UK: The FSA, Compliance and Anti-money Laundering Controls

Originally published August 2005

In the last few weeks it has become clear that the Financial Services Authority has a renewed focus on private equity firms, their compliance and anti-money laundering controls. It has found a number of shortcomings in practice and is planning a new round of visits to firms before the year end.

On 8 August 2005 the FSA wrote to Compliance Officers at all private equity firms reporting on visits it had made to 11 firms, varying in size and type of business. Although there were some concerns on general compliance issues - overambitious monitoring programmes, out of date compliance manuals, insufficient controls on outsourcing - over half of all key weaknesses they identified related to anti-money laundering controls.

Three failings in particular were highlighted:

Lack of knowledge - the FSA highlighted serious gaps in the knowledge of compliance officers and executives when dealing with the mass of legislation, FSA rules and industry guidance in this area. With the JMLSG's Guidance Notes due to be completely revised by the end of the year, including their private equity specific advice, confusion is only going to worsen.

Failure to make Annual Reports - FSA rules require a firm's Money Laundering Reporting Officer to make a formal compliance report each year to senior management. Some firms have been rather slow in completing this report, and some have ignored it entirely.

Poor record keeping - some firms were unable to demonstrate that they had carried out all the checks they should have done. At the least, the FSA criticised this as poor record keeping. Failure to keep proper records can itself be a criminal offence.

Although the FSA has couched its warning in relatively friendly terms, they clearly mean business. Vince O'Brien, the BVCA chairman, has commented that: "The FSA has a track record of bringing enforcement proceedings against firms where it believes that they have ignored important messages communicated by direct letters of this kind."

The FSA has said that they "encourage all venture capital firms to review their compliance arrangements". To back this up, they intend to visit a further sample of firms before the year end to check whether this message is being acted upon.

Regardless of the actual level of threat money laundering may pose for your business, the FSA needs to see the correct systems and procedures in place, to know that staff have been trained and that monitoring and reporting structures work. To help you guard against the risks of an FSA visit and subsequent enforcement action, we can:

• review with you your current compliance and antimoney laundering procedures and advise on practical ways to deal with any shortfalls.
• train relevant staff in what they should be doing - our compliance unit has many years experience of providing training in this area in user-friendly formats.
• help you put in place controls and reporting structures which will answer concerns raised by the FSA.