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Financial Crime Newsletter


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									Financial Crime Newsletter
September 2011 | Issue 15

 What’s inside                              It has been a busy year so far, as we continue to maintain our
                                            regulatory responsibilities while also working towards creating
                                            the UK’s new ‘twin peaks’ regulatory structure.

 1      Introduction
        FSA developing Pilot for Core
                                            Many of the key issues we look at in this newsletter were covered
                                            at our recent Financial Crime Conference, which was attended
        Financial Crime Programme           by over 350 delegates. The event looked ahead to the future of
                                            financial crime in the changing regulatory landscape and offered

 2      FSA ‘concerned’ about AML
        thematic report findings
                                            attendees an update on our current and future work.

                                            The tone for the day was set in the opening address. As we
                                                                                                                 Tracey McDermott
                                                                                                                 Acting Director,
                                                                                                                 Enforcement and
                                                                                                                 Financial Crime
        We fine Willis Limited              said then: ‘The FCA will pursue the objectives of keeping crooks
        £6.895m                             out of finance, encouraging industry to
                                            strengthen its defences, and educating and
        Mortgage fraud: some                warning consumers about the dangers they
        progress but could do better        may face.’                                                The FCAwill pursue the
                                                                                                    objectives of keeping
 3      Mortgage fraud: some
        progress but could do better
                                            We outlined the continued importance the
                                            FSA attaches to fighting financial crime
                                                                                                    crooks out of finance,
                                                                                                    encouraging industry to
                                            and the part this will play within the new              strengthen its defences,
                                            Financial Conduct Authority (FCA).
        Thematic work – next steps                                                                  and educating and
                                            I would like to thank everyone who
                                                                                                    warning consumers
        The FSA and the Bribery Act                                                                 about the dangers they
                                            attended and took part. Feedback shows
        Final chance to comment             the conference continues to be a valuable               may face
        on Financial crime: a guide         forum to discuss the FSA’s work and wider
        for firms                           themes within financial crime.

                                            Tracey McDermott
                                            Acting Director, Enforcement and Financial Crime

FSA developing Pilot for Core Financial Crime Programme
The FSA is developing a Core Financial      intrusive approach which is now a key         and controls to manage those risks. We
Crime Programme (CFCP) focusing on          part of our supervisory philosophy. It        expect there to be a rolling cycle for
anti-money laundering, countering           will be focused on a group of very large      the programme and this is intended to
terrorist finance (AML/CTF) and financial   banks which, by virtue of their size and      be part of the supervisory approach for
sanctions. Its aim is to ensure that        range of business, pose the highest level     these firms. We will have a number of
the FSA is discharging effectively          of AML/CTF risk. The CFCP will look at all    discussions with the firm at a high level
its statutory responsibility to secure      the banking activities of these banks,        and other levels as appropriate, plus
regulated firms’ compliance with UK         wholesale as well as retail, overseas as      ‘deep dives’ to test outcomes across the
legislation on AML, terrorist finance       well as UK.                                   firm’s activities.
and sanctions regimes, and that this is
carried over to the FCA.                    We are now designing the operating            We will be conducting a pilot for the
                                            framework for the CFCP. We will focus on      programme over the next few months,
The CFCP is designed to extend to AML/      the risks inherent in each bank’s business    and will review our plans in the light of
CTF the systematic, more intensive and      model rather than simply on the systems       our findings.

September 2011 | Issue 15                                                                                                             1
Financial Crime Newsletter

FSA ‘concerned’ about AML                                                                   found some key staff did not understand
                                                                                            the definition of a PEP – including some

thematic report findings                                                                    Money Laundering Reporting Officers
                                                                                            which we interviewed.

In June, we published our anti-money         encourage an increase in standards             Under the Regulations, senior management
laundering (AML) thematic work, Banks’       across the board.                              approval must be sought to take on a
management of high money laundering                                                         PEP as a client. During our visits we
risk situations. As with our mortgage        Our primary concern was over banks’            found that at over a third of banks senior
fraud review, published concurrently,        relationships with high-risk customers and     management approval of PEPs was vague,
both reports are the product of the          Politically Exposed Persons (PEPs). PEPs       and records of approval did not contain
FSA’s increasingly intensive, intrusive      prominent positions in public life expose      sufficient detail, including whether or
supervision style that will be carried       them to the risk of influence, improper        not serious allegations were factored into
into the FCA.                                or otherwise. Around a third of the banks      the final decision-making process. In
                                             appeared unwilling to turn away, or exit,      addition, ongoing monitoring and reviews
The Money Laundering Regulations 2007        very profitable business relationships when    of relationships were often mechanistic,
(The Regulations) require firms to take      there appeared to be an unacceptable           resulting in weak judgements. In some
extra steps to contain the risks posed by    risk of handling the proceeds of crime. In     cases, approvals relied on explanations
high-risk situations and our rules require   addition, three-quarters of banks failed to    from customers and relationship managers
firms to have risk-based policies and        take adequate measures to establish the        that had no supporting evidence.
procedures which enable them to meet         legitimacy of a PEPs source of wealth.
their legal obligations.                                                                    We are extremely concerned by these
                                             It is concerning that these findings,          findings. The Regulations state that firms
Our findings showed banks were               relating to high risk customers, are similar   must conduct enhanced due diligence
generally complying with the wire            to those from an investigation into how        and monitoring in high risk situations.
transfer regulations, although we would      UK banks handled accounts linked to the        On many occasions, we found serious
encourage a more collaborative effort        Nigerian General, Sani Abacha, which we        weaknesses in systems and controls
within the regulated community to            reported on in 2001.                           and questionable judgements made by
ensure higher standards.                                                                    firms. We therefore expect significant
                                             More then a third of banks failed to put       improvements in banks’ systems, controls
On correspondent banking, we found           in place effective measures to identify        and decision making.
the quality of systems and controls          PEPs and over half the banks we visited
varied. In a number of instances a tick      failed to carry out robust enhanced            Cases have been referred to our
box approach was applied towards due         due diligence in high risk situations,         enforcement division with the prospect
diligence of corresponding institutions.     sometimes failing to identify, record          of more to come. We may also undertake
The majority of these failings were found    and review credible adverse allegations        follow-up thematic work in the future to
in smaller institutions; however we would    about their clients. In some banks we          check improvements have been made.

 We fine Willis                              Mortgage fraud: some progress but could do better
 Limited £6.895m
                                             Our second thematic review, published in       impede the quality of management
 On 21 July, we fined Willis                 June 2011, focused on the adequacy of          information produced, which reduces
 Limited £6.895m for failings in             lenders’ systems and controls against          senior management’s ability to assess and
 its anti-bribery and corruption             mortgage fraud. Our review found that          manage mortgage fraud risk, effectively.
 systems and controls. These                 the industry had made some progress
 failings created an unacceptable            in recent years, developing stronger           We recognise that firms have to work
 risk that payments made by Willis           defences and recognising the importance        with a variety of third parties throughout
 Limited to overseas third parties           of cross-industry co-ordination. However,      the mortgage lending process but it
 could be used for corrupt purposes.         we found that many in the industry could       is imperative for firms to manage the
 This is the biggest fine imposed            do better.                                     associated risks. Many lenders identified
 by the FSA in relation to financial                                                        third parties such as solicitors, brokers
 crime systems and controls to               Two key findings are the lack of a             and valuers as the main source of
 date. www.fsa.gov.uk/pubs/final/            group-wide definition of mortgage              mortgage fraud risk. We found weaknesses
 willis_ltd.pdf                              fraud and a clear reporting process            in panel management and the level of
                                             in some firms. Weaknesses here can             due diligence conducted on third parties.

September 2011 | Issue 15                                                                                                                2
Financial Crime Newsletter

In particular, we were concerned that        cross-industry information sharing
some firms’ due diligence relied solely      initiatives, including the FSA’s               Thematic work –
on a mortgage broker’s entry in the FSA      Information from Lenders’ (IFL) scheme.        next steps
Register – while this can form part of the   We believe engagement with IFL is good
due diligence process it should not be the   practice and we will shortly be publishing     Our next round will focus on:
only form of assurance.                      further guidance on when firms should          1. investment banks’ procedures
                                             consider submitting a report.                     to contain the risk that staff or
The importance of information                                                                  agents receive or pay bribes; and
sharing, both internally and externally,     Firms should take note of our findings and     2. banks’ systems and controls to
underpinned many of our findings. A          the good and poor practice contained in           counter the threat posed by
number of firms, including some larger       our report. We will continue to look at           unauthorised business.
lenders, are not fully engaging with         lenders’ systems and controls in this area.

The FSA and the Bribery Act
Corruption and bribery are criminal          The FSA does not enforce the Bribery          We have consolidated our expectations
offences under the Bribery Act 2010,         Act. FSMA-authorised firms are under          of firms’ anti-bribery and corruption
which came into force on 1 July 2011.        a separate, regulatory obligation to          systems and controls in Chapter 7 of our
The Act consolidated and replaced            identify and assess corruption risk           proposed Financial Crime: a Guide for
previous anti-corruption legislation and     and to put in place and maintain              Firms. Our Guide is consistent with, but
introduced a new offence of commercial       policies and processes to mitigate            separate from, the Government’s Bribery
organisations failing to prevent bribery.    corruption risk. We can take                  Act guidance. This is because the scope
Firms have a full defence for this offence   regulatory action against firms who           of the Bribery Act is different from
if they can show that they had adequate      fail adequately to address corruption         our rules and Principles; firms should
procedures designed to prevent bribery.      risk; we do not need to find evidence         bear this in mind when reviewing
The Government has published guidance        of corruption to take action against          the adequacy of their anti-corruption
on these procedures.                         a firm.                                       policies and procedures.

 Final chance to comment on Financial crime: a guide for firms
 A reminder that the consultation period     The guide will sit on the Handbook            The consultation is your
 for CP11/12: Financial crime: a guide       pages of our website. But it does not         opportunity to tell us what
 for firms is drawing to a close.            contain rules, and imposes no new             you think about the guide, its
                                             requirements – so firms won’t have to         contents, structure, scope and
 Our financial crime guide contains          ‘comply’ with its contents. Instead it        impact, and we encourage
 guidance on steps firms can take to         seeks to improve firms’ understanding         readers to respond. You have
 reduce their financial crime risk. It is    of our expectations, and to enable            until Wednesday 21 September
 drawn mostly from our previous, and         them to better assess the adequacy of         to submit your views.
 most recent, thematic reviews on topics     their systems and controls to tackle
 related to financial crime.                 financial crime.

September 2011 | Issue 15                                                                                                             3

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