Managing money laundering risks: six proactive steps for wealth managers and private banks

The latest National Risk Assessment of Money Laundering and Terrorist Financing was published by H.M. Treasury and the Home Office in December 2020.  As in the 2015 and 2017 National Risk Assessments, wealth managers and private banks have been assessed as being at high risk of being used for money laundering and in particular of laundering the proceeds of corruption and tax evasion. These risks are heightened for firms that have global operations and high numbers of politically exposed persons (PEPs) in their client base. Family offices have been specifically identified as a means of infiltrating these sectors.

The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 as amended by The Money Laundering and Terrorist Financing (Amendment) Regulations 2019, and the Joint Money Laundering Steering Group’s Guidance set out a number of measures that firms should take to manage their exposure to laundering the proceeds of corruption and tax evasion.  We have identified a number of these that are particularly relevant to firms dealing with PEPs and family offices which, while not new, are worth re-iterating:

1. Review requirements and processes for identifying source of wealth and source of funds. Consider the use of external due diligence reports and obtaining documentary verification from clients of the sources of their wealth. This is particularly key where clients may have undertaken business activities in jurisdictions associated with higher levels of financial crime and/or corruption.
   
   
2. Understand  the risks of your PEPs
   Where a client or ultimate beneficial owner of a client is a PEP, assess and document the nature of the role undertaken that led to the PEP status, the corruption risks present from the type of role and the jurisdiction it was undertaken in and how the firm has mitigated those risks.
   
   
3. Validated beneficial ownership structures
   Where the client is a corporate structure, ensure that each layer of the ownership chain is understood up to the ultimate beneficial owner. Verification of the beneficial ownership structure should be undertaken, on a risk-based approach, from reliable sources including, but not solely based, registers of persons of significant control.
   
   
4. Verify all beneficiaries of trusts
   Wealth management structures frequently involve trusts – a review of requirements and processes to identify and verify all beneficiaries of trusts (rather than those with an interest in 25% of more of the capital) should be undertaken following the revision of the definition of beneficial owner in the 2019 amendments to the Money Laundering Regulations.
   
   
5. Document adverse media mitigation
   Where client screening has identified adverse media coverage on clients, consider the financial crime risks and document how these risks have been mitigated.
   
   
6. Focus on tax
   Understand the customer’s tax status, structures, assets held and any tax planning that may involve the products and services provided.

The FCA and other European regulators have already undertaken enforcement action against some private banks for money laundering failings. It is our expectation that their focus on the wealth management and private banking sector will continue to increase. Taking proactive steps now to manage money laundering risks can put you in a good position should the FCA undertake a review at your firm.