Introducers and Associated Risks
As in many other industries, commercial insurance broking and energy are sectors where the use of third party intermediaries to assist in the obtaining and/or retaining of customers (“Introducers”) is prevalent. This is for legitimate reasons: it is rarely commercially viable to maintain a presence in all locations a company’s goods or services are, or could be, consumed and Introducers enable businesses to penetrate a wide range of markets that they would otherwise be unable to access.
However, as is also well-known, the use of Introducers increases a company’s risk- profile in terms of compliance with various anti-bribery laws, including the United Kingdom’s Bribery Act and the U.S. Foreign Corrupt Practices Act. Given the ever- increasing focus of regulators across the globe on bribery and corruption issues, these risks must be carefully monitored and managed.
The need for effective anti-bribery procedures to prevent, or at least minimize, the risk of corruption is thus greater than ever. This was recently demonstrated by the nearly £1.9 million fine levied against JLT Specialty Limited (“JLTS”) by the U.K. Financial Conduct Authority (“FCA”) in December 2013 for failings in its anti-bribery and corruption procedures relating to its use of Introducers.1
JLTS is the specialist insurance broking and risk management arm of Jardine Lloyd Thompson, a global business offering its diverse portfolio of services in 135 countries. The use of Introducers by JLTS formed a key part of its sales strategy; between February 2009 and May 2012 Introducers generated almost £20.7 million of commission for JLTS. Of that commission, almost 57%, or £11.7 million, was remitted to JLTS’s Introducers in payment for their services.
JLTS’s controls and risk management procedures were, however, found to be wanting by the FCA, which fined the business £1,876,000. The fine related to a breach of Principle 3 of the FCA’s Principles for Businesses, which requires any business regulated by the FCA to take “reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.”2 In particular, significant inadequacies in due diligence processes gave rise to an unacceptable risk that payments made to JLTS’s Introducers could be used for corrupt purposes, including the payment of bribes.
The case is a clear illustration of the regulatory pitfalls associated with the use of Introducers. It is also a salutary reminder of the robust approach the FCA will adopt should failings be found in a regulated entity’s anti-bribery and anti-corruption procedures. The decision in relation to JLTS also provides concrete guidance to business in general, and in particular the insurance broking industry, on how to implement effective control systems.
Bribery and Corruption Risks in Commercial Insurance Broking
The need for robust anti-bribery procedures should be particularly well-known to the commercial insurance broking industry. In November 2007, the FCA’s predecessor, the Financial Services Authority (“FSA”), issued an open letter in which it reminded commercial insurance brokers of the need to “establish and maintain effective systems and controls to counter the risk that they might be used to further financial crime.” The FSA stressed that the purpose of such systems and controls included minimizing the risk that a broker “makes, or will make, illicit payments either directly or indirectly to, or on behalf of, third parties.”3
In January 2009, Aon Limited was fined £5.25 million by the FSA for inadequate internal control systems relating to its use of Introducers between January 2005 and September 2007. Aon’s deficient compliance regime was found to have allowed $2.5 million and €3.4 million in suspicious payments to be made to Introducers during the relevant period.4
On the back of the Aon fine, in May 2010 the FSA published guidance on reducing the risk of illicit payments or inducements to third parties in commercial insurance broking. The guidance noted that brokers’ approaches to higher risk Intermediaries were often too informal and that there was a clear need to reduce the risk of illicit payments or inducements being paid to, or by, Introducers. The guidance made clear to commercial insurance brokers that proactive steps should be taken by firms to address these issues.5 Then, in July 2011, the FSA fined Willis Limited nearly £6.9 million for breaching Principle 3 (the same provision as would be at issue in relation to JLTS), as well as rules under the FSA Senior Management Arrangements, Systems and Controls Handbook, also in relation to the company’s engagement of Introducers.6 The penalty was, at that time, the largest fine for financial offences ever imposed by the FSA.
Guidance for Companies
Strikingly similar to the fines levied against Aon and Willis, the JLTS fine is also a further example of the broad risks of inadequate oversight of bribery and corruption issues. Taken together, the three decisions contain important lessons for insurance brokers and other businesses that engage Introducers as part of their sales or business development activities.
First, it is clear that the FCA maintains a robust approach to combatting illicit payments and the risk of sanction by the FCA where failings occur is real. In contrast to the Aon and Willis cases, where actual suspicious payments were identified, no such payments were found in the review of JLTS but the mere fact that such payments could have occurred was sufficient to merit censure. The FCA adopts a risk based approach to regulatory oversight and regulated firms are expected to maintain systems designed to minimize the risk of illicit payments being made.
Second, businesses should be proactive and outward facing in their approach to compliance. JLTS was not only expected to heed the advice specifically given to it on two separate occasions following FCA inspections, but was also expected to learn the appropriate lessons from the Aon and Willis fines, as well as other materials published by the regulator. Businesses therefore need to keep their compliance procedures and performance under constant review in light of, and drawing appropriate lessons from, the experiences and failings of others. If a company fails to do so, it will result in more severe sanctions being handed down should issues arise, as was the case for JLTS.
“In contrast to the Aon and Willis cases, where actual suspicious payments were identified, no such payments were found in the review of JLTS but the mere fact that such payments could have occurred was sufficient to merit censure.”
Third, rigorous and meaningful due diligence of Introducers must be performed on an on-going basis; one-off assessments, no matter how thorough, are not enough. A necessary element of a robust compliance program is an assessment of the risk of illicit payments being made for each piece of business procured by an Introducer. This will include a proactive investigation of whether the Introducer is connected to the underlying customer, or to any political office holder. In the case of JLTS, it was deemed insufficient solely to rely on a computer software program to identify relevant connections. Businesses must turn their collective mind to identifying connections and not treat the exercise as a tick-box formality.
Fourth, policies to combat compliance risks should contain meaningful, practical guidance that can be easily followed by those applying them. The efficacy of the policies must be monitored by, as well as reported on to, management who must assess them on a regular basis. Companies must show that their policies are implemented in an effective manner that involves ensuring that staff are given the guidance and training necessary to understand and implement them. At the same time, management must monitor their practical implementation on a rolling basis. Simply putting in place detailed and elaborate policies and procedures is insufficient to discharge a company’s regulatory obligations. JLTS is illustrative of these issues: it had internal compliance policies and procedures that, on their face, combatted the bribery and corruption risks associated with the use of Introducers. These policies were, however, poorly implemented and staff were unaware of the extent of compliance required.
Fifth, and finally, firms should consider their internal procedures from the view of the Bribery Act 2010 as well any other regulatory obligations to which they are subject. JLTS had obtained advice regarding bribery and corruption risks from the perspective of the Bribery Act 2010 but had failed to turn its mind to the FCA’s
“While consideration of the Bribery Act 2010 is undoubtedly a key element of any robust anti-bribery and corruption compliance framework, it is not a substitute for consideration of wider regulatory requirements.”
Principles for Businesses, a violation for which it was fined. While consideration of the Bribery Act 2010 is undoubtedly a key element of any robust anti-bribery and corruption compliance framework, it is not a substitute for consideration of wider regulatory requirements.
In summary, businesses must take proactive steps to address the risks of bribery and corruption from the perspective of all relevant regulatory bodies. Firms should undertake continuous and robust reviews of their internal control systems, not only where they engage Introducers but in all aspects of their business where regulatory risks arise. Only where companies do this, will they be able to maximize the benefit of engaging Introducers while minimizing the associated compliance risks.