Financial news

By Dr. Henry Balani

The UK Government recently announced a new ‘crackdown’ on dirty money, ruling that overseas companies owning UK land must declare their beneficial owners or risk facing severe sanctions, prompting a review of how the Government, banks and regulators can collaborate in the fight against financial crime. 

Russia’s invasion of Ukraine shone the spotlight on the complexities behind financial crime and the evolving landscape, as well as resulting in the UK introducing stringent sanctions and updating legislation through policy such as the Autumn Statement. 

The threat of illicit finance undermines legitimate businesses and, as such, has demanded – and still demands – strong action. Increased investigatory powers, stricter legislation and the creation of a £20m economic crime fund are all positive steps but it’s important that the controlling powers – the Government, banks and regulators – work together to look at new methods, such as adopting innovative technologies, to ensure robust protection and prevention is in place across society.  

Outdated Processes Are Holding The UK Back

Critical compliance processes, like identifying beneficial ownership, are often managed by outdated and inefficient manual systems, even inside some of the world’s largest financial institutions. 

There are numerous examples of high-profile financial scandals connected to the UK over recent years, from Russian Oligarchs to the Pandora Papers and beyond, showcasing that the current systems need to evolve, across Government, banks and regulators, in order to effectively detect and prevent financial crime. 

Part of this evolution requires major financial institutions to embark on digital transformation journeys, automating out-of-date compliance processes. 

Automation is essential to improving the speed and accuracy of core checks, such as those connected to Know Your Customer (KYC) and Anti-Money Laundering (AML) tasks. Utilising the best in technology here also reduces human error while freeing staff up to engage in higher-level, higher-impact compliance activity, to the benefit of businesses.

KYC automation can also transform the way that financial institutions obtain and track important customer information, including that of Ultimate Beneficial Owners (UBOs). As a result of the Russian sanctions, the industry has realised the challenges associated with identifying beneficial ownership, which have also contributed to the Government revamping Companies House to improve the accuracy of the company register. In turn, this has increased collaboration between banks and regulators through up-to-date data for Application Programming interfaces (APIs). 

Undoubtedly, the ability to assess exposure quickly and accurately when it comes to sanctioned individuals and entities is a major benefit for banks and financial institutions. This is another factor that underlines why these organisations should re-assess existing manual processes and implement state-of-the-art, cloud enabled, automation technology to ramp up processes to ensure compliance with evolving regulations.

Increased Regulatory Pressure

UK regulators must lead from the front when it comes to ensuring compliance across the financial services sector, and we have recently witnessed increased scrutiny and action in this regard. In 2022, the number of fines issued by the Financial Conduct Authority (FCA) spiked to 26, up from 10 in 2021, highlighting their willingness to clamp down on non-compliance.

Penalties against those failing to protect against dirty money are also likely to increase further, with regulators not afraid to make examples out of those falling foul of non-compliance as a means of encouraging best practice. 

The Government crackdown has also played a role in increased regulatory pressure with the deadline having passed for foreign companies to submit accurate information on their true beneficial owners to Companies House. Those who have not yet registered have been automatically rejected from registering ownership of any new land by HM Land Registry, while Companies House is already assessing cases for enforcement action which will include sanctions such as financial penalties or prosecution.

The increased pressure is yet another reason for financial institutions to improve their compliance immediately through digital transformation to avoid severe punishments.

RegTech Collaboration

An additional, vital collaborator in the mix should be the regulatory technology providers that can assist banks in overhauling processes and adopting state-of-the-art technologies to improve compliance processes and identify potential illicit actors. 

The current issue is that RegTech solutions are still considered by some as relatively new, with the market being fragmented with different levels of maturity. However, collaboration between financial institutions and RegTech providers will, over time, develop as the adoption of these essential solutions also increases, while ultimately helping the sector to best prepare for and meet evolving regulatory requirements.

The Government is another important collaborator for providers to consider, with investment, communication and support key to the ongoing development of the offerings that will be central to reducing financial crime across the UK.

The Road Ahead

While Government and regulators are taking a strong stance in cracking down on financial crime, there is clearly still significant work to be done – especially as digital transformation comes to the fore at financial institutions. 

It is only by trusting in innovative technology and automated processes that we will see a truly accurate standard of anti-money laundering procedures that can swiftly identify dirty money and allow the authorities to take appropriate action.

The Government, banks and regulators, alongside RegTech providers, must all work towards the common goal of stamping out financial crime, with fostering a truly collaborative dialogue being the key to making the financial services a safer and more robust environment.

About the Author

Dr. Henry Balani is Global Head of Industry and Regulatory Affairs at Encompass. He is a noted industry thought leader and commentator on regulatory compliance issues and trends affecting the financial services industry. A published academic, Dr. Balani also lectures on international business, economics and regulatory compliance courses globally.