On 26 November 2015, the Financial Conduct Authority (FCA) fined Barclays Bank (Barclays) £72,069,400 for failing to follow adequate customer due diligence monitoring for a number of high-worth clients that were classified as politically exposed persons (PEPs). The fine consists of £52.3 million which was received as revenue from the deal and a penalty of £19.8 million.
The FCA found that Barclays conducted a £1.88 billion transaction in 2011 and 2012 during which it breached Principle 2 for failing to conduct its business with due skill, care and diligence. Although the transaction did not involve financial crime, it involved a number of PEPs and a large number of deals, which indicated a higher level of risk. The nature of the transaction was complex as it involved a structured finance transaction comprised of investments in notes backed by underlying warrants and third party bonds which amounted to deals of over £20 million (commonly referred to as “elephant deals”).
In its final notice, the FCA stated that firms must perform enhanced due diligence when establishing relationships with PEPs. The FCA found that although Barclays classified the clients as sensitive PEPs, and despite the exceptional size of the transaction, Barclays failed to adequately monitor the business relationship established. Barclays agreed to keep details of the transaction strictly confidential, even within the firm and to indemnify the clients up to £37.7 million in the event of a leakage of such confidential information. As a result, few people knew the existence and location of the firm’s due diligence records, which were not kept on Barclays’ systems, but in hard copy.
The FCA specifically found that:
- Barclays’ senior management at the relevant time failed to oversee adequately Barclays’ handling of the financial crime risks associated with the business relationship and that it was unclear whichsenior managers were in charge of doing so. The FCA stated that senior managers preferred to rush through the transaction in order to satisfy wealthy clients and secure fees received by them, but this resulted in misunderstanding of the actual risks involved;
- Barclays failed to respond appropriately to the higher risk indicators associated with the deal and did not conduct a sufficiently comprehensive review of the higher crime risks associated with clients classified as sensitive PEPs;
- Barclays failed to follow its own standard procedures for establishing business relationships with PEPs and ended up following a less robust process than it would have done for other business relationships that had a lower risk profile;
- Barclays failed to obtain sufficient enhanced due diligence information or establish the purpose and nature of the transaction. Therefore the clients’ stated source of wealth and source of funds for the transaction was not sufficiently verified;
- Barclays failed to sufficiently monitor the financial crime risks associated with the business relationship on an ongoing basis and maintain adequate records of due diligence that were readily identifiable and capable of retrieval.
Barclays agreed to settle at an early stage of the FCA’s investigation and therefore qualified for a 30% discount on the fine. This discount does not apply to the £52.3 million in revenue that Barclays generated from the transaction.