A diverse & complex industry sector
The Forex (FX) and Contracts for Difference (CFD) sector by its very nature typically involve multi-jurisdictional markets and client bases, undertaking business in more emerging territories where local practices and documentation may not always readily conform to the established norms of recognized markets. But it is also a business sector that will heavily use and rely on real-time platforms and often innovative distribution and service solutions in respect to client instructions and/or associated transaction and trading activity. These scenarios can provide challenges for delivering compliance with respective Money-Laundering Regulations (MLR).
An expectation & reflection of risks
Legislators and regulators have formed a persistent and long-determined view that the products and services typically involved with the FX and CFD business are inherently complex and present potentially higher-risk(s). The FX and CFD firms, therefore, need to maturely reflect and respond to the realities of this perception and situation, in ensuring their own policy and process arrangements remain both adequate and proportionate in the event of any external challenge and scrutiny.
Given this background, firms must make sure their arrangements in respect to anti-money laundering and counter financing terrorism (AML/CFT) are effectively fit-for-purpose and resilient. This presents numerous challenges and aspects firms will need to factor into and successfully embrace with their own strategic planning, policy decision-making, and operational practices.
The current UK environment & framework
The substantive legal and regulatory provisions applicable to UK-based FX and CFD businesses stem ultimately from the international standards set out and monitored by the global Financial Action Task Force (FATF) and other similar FATF-style regional bodies e.g. the Asia/Pacific Group on Money Laundering (APG). In the UK, the conduct regulator (Financial Conduct Authority – FCA) acts as the domestic working supervisor of its regulated financial-services businesses in respect to AML/CFT compliance.
In addition, the detailed provisions of UK law and regulation concerning specific practices and obligations themselves flow down from the UK’s adoption of specific European money laundering (AML/CFT) directives, with the latest 5th ML Directive (5MLD) due to be implemented into the UK for January 2020, and around the same time as the UK FCA is expected to also become the working supervisor for the future AML/CFT regime covering crypto-assets (see the UK Economic Crime Plan 2019-22).
The fundamentals of a risk-based approach
To mitigate and avoid the arrangements of a firm becoming a restrictive or cumbersome burden, it has to ensure its embedded approach and controls follow and reflect the core elements of any risk-based approach in this regard. Namely, this extends to being satisfied and assured in knowing (both legally and beneficially) who any customer(s) actually is/are, as well as nature and purpose/expectations around which any client seeks to form and undertake any business relationship(s). But regulated firms will also be expected to apply and use suitable measures and independent sources and documentation to both identify any client(s) and then separately verify that identity, whilst also carrying out relevant risk-based due diligence (CDD) on its customer(s) on an initial and ongoing basis. For the FX and CFD firms, this might extend to applying investigative and control measures to ascertain and verify the underlying and legitimate source-of funds (SoF) and/or origin-of-wealth concerning how and where investment funds originate from for account deposit and transaction purposes e.g. realistic income, an inheritance or previous investment/savings, etc. However, it may also mean that firms need to be flexible and pragmatic in what documentation is sought and accepted to fulfill their regulatory and legal duties and enable client relationships to function smoothly.
Furthermore, the actual practical and proportional scope of all these risk elements in delivering risk-based compliance in relation to the FX and CFD business are further outlined and explained at various points within the UK’s industry guidance notes issued by the Joint Money Laundering Steering Group (JMLSG – see especially Part II chapters 10 and 18 sectoral guidance in respect to retail and wholesale markets).
Meeting the burden as a necessary opportunity-cost
Many firms struggle to not only identify the applicable processes and controls they must adopt but also to understand how these can be operationally and proportionately maintained. In essence, the UK legal and regulatory framework imposes an objective requirement on firms to not only follow these requirements but to be able to demonstrate and evidence how the firm and its senior management understand and are effectively taking all reasonable steps to avoid and forestall its organization and business being used for any financial-crime purposes.
The real consequences of neglect & failure
The UK conduct regulator (FCA) persists in taking prompt and decisive action against firms who are not meeting the requirements and their expectations in terms of having an adequate and/or effective risk-based approach. Not only do a firm’s arrangements need to be clear, embedded, and proportionate, but regulators will equally look for evidence that any arrangements and related risk-controls are consistent and being cascaded and followed/applied in practice across the organization.
During 2019, a financial penalty of over £100m was imposed on a UK bank for substantive compliance failures in respect to UK ML Regulations, with potential wider reputational consequences of enforcement action ensuing for such firms and/or any connected individuals involved. But back in 2010 a firm providing execution-only FX trading for speculative investment was itself fined £140k for breaches in regard to related UK FCA Principal (PRIN 3) for having inadequate money-laundering systems and controls concerning resourcing, training, as well as its client screening and due-diligence involving higher risk jurisdictions and non-face-to-face business.
Any FX and CFD firm, especially where it is located or conducting business from/in any highly developed jurisdiction(s), is of course likely to be subject to broadly similar standards and obligations in regard to AML/CFT requirements and regulations. Therefore it becomes a necessary cost of operating in any professional and well-developed financial-services market. But that doesn’t mean firms can’t manage and minimize the consequent operational burden through having the necessary effective and proportionate on-boarding and relationship management practices.
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