The FSA has published its final report on anti-bribery and corruption in commercial insurance broking which concludes that the approach of broker firms to higher risk business with third parties has been too informal, with many brokers failing to apply a risk-based approach to anti-bribery and corruption in practice.
The report follows the FSA’s investigation of Aon Limited which culminated in a £5.25 million fine for Aon’s failure to establish and maintain effective systems and controls to counter the risk of bribery and corruption in respect of payments made to overseas third parties. The FSA's interim findings on anti-bribery and corruption in the sector were published in September 2009.
The FSA’s comprehensive review and analysis of anti-bribery and corruption practices in the insurance broking industry focuses on the standards implemented by firms to reduce the risk of illicit payments or inducements to third parties to win business. The report includes examples of good and poor practice in specific areas, such as management information, due diligence and incident reporting. Although the report does not constitute formal FSA guidance, the FSA expects brokers to consider its findings and implement effective anti-bribery systems and controls where necessary.
Bribery Act 2010
The Bribery Act 2010 contains a new strict liability criminal offence for corporates of ‘failing to prevent bribery’ occurring within the organisation. In addition, corporate entities can be guilty of this offence if an ‘associated person’, such as a service provider or agent, carries out an act of bribery when acting on their behalf. The only defence in either scenario is if the corporate had put into place ‘adequate procedures’ designed to prevent bribery and corruption.
Given the significant scope and extra-territorial reach of the Bribery Act it is extremely important for companies that have operations carried out by an intermediary on its behalf (for example, insurance brokers that have authority to bind business on behalf of insurers) to ensure that the intermediary has a robust anti-corruption compliance programme and that it is subject to appropriate due diligence and monitoring.
In lieu of a definition of ‘adequate procedures’ under the Bribery Act and any formal non-statutory guidance on the matter, the examples of good and poor practice in the report provide timely assistance to firms in respect of determining the effectiveness of their own and their intermediaries’ procedures. This report and its findings are therefore highly relevant and should be considered by any firm that engages third parties to win business, particularly in high risk jurisdictions.
Insurance broking, as with many other sectors, often involves dealing with a wide range of jurisdictions and types of business and third parties are regularly engaged to assist in obtaining and retaining business.
The main areas of concern identified by the FSA include:
- weak governance of anti-bribery and corruption efforts and a poor understanding of bribery and corruption risks faced by the business among senior managers and front line staff
- poor responses by many firms to significant bribery and corruption events which should have led to a reassessment of the adequacy of their preventative systems and controls. The FSA was particularly dissatisfied to find that despite sending a “Dear CEO” letter to brokers firms in November 2007 and publishing the Aon Enforcement Notice in January 2009, the majority of brokers had taken inadequate steps to review their internal systems in light of these events at the time of the FSA’s visits;
- weak due diligence on, and monitoring of, third party relationships and payments and a worrying lack of documentary evidence of due diligence. For example:
- heavy reliance by many firms on an informal ‘market view’ of the integrity of third parties;
- little or no steps to check the accuracy of account opening documentation or whether third parties are connected with either the assured, the client or public officials;
- lack of consideration of whether payments made to third parties were commensurate with the services they provided.
- lack of steps taken to identify unusual payments to third parties resulting in a failure to make suspicious activity reports;
- lack of due diligence on third parties when teams or business were acquired from other broker
- firms; and
- poor vetting of staff with heavier reliance on personal referrals and market gossip compared with other financial sectors.
Good practice recommendations
The report contains several examples of good and poor practices which will assist all firms that engage third parties or operate in high risk business to assess the adequacy of their current internal systems and controls. Examples of good practice include:
- establishing and documenting policies with a clear definition of a ‘third party’ and the due diligence required when establishing and reviewing third party relationships;
- requiring a detailed understanding of the business case for using third parties;
- taking reasonable steps to verify the information provided by third parties during the due diligence process;
- using third party forms which ask relevant mandatory questions and having such forms reviewed and approved by compliance, risk or committees involved in these areas;
- setting commission limits or guidelines which take into account risk factors related to the role of the third party, the country involved and the class of business;
- conducting a regular review of third party relationships and maintaining accurate central records of approved third parties which includes the due diligence conducted on the relationship and evidence of periodic reviews.
A risk-based approach to anti-bribery and corruption
The FSA acknowledges that insurance brokers often deal with a very wide range of countries, industry sectors and third parties and recommend that brokers adopt a risk-based approach to achieve optimum risk mitigation rather than a “one size fits all” approach.
One of the suggestions made by the FSA is that firms utilise commercially-available intelligence tools and databases. Norton Rose offers clients access to a unique Legal and Regulatory Environment Atlas, developed by the risk consultancy Maplecroft, which enables businesses to assess and compare legal and regulatory risks across 172 countries with a scorecard for each country.
The FSA notes that the report's findings and the examples of good and poor practices will be relevant to firms in other sectors and has indicated that it may undertake further thematic reviews on anti-bribery and corruption elsewhere in the financial services sector.