The UK Financial Services Authority (“FSA”) revealed last week that it is launching an investigation into the way in which banks do business. The FSA will be looking specifically at whether the banks have taken steps to protect against the risk of bribery and corruption, especially with the advent of the UK’s new Bribery Act 2010 which comes into force in a few days time on 1st July 2011. This was revealed last week at a financial crime conference in London.  It was reported in Bloomberg News on 22nd June that the UK’s Serious Fraud Office has never prosecuted an investment bank for overseas corruption. 

You may recall that the FSA has already conducted an investigation into the UK’s insurance broking industry.  The investigation took 18 months or so to complete. This report was published in June 2010. The FSA found many problems across the industry (too numerous to list here but some of them mind bogglingly daft by their very simplicity, but a recommended read nevertheless, as it gives us all a clear steer as to where things can so easily go wrong – none of it rocket science).  Here are a few of examples of criticisms, quoted directly in the FSA's own words:

  • Weak governance of anti-bribery and corruption efforts and a poor understanding of bribery and corruption risk among senior managers
  • Some firms awarded their brokers large bonuses directly related to the income or profit they generated. This could encourage risk-taking and negligence, and increase the risk of bribery and corruption, particularly where brokers use third parties to win business.
  • Very weak due diligence on, and monitoring of, third party relationships and payments with a worrying lack of documentary evidence of due diligence taking place
  • Although payment authorisation controls appeared generally adequate, virtually no firms took steps to identify unusual payments to third parties. As a result, some firms failed to report suspicious activity until after our visit or follow-up work
  • Weak vetting of staff compared with other financial sectors, with a heavier reliance on personal referrals and market gossip than usual.
  • Although controls over staff expenses and accounts payable generally appeared to be effective, some firms gave large cash advances to staff to assist travelling in higher risk countries where they said credit cards were not readily accepted.

I view the FSA’s findings as generic to the administration of commercial organisations of any industry and not just insurance broking. I predict that a similarly lengthy and critical report will be published on the banking industry in due course (probably next year if the last report is anything to go by) and that the faults will look remarkably similar in many respects.  I seriously doubt that the banks’ anticorruption systems will survive the FSA’s scrutiny any better. 

Banks are, of course, already heavily regulated around the world and they are familiar with undertaking compliance and spending money on it. However, we at the BriberyLibrary have detected from some of the banks which we have spoken to a degree of compliance fatigue, leading to a lack of internal will and enthusiasm to get to grips properly with the Bribery Act. In addition, banks are cutting costs like most other organisations in order to try to turn a profit and because of the legacy of problems from the banking crisis which started in 2008.  Its a fact that many global banks still don’t see the immediate benefit of spending large sums of money (and time) on anticorruption compliance. That’s almost certainly due to the fact that they have not previously been investigated/prosecuted in the UK, so you could say that the SFO is partly at fault because of their historical failure to pursue banks for corruption. Its not just the law that people pay attention to – its also enforcement i.e. the risk of actually getting caught. 

Many of the banks will be (or ought to be) FCPA compliant already so they ought in theory not to have to do a great deal more in order to be compliant with the Bribery Act, but actually its not necessarily as simple as that. I will post more on the question of “does my FCPA compliance programme hold good for the Bribery Act as well?” soon. Its a question we are almost always asked as many of our firm’s clients are either American or have a sufficient interest in the US to need to be compliant with the FCPA. 

In the meantime, some of the several hundred foreign and UK banks which are doing business in the UK should brace themselves for a visit from the FSA and should be prepared for them to interrogate their systems and question their staff. 

In January 2009 the American broking firm, AON, was heavily fined for its corrupt activities.  I quote from the FSA’s press release dated 8th January 2009

"The Financial Services Authority (FSA) has today fined Aon Limited (Aon Ltd) £5.25 million for failing to take reasonable care to establish and maintain effective systems and controls to counter the risks of bribery and corruption associated with making payments to overseas firms and individuals.

Between 14 January 2005 and 30 September 2007, Aon Ltd failed to properly assess the risks involved in its dealings with overseas firms and individuals who helped it win business and failed to implement effective controls to mitigate those risks.  As a result of Aon Ltd’s weak control environment, the firm made various suspicious payments, amounting to approximately US$7 million, to a number of overseas firms and individuals...... The involvement of UK financial institutions in corrupt or potentially corrupt practices overseas undermines the integrity of the UK financial services sector.  The FSA has an important role to play in the steps being taken by the UK to combat overseas bribery and corruption.  We have worked closely with other law enforcement agencies in this case and will continue to take robust action focused on firms’ systems and controls in this area." 

The FSA’s initiative, whilst strengthening the banking sector’s attitudes towards compliance and financial crime, is a good indication that the new Bribery Act applies to everyone in every sector, both public and private, including industries once thought to be pillars of the City, the powerful financial district of London. 

We will return to this subject when the FSA reports next, possibly in 18 months time !