FSA delivers on AML promise

Following its thematic review and report on "Banks’ management of high money-laundering risk situations" published in June last year, the FSA on Monday announced that it has fined Coutts £8.75 million for anti-money laundering (AML) control failings.

Coutts had failed to take reasonable care to establish and maintain effective AML systems and controls relating to high risk customers, including Politically Exposed Persons (PEPs).  PEPs are individuals whose prominent position in public life may make them vulnerable to corruption, and the definition extends to immediate family members and known close associates.

Coutts' failings, identified by the FSA's thematic review visit to the firm in October 2010 were found to be serious, systemic and spanned a period of almost three years. They resulted in an unacceptable risk of Coutts handling the proceeds of crime. The FSA’s investigation identified that Coutts did not apply robust controls when starting relationships with high risk customers and did not consistently apply appropriate monitoring of those high risk relationships.  The FSA also found that Coutt's AML team failed to provide an appropriate level of scrutiny and challenge.

Deficiencies were identified by the FSA in nearly three quarters of the PEPs and high risk customer files it reviewed.  Those deficiencies included failing to gather sufficient information to establish the legitimacy of the source of wealth and source of funds of its prospective PEPs and other high risk customers; failing to identify and/or assess adverse intelligence about prospective and existing high risk customers properly and take appropriate steps in relation to such intelligence; failing to keep the information held on its existing PEPs and other high risk customers up-to-date; and failing to scrutinise transactions made through PEPs and other high risk customer accounts appropriately.

Coutts made a number of improvements to their systems including significant remedial amendments to PEPs' and other high risk customers' files.  In settling early, the firm qualified for a 30% discount.

But Coutts is not alone.

Last year's report which focused in particular on correspondent banking relationships, wire transfer payments and high-risk customers, including PEPs, identified a whole host of AML sins at UK banks. Among them, the FSA found that some banks appeared unwilling to turn away, or exit, very profitable business relationships with high risk customers and PEPs when there appeared to be an unacceptable risk of handling the proceeds of crime.  Around a third of banks, including the private banking arms of some major banking groups, appeared willing to accept very high levels of money-laundering risk if the immediate reputational and regulatory risk was acceptable.  Certainly, Coutts was expanding its customer base and in turn, increasing the number of high risk customer relationships.

Other issues identified by the FSA's review included banks failing to apply meaningful enhanced due diligence measures in higher risk situations (and dismissing serious allegations about their customers without adequate review) and banks failing to put in place effective measures to identify customers as PEPs, with some banks exclusively relying on commercial PEPs databases, even when there were doubts about their effectiveness or coverage, or relying unrealistically on their relationship managers in the respective countries. Whilst some banks had poor management of customer due diligence records and had AML risk-assessment frameworks which were not robust, at a few banks, the general AML culture was a concern, with senior management and compliance challenging the very notion of the AML regime or the need to identify PEPs.  All of which made for uncomfortable reading for the FSA in light of its statutory objective to reduce financial crime.  And as a result, the FSA stated that it had referred two banks to enforcement and was considering whether further regulatory action was required in relation to other banks.

It seems likely then, that Coutts will not be the last bank to be fined in this context.

In the meanwhile, the FSA hopes that Coutts' penalty will serve as a warning to other firms that, not only should they constantly review and adapt their controls to the changing financial crime risks within their businesses, but that they must also make changes to reflect changing regulatory or other legal standards.

With the more recent focus on funds emanating from the Arab Spring, the management of high-risk customers, including PEPs, will no doubt remain a significant focus of the FSA's anti-financial crime work for some time to come.