Financial Services, Sectors - Written by on Thursday, August 18, 2011 1:26 - 0 Comments

Demand & Supply – FSA thematic reviews: now Bribery & Corruption

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Buried in the same speech when the FSA announced its Financial Crime guide for firms consultation Tracy McDermott, Acting Director, Enforcement and Financial Crime Division at the FSA also announced a forthcoming thematic review of investment banks and bribery and corruption.

The supply side

She said:

“Corruption in one country often leads to laundering in another. Paying or receiving bribes is, of course, an offence in its own right. Corruption and bribery will be one of the topics of our forthcoming round of thematic investigations; we will be looking at investment banks’ procedures designed to contain the risk staff or agents pay or receive bribes.”

The demand side

This comment followed on a segment of speech which focussed on the outcome of the recent FSA thematic review into Banks and their money laundering take on procedures and which in particular highlighted:

“The Money Laundering Regulations explicitly require firms to take extra steps to contain the dangers posed by high-risk customers (for example, Politically Exposed Persons) or by correspondent banks. Our review looked at banks’ efforts to manage these risks.

“We found controls over correspondent banking relationships often lacked rigour with, for example, insufficiently rigorous scrutiny of the ownership of those institutions; of who was pulling the strings. Controls over customers who were Politically Exposed Persons, or ‘PEPs’ were also often weak. Let me remind you who these people are: they are prominent politicians, military figures and the like, and their well-connected associates, who could abuse their public position for private gain. Of course most of these customers will be entirely legitimate, but not all of them are, and they are recognised as posing an increased risk. Stronger measures are required, by law, to counter this risk. Those measures were lacking in too many of our sample banks.”

“We found many banks’ investigations into the source of PEPs’ wealth was cursory, while some banks’ internal documents discussing the pros and cons of taking on a new PEP customer lacked detachment and analysis, being seemingly skewed from the start towards the assumption that the business would be accepted, despite, in some cases, credible adverse information being publicly available against those individuals.”

..we do not want…to allow huge sums of money with deeply suspect origins to end up in London. The case studies set out in our report into banks’ anti-money laundering systems and controls show serious deficiencies and indicate the need to do much, much better.”

“Cases have already been referred to Enforcement and we may undertake a follow-up thematic review; we have set money aside for this work.”

[our emphasis]

We have highlighted in recent posts that notwithstanding the SFO is the lead prosecutor for Bribery Act offences the FSA is also a powerful enforcer.  The outcome of the recent thematic review of anti-money laundering client take on procedures and the comments about the risk related to PEPs is a thinly veiled assault on curbing the demand side of bribery.

This thematic review now complete (albeit with some unsatisfactory results according to the FSA with cases having been sent to enforcement) the FSA now looks to be addressing the supply side in the context of investment banks.

The decision to start with investment banks is not immediately obvious – though there may be a clue in the recent Goldman Sachs disclosure about “a probe of the company’s ‘compliance with the U.S. Foreign Corrupt Practices Act,'” as reported by the Wall Street Journal. In it’s recent 10Q Goldman disclosed:

“Sales, Trading and Clearance Practices.

Group Inc. and certain of its affiliates are subject to a number of investigations and reviews, certain of which are industry-wide, by various governmental and regulatory bodies and self-regulatory organizations relating to the sales, trading and clearance of corporate and government securities and other financial products, including compliance with the SEC’s short sale rule, algorithmic and quantitative trading, futures trading, securities lending practices, trading and clearance of credit derivative instruments, commodities trading, private placement practices, compliance with the U.S. Foreign Corrupt Practices Act and the effectiveness of insider trading controls and internal information barriers.”

We wrote in March about the reported SEC FCPA investigation into financial institutions and sovereign wealth funds.

In July the SFO was forced to clarify that the SFO was not involved in the banking probe after media speculation.

On the other hand, the FSA…

Regardless.  It is clear that the FSA is an important part of the international enforcement jigsaw when it comes to anti-bribery enforcement.

FSA firms should sit up and take note. At a minimum all FSA firms should ensure that their Adequate Procedures to prevent bribery are robust and do not fall foul of any of the deficiencies identified in previous thematic reviews and cases.

Are they?


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