The Financial Conduct Authority has said that new and challenger banks are not doing enough to tackle money laundering.

According to an FCA review, challenger banks need to do more as a whole to prevent money laundering.

The review assessed a sample that included six challenger retail banks and eight million customers. The FCA examined, among other factors, the governance and management information, the banks’ policies and procedures and how they identified high risk/sanctioned individuals or entities.

In addition, the FCA found weaknesses in customer due diligence. It noted that most challenger banks did not obtain details about customer income and occupation, resulting in an incomplete assessment of the purpose and intended nature of a customer’s relationship with the bank.

The FCA also warned that some banks had non-existent or underdeveloped customer risk assessment frameworks that lacked sufficient detail.

“The weaknesses we found create an environment for more significant risks of financial crime to occur both when customers are onboarded and throughout the customer journey. Challenger banks are requested to review these findings and make improvements where necessary,” the FCA review stated.

However, the FCA noted that there was also evidence of good practice, citing the innovative use of technology to identify and verify customers at speed.

It also noted that challenger banks make effective and innovative uses of data and information to mitigate risks.

Some challenger banks also mitigate fraud risk by incorporating additional monitoring for known fraud typologies at onboarding and as part of account monitoring. This included Credit Industry Fraud Avoidance System (CIFAS) checking, as well as checks on customers using multiple devices to manage their accounts.

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The FCA noted that a 2020 risk assessment warned that challenger banks may be attractive to criminals due to the fast onboarding process they offer.

This presents a danger that information required to open an account is insufficient to identify higher risk customers.

These practices make them particularly useful when setting up money mule networks – people who have been recruited, knowingly or not, to transfer stolen funds between accounts on behalf of criminals.

“Following our review, the challenger banks where we identified material issues established remedial programmes to address our concerns. This may result in them potentially rejecting a larger number of new customers at onboarding,” the FCA noted in a statement.

It added that challenger banks should ensure their customer risk assessment and enhanced due diligence measures adapt to the heightened risk of sanctions evasion.

This has become even more pressing in the light of the Russian invasion of Ukraine, which has seen a raft of sanctions imposed on Russia.

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