Sep 2018 – Financial Crime

As the techniques used to carry out financial crime continue to advance, firms should be regularly reviewing their systems and controls.  This includes reviewing processes to mitigate the evolving risks of money laundering and fraud.

The FCA recently wrote to the banks on how to handle financial crime risks posed by cryptocurrencies, such as Bitcoin.  With increased popularity in these virtual currencies, firms may be seeing more clients use the proceeds from cryptoassets as part of their deposit for a mortgage.  However there is a greater risk of money laundering due to these products offering potential anonymity and the ability to move money between countries.  The FCA therefore expects firms to enhance scrutiny of these customers.  This may mean that brokers find it difficult for a lender to accept money that has resulted from cryptocurrencies.  Mortgage brokers should be vigilant to these risks, ensure any income or gains are declared and take adequate precautions.  All sources of funds should be researched, validated and recorded.

Another area of financial crime which continues to develop is fraud, and the latest ombudsman newsletter centres on authorised push payment scams where criminals trick customers into transferring money into their bank account.  However it isn’t just banks who are at risk but all firms, including mortgage brokers.  Fraudsters will play on the emotion of their targets, such as customers under the stress of buying a house which becomes more acute when they think there is a chance that it won’t complete.  With fraudsters exploiting reliance on email, a firm’s approach to cyber security plays an important role, particularly the need to engage at all levels within a firm including advisers.  Fraudsters continue to attempt to masquerade as conveyancers and brokers to dupe a customer into transferring a significant amount of funds elsewhere.  Training staff to ensure that they can identify signs that a customer has become a victim is crucial to prevention, as well as taking basic security steps around business email accounts.

The risk of a customer becoming a victim of fraud should be considered by firms not just with regard to losing trust and reputational damage, but also the financial reimbursement that will be expected.  The ombudsman has made clear that if a business does not take responsibility because it claims the customer acted with gross negligence, the customer needs to have shown a very significant degree of carelessness. The increasing sophistication of scams means that the bar for gross negligence is high.  Firms are expected to warn customers about the risks of scams, but a generic caution buried in terms and conditions is unlikely to be sufficient.  Educating customers about what they might expect from a fraudster and what they should do is likely to be more engaging and therefore effective.

Fraud takes many guises, and there is still a widespread risk of mortgage fraud.  This includes advisers encouraging customers to inflate their income or to provide false employment details, offering customers access to false documents to support an application, or manipulating customers’ details to fit criteria.  Another example is where a lender may have encouraged a broker to favour certain products that aren’t suitable.

The FCA expects firms to have sufficient controls in place to prevent the firm from being used to commit fraud.  Firms are also responsible for reporting suspicions of fraudulent activity.  For brokers to protect themselves from the risk of panel removal or allegations of facilitating or ignoring even potentially fraudulent activity, robust processes should be in place to mitigate these risks and to effectively deal with them if identified.

Aileen Lees
Senior Policy Adviser

September 2018