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Al Rayan, a UK-based Shariah-compliant bank, has been issued a £4m fine by the Financial Conduct Authority (FCA) for a series of “egregious” anti–money laundering (AML) failures.
As per the FCA’s Final Notice, the failures took place between April 2015 and November 2017, when Al Rayan allowed large amounts of cash deposits to pass through the bank and be used in the UK without appropriate checks.
Specifically, Al Rayan failed to adequately check its high-risk customers’ source of wealth and source of funds when onboarding as required.
Headquartered in Birmingham, Al Rayan has several branches in the UK, and its parent bank is a subsidiary of Masraf Al Rayan, a Qatar-based Islamic bank.
As noted by the FCA, a “significant number” of Al Rayan’s 90,000 customers are from the Gulf Cooperation Council (GCC) states of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE.
In 2015, Al Rayan opened a branch in London’s Knightsbridge area to service high net worth and ultra-high net worth individuals, with a particular focus on those from the GCC.
According to the FCA, Al Rayan failed to carry out adequate enhanced due diligence (EDD) on these high-risk customers’ and instead relied on due diligence carried out by financial institutions in the GCC.
The FCA said Al Rayan was “aware” that this would not meet the required standards of UK AML laws and that it would result in Al Rayan being unable to corroborate the origin of customer monies from large, in-person cash deposits.
For example, Al Rayan failed to keep customer due diligence documents, data or information, and it had a backlog of more than 300 high-risk or politically-exposed persons (PEPs) whose KYC had not been periodically reviewed, in violation of Al Rayan’s own policies.
Additionally, Al Rayan failed to provide adequate training to staff, including in relation to the handling of large cash deposits, which led to the acceptance of such deposits without challenge or scrutiny.
During the two years covered by the FCA’s investigation, Al Rayan accepted 1,133 cash deposits of more than £10,000 across its branch network, worth £22.74m in total.
This included 60 deposits of more than £50,000, 16 of more than £100,000 and nine of more than £200,000.
These deposits were concentrated at the Knightsbridge branch, where by the end of 2017, Al Rayan had accumulated about 1,500 current accounts and 258 home purchase customers with a book value of £253m.
FCA visit fails to produce results
In 2015 and 2017, the FCA visited Al Rayan to review its AML control framework. During both of those visits, the FCA identified AML weaknesses that Al Rayan was required to address.
However, Al Rayan failed to remediate these issues in accordance with its own remediation action plan, and by the end of 2017 certain key actions remained unresolved.
In July 2018, the FCA therefore imposed a requirement that Al Rayan appoint a “skilled person" to improve its AML control framework.
In April 2019, due to the lack of progress observed by the FCA, Al Rayan entered into a voluntary agreement restricting it from accepting or processing any new deposit account applications from high-risk customers, PEPs, their family members or associates.
After working with the skilled person for three years, Al Rayan committed significant resources to its AML controls, and in June 2022 the FCA lifted its ban on onboarding new high-risk customers.
However, other business restrictions still remain, and the FCA said it will only be lifted when certain processes become fully automated.
“Al Rayan failed to manage the risk that it might be used to facilitate money-laundering,” said Mark Steward, executive director of enforcement and market oversight at the FCA.
“These failings create the conditions in which financial crime is facilitated and can take root within a firm. While the risk was caught in time, the failings here were egregious.”
Since Al Rayan agreed to resolve the matter with the FCA, it qualified for a 30 percent discount on the penalty fee. Were it not for Al Rayan’s cooperation, the penalty fee would have been £5.75m.
Maya Braine, managing director at UK-based financial crime consultancy Fintrail, said the case shows that although building an effective AML framework can be a long process, interaction with regulators can provide helpful practical guidance along the way.
“Understanding how to determine source of wealth and source of funds is often quite nebulous, with confusion around what constitutes best practice, what to ask for, and what evidence to accept,” she said.
“The FCA obviously doesn't give chapter and verse, but there is useful information in the Final Notice to Al Rayan.”
The FCA’s three-year war on money laundering
In April last year, as covered by VIXIO, the FCA set out a three-year strategy to improve outcomes for consumers and markets, of which prevention of money laundering risks was a key component.
The strategy builds on activities launched by the FCA in July 2021, when chief executive Nikhil Rathi committed the regulator to becoming more innovative, assertive and “data-led”.
At the launch of its three-year strategy, the FCA highlighted its achievements to date in combating money laundering.
These include the largest ever criminal trial and conviction for violation of AML regulations, which led to a £264m fine being issued to NatWest in December 2021.
