Anti-money laundering, terrorist financing, and know your client obligations
FCA-authorised firms are required, pursuant to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on Payer) Regulations 2017 (“MLRs”), to implement anti-money laundering (“AML”) measures.
The AML requirements set out under the MLRs create a number of obligations which would apply to regulated online platforms including:
- creating internal policies and procedures;
- carrying out internal risk assessments;
- creating a system for suspicious activity reporting;
- training staff;
- carrying out customer due diligence (“CDD”), enhanced due diligence (“EDD”), or simplified due diligence where necessary; and
- record keeping.
Online platforms commonly implement some of the following measures to meet AML obligations:
- filtering customers to avoid “high risk” customers or customers where EDD may be required;
- preventing persons from certain (e.g. sanctioned) jurisdictions from registering with the service;
- online CDD checks (e.g. by using a picture of a customer and their identification documents);
- online EDD checks (e.g. by using video messaging services to identify and verify customers);
- creating a digital suspicious activity reporting system; and
- recording transactions and using algorithms to track fraudulent patterns.
Firms should also be aware that a new anti-money laundering provision, the fifth Money Laundering Directive (“MLD5”) is due to be implemented across member states, including the UK (depending on Brexit), by 2020. This will create a number of new obligations including which may affect online platforms, including the mutual recognition of the latest developments in electronic identification schemes to allow for quicker and easier due diligence checks.
In summary, under FSMA a person is not permitted to issue a “financial promotion” unless the financial promotion is:
- issued by an FCA-authorised firm;
- its content approved by an FCA-authorised firm; or
- falls within the scope of an exemption.
Any contravention of the financial promotion regime is a criminal offence.
A communication will only constitute a “financial promotion” if it satisfies each of the following criteria (as above, if one is not satisfied, then it will not amount to a financial promotion):
- it is an invitation or inducement (e.g. by marketing);
- to engage in investment activity (e.g. to acquire or dispose of a “specified investment”, see “Regulatory Permissions” above);
- in the course of a business (as above, e.g. to make a profit).
Online platforms commonly implement the following measures to help them discharge their financial promotion obligations:
- creating a “tick box” for investors to certify whether they meet certain conditions, so the financial promotion can be communicated without restriction;
- categorising customers; and
- limiting the products available to a customer depending on exemption category.
Firms should also be aware that the FCA issued a “Dear CEO” Letter for all regulated firms earlier this year. This letter was to remind CEOs that firms carrying out both regulated and unregulated activity are not permitted to issue financial promotions which suggest all their activity is regulated by the FCA. Online platforms should therefore consider their financial promotions carefully to ensure that they do not misrepresent the scope of their existing permissions.
As published in Butterworths Journal of International Banking & Financial Law, June 2019.
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