Countering the risk that authorised firms may be used for financial crime remains at the core of the FSA regulatory objectives. Although recently the FSA has become more bullish in prosecuting cases of financial crime (for example insider dealing and breaches of the Financial Services and Markets Act 2000) its primary role, and perhaps where it can add the most value, is enforcing the requirement for regulated firms to identify financial crime risks and use appropriate systems and controls to counter those risks.
The regulated sector has seen the FSA take enforcement action against high street and private banks for failures in anti-money laundering systems and controls; these resulted in sizeable fines. The Regulator’s attention then moved to anti-fraud procedures followed by anti-market abuse systems and controls and best practices to restrict the leak of price sensitive or inside information. It is therefore not surprising that the FSA now has an interest in the hot topic of anti-bribery and corruption.
Regulatory focus on anti-bribery and corruption systems and controls
The FSA’s Financial Crime and Intelligence Division (FCID) is currently undertaking a thematic review of the anti-bribery and corruption systems and controls engaged by commercial insurance intermediaries. Part of the review resulted in the largest financial crime related fine imposed by the FSA, when Aon Limited were fined £5.25m for breaching Principle 3 of the FSA’s Principles for Businesses, for failures to take reasonable care to establish and maintain effective systems and controls to counter the risks of bribery and corruption associated with payments to overseas parties.
The fine was reduced due to the firm’s co-operation with the FSA. The Regulator commented: “… the pro-active determination of Aon’s current senior management to identify past issues and improve the firm’s systems and controls in this area is a model of best practice that other firms may wish to adopt.”
Perhaps signalling its intention to take more enforcement action, the FSA Director of Enforcement commenting on the case, stated:
“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.”
Benchmarking existing systems
The FCID has indicated that once it has considered the results of the current thematic review it may undertake a wider review. Now is the time to bench mark and stress test existing anticorruption systems and controls against the following areas:
- Identification of risks – while there may be lesser risks when the firm makes direct payments to a third party, payments or ‘netting off’ further along the brokerage chain pose a greater risk of illicit and inducement payments. It is currently not clear how far the FSA expects firms to investigate and control such payments, it is hoped that the results of the FCID thematic report will offer further guidance.
- “The smell test” – if payments are to be made, firms need to ask themselves the question does the payment seem appropriate? Does it smell right? Simple questions, such as: who are we making payment to and why? Is the amount being paid reasonable? - can answer the smell test question.
- Due Diligence – Anti-Money Laundering and Know Your Client checks can be adapted to undertake sufficient due diligence checks on third parties.
- Monitoring – once third party arrangements/relationships are established these need to be carefully monitored.
- Management Information – is not just a Treating Customers Fairly tool, senior management require adequate MI to assess the effectiveness of antifinancial crime systems and controls.
- Staff training – processes and procedures are meaningless if staff are not correctly trained how to use them, identify potential corruption risks, undertake appropriate due diligence, and report concerns to senior management. Staff training, and not just one-off training during induction, is key to any anti-financial crime systems and control.
Beyond the FSA?
In addition to attention from the FSA, firms may also face investigations and enquiries from law enforcement agencies. Last year saw a greater drive to tackle corruption; for example the Serious Fraud Office appointed a new Head of Anti- Corruption and announced that it intends to increase the number of investigators it has on anti-corruption work from 65 to around 100.
In 2008, the City of London Police Overseas Anti-Corruption Unit secured its first criminal conviction under the Prevention of Corruption Act 1906 against a company director of a British security company accused of making illicit payments to Ugandan public officials. Although UK authorities are investing more resources into anti-corruption investigations, there is still international criticism of the UK’s efforts to combat bribery and corruption. In October 2008, the OECD’s Working Group on Bribery criticised the UK for its failure to bring its anti-bribery laws into line with its international obligations under the OECD’s Anti-Bribery Convention.
The following month the Law Commission published its final report on bribery offences in the UK. The Law Commission’s recommendations include replacing the current common law and statutory offences with two general offences of bribery and one specific offence of bribing a public official, plus a new corporate offence of negligently failing to prevent bribery.
Ten years earlier, when the Law Commission published its first draft Corruption Bill, this was kicked firmly into the long grass by the Parliamentary Joint Committee; however there now seems a greater enthusiasm to bring UK anti-bribery and corruption legislation into line with the international Convention. Against the background of heightened regulatory interest in anti-bribery and corruption issues, greater criminal investigative resources directed to tackle corruption and the real prospects of new criminal offences, regulated firms are well advised to review existing systems and controls.
First published in Post Magazine on February 19 2009