Regulated firms at risk of financial crime without due diligence

29th February 2024

New data reveals that more than nine out of 10 (92%) regulated firms do not carry out daily monitoring on clients. This exposes them to potential sanctions breaches and other financial crime such as money laundering, warn digital compliance experts at SmartSearch.

Under UK law, regulated firms must identify and verify anyone they work with, to ensure they don’t unknowingly become involved with a person or business under sanctions or with a history of financial crime.

This alarmingly high figure of 92% is newly released from SmartSearch’s September 2023 survey of more than 500 compliance decision-makers. It is up by a worrying 8% from their previous annual survey in 2022, when 84% of people said they did not conduct daily client screening. 

Of the regulated firms surveyed – including financial, legal, property and accountancy – the property sector was found to be at greatest risk, with 95% of firms not conducting daily checks. This is followed swiftly by the financial services sector, where 94% of finance firms could be exposed to a breach of financial sanctions by not conducting daily customer due diligence – up by 6% from 88% in the 2022 survey.

In joint third place are accountancy and legal firms, 88% of whom are elevating their risk to financial crime by not performing daily due diligence on clients.

Martin Cheek, Managing Director at SmartSearch, said “The rising sophistication of financial crime coupled with increasing regulatory pressure can be overwhelming for firms. Everyone is so busy that it can be a real challenge for firms to  comply with the law while mitigating financial and reputational risk for them and their clients.

“People in regulated businesses are genuinely worried that a breach of financial sanctions could be considered a criminal offence worth seven years in prison. A simple solution is to switch to electronic verification (EV) and adopt a perpetual KYC (know your customer) model to support daily customer due diligence (CDD). 

“A pKYC approach utilises real-time data and intelligence, including robust sanctions and politically exposed person (PEP) screenings to build a complete picture of client, which is constantly updated. This way, the risk level that an individual client or business might pose to a firm is continuously assessed, with any anomalies flagged. These advancements have been a key driver in the shift by many firms to a digital compliance strategy.”