During their Financial Crime Conference 2011, the FSA set out its financial crime agenda by emphasising the importance for firms to commit to reducing their financial crime risk, reporting on some startling results from recent thematic reviews, issuing a consultation on guidance for firms on best practice and setting out their future priorities including bribery and corruption, tackling illegal schemes and scams, and investigating and prosecuting insider dealing.   The Minister for crime and security also set out the government’s strategy for financial crime.

Three documents were published to coincide with the conference:

  • a new consultation 'Financial Crime - a guide for business'
  • a thematic review ‘Banks’ management of high money-laundering risk situations’
  • a thematic review ’Mortgage fraud against lenders’

In addition, the FSA set out its priorities to include:

  • the fight against bribery and corruption, in particular the FSA will be looking at investment banks’ procedures designed to contain the risk that staff or agents pay or receive bribes.
  • tackling schemes and scams that target the public, including boiler room scams (share sale scams),  Ponzi schemes, bogus collective investment schemes.  This will include a thematic investigation to look at the role banks can take in countering these unauthorised businesses
  • insider dealing with the aim to follow on from a number of successes in 2010/11  

With the changing regulatory landscape, the Financial Conduct Authority (FCA) is expected to pick up the majority of the responsibilities currently undertaken by the FSA's enforcement and criminal teams, in particular

  • Monitoring  firms’ efforts to tackle money laundering, and to stamp out anonymous interbank payments.
  • overseeing the industry’s systems and controls to comply with asset freezes and financial sanctions.
  • insider dealing.
  • unauthorised business.

AML thematic review

The thematic review conducted by the FSA on ‘Banks’ management of high money-laundering risk situations’, had some disturbing results.  In particular there were clear weaknesses in the systems of many of the organizations reviewed, with a conclusion that many had not kept their systems up to date and many were being observed only in the breach.

The Money Laundering Regulations explicitly require firms to take extra steps to contain the dangers posed by high-risk customers (for example, Politically Exposed Persons (PEPs)) or by correspondent banks. The FSA’s thematic review looked at banks’ efforts to manage these risks plus the measures banks take to ensure inter-bank payment messages meet international standards which are designed to allow the authorities to track suspicious fund flows. The review concluded that too many firms are failing to meet the requirements and did not appear to have resolved the weaknesses identified back in 2001, when the FSA published the findings of their review into banks’ handling of the funds of Nigeria’s General Abacha. 

Of particular concern were banks’ systems to identify PEPs and implement enhanced procedures. Politically exposed persons (PEPs) are individuals whose prominent position in public life may make them vulnerable to corruption. The definition extends to immediate family members and known close associates.   Examples of bad practice included out-of-date procedures, staff (including MLROs) not understanding the definition of PEP being used by the bank, weaknesses in risk assessment policies including not using well-known indicators, relationship managers being able to override the assessment and thresholds so high that no-one would qualify.  There was also a high occurrence of inadequate record keeping. 

AML is one of the chapters in the consultation document “Financial Crime: A Guide for business”. Although the Guide is not intended to impose new requirements on firms, the FSA makes it clear that it expects “firms to be aware of the guidance it contains and, where appropriate, to consider how to translate it into more effective policies and controls”.

Bribery and Corruption

The Bribery Act 2010 consolidates and replaces early bribery and corruption legislation and provides for “active” bribery (the giving of a bribe), “passive bribery” (the receiving of a bribe, and bribery of a public official as well as a corporate offence of failure of a corporate organisation to prevent bribery.  The corporate offence is committed if any person associated with the company bribes another with an intention to offer or retain business or obtain or retain an advantage.  The definitions are deliberately wide to capture all persons associated with the firm and a wide range of activities which include facilitation payments and excessive or lavish hospitality.  There is a defence to the corporate offence if the firm can demonstrate they have adequate procedures to prevent bribery. 

The FSA does not have the jurisdiction to prosecute the criminal offences under the Bribery Act, and it will be the Serious Fraud Office (the SFO) who will be the lead agency enforcing the provisions of the Act and determining if criminal proceedings should be pursued.  However, the FSA recognises that corruption effects market confidence, which is one of their statutory objectives and one of its priorities, is to ensure that institutions have systems and controls to prevent bribery and corruption.  As part of the on-going co-operation between the two agencies, the SFO and FSA will share of information relevant to bribery and corruption allegations. 

Although the Bribery Act itself does not create an obligation to put in place compliance systems, authorised firms are under an additional, regulatory obligation to put in place systems and controls to mitigate corruption risk and to conduct their business with integrity. Therefore, the FSA could take enforcement action to penalise institutions for systems failures and authorised persons who have been involved in such activity. Under principle 11, “a firm must disclose to the FSA appropriately anything relating to the firm of which the FSA would reasonably expect notice”. The FSA's view is that this includes reporting any activity which suggests there may have been bribery and corruption.

The FSA's “Financial Crime: A guide for firms” provides guidance on best practice in combating bribery and corruption drawing on their earlier thematic report “Anti-bribery and corruption in commercial insurance broking” that was published in May 2010. The FSA have already taken action in this area. In 2009, they fined insurance broker Aon Ltd £5.25 million pounds ($8.5 million) for failing to prevent a number of suspicious payments to overseas firms and individuals between 2005 and 2007. Banks and fund managers will clearly not be immune in future and the FSA will be looking for a high level scalp early on.

Government’s strategy for fighting financial crime

James Brokenshire MP, Minister for Crime and Security, set out the government’s strategy to “declutter” the financial crime landscape by merging many of the current agencies working in that arena within the National Crime Agency (NCA).  Despite his claim that this is a high priority, it appears there is no new money, with the expectation that the funding will be from the pre-cursor agencies and that the proposed streamlining, better procurement decisions and “intelligence led” investigations will provide sufficient savings to fund a strong approach.  The Minister did not accept that there would be any problems in staffing the NCA despite the cuts in the funding of all agencies, recent difficulties in recruiting a senior police officer to head the NCA and the current “hemorrhaging” of staff from the SFO into the private sector.  Although there will be an  “economic crime command” within the NCA, in light of its broad remit to cover all types of criminal activity, it is difficult to see that financial crime will remain a priority unless it is related to serious organized crime such as people or drug trafficking or terrorism.  The NCAs strategic plan is due to be published later this year which will hopefully shed some light on some of these issues.