FCG 2/22.1.1Who should read this chapter? This chapter applies to all firms subject to thefinancial crime rules in SYSC 3.2.6R or SYSC 6.1.1R. It also applies to emoney institutions and payment institutions within our supervisory scope.2.1.2The Annex I financial institutions which we supervise for compliance withtheir obligations under the Money Laundering Regulations are not subject tothe financial crime rules in SYSC. But the guidance in this chapter applies tothem as it can assist them to comply with their obligations under theRegulations.2.1.3All firms must take steps to defend themselves against financial crime, but avariety of approaches is possible. This chapter provides guidance on themesthat should form the basis of managing financial crime risk. The generaltopics outlined here are also relevant in the context of the specific financialcrime risks detailed in subsequent chapters. See SYSC 6.1.1R and SYSC 3.2.6R.www.handbook.fca.org.uk Release 6 Apr 2021

FCG 2 : Financial crime systemsand controls2.2Section 2.2 : ThemesThemes2Governance.2.2.1We expect senior management to take clear responsibility for managingfinancial crime risks, which should be treated in the same manner as otherrisks faced by the business. There should be evidence that seniormanagement are actively engaged in the firm’s approach to addressing therisks. In considering senior management arrangements in the Guide, firmsshould consider their arrangements to comply with the Senior Managers andCertification Regime (SM&CR).[Editor’s note: see ficationregime]Self-assessment questions: When did senior management, including the board or appropriatesub-committees, last consider financial crime issues? What actionfollowed discussions? How are senior management kept up to date on financial crimeissues? (This may include receiving reports on the firm’s performancein this area as well as ad hoc briefings on individual cases oremerging threats.) Is there evidence that issues have been escalated where warranted? Release 6Examples of good practiceExamples of poor practice Senior management set theright tone and demonstrateleadership on financial crimeissues. There is little evidence ofsenior staff involvement andchallenge in practice. A firm takes active steps toprevent criminals taking advantage of its services. A firm concentrates on narrow compliance with minimum regulatory standardsand has little engagementwith the issues. We would draw comfort fromseeing evidence that thesepractices take place. Financial crime issues aredealt with on a purely reactive basis. A firm has a strategy for selfimprovement on financialcrime. There is no meaningful recordor evidence of senior management considering financialcrime risks. There are clear criteria for escalating financial crime issues. Apr 2021www.handbook.fca.org.ukFCG 2/3

FCG 2 : Financial crime systemsand controlsSection 2.2 : ThemesManagementinformation (MI).2.2.22MI should provide senior management with sufficient information tounderstand the financial crime risks to which their firm is exposed. This willhelp senior management effectively manage those risks and adhere to thefirm’s own risk appetite. MI should be provided regularly and ad hoc, as riskdictates.Examples of financial crime MI include: an overview of the financial crime risks to which the firm isexposed, including information about emerging risks and anychanges to the firm’s risk assessment legal and regulatory developments and the impact these have onthe firm’s approach an overview of the effectiveness of the firm’s financial crime systemsand controls an overview of staff expenses, gifts and hospitality and charitabledonations, including claims that were rejected, and relevant information about individual business relationships, forexample:the number and nature of new business relationships, inparticular those that are high riskthe number and nature of business relationships that wereterminated due to financial crime concernsthe number of transaction monitoring alertsdetails of any true sanction hits, andinformation about suspicious activity reports considered orsubmitted, where this is relevant.MI may come from more than one source, for example the compliancedepartment, internal audit, the MLRO or the nominated officer.Structure.2.2.3Firms’ organisational structures to combat financial crime may differ. Somelarge firms will have a single unit that coordinates efforts and which mayreport to the head of risk, the head of compliance or directly to the CEO.Other firms may spread responsibilities more widely. There is no one ‘rightanswer’ but the firm’s structure should promote coordination andinformation sharing across the business.Self-assessment questions: Who has ultimate responsibility for financial crime matters,particularly: a) anti-money laundering; b) fraud prevention; c) datasecurity; d) countering terrorist financing; e) anti-bribery andcorruption and f) financial sanctions? Do staff have appropriate seniority and experience, along with clearreporting lines?FCG 2/4www.handbook.fca.org.uk Release 6 Apr 2021

FCG 2 : Financial crime systemsand controlsSection 2.2 : Themes Does the structure promote a coordinated approach andaccountability? Are the firm’s financial crime teams adequately resourced to carryout their functions effectively? What are the annual budgets fordealing with financial crime, and are they proportionate to the risks?2 In smaller firms: do those with financial crime responsibilities haveother roles? (It is reasonable for staff to have more than one role,but consider whether they are spread too thinly and whether thismay give rise to conflicts of interest.)Examples of good practiceExamples of poor practice Financial crime risks are ad dressed in a coordinated manner across the business and information is shared readily.The firm makes no effort tounderstand or address gaps inits financial crime defences. Management responsible for financial crime are sufficientlysenior as well as being credible, independent, and experienced.Financial crime officers arerelatively junior and lack access to senior management.They are often overruled without documented justification. A firm has considered how counter-fraud and anti-moneylaundering efforts cancomplement each other.Financial crime departmentsare under-resourced andsenior management are reluctant to address this. A firm has a strategy for selfimprovement on financialcrime. The firm bolsters insufficientin-house knowledge or resource with external expertise, for example in relation toassessing financial crime riskor monitoring compliancewith standards.Riskassessment.2.2.4A thorough understanding of its financial crime risks is key if a firm is toapply proportionate and effective systems and controls.A firm should identify and assess the financial crime risks to which it isexposed as a result of, for example, the products and services it offers, thejurisdictions it operates in, the types of customer it attracts, the complexityand volume of transactions, and the distribution channels it uses to service itscustomers. Firms can then target their financial crime resources on the areasof greatest risk.A business-wide risk assessment – or risk assessments – should: be comprehensive and consider a wide range of factors – it is notnormally enough to consider just one factor draw on a wide range of relevant information – it is not normallyenough to consider just one source, and Release 6 Apr 2021www.handbook.fca.org.ukFCG 2/5

FCG 2 : Financial crime systemsand controlsSection 2.2 : Themes be proportionate to the nature, scale and complexity of the firm’sactivities.Firms should build on their business-wide risk assessment or risk assessmentsto determine the level of risk associated with individual relationships. Thisshould:2 enable the firm to take a holistic view of the risk associated withthe relationship, considering all relevant risk factors, and enable the firm to apply the appropriate level of due diligence tomanage the risks identified.The assessment of risk associated with individual relationships can inform,but is not a substitute for, business-wide risk assessments.Firms should regularly review both their business-wide and individual riskassessments to ensure they remain current.Self-as

FCG 1/4 www.handbook.fca.org.uk Release 5 Mar 2021 1.2 How to use the FCG Who should read this chapter?This paragraph indicates the types of firm to which the material applies. A reference to‘all firms’in the body of the chapter means all firms to which the chapter is applied at the start of the chapter.

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