• The FCA warns financial firms to strengthen AML measures as criminals exploit rapid transactions to hide illicit funds
• Despite increased oversight, gaps remain in compliance, with firms failing to meet expectations
• Compliance costs have surged, reaching £38.3bn in 2023, far exceeding law enforcement budgets
• AI could enhance AML efforts, but adoption remains slow, with little progress in transaction monitoring

The UK’s financial services regulator, the Financial Conduct Authority (FCA), has issued a stark warning to financial institutions to redouble their efforts to address growing concerns over anti-money laundering (AML) risk.

The FCA’s latest report on the issue, published in the last fortnight, highlights how criminals exploit the high volume of transactions and rapid clearing times – often under a day for money market trades and just two days for foreign exchange and equities – to conceal illicit activities.

The complexity of financial markets makes it difficult to identify suspicious transactions among legitimate trades, posing a persistent challenge for regulators and financial institutions alike.

The UK government has long recognized the risks posed by money laundering in the capital markets. In its 2017 National Risk Assessment (NRA), it acknowledged the emerging threat, and by 2020, it had refined its understanding of these risks.

However, the scale of illicit activity remains difficult to quantify due to the sheer volume of financial transactions, and despite increased regulatory oversight, the FCA insists that financial institutions must do more to safeguard against abuse.

Banks, exchanges, and brokers serve as gatekeepers, required to implement robust AML measures, monitor transactions, and report suspicious activities.

Yet, the FCA has expressed concern that some firms are failing to meet expectations. In a 2019 letter to wholesale market firms, the regulator criticized a culture that underestimates financial crime risks and identified weaknesses in compliance monitoring.

The latest report reiterates these concerns, emphasizing the need for stronger oversight.

One of the UK’s key strategies in combating financial crime has been fostering public-private partnerships. Regulators and law enforcement agencies collaborate with financial institutions, sharing intelligence on emerging threats and suspicious activity patterns.

The FCA’s report includes case studies demonstrating successful interventions, helping firms to recognize and address vulnerabilities in their systems. However, while suspicious activity reports in capital markets increased by approximately 29% in 2020, the FCA insists that firms can – and must – do more to detect and prevent illicit financial channels.

Firms are required to conduct business-wide risk assessments, perform due diligence on clients, monitor transactions, and report suspicious activities. The FCA found gaps in all these areas, warning that non-compliance could lead to enforcement action.

Penalties for financial crime violations can be severe, particularly in the U.S., where fines often reach billions of dollars. Beyond financial consequences, firms risk significant reputational damage if they fail to meet regulatory standards.

Compliance costs for UK financial services firms have skyrocketed in response to evolving regulations.

In 2023, total compliance spending in the sector reached £38.3 billion, with firms reporting continued cost increases. By comparison, the UK’s three security and intelligence agencies had a combined annual budget of under £5 billion, and the National Crime Agency’s funding stood at just £870 million.

The FCA has acknowledged that artificial intelligence (AI) could play a transformative role in AML efforts. In an April 2024 update, the regulator highlighted AI’s potential to enhance transaction monitoring and detect money laundering schemes more efficiently.

A survey conducted by the FCA and the Bank of England in November 2024 found that 15-20% of financial firms were already using AI-driven AML tools, while 40-50% planned to adopt them within the next three years.

Despite AI’s promise, the FCA’s January 2025 report found that no firms had made significant progress in leveraging AI for transaction monitoring. While AI adoption could initially drive compliance costs higher, long-term efficiencies may eventually reduce expenditures.