Standard Bank, a non-standard fine and sub-standard AML systems

The £7.6m fine recently meted out to Standard Bank was accompanied by a self-congratulatory press release by the regulator heralding new firsts.

It was apparently the first AML case brought with respect to commercial banking and first AML case to use the new FCA penalty regime which applies to breaches committed from 6 March 2010. 

For compliance officers the fine represents today's tough reality and a taste of things to come:

• enforcement actions for systemic failings regardless of whether those failings did or did not cause a loss or result in an illegitimate gain;
• failures to heed industry warnings will be punished severely;
• papered AML policies and procedures that are not properly implemented will be used by the FCA as evidence of what ought to have been in place; and
• large fines are here to stay. 

Standard failings

Standard Bank was censured for failing to take sufficient care to ensure that its AML policies and procedures were applied appropriately and consistently in relation to customers "connected to politically exposed persons ("PEPs")". 

A PEP is essentially an individual who is, or has in recent times, been entrusted with a prominent public function or a family member or close associate of such a person. It is established that due to their position and influence PEPs are in positions that can potentially be abused for the purposes of money laundering. PEPs are not, simply by virtue of their status, to be viewed as criminals and banks that refuse to deal with PEPs on a blanket basis are susceptible to criticism.

It is within this context that Standard Bank's failings must be viewed. The FCA did not find any instances of money laundering and it did not find AML failings with respect to PEPs themselves. It found that insufficient checks were performed into those with known or suspected links to PEPs.    

In no way was it suggested that Standard Bank abrogated its AML duties. It was recognised that the bank did "in many cases" take steps towards applying enhanced due diligence on higher risk transactions, that in 2009 it introduced a "comprehensive risk classification process" and that it had "taken significant steps at significant cost" to remediate identified issues. However, the Bank's processes did not go far enough especially because the failings related to business conducted in high risk jurisdictions and high risk industry sectors.

Once bitten twice shy

The fate of Standard Bank is a reminder to compliance officers that issues identified by the FCA as being of concern to it ought to be addressed promptly and comprehensively. The FCA was at pains to point out that it had previously brought action against firms for AML deficiencies and that there were a number of relevant bodies and guidance (the Joint Money Laundering Steering Group (JMLSG) and its Guidance for example) that firms ought to take heed of and incorporate into their working practices.

Poorly implemented policies an easy win for the FCA

It is noteworthy from the FCA's Decision Notice that Standard Bank's policies were not in themselves criticised. They contained various steps that staff were required to carry out or consider when applying enhanced due diligence which included verifying with documentary evidence corporate ownership structures, the customer's (and where applicable the associated PEP's) source of wealth and the source of funds to be used in the banking relationship. The problem for Standard Bank was that it failed properly to implement those policies. In such circumstances, the FCA will use these failures as proof that the firm in question failed to abide by its own stated systems and controls. Papered policies that are not properly enforced are an enforcement officer's dream and represent a sure-fire route to a censure and fine.

The new penalty regime

Standard Bank's heavy fine is a sobering warning of things to come for those subject to enforcement action. The bulk of the conduct in question occurred prior to March 2010 and was therefore judged under the old penalty regime. Despite this, over three quarters of the fine levied on the bank was attributed to conduct that took place on or after March 2010. FCA fines have increased significantly under the new penalty regime and that theme is set to continue.

Finally, this is an example of the new regulator's 'wholesale conduct' agenda in action.  There need be no direct impact, let alone consumer detriment, for the FCA to find fault and impose sanctions.