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FCA AML June 2022 fines = £13.6 million. Are your Financial Crime Systems and Controls in order?

25/07/2022

Introduction

  1. In recent weeks, the Financial Conduct Authority (FCA) has fined two companies for weaknesses in their financial crime systems and controls:

2.These cases indicate that the FCA focuses on enforcing weaknesses in financial crime systems and controls, even         where no underlying money laundering (as in the GIB case) or other criminal offence is detected.

JLT Specialty Limited

The FCA found that JLTSL had breached Principle 3 of the FCA’s Principles for Businesses2 by failing to manage its business responsibly and effectively, with adequate ABC risk management systems. The key facts are as follows:

  1. JLTSL, a UK-based company (part of the JLT Group), placed the business in the London reinsurance market for another JLT Group entity, JLT Re Colombia (JLT Colombia).
  2. Between November 2013 and June 2017, JLTSL paid over US$12 million in commission to JLT CoJLT Colombia, in turn, paid US$10.8 million of this commission to a third-party introducer.
  3. lombia.
  • The third-party introducer subsequently paid over US$3 million to government officials at a state-owned insurer to help retain and secure business for JLTSL and JLT Colombia.
  • JLTSL was unaware of the bribery scheme until the individuals involved were prosecuted in the US in 2018.

Also of note was that JLTSL employees were involved in significant hospitality expenditure for the benefit of government officials and members of their families, as well as the third-party introducer.

  1. The expenditure related to events, including the Wimbledon Championships and the Monaco Grand Prix, totalled US$200,000 for ten months, the vast majority of which was not formally approved in line with the JLTSL’s gifts and hospitality policies and procedures.
  2. In one instance, JLTSL and JLT Colombia employees entertained a public official and his wife, among others, at the Wimbledon Men’s Semi-Final and Final events, with the hospitality costing £67,200 and including food and drink, Centre Court tickets, and a meet and greet with a former Wimbledon champion.
  3. The third-party introducer was asked to pay for the entertainment but then subsequently reimbursed through an increased commission fee from JLTSL.
  4. The expense was not declared for approval as JLTSL’s Gifts and Entertainment policy required.
    • The JLTSL employee in question was able to circumvent the policy by reimbursing the cost through the increased commission payment.
    • In this case, the hospitality in question was particularly lavish, but reasonable and proportionate hospitality to events such as Wimbledon or Formula One, which are internally approved and consistent with market practice, is unlikely to raise bribery concerns.3

There were several interesting features of this case:

  1. JLTSL was a recidivist company who the FCA fined in December 2013 for similar ABC control failures (namely, failure to address risks of bribery and corruption associated with making payments to third parties).4
  2. While JLTSL had improved its systems and controls following the 2013 decision, in the present case,
    • JLTSL’s failure allowed another group entity to engage in bribery since its improved systems and controls had not catered for the need for additional safeguards or approvals concerning third-party introducers engaged by another JLT group entity where JLTSL subsequently placed such introduced business in the London market.5
  3. This highlights the need for firms to ensure that their group-wide financial crime compliance controls are suitably robust and effective. In this case, the risks were heightened for JLT group entities based in countries with a perceived higher level of bribery and corruption. Firms should ensure that they have put in place proportionate procedures tailored to the particular risk profile of their business, paying special attention to the risks around third-party relationships, which are an ever-present feature of bribery cases.
  4. In determining the penalty, the FCA acknowledged JLT Group’s disgorgement of c. US$29 million to the US Department of Justice, which covered the financial benefit arising directly from JLTSL’s breach of Principle 3.6
  5. Whilst the FCA considered JLTSL’s self-report, cooperation with its investigation (including providing the FCA with access to its internal investigation materials)7 and the remedial steps taken after the identification of the breach to be mitigating factors in determining the penalty, the fact that JLTSL was a reoffending company (in circumstances where the FCA has issued considerable guidance to firms in relation to financial crime risk) was an aggravating factor.8
  6. Furthermore, the penalty was adjusted upwards for deterrence, given the Authority’s view that
    • “There have been a series of enforcement outcomes against commercial insurance brokers for failings in their anti-bribery and corruption systems and controls, and these have not had a sufficient deterrent effect.”
  7. Mark Steward, Executive Director of Enforcement and Market Oversight, commented that
    • JLTSL’s “lax controls” facilitated the corruption and confirmed that the FCA is “maintaining [its] focus on financial businesses’ financial crime systems, taking action where these firms fall short”.

Ghana International Bank

  1. The FCA found that GIB had breached Regulations 14(1), 14(3) and 20(1) of the Money Laundering Regulations 20079 by failing to:
    1. (i) Establish and maintain appropriate and risk-sensitive policies and procedures;
    2. (ii) Conduct adequate enhanced due diligence (EDD) when establishing new business relationships; and
    3. (iii) Conduct adequate enhanced ongoing monitoring.10 The key facts were as follows:
  2. GIB provided correspondent banking services to overseas banks.
    • Correspondent banking is regarded as a high-risk area for money laundering and terrorist financing and firms are required to undertake enhanced checks if they conduct business in this area.
  3. Between January 2012 and December 2016, GIB did not conduct adequate additional checks when it established relationships with overseas banks. For example, GIB failed to demonstrate it had assessed the respondent banks’ (i.e. the banks for which GIB provided correspondent services) controls, failed to conduct annual reviews or adequate training, and did not establish proper policies and procedures.
  4. During the relevant period, the value of funds flowing between GIB and its respondent banking customers11 totalled £9.5 billion.
  5. This decision highlights that:
    1. In this case, the FCA took action to control weaknesses, including a failure to correctly identify risks and scrutinise transactions in circumstances where no actual money laundering was detected.
    2. As such, firms should monitor and improve their systems and controls on an ongoing basis to ensure compliance. Of particular note was that, in this case, GIB’s internal audit team identified issues with GIB’s control framework, including around KYC, which were not adequately remediated.
    3. Firms must create and tailor policies and procedures to high-risk areas for money laundering.
    4. The FCA criticised GIB’s “fragmented, confusing and overlapping policies” and the fact that it did not recognise correspondent banking as a separate business line or product area.
    5. GIB did not have clear procedures for undertaking required EDD steps, failed to obtain adequate identification information and failed to get senior management approval in several instances.
    6. Firms must keep up with the latest guidance and developments in money laundering regulation.
    7. The FCA considered GIB’s failings severe because before and throughout the relevant period, the FCA issued publications and disciplinary notices highlighting the high-risk nature of correspondent banking.12
    8. The FCA also referenced that other international and domestic organisations issued communications regarding jurisdictions with a high risk of money laundering, including when Ghana was subject to a Financial Action Task Force (FATF) public statement.

Conclusion

  1. These recent FCA enforcement actions and forthcoming regulatory changes highlight the importance of firms ensuring that their financial crime systems and controls are in order.
  2. To the extent that firms have not done so already, they should assess their financial crime risks and implement systems and controls to mitigate and monitor those risks across their business.

Footnotes

  1. Examples include Swiss prosecutors securing the first conviction of a bank for money laundering offences in December 2021, large fines issued by the Dutch authorities for AML control weaknesses, including to ABN AMRO, and enforcement action by the Singapore Securities and Futures Commission for failures to comply with AML/CTF regulatory requirements.
  2. A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.
  3. Ministry of Justice Bribery Act 2010 Guidance.
  4. Final Notice (JLTSL) dated 19 December 2013.
  5. Final Notice (JLTSL) dated 16 June 2022, para 2.6.
  6. Ibid, para 6.4.
  7. Ibid, para 2.25.
  8. Ibid, para 6.16.
  9. The version of the Money Laundering Regulations in force at the time.
  10. Decision Notice (GIB), para 2.1.
  11. Net of transfers between customers’ own accounts and fixed deposits.
  12. Decision notice (GIB), para 2.4.
  13. Amendments to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017: Response to the Consultation (June 2022).

Source

https://www.dechert.com/knowledge/onpoint/2022/7/fca-enforcement--are-your-financial-crime-systems-and-controls-i.html

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