The Financial Services Authority continues its thematic reviews into anticorruption compliance - now it is the turn of asset managers
So far, since the Bribery Act came into force on 1st July 2011, the largest fines for activities relating to anticorruption controls have been dished out by the FSA, which regulates the financial services sector in the UK, rather than by the courts. There has, so far, only been one case tried under the new laws (the case of Munir Patel, on which we blogged here, here and here) although the courts are, of course, continuing to hear cases under the old corruption laws (for acts or omissions taking place before 1st July 2011).
When we at the BriberyLibrary give presentations on anticorruption, we often tell the audience that companies which are regulated by the FSA may, if they get their compliance systems wrong, suffer a "double whammy" because firstly the FSA can raise an administrative fine if it finds that a company has not put in place adequate systems and controls but, further, if it finds evidence of an actual offence having taken place, it can then refer the company to the Serious Fraud office ("SFO"), which may decide to investigate and prosecute, leading to a fine being imposed on it by the court. Often a double/triple whammy may occur anyway when the company is sued by competitors or others who claim to have been damaged by it's illegal actions. When bad news is discovered in the form of a bribe being paid to win business, it can really be long-lasting bad news for the company, and in our experience, it can take 5 to 10 years to sort it all out, remembering that in addition to the fines (and prison sentences for individuals), courts in the US and the UK are becoming more willing to impose lengthy court monitorships, but that's the subject of another blog topic for the future.
In May 2010 the FSA published the first of its thematic review reports into anticorruption, following a detailed review of a sample of firms in the insurance broking industry. We blogged on it here. The report, which is lengthy and quite scathing of this industry, was startling reading, not least because in truth the complaints which the FSA made of this industry were mostly very obvious ones, and were criticisms which could almost certainly be made of almost any other industry (whether in the regulated sector or not). They mostly concerned the absence of adequate systems and controls. The evidence collected by the FSA demonstrated clearly that many companies had not taken the risk of anticorruption seriously and had not attempted to deal with the risks adequately. The inference to be made is that firms were not investing enough of their resources in their risk and compliance departments, and/or that those departments were not up to the job. Two large broker firms received very large fines from the FSA.
In March 2012, the FSA published a further report following its second thematic review of anticorruption, this time of the investment banking sector. The report looked remarkably similar to the insurance broking sector report, underlining our view that the mistakes being made when it comes to establishing systems and controls are common to other industries in the UK (whether in the regulated sector or not). A copy of the FSA’s press release is here. They visited a sample 15 firms including 8 major banks. A summary of their findings, in the FSA’s own words:-
“In particular, we found the following common weaknesses:
- most firms had not properly taken account of our rules covering bribery and corruption, either before the implementation of the Bribery Act 2010 or after;
- nearly half the firms in our sample did not have an adequate ABC risk assessment;
- management information on ABC was poor, making it difficult for us to see how firms’ senior management could provide effective oversight;
- only two firms had either started or carried out specific ABC internal audits;
- there were significant issues in firms’ dealings with third parties used to win or retain business
- though many firms had recently tightened up their gifts, hospitality and expenses policies, few had processes to ensure gifts and expenses in relation to particular clients/projects were reasonable on a cumulative basis.”
In November 2012, Tracey McDermott, the FSA’s Director of enforcement and financial crime made a key note address at the Association of Private Client Investment Managers and Stockbrokers’ (“APCIMS”)conference in which she explained why the FSA is currently focusing so much on anti money laundering (apart from anything else, because London financial institutions are being used to launder illegal drug money). Ms McDermott also talked about the imminent split of the FSA into two new organisations in April 2013, when the Prudential Regulation Authority (“PRA”) will take over prudential regulation of much of the regulated sector (although in fact the Financial Conduct Authority ("FCA") will be the prudential regulator for most of APCIMS’s members), and the FCA will be the conduct regulator, thereby separating out these different responsibilities. The Bill creating the PRA and the FCA makes it clear that only the FCA will have enforcement powers, and not the PRA, in order to avoid the obvious risk of duplication of resources, and any overlapping functions.
Ms McDermott also announced that the third sector to receive the thematic reviews of her department will be asset managers and that their first visits are imminent. The review will sample 22 firms and will look at these firm’s systems and controls to counter both money laundering and bribery and corruption. She said:
“... we are about to start a thematic review of how asset managers handle the risks of money laundering and bribery. Let me now give you the details. Perhaps this review is overdue: the asset management sector holds over £4 trillion in assets, with APCIMS members alone collectively managing assets of half a trillion pounds for 6 million clients. Clearly this is a huge industry, and the scope for damage should financial crime risks be mishandled is enormous.
London is an attractive destination for the world’s wealthy and their money – unfortunately including those whose wealth is illegitimate. I expect you, as UK-based wealth management professionals, to be developing your business by offering peerless service and unmatched expertise: not by accepting money without properly gauging its provenance.
We hope the findings of this review will be better than the disappointing findings of our 2011 review into banks handling of high risk situations. We were greatly concerned by the findings of that 2011 review, and Enforcement actions followed. Since publication we have fined three banks with more to go....”.
We at the BriberyLibrary suspect that, even having had the opportunity to review the FSA’s 2010 report on the insurance broking industry review and its’ 2012 report on the investment banking sector review, the FCA will find many of the same problems and failures arising within the asset managers sector, and that the FCA’s report will also be depressing reading. We feel almost certain that further fines will follow. But if this is what is required to make all these companies wake up and smell the coffee of the new regulatory regime in the UK, following the 2008 financial crisis, then British voters and tax payers are unlikely to complain. And London should be a safer place for all investors, British or foreign.
If you are one of the 22 specially selected asset manager firms in the review sample, this would be a good time to start upgrading your systems and controls, although you may still receive criticisms and fines if they are still deficient when the FSA/FCA visit you. For everyone else in this sector not in the sample, who has not recently reviewed their systems thoroughly, now is time to get on with reviewing and improving your compliance department's systems and controls. Or start saving for a massive fine.
We will report back on the FCA’s findings in the third quarter of 2013 when Ms McDermott has indicated their report will be published.