The Financial Conduct Authority (FCA) has fined Standard Bank £7,640,400 for failings relating to its anti-money laundering (AML) policies and procedures over corporate customers connected to politically exposed persons (PEPs).
This is the first AML case the FCA, or its predecessor the Financial Services Authority (FSA), has brought focused on commercial banking activity. This is also the first AML case to use the new penalty regime, which applies to breaches committed from 6 March 2010. Under the new regime larger fines are expected.
Tracey McDermott, director of enforcement and financial crime, said: 'One of the FCA’s objectives is to protect and enhance the integrity of the UK financial system. Banks are in the front line in the fight against money laundering. If they accept business from high risk customers they must have effective systems, controls and practices in place to manage that risk. Standard Bank clearly failed in this respect'.
Standard Bank is the UK subsidiary of Standard Bank Group, South Africa’s largest banking group. Standard Bank Group is an international banking group with extensive operations in 18 African countries and operations in 13 other countries outside of Africa.
Between 15 December 2007 and 20 July 2011, Standard Bank failed to comply with Regulation 20 of the Money Laundering Regulations because it failed to take reasonable care to ensure that all aspects of its AML policies were applied appropriately and consistently to its corporate customers connected to PEPs.
As with any financial services activity, commercial banking business can be used to launder money, particularly in the layering or integration stages of the money laundering process. In order to prevent financial crime, banks operating in this sector must have effective AML systems and controls in place ensuring that all the participants in commercial banking transactions are subjected to effective and appropriate due diligence. This is particularly important where the transaction involves PEPs or other high risk customers.
Guidance issued by the Joint Money Laundering Steering Group (JMLSG) provides that where a corporate customer is known to be linked to a PEP, such as through a directorship or shareholding, it is likely that this will put the customer into a higher risk category, and that enhanced due diligence (EDD) measures should therefore be applied. During the relevant period, Standard Bank had business relationships with 5,339 corporate customers of which 282 were linked to one or more PEPs.
The FCA reviewed Standard Bank’s policies and procedures and a sample of 48 corporate customer files, all of which had a connection with one or more PEPs. The results of this review highlighted serious weaknesses in the application of Standard Bank’s AML policies and procedures.
This meant that it did not consistently:
carry out adequate EDD measures before establishing business relationships with corporate customers that had connections with PEPs; and
conduct the appropriate level of ongoing monitoring for existing business relationships by keeping customer due diligence up to date.
The FCA considers these failings to be particularly serious because:
Standard Bank provided loans and other services to a significant number of corporate customers who emanated from or operated in jurisdictions which have been identified by industry recognised sources as posing a higher risk of money-laundering;
Standard Bank identified issues relating to its ability to conduct ongoing
reviews of customer files early in the relevant period, but failed to take the necessary steps to resolve the issues; and
the FCA has previously brought action against a number of firms for AML deficiencies and has stressed to the industry the importance of compliance with AML requirements.
The weaknesses in Standard Bank’s AML systems and controls resulted in an unacceptable risk of Standard Bank being used to launder the proceeds of crime.
Standard Bank and its senior management have co-operated with the FCA investigation and have taken significant steps at significant cost towards remediating the issues identified, including seeking advice and assistance from external consultants.
Standard Bank settled at an early stage of the investigation and qualified for a 30% discount on its fine. Without the discount the fine would have been £10.9 million.
The FCA also acknowledged that 'the Bank improved its customer risk assessment process in April 2009 by introducing a more comprehensive risk classification process'.
Since 2010, the Bank has embarked on an extensive remediation plan including:
• refreshing all active client files
• conducting a Compliance and Business review of all active customer relationships
• significantly increasing the resources of its anti-money laundering Compliance function
• introducing an electronic client on-boarding system to assist with the consistent application of the Bank's policies
The FCA noted that Standard Bank had customers who emanated from or operated in jurisdictions which pose a higher risk of money laundering. Standard Bank Group's Africa-focussed strategy requires an in-depth understanding of the risks and regulations both on the continent and internationally, to deliver the right opportunities for clients.
image: © Sebastian Krause