In a Quarterly Consultation paper CP24/11 published this week, the FCA outlined how it is to consult on introducing compulsory criminal background checks on firm owners and controllers applying for authorisation from January 2025.

Currently, the UK regulator requires only risk-based checks on some applicants.

In a paper the FCA said the risk-based approach means checks are performed when specific concerns about an individual’s fitness and propriety arise.

This was in contrast to other statutory anti-money laundering (AML) and counter-terrorist financing (CFT) supervisors such as HMRC and the Gambling Commission, where such checks are performed routinely.

“In line with the FATF recommendation, the FCA (in agreement with the Prudential Regulation Authority (PRA)) is now proposing to require controllers and beneficial owners to obtain criminal background checks from the Disclosure and Barring Service (DBS) (or equivalent for persons outside of England and Wales).

“This requirement will apply to those making an application for authorisation or registration with the FCA and for a notice of an intended acquisition or increase in control (‘change in control’ or ‘CIC’)”, the consultation statement said.

The regulator also highlighted exceptions to the requirement for DBS checks (or equivalents) is a reasonable measure to assess controllers’ criminal backgrounds.

“However, we recognise that in rare cases this requirement may be unreasonable where, for example, a DBS equivalent cannot be obtained due to jurisdictional limitations. It is likely that these cases will be outliers, as a DBS equivalent is available in most jurisdictions and the processing timescales are broadly consistent with the DBS service in the UK.

“In such circumstances where an individual may not be able to obtain a DBS equivalent, we will conduct a risk-based assessment to determine the appropriateness of this exception, strictly adhering to the established FCA risk tolerance framework.

“We also understand that it may not be possible for proposed controllers to undertake a DBS where a notification of change needs to be completed in rare or unusual circumstances and to extremely short timeframes. In circumstances where such transactions involve individuals, we propose to take a risk-based approach in line with the current FCA risk tolerance framework.

“We believe that these exceptions create a flexible approach, while maintaining standards and supporting the wider aim to prevent criminals from being financial controllers.”

The FCA is inviting comments on the proposals just over a month away by 12 August.

The country will now become a “jurisdiction under increased monitoring” and countries will have to actively work with the FATF to address strategic deficiencies to counter money laundering, terrorist financing and proliferation financing.

South Africa now becomes the second G20 country to be on the greylist after Turkey were added in 2021.

FATF said on 24 February that South Africa had “made a high-level political commitment to work” with the body to strengthen the effectiveness of its anti-money laundering regime.

It added that since 2021 it has made “significant progress” on recommended actions to improve its system including by developing national anti-money laundering and counter terrorism financing policies.

The body said that South Africa will have to implement eight steps of a FATF action plan to get itself of the greylist.

International Adviser spoke with a range of firms to discuss how the greylisting will impact the South African advice and investment markets.

‘Good position’

Francis Marais, product director at Morningstar Investment Management South Africa, said: “What is perhaps a bit more obvious is the risk that greylisting poses to foreign direct investments, specifically from European countries. It is therefore imperative that South Africa address these weaknesses or shortcomings as identified as soon as possible. The longer the greylisting continues the worse these effects could be which would then inevitably feed through to asset class returns.

“South Africa is, however, in a relatively good position, when compared to some of the incumbents on the grey list and has already shown intent by addressing some of the concerns and weaknesses. Indeed, should the country not be greylisted, the two laws already passed, in record time, should put us on an even stronger footing going forward and re-establish South Africa as an important global participant in the world financial markets.”

Lindsay Bateman, head of business development at Brooks Macdonald International, said: “While the move wasn’t a surprise, it has resulted in an immediate depreciation of the South African Rand on global currency markets and has dealt a significant reputational blow to the country.

“In addition to the potential currency impact, the costs of conducting global business for asset managers, banks, and other financial intermediaries will be impacted. This is due to the need for ‘enhanced due diligence’ on factors such as the source of wealth and funds, as well as greater ongoing supervision. The country faces increased risks, including concerns about greater capital outflows, as well as higher transactional, administrative, and funding costs, particularly in the banking sector.

“The listing is expected to be challenged for review in June and since many financial firms will initially bear additional expenses, the immediate influence on international financial transactions may be subdued.”

Rex Cowley, director at Overseas Trust & Pension, said: “The grey listing of South Africa is very unfortunate given the efforts taken by legislature, administrative bodies, and other authorities to address the issues identified in the 2021 mutual evaluation report. The grey listing will increase the administrative burden on the average person and all foreign provider of accounts to South Africans.

“Whether these costs are passed on or not time will tell but it is a far from desirable position. What seem unfair is that the majority of impact will be on the joe public when the drivers for the grey listing had nothing to do with them, and comes from state corruption, associated criminal activity and failures to convict or address perpetrators.”

Impact for intermediary market

The country is set for more disturbance, but what does this mean for South Africans who may be concerned about their investments, pensions and overall financial planning?

Michael Yuille, managing director at Northern Cross Wealth Management, added: Well, the immediate effect is that South African companies and individuals that trade or invest internationally will be subject to enhanced due diligence, which will add complexity and costs to these transactions.

“In addition, the likelihood is that the Rand may depreciate further against major international currencies, such as the US dollar and British pound.

“This, in turn, will make trading and investing internationally more expensive for South Africans, and may dissuade people from diversifying their portfolios into overseas markets, which should be one of the fundamental aspects of a truly diversified investment portfolio. South Africa clearly has a plan to be taken off the grey-list, it is now a question of how quickly it can be implemented.

Rashay Makan, managing director at Carrick Wealth South Africa, added: “Carrick Wealth are expecting increased transaction costs from international fiduciary, life, platform and investment providers. In addition, clients can expect increased scrutiny and enhanced due diligence, particularly surrounding source of wealth.

“These enhanced due diligence processes will certainly add to the overall transaction costs and increase processing turnaround times for clients.”

The UK was awarded the excellent rating by the FATF in its Mutual Evaluation Report.

The positive assessment followed the UK implementing all 40 of the recommendations previously made by the taskforce.

Investigative priorities

The FATF report found that, on an annual basis, the UK “achieves around 7,900 investigations; 2,000 prosecutions and 1,400 convictions” for money laundering alone or where it is a principal offence.

Similarly, investigations into high-end money laundering have significantly increased since the UK prioritised these types of cases in 2014.

Overall, the report found that “the UK is a global leader in promoting corporate transparency and has a good understanding of the money laundering/terrorist financing risks posed by legal persons and arrangements”.

“The UK has a comprehensive legal framework requiring all financial institutions and all designated non-financial businesses and professions to conduct customer due diligence and obtain and maintain beneficial ownership information in a manner that is generally in line with the FATF requirements.”

National Crime Agency

The UK’s National Crime Agency (NCA), which was recognised for the significant role it plays in tackling financial crime, stated that it is not resting on its laurels.

Donald Toon, director of the NCA’s National Economic Crime Centre, said: “[The FATF report] shows law enforcement is aggressively pursuing the global fight against illicit finance and the NCA uses the fullest extent of powers to pursue and deny the illicit assets of those that pose the highest harm to the UK.

“We are not complacent and there is always more we can do.”

A committee of anti-money laundering (AML) experts from the Council of Europe first raised concerns in an assessment of Jersey’s AML in 2015.

The report said authorities needed more powers to confiscate money that has been given to third parties as gifts, particularly those that were put into trust where the settlor retains a beneficial interest.

Even if it agreed the gift would not be automatically considered “realisable property”, the Moneyval committee said more could be done by the island’s authorities to get the money back.

One method might include examining the settlor’s letter of wishes – the founding document of a trust – for loopholes.

In a consultation published on 27 July 2018, Jersey’s crime strategy group said it did “not consider it appropriate to make inroads into fundamental principles of trust law by seeking to prescribe how much of the trust’s assets a discretionary beneficiary might theoretically be entitled to”.

The group added that letters of wishes are “not absolute, which would make such an exercise in most cases practically very difficult”.

Proposed changes to trust law

Instead, Jersey said it would consider inserting a clawback clause like the one it already uses in cases of drug trafficking.

The proposed change will mean that any gifts made within a period of five years leading to the criminal offence (or the earliest of the offences) may also be caught if a court agrees to take the gift into account.

Jersey wants to hear from the island’s financial services and trust industry whether the measure is effective and proportionate and whether five years is long enough.

It is one of 45 measures the island is consulting on, aimed at improving its anti-money laundering rules. The measures follow guidelines set out by AML body the Financial Action Task Force approach.

The consultation ends on 30 September 2018.

The task force is looking for views from competent authorities, insurers and insurance intermediaries.

Among the measures detailed in the paper, the FATF wants insurers to take ultimate responsibility for AML measures.

Insurers would be required to treat smaller advisers as higher risk and subject them to higher standards, especially those in higher-risk jurisdictions or those with higher-risk clients, like politically exposed persons.

When determining the risk profiles of life insurers and intermediaries, regulatory supervisors would have to consider an adviser’s business model, including products and services offered, customer base and characteristics, distribution channels, geographic locations in which they operate and relevant financial information.

Supervisors would also look at the controls in place, including governance arrangements, the quality of the risk management and AML framework, and the effectiveness mitigating measures like the fitness and properness of the management and holders of controlling interest.

Risky places

A contract will receive more scrutiny in cases with one or more red flag, including:

• Significant and unexplained geographic distance between the residence or business location of the customer and the location where the product sale took place (or the location of the insurer’s representative);
• Has the customer provided certification of their domestic tax residency that is supported by other information that the insurer or intermediary knows about the customer? Such as:
  • What is the tax residency of the customer?
  • Are all communications sent internationally without foreign residency ties?
  • Does the source of wealth, source of funds or other known relationship include ties to higher-risk countries?
  • Death claim payments to a beneficiary residing in a country with a high risk of terrorism.
  • Premiums and/or settlements are paid through accounts held with financial institutions established in jurisdictions associated with higher AML risk; and,
  • Intermediary is based in, or associated with, jurisdictions associated with higher AML risk.

Risky customers

Clients will receive more scrutiny when:

• Customers that are legal entities whose structure makes it difficult to identify the ultimate beneficial owner or controlling interests. This can happen at inception or, subsequently, an individually-owned insurance policy can be assigned to a legal entity. Know your client processes should apply at both stages;
• The policyholder and/or the beneficiary of the contract are companies whose structure makes it difficult to identify the beneficial owner, eg, multiple layers or because the entity’s ownership structure crosses jurisdictions;
• The policyholder and/or the beneficiary of the contract are companies with nominee shareholders and/or shares in bearer form;
• Occupation with a low average income and the policy has high ongoing deposits;
• A history within an occupation with a higher risk for AML due to local crime typologies, high access to cash-based businesses or international exposure;
• Customers who are reluctant to provide identifying information when purchasing a product, or who provide minimal or seemingly fictitious information;
• Customer transfers the contract to another insurer; (low risk after a long relationship, higher risk if after a short period of time, especially with high fees);
• The insurer is made aware of a change in beneficiary only when the claim is made; and a customer incurs a high cost by seeking early termination of a product; and,
• Customers request to change or increase the sum insured and/or the premium payment are unusual or excessive.

The FATF paper also emphasises scenarios where simplified checks are acceptable – such as low-risk jurisdictions and intermediaries selling simple products.

It also outlines why a supervisor might want to reduce the frequency and intensity of their AML checks.

The consultation is seeking views until 17 August.