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Private Banking Looms Large in FSA's Money Laundering Theme

A staff reporter

29 January 2005

The UK Financial Services Authority has released details of its thematic approach to regulation; international banking and high-risk jurisdictions come top of the list. An FSA official told Private Client Management that private banking was a significant part of the regulator’s all-important international banking brief. "This section was highlighted by the FSA’s investigation into banks which had handled money linked to General Abacha, the late Nigerian military dictator. We will focus on banks with clients from countries that do not belong to the Financial Action Task Force," he said. Other high-risk ‘clusters’ of concern to the FSA, which appear further down the list, are: domestic banking; offshore funds; online stockbroking; spread betting; and credit unions. Firms in all these categories can expect to receive close attention from the FSA. The regulator's decisions were based on the findings of a survey of 300 money laundering reporting officers from all parts of the financial services industry. When the FSA looks at a theme it travels across firms and looks at the whole area that it is regulating. Other themes are e-commerce, the fair treatment of customers after the point of sale and financial services for elderly people. They all stem from the statutory objectives that the Financial Services and Markets Act will impose on the regulators after N2. The FSA's thematic strategy is an expression of its desire to conduct regulation on the basis of risk. It is in the mid-stages of following this policy even in the run-up to N2, its ‘D-Day’ when large parts of the Financial Services and Markets Act give it new, sweeping powers. Themes: the input phase The FSA has two main approaches to its themes; an input and an output phase. The input phase, of which the money laundering survey is an early example, consists of information gathering. This is conducted in the most wide-ranging way possible in the hope that it will give the regulators a snapshot of this or that problem in the financial services industry. The FSA hired an independent consultancy to supervise the survey. This survey represents the bulk of the its research, although it has also asked the National Criminal Intelligence Service to add to its data and it published a sketchy report on AML failures at UK banks in the wake of the Abacha scandal in March. The spokesman went on to tell Complinet: "It sounds extraordinary, but it's the first time anything like this has been done in the UK by a regulator. The Securities and Futures Authority and the Investment Management Regulatory Organisation never attempted it; only the regulatory arm of the Bank of England had the resources to do it. It was a big piece of work across the whole industry." The FSA signed a 'partnership agreement' with NCIS yesterday. This is basically a memorandum of understanding that will result in the permanent presence of an NCIS secondee at the FSA after N2. Such agreements are also part of the input phase of the FSA's themes. Themes: the output phase As with other themes, the FSA is keen to help the institutions concerned, in this case all of them, improve their practices by offering them help. The regulators publish a 'gap analysis' that takes the results of the survey and points out the main areas of concern. In this case the analysis comes from the survey and the NCIS information taken together. The FSA found that certain key types of company were deficient in their 'know your customer' procedures and failed to grasp the importance of verifying the identities of customers. Others were deficient in verifying customers' addresses. The relevant section is to be found on page ten of the report on the FSA's website and should be read by all MLROs. Also on the subject of helping firms, the regulators publish examples of good practice that they have encountered at this or that institution, praising its efforts and advising other firms to follow its lead. Some firms, for example, have been congratulated for making a habit of sending e-mails to ordinary staff that boost their awareness of this or that element of laundering risk at their place of work. The examples are all anonymous. There is, of course, another element to the output phase of thematic regulation; the FSA's decisions about where and how to devote its regulatory resources. The private banking ‘cluster’ is one of these. The regulator's desire to concentrate on these areas is in tune with its risk-based approach to post-N2 regulation. Themed visits, which the FSA has been conducting for years, will continue. These occur when the regulators turn up at companies with the sole aim of investigating their money laundering or other procedures. The FSA spokesman told Complinet, however, that "these visits will not necessarily be the greater part of the FSA's themed work." Other thematic work is being done by the relationship managers that the FSA has assigned to large firms. "These managers will devote a fixed bit of their time to money laundering work, say five or ten per cent," said the spokesman. This figure, of course, is just a quick estimate. The incidence of thematic work Kelvin Baynton, the FSA's manager in charge of the FSAVC review, told Complinet that 30 per cent of the FSA's work is already devoted to thematic endeavours. The FSA money laundering spokesman queried this figure, saying that the volume was not quite as high in his field, but was in no doubt that the FSA wants to push the percentage up. The money laundering initiative is a good indication of the way the FSA will be working in future. The FSA’s AML apparatus The regulator will set up a structured internal network to support its proposed supervisory focus on the high-risk clusters. This will involve: a money laundering coordination committee, which should coordinate the money laundering activities being undertaken by the supervisory function and by other parts of the FSA; a financial crime policy unit, responsible for setting policy relating to the FSA’s money laundering rules and guidance; enforcement teams, responsible for policy in relation to the investigation of non-compliance with the rules and regulations, and for the formal investigation of potential breaches of the rules and regulations; the development by the risk review department of a risk review team to assist supervision with thematic visits relating to financial crime, which will work with the financial crime policy unit and enforcement teams; and the intelligence and records department, which will be responsible for liaison with NCIS, with other law enforcers and with international agencies. An officer from NCIS is now on permanent secondment to the FSA. Naming and shaming Private banks can expect to be exposed to the public glare if they transgress against the FSA’s money laundering rules after N2. At the moment, however, the regulators do not feel themselves to be in a strong enough legal position to do this. At first sight this argument might seem odd: under s179 Financial Services Act 1986 they can appeal to a judge for permission to expose firms, as they did in the Scandex case in 1999. The FSA spokesman, however, maintained that under the Banking Act 1987 it is impossible to pass on any information gained during an investigation to a third party, such as the public. The Abacha banks were pinpointed by such an investigation. There had been no formal disciplinary process, so they could have demanded the right of appeal, he said. He added that no further action would be taken against the banks, but the FSA has long been promising a ‘step change’ in its dealings with banks that subvert either its own rules or the older Money Laundering Regulations of 1993.