A call to arms: The FCA highlights the ongoing risk of money laundering through the capital markets
6 min read
The UK's capital markets are a vital economic driver, and also a significant source of money laundering risk. This is a difficult area of risk for regulators and law enforcement to understand and tackle, but progress is being made. A new FCA report makes clear that the regulated sector has a key role to play. Financial services firms should focus on building more robust systems and controls and considering how AI could be better used as part of their compliance toolkit.
On 23 January 2025, the Financial Conduct Authority (FCA) produced an updated report looking at the risk of money laundering through the markets (MLTM), a long-existing, continually evolving and particularly impactful criminal threat to the UK economy.
The FCA's work in producing its updated analysis on MLTM risk (the MLTM Report) was catalysed by the commitment it made within the UK's second Economic Crime Plan (2023-26), issued under the former Conservative government, as well as concerns it had in the course of its supervisory work.
London's position as a leading global financial centre brings with it particular challenges as well as benefits. The enormous number of trades taking place each year on the City's capital markets leads to a correspondingly high level of opportunity for money laundering and other economic crime, including fraud and sanctions evasion. Complex, illicit financial transactions can be hidden by the large volume of legitimate business, taking advantage also of the typically short clearing times.
In 2017, when the first National Risk Assessment (NRA) of money laundering was conducted, the UK government recognized money laundering in the capital markets as an emerging risk. The updated 2020 NRA built on this, explaining that the Government's understanding of the inherent risks in the sector had improved (although the scale of money laundering through the markets remained unclear "due to the difficulties in identifying it among the huge volume of transactions").1
The FCA has also continued to build its understanding of MLTM risks, including through participation in the Money Laundering Through the Markets Group of the Joint Money Laundering Intelligence Taskforce (JMLIT), a partnership between regulators, law enforcement agencies such as the National Crime Agency (NCA), and the financial services sector. JMLIT was created a decade ago and has been perceived as a great success in the UK, with the public-private partnership concept being exported around the world.
A huge amount of work has been carried out by all of these participants. For its part, the FCA's dissemination of case studies of suspect trading schemes and examples of good and bad compliance practices will help the firms it regulates to identify and stop bad actors from laundering money or evading sanctions via capital markets trading.
On the private-sector side, financial institutions, including investment banks, exchanges and inter-dealer brokers, have worked with the FCA to share information and resources. Regulated financial services firms have defined anti-money laundering obligations, and act as financial gatekeepers to the capital markets. They are essentially tasked with providing barriers to entry for bad actors and reporting suspicious trades and suspicions regarding money laundering. The 2020 NRA noted a 28.7% increase in the number of suspicious activity reports (SARs) filed under the "capital markets" glossary code over the previous two years, "potentially indicating an increased understanding and identification of the typology by firms" and highlighting the important role SARs play in assisting law enforcement.
However, the FCA has said that it expects more from the financial services sector. In April 2019, it issued a letter to wholesale market firms which identified "a culture and mindset which underestimates the risk of brokers committing or facilitating… financial crime through their role as market intermediaries, combined with poor monitoring and controls."2 Now, in the MLTM Report, the FCA reiterates that commercial firms have more work to do in this area.
What should firms be doing?
Regulated firms must follow the obligations set out in the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, as amended (MLRs). The MLTM Report explains that – over a decade since the latest MLRs were introduced – there has been "good practice and progress in several financial crime processes and controls across larger and smaller firms." However, the FCA also found a number of important gaps in all of the areas regulated firms are obliged to consider under the MLRs. That includes business-wide risk assessments, customer risk assessments, conducting customer due diligence, transaction monitoring, policies and procedures, and SARs. These are fundamental points, and the FCA sets out its expectations clearly in the MLTM Report:
"We expect firms to have robust systems and controls at each stage of the customer and transaction journey. This is essential to make sure there are no ‘weak links' that expose participants and the overall transaction to financial crime. Firms must understand the risk posed to, and by, their business, to make sure they take a proportionate risk-based approach to implementing systems and controls. Customer risk needs to be thoroughly understood to provide a meaningful basis for managing the risk and subsequent customer activity monitoring. Suspicious activity should be identified, investigated, mitigated and reported in a timely manner. There should be appropriate oversight, resourcing, training and documentation to support the effective operation of a firm's systems and controls."
Artificial intelligence (AI) will inevitably have a part to play in both designing MLTM schemes on the criminal side and identifying and disrupting them on the law enforcement side. The FCA published a comprehensive AI Update in April 2024, in which it set out its support for "beneficial innovation", and pointed out that AI had already "transformed the speed" by which it could monitor money laundering and sanctions breaches.3
According to the FCA's survey of AI in UK financial services (published in November 2024 in collaboration with the Bank of England), around 15 to 20% of companies were already using AI anti-money laundering monitoring or identification tools, while around 40 to 50% were planning to do so in the next three years.4 However, in the MLTM Report, the FCA identifies that none of the firms it observed had made significant progress in how AI could be used to monitor transactions. This will clearly be a significant growth area for the private sector.
A long-term balancing act
Managing MLTM risk will be an issue for the UK and the FCA for many years to come. Money laundering is an arms race: as compliance approaches evolve, bad actors will develop more complex schemes to evade detection.
In that context, the MLTM Report makes essential reading for firms whose business relates in any way to the capital markets, and those responsible for their compliance with regulatory obligations.
There are of course many competing compliance obligations for firms to balance, along with pragmatic, commercial considerations to consider. However, by ensuring an up-to-date money laundering risk assessment is in place, firms will have a firm foundation to build on, and a point from which other essential updates to policies and procedures can naturally flow. An appropriate investment of resources into AI is also likely to form a key component of many firms' risk identification and mitigation strategy, and will help future-proof their compliance frameworks.
The FCA's updated MLTM Report can be accessed here.
1 https://www.gov.uk/government/publications/national-risk-assessment-of-money-laundering-and-terrorist-financing-2020
2 https://www.fca.org.uk/publication/correspondence/dear-ceo-letter-wholesale-market-broking-firms.pdf
3 https://www.fca.org.uk/publication/corporate/ai-update.pdf
4 https://www.bankofengland.co.uk/report/2024/artificial-intelligence-in-uk-financial-services-2024
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