Fit and proper test: how regulators assess directors and AML officers

Obtaining a license in the financial sector depends not only on the company’s structure and business plan. In many cases, a key factor is the assessment of the individuals who will manage the company and ensure compliance with regulatory requirements. For this purpose, regulators apply the fit and proper test – a procedure used to evaluate directors, shareholders, and key officers. Regulators review candidates’ professional experience, business reputation, financial soundness, and independence. Even when the corporate structure is fully prepared, insufficient qualifications or concerns about a candidate’s reputation may lead to delays or refusal in the licensing process. In this article, we examine how regulators conduct fit and proper assessments and which factors most often influence the final decision.

What is fit and proper testing and why do regulators do it

The fit and proper test is a procedure used to assess candidates for key roles in regulated companies. Regulators apply it to ensure that individuals responsible for strategic decisions or compliance have the required qualifications, a solid reputation, and the ability to perform their duties in accordance with the law.

This assessment is used during company licensing and when appointing directors, board members, senior managers, and AML officers. In some jurisdictions, the fit and proper assessment is conducted not only at the licensing stage but throughout the company’s operations, particularly when management changes or significant corporate restructuring occurs.

Purpose of the fit and proper assessment

The main objective of the procedure is to reduce regulatory and financial risks related to company management. Regulators seek to ensure that individuals making key decisions act competently, responsibly, and independently.

The assessment examines not only a candidate’s professional background but also their ability to comply with regulations, manage risks, and support an effective compliance framework. Particular attention is given to directors and AML officers, as they oversee strategic governance, financial controls, and AML/CTF compliance.

Where the fit and proper test is applied

Fit and proper assessments are widely used in regulated sectors where management quality directly affects financial stability and customer protection.

They are most commonly applied in:

Financial institutions and investment companies;
Payment institutions and electronic money providers;
Fintech companies and financial technology providers;
Crypto platforms and digital asset service providers;
Licensed firms in asset management and brokerage services.

In many jurisdictions, regulators may reject a candidate for director or AML officer if they do not meet fit and proper criteria. As a result, the selection of management becomes a critical part of licensing preparation and ongoing regulatory oversight.

Main criteria for evaluating candidates

When conducting a fit and proper test, regulators do not assess a single indicator but a combination of factors to determine whether a candidate can perform their duties effectively and responsibly. The review usually includes analysis of professional experience, business reputation, financial stability, and potential conflicts of interest.

The goal is to ensure that company leadership possesses not only formal qualifications but also practical risk management skills, regulatory awareness, and sufficient independence to make responsible decisions. While criteria may vary across jurisdictions, the core principles remain broadly consistent.

Professional competence and experience

A key factor is the candidate’s professional competence. Regulators assess whether the individual has sufficient experience and knowledge to perform the role of director, board member, or AML officer.

The assessment typically considers:

Professional experience in the relevant industry;
Management experience and involvement in strategic decisions;
Understanding of regulatory requirements and compliance systems;
Education and relevant qualifications;
Experience in regulated financial or technology companies.

Practical experience in the sector where the company operates is particularly important. For example, fintech or crypto firms are often expected to appoint leaders with experience in financial technology, payment systems, or digital assets.

Reputation and integrity

Another critical element is the candidate’s reputation. Regulators aim to confirm that the individual demonstrates high professional integrity and is not associated with activities that could undermine their credibility.

The review typically includes:

Criminal records or ongoing investigations;
Involvement in financial fraud or legal violations;
Past regulatory sanctions or disciplinary measures;
Participation in bankrupt companies linked to poor management;
Professional history and reputation within the industry.

Even past incidents may be considered depending on their nature, circumstances, and the candidate’s role in those events.

Financial soundness

A candidate’s financial stability may also be assessed. Regulators consider whether significant personal financial problems could increase the risk of misconduct or conflicts of interest.

The evaluation may include:

Bankruptcy proceedings or major debt disputes;
Substantial financial liabilities;
Involvement in companies with financial irregularities;
Potential conflicts of interest related to the candidate’s business activities.

This analysis helps regulators ensure that the candidate can act independently and is not under financial pressure that could affect professional judgment.

How fit and proper assessment takes place in practice

The fit and proper assessment is usually conducted during company licensing or when appointing new directors and key officers. In many jurisdictions, regulators may also repeat the review during the company’s operations, for example after management changes or when potential regulatory risks arise.

The assessment involves a comprehensive review of documents, professional experience, and reputation. Regulators analyze the information provided by the company and may also rely on their own databases and sources to verify its accuracy.

During the assessment, regulators typically review:

The candidate’s detailed CV and confirmation of professional experience;
Education records and professional qualifications;
Criminal record checks and background screening results;
History of participation in companies and previous roles;
Any regulatory sanctions or disciplinary actions;
Potential conflicts of interest;
The candidate’s reputation within the industry.

In some cases, regulators may request additional information or conduct interviews with candidates. This is particularly common for licensed financial institutions, where management plays a critical role in risk management and compliance.

If a regulator concludes that a candidate does not meet the fit and proper criteria, the company may be required to replace the candidate or provide additional evidence of their competence and reputation. Therefore, preparing clear and complete documentation is essential for successfully passing the assessment.

Features of the AML officer's check

Although the fit and proper test applies to all key executives, requirements for the AML officer role are often stricter. This is because the AML officer is responsible for the anti-money laundering framework, transaction risk monitoring, and interaction with regulators and financial institutions.

Regulators view the AML officer as a central figure in the compliance system. Therefore, when appointing this role, particular attention is given to professional qualifications, independence, and real involvement in risk management.

Competence in AML/CTF compliance

An AML officer candidate must have sufficient knowledge and experience in AML/CTF regulation. Regulators expect the role not only to maintain compliance policies but also to identify and manage financial crime risks effectively.

The assessment typically considers:

Experience in AML/CTF compliance;
Knowledge of international standards and FATF recommendations;
Experience interacting with regulators and financial institutions;
Involvement in developing internal compliance policies and procedures;
Understanding of transaction risks and monitoring systems.

In many cases, regulators also expect experience in the company’s specific sector, such as financial services, fintech, or crypto.

Independence and role in governance

Another key criterion is the AML officer’s independence within the corporate structure. Regulators must be confident that the officer can objectively assess risks and, when necessary, initiate internal investigations or report suspicious activities.

The review usually focuses on:

The AML officer’s position within the company’s organizational structure;
The ability to communicate directly with the board or senior management;
Absence of conflicts with commercial functions;
Availability of adequate resources for compliance duties.

If the AML officer lacks sufficient independence or is not genuinely involved in risk management, regulators may require changes to the compliance structure or the appointment of a different candidate.

The most common reasons for rejection

Even when a candidate has relevant experience and formally correct documentation, regulators may still reject a director or AML officer during the fit and proper assessment. In practice, refusals are rarely based on a single issue but rather on a combination of factors that raise doubts about the candidate’s competence, reputation, or independence.

Regulators assess not only formal criteria but also the candidate’s overall profile, professional history, and potential risks for the company’s governance framework. If there are concerns about the candidate’s ability to perform the role effectively, the regulator may require the company to replace the candidate or undergo additional review.

Common reasons for rejection include:

Insufficient management or industry experience;
Lack of practical experience in a regulated sector;
Involvement in companies that previously violated regulatory requirements;
Negative reputation or past disciplinary sanctions;
Incomplete or inaccurate disclosure during the assessment process;
Potential conflicts of interest;
Insufficient independence from beneficial owners or other executives.

Regulators pay particular attention to cases where a candidate previously held senior roles in companies that lost their license or were involved in serious compliance breaches. Even if the individual was not directly responsible, regulators may consider the broader context of their involvement.

A lack of transparency about the candidate can also raise concerns. Inconsistencies in professional history, missing information about previous activities, or lack of supporting documentation often lead to additional regulatory questions and may delay the licensing process.

How to prepare for fit and proper assessment

Preparation for a fit and proper assessment should begin well before submitting licensing documents or appointing candidates to key roles. Regulators expect companies to assess in advance whether their executives meet the required standards and to demonstrate their competence, reputation, and independence.

Successful approval largely depends on well-prepared documentation and transparent information about the candidates. Companies that conduct internal checks of their management in advance usually reduce the risk of delays or regulatory refusals.

To prepare for a fit and proper assessment, companies typically take the following steps:

Conduct preliminary checks of candidates’ professional experience and reputation;
Prepare detailed CVs confirming management and industry experience;
Collect documents on education and professional qualifications;
Analyze potential conflicts of interest and corporate affiliations;
Review the candidate’s involvement in other companies;
Prepare an explanation of the candidate’s role within the corporate governance structure.

It is also important to ensure that the company’s organizational structure meets regulatory expectations. The roles of directors and the AML officer should be clearly defined, and risk management and compliance frameworks properly documented.

How Structum helps you pass fit and proper assessment

Passing a fit and proper assessment requires not only selecting qualified candidates but also properly preparing the company’s governance structure from a legal and compliance perspective. In practice, many difficulties arise from poorly prepared documentation, candidates whose experience does not fully match regulatory expectations, or an unclear definition of their role within the corporate structure.

Structum team assists international companies, fintech projects, and licensed businesses in preparing for fit and proper assessments and reducing the risk of regulatory rejection. Our specialists support clients at every stage: from preliminary candidate evaluation to interaction with supervisory authorities.

Within this practice, we provide comprehensive support, including:

Preliminary assessment of candidates against fit and proper criteria;
Analysis of directors’ and AML officers’ professional experience from a regulatory perspective;
Preparation of CVs, explanatory notes, and supporting documentation for regulatory submission;
Advice on corporate governance and the role of executives within the governance structure;
Review of AML compliance frameworks and the reporting structure of the AML officer;
Preparation for regulatory interviews and additional information requests;
Support during licensing procedures and communication with regulators.

If your company plans to obtain a license, appoint directors or an AML officer, or expand in a regulated sector, the Structum team can conduct a preliminary candidate review and help prepare your governance structure for a successful fit and proper assessment. Contact us to discuss your situation and receive professional support.