Reported by Jonah Anderson

(Summary version featured below)

As one of the world’s leading financial centers, London’s bustling capital markets provide both immense opportunities and significant risks. With trillions of dollars in trades processed annually, the city’s financial institutions serve as prime targets for money laundering, fraud, and sanctions evasion. Regulators and firms alike struggle to distinguish illicit transactions from legitimate ones, particularly given the rapid clearing times of financial trades, which often occur within a day. The scale of money laundering in capital markets remains difficult to quantify, making it a persistent and evolving challenge.

The UK government has long recognized money laundering in capital markets as an emerging threat. In its 2020 National Risk Assessment (NRA), officials acknowledged progress in understanding these risks but admitted that tracking illicit activity amid vast transaction volumes remains a daunting task. Regulated financial firms are tasked with acting as gatekeepers, identifying and reporting suspicious trades. Yet, a recent report from the Financial Conduct Authority (FCA) underscores that compliance gaps persist, with firms often underestimating their exposure to financial crime. Regulators have increasingly pressured firms to strengthen their anti-money laundering (AML) efforts, but enforcement remains a challenge.

Public-private collaboration has been a cornerstone of the UK’s approach to financial crime prevention, allowing regulators, law enforcement, and private firms to share intelligence on emerging threats. This cooperation has yielded a marked increase in suspicious activity reports, with financial institutions demonstrating a growing commitment to compliance. However, the FCA has expressed frustration over the financial sector’s slow progress, particularly in wholesale markets, where brokers have been found to lack robust monitoring and controls. The complexity of illicit financial networks means that even well-intentioned compliance efforts can fall short.

Despite increasing regulatory scrutiny, financial institutions face mounting costs in their fight against financial crime. UK firms collectively spent £38.3 billion on compliance in 2023, with expenses continuing to rise. The financial penalties for failing to meet AML obligations can be severe, particularly in the United States, where enforcement actions frequently result in multi-million-dollar fines. Compliance costs now dwarf the budgets of the UK’s law enforcement agencies, raising concerns about whether firms are being left to shoulder the burden of financial crime prevention without sufficient government support.

Emerging technologies like artificial intelligence (AI) offer hope for more effective and cost-efficient monitoring of suspicious financial activity. The FCA has endorsed AI as a tool for improving transaction monitoring, with a growing number of firms adopting AI-driven AML solutions. However, the regulator’s latest findings suggest that meaningful progress in AI-based monitoring remains limited. While AI may eventually reduce compliance costs and enhance enforcement efforts, financial crime remains an evolving threat. As illicit actors refine their tactics, regulators and firms must continuously adapt, ensuring that London’s financial system remains resilient in the face of an ongoing arms race against financial criminals.

Read original report: https://www.ftadviser.com/financial-fraud/2025/2/6/money-laundering-risk-in-capital-markets-is-uphill-battle-for-firms-and-regulators/