“Trusting” regulated firms risk sanctions breaches

Trust your existing clients - but make sure you monitor them as well, an anti-money laundering (AML) expert has warned regulated firms.

The advice was given to hundreds of compliance decision-makers who attended a series of webinars on Russian sanctions and what they mean for regulated businesses.

During the webinars, Martin Cheek, Managing Director of SmartSearch, the UK’s leading AML software provider, advised that an “unprecedented” 7,200 individuals and 1,250 entities had been added to the thousands of sanctions already affecting Russia since the war in Ukraine began.

His advice came as new data revealed that almost half (47 percent) of regulated firms in the legal, property and finance and banking sectors admitted to not changing their approach to monitoring existing customers since Russia had invaded Ukraine – mainly because they either trusted their clients or had worked with them for a long time.

“My biggest takeaway from these talks is to stress the on-going monitoring of existing clients,” said Mr Cheek.

“There were 43 amendments to existing sanctions just this week. Verifying clients at the onboarding stage is simply not sufficient in the context of the ever-changing sanctions landscape. You can’t say to the regulator that you know your clients if you don’t monitor them.”

Mr Cheek, a qualified lawyer, added that the Government had imposed stricter, “eye-watering” penalties on firms who breached the regulations: “Unintentionally breaching the rules is not a defence. Firms are required to regularly update their sanctions policies and procedures as well as demonstrate robust sanctions screening. Breaching the rules is a strict liability offence, and those involved can also be held personally liable. A criminal prosecution can mean up to seven years in jail.

“As well as the fines and reputational damage that censures bring, dealing with investigations by the regulator takes up a lot of management time.”

However, despite these warnings, a comprehensive, multi-sector survey of regulated firms by SmartSearch saw many firms admit to either not monitoring existing clients or doing so infrequently – leaving loopholes to be exploited by Russians trying to circumvent sanctions rules.

Five hundred regulated UK businesses across the legal, property and finance and banking sectors were questioned in May on a range of AML compliance issues as part of SmartSearch’s EV Uncovered campaign.

Almost half (47 percent) admitted to not changing their approach to monitoring existing customers since the war in Ukraine began. And almost a quarter (23 percent) of the firms which did monitor existing clients said they did so only annually or every six months.

An astonishing 77 percent of the property firms who responded said they had either not changed the way they monitored existing clients or even reduced checks on them. Legal and finance firms were only slightly better at 57 percent and 41 percent respectively.

Nearly two-thirds (60 percent) of the firms said that this was because they either trusted their clients or had worked with them for a long time.

Finance and banking firms were the most likely to trust their existing clients – with one in seven (14 percent) saying they did so. Just over one in ten (11 percent) of legal firms said they trusted their clients.

Ironically, no property firms – the sector least likely to monitor existing customers - said they trusted their clients.

Mr Cheek added: “This is a long way from proper due diligence and it’s no wonder that criminals and kleptocrats are taking advantage of these loopholes to wash their money in the UK.

“Electronic verification (EV) is the only robust way to monitor existing clients – it can even retro-screen them. It is the most effective way for firms to show they have sought to avoid sanction breaches and, more importantly, to keep this dirty cash out of the UK economy.”

For more information please visit: www.smartsearch.com