Firms “failing to conduct AML checks on existing clients”

Trust your existing clients, but make sure you monitor them as well, regulated firms have been warned.

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, with firms being 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.

The advice from Martin Cheek of SmartSearch came as new data revealed that almost half (47%) 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. He continued:

“My biggest takeaway from these talks is to stress the on-going monitoring of existing clients.

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.”

Cheek 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 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.

Almost half (47%) admitted to not changing their approach to monitoring existing customers since the war in Ukraine began. In addition to this, almost a quarter (23%) of the firms which did monitor existing clients said they did so only annually or every six months. An astonishing 77% of the property firms who responded said they had either not changed the way they monitored existing clients or even reduced checks on them.