Asset Finance
Asset Finance – Key Highlights
- Asset finance enables businesses to get machinery, equipment or vehicles without paying for them upfront.
- Criminals use tactics such as over/under valuing asset prices or use complex corporate structures to disguise illicit funds, leading to high-risk asset finance.
- Regulators expect asset finance providers to conduct customer due diligence, transaction monitoring, record-keeping, and SAR reporting to combat financial crime.
- AML Consultants UK help asset finance providers implement effective control measures for AML compliance.
What Is Asset Finance in a UK AML Context?
Asset Finance is a method that allows businesses to acquire equipment, machinery, vehicles or other resources without paying the full price upfront. The cost is spread over time through techniques such as hire purchase (buying assets by paying an amount in instalments), leasing (renting), or asset-based financing (loans).
Financial institutions (FIs) often provide hiring, leasing, or credit services, which criminals misuse to disguise illicit funds. This leads FIs subject to UK AML regulation when conducting regulated credit or financial activity. Further, lenders, brokers, funders, and introducers share responsibility for compliance and are required to conduct due diligence processes.
Unlike traditional lending, where banks provide loans based on customers’ credit score and income, asset finance involves financing of the asset until complete payment is made. This indicates high financial crime risks resulting from over-valued or fake equipment rather than fraudulent borrowers.
How Can Asset Finance Be Exploited for Money Laundering in the UK?
Money launderers use the following techniques to inject illegal money into the legitimate financial system through asset financing:
- Inflating the prices of equipment on paper to make illicit proceeds look like a business deal.
- Paying off the entire asset financing loans early using illicit money.
- Fake or falsified rental contract to make illegal money look legitimate (sham leasing arrangements).
- Purchase of expensive, movable equipment such as vehicles, plant machinery, or specialist equipment and later pay off financing using illegally obtained money.
- Use of shell companies or complex ownership structures to buy a high-value asset with illegal money and lease it out to a real business, making payments appear legitimate.
- Use of brokers, or third-party payment methods, to create a complex trail, making it hard for authorities to link equipment with dirty money.
- Buying and moving a high-value asset to cross borders and selling it in secondary markets to break the audit trail and make money appear clean.
What UK Laws and Regulatory Expectations Apply to Asset Finance AML Compliance?
The Money Laundering Regulations 2017 (MLR 2017) mandate asset finance firms to implement Customer Due Diligence (CDD) and perform ongoing monitoring to manage ML/TF risks. Asset finance firms must verify beneficial owners and apply Enhanced Due Diligence (EDD) to high-risk customers & transactions. MLR 2017 also requires firms to have written policies and to execute staff training.
Further, the Proceeds of Crime Act 2002 (POCA) requires firms to adopt a risk-based approach and report suspicious activity to the National Crime Agency (NCA), while penalising for non-compliance. The Financial Conduct Authority (FCA), which supervises these asset finance firms, expects them to have effective systems and controls to combat financial crime.
In addition, the Joint Money Laundering Steering Group (JMLSG) provides guidance to asset finance firms, as approved by HM Treasury, that helps them assess risks and conduct CDD appropriately.
What Are Effective AML Controls for Asset Finance Firms in the UK?
Asset finance firms must identify risks across customers, products, delivery channels and geography, assess inherent risks, evaluate controls and calculate residual risk to understand their firm-wide risk. Further, firms must align their AML/CFT policies and procedures with the identified firm-wide risk.
For firms such as corporate borrowers, Special Purpose Vehicles (SPVs), and introducers, verification of the existence of legal structures and identification of true beneficial owners is required. In addition, asset finance firms must conduct EDD for high-value asset transactions, requiring verification of the source of wealth/funds.
Asset finance firms must use effective transaction monitoring systems that generate alerts for suspicious activities, indicating early repayments, refinancing patterns, and unusual settlement structures.
Furthermore, the Money Laundering Reporting Officer (MLRO) must identify ML/TF vulnerabilities and report suspicious activities. Firms must maintain comprehensive documentation to demonstrate compliance during regulatory inspections and conduct staff training to support them in identifying red flags and combating financial crime.
What Compliance Challenges Do UK Asset Finance Providers Commonly Face?
Regulators find the following compliance challenges during inspecting asset finance providers:
- Firms fail to identify and verify the ultimate beneficial owners and depend heavily on brokers, intermediaries, or third parties to conduct CDD.
- Asset finance firms struggle to deal with complex corporate structures and cross-border jurisdictions, as these make it hard for them to perform CDD accurately.
- Reliance on manual processes and inaccurate documentation may also lead to compliance failures.
- Failure to conduct due diligence and effective monitoring of new owners during secondary sales or asset transfers.
- Regulators identify gaps such as weak EDD, poor risk assessment, ineffective transaction monitoring, and inadequate SAR filing, resulting in fines and reputational damage.
- Firms struggle to balance commercial growth with robust AML controls, as growth demands faster customer onboarding, while AML checks often slow down the operations.
How AML Consultants UK Can Help with Asset Finance AML Compliance
AML Consultants UK support asset finance providers with tailored firm-wide risk assessment (FWRA), which is also known as business-wide risk assessment (BWRA), to identify vulnerabilities for specific services such as hire purchase, leasing, and equipment financing. The tailored approach helps implement risk controls based on actual risk posed by customers, products, geographies, and delivery channels.
Further, AML Consultants UK create customised policies and procedures aligned with FWRA and performs a comprehensive AML/CFT health check. With this, provide MLRO support and AML training to ensure firms detect, prevent, and report financial crime.
AML Consultants also provide advisory support to FCA-regulated asset finance firms to help them evaluate and strengthen their compliance frameworks before regulatory inspections. In addition, provide specialised support to identify, fix and manage weaknesses in their AML compliance program.
FAQs on Asset Finance
Are asset finance companies subject to the Money Laundering Regulations 2017?
Yes, as asset finance companies provide lending and financing services, they are denoted as financial institutions and must comply with AML obligations under the Money Laundering Regulations 2017.
Is enhanced due diligence required for high-value asset leasing?
Yes, high-value asset leasing generally involves large, complex transactions which may disguise the origin of illicit funds, hence requiring enhanced due diligence.
What AML checks are required for asset finance brokers?
Asset finance brokers must conduct customer due diligence, perform EDD for high-risk customers, conduct risk assessment, ongoing monitoring, record-keeping, and file a suspicious activity report to comply with AML regulations.
What are the FCA’s expectations for AML systems in specialist lending?
FCA expects specialist lenders to have risk-based AML systems that perform comprehensive risk assessment, due diligence, and transaction monitoring to identify red flags in real time and combat ML/TF risks.
When should an asset finance firm submit a Suspicious Activity Report?
An asset finance firm must file a suspicious activity report immediately when it suspects or detects unusual patterns or attempts to conceal illegal funds to meet UK AML regulations.
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