recruiting talent
Europe Feature Stories Insights Regtech Trending

Worrying Signs for Financial Services as PEP Due Diligence Drops From 66% to 22% Finds SmartSearch

SmartSearch, the UK digital compliance solutions provider, has published new data revealing there has been an almost 50 per cent drop in the number of firms upholding strict screening procedures for new customers. The report found that in 2022, 73 per cent of regulated businesses were doing their due diligence against sanctions or politically exposed person (PEP) lists, while in 2023, only 25 per cent were.

The survey examined 500 compliance decision-makers across financial services, estate agents, mortgage brokers, intermediaries, accountancy and law firms. According to SmartSearch, this ‘backslide’ in compliance is “particularly alarming” due to growing geopolitical tensions between the West and China, echoing the lessons from the sanctions against Russia. New sanctions have the potential to turn low-risk, longstanding UK clients into high-risk entities overnight.

Martin Cheek, managing director, SmartSearch
Martin Cheek, managing director, SmartSearch

Commenting on the survey data Martin Cheek, managing director of SmartSearch said: “The backslide in this year’s data underlines a worrying theme of complacency on compliance. Sanctions are not a static list, they are a dynamic and rapidly evolving tool of foreign policy. Firms that think occasional checks are sufficient are not just naïve, they’re risking severe penalties, including substantial fines.

“Under the Economic Crime Act, breaches of financial sanctions are punishable by fines of up to £1 million – and let’s not forget the accompanying reputational damage. In this digital age, news travels fast, and being named and shamed for a sanctions breach can be devastating.”

A drop across sectors

As a result, more must be done to ensure compliance processes to avoid substantial fines. The UK government estimates that money laundering costs the UK economy more than £100billion each year and the International Monetary Fund (IMF) estimates that financial crime equates to a staggering two to five per cent of global gross domestic product (GDP).

Breaking down the drop in compliance by sector, SmartSearch found that the legal sector, which previously led with a robust four-fifths (84 per cent) commitment to always performing checks, plummeted to a mere quarter (24 per cent) in 2023. The financial services sector also declined from almost two-thirds (66 per cent) to just over a fifth (22 per cent). Estate Agents demonstrated a similar downturn, from over a third (37 per cent) to roughly a quarter (24 per cent).

Complying with the FCA

The research comes just a few months after the Financial Conduct Authority (FCA) announced its new measures to ensure PEP due diligence. Alarm bells should be ringing for firms as the UK regulator examines businesses for its PEP review which will conclude and be published in June 2024. This added focus on compliance will result in the FCA taking action against deficiencies that are identified in any of the assessed firms.

Sarah Pritchard, Executive Director of Markets at the FCA
Sarah Pritchard, executive director of markets, FCA

When the review was announced, Sarah Pritchard, executive director of markets at the FCA, said: “Under legislation adopted by Parliament, financial firms are required to do extra checks on political figures, their families and close associates. More than 200 countries and jurisdictions have signed up to the standards set by the Financial Action Task Force. However, if rules are applied inappropriately by firms, then individuals may find themselves excluded from products or services through no fault of their own.

“The FCA has already taken a number of steps to remind the industry and specific firms that they should follow its guidance on implementing current rules, and some firms have already changed their approach as a result. Individuals can also raise concerns with their financial institution or the Financial Ombudsman Service.”

Preparing for the next hurdle

The SmartSearch data suggests firms may not be prepared for the next geopolitical challenge, which could result in serious consequences. This worrying trend is not just a regulatory concern, it poses significant consequences for the fight against the criminal gangs that laundering their “dirty money” in the UK.

Collette Allen, COO, SmartSearch
Collette Allen, COO, SmartSearch

Collette Allen, COO, SmartSearch stresses the importance of robust digital compliance: “The speed at which sanctions can be imposed can catch firms off guard. It is crucial that regulated firms are proactive rather than reactive when it comes to their digital compliance.

“Our recent survey data shows that firms are still not taking adequate steps to ensure they are not dealing with sanctioned individuals or entities. It is simply not enough to have screened a client ‘sometimes’ or ‘often’ and assume the job is done.”

The call to action is clear, regulated firms must revive their compliance processes. The use of electronic verification (EV), recommended by the 2020 Money Laundering and Terrorist Finance Act, is a step in the right direction. EV streamlines the verification process and provides a more reliable risk assessment.

The data from the third iteration of SmartSearch’s Electronic Verification Uncovered campaign, questions firms on their attitudes and approaches to compliance. The campaign highlights a concerning complacency in sanctions screening, which is a move away from the heightened vigilance displayed in the wake of ongoing Russian sanctions. The lessons from the past must inform the actions of the present to ensure that we protect the integrity of regulated firms.

Author

  • Francis is a journalist and our lead LatAm correspondent, with a BA in Classical Civilization, he has a specialist interest in North and South America.

Related posts

Deloitte and FintechOS, partners in CEC Bank’s digital transformation

Manisha Patel

Unlocking LatAm: Global Expansion Without a Local Entity

The Fintech Times

ForgeRock Announces PSD2 and Open Banking Accelerators, Including ‘Mock Bank’ for Testing

Jason Williams