This article summarizes three recent enforcement actions imposed by the FCA.
FCA Fines Bank Over Anti-Money Laundering Failures
On June 17, 2020, the FCA fined the London Branch of an international bank £37,805,400 for failing to put adequate anti-money laundering (AML) systems and controls in place between October 2012 and September 2017.
The FCA fined the London Branch of an international bank £37,805,400 for failing to put adequate anti-money laundering (AML) systems and controls in place between October 2012 and September 2017. The London Branch was aware of these weaknesses and failed to take reasonable and effective steps to fix them, despite the FCA raising specific concerns about them in 2012, 2015 and 2017. These weaknesses also persisted during a period when the FCA was publishing guidance on steps firms could take to reduce financial crime risk as well as taking enforcement action against a number of firms in relation to AML controls. Despite these clear warnings, the failures continued.
Firms operating in the UK, including branches of overseas firms, must take reasonable care to organize and control their affairs responsibly and effectively, and to establish and maintain an effective risk-based AML control framework. The FCA’s investigation identified failings in a number of areas, including the London Branch’s failure to:
- conduct timely periodic due diligence on its clients, which resulted in a significant number of existing clients not being subject to timely know-your-client checks. By March 1, 2017, 1,772 clients were overdue updated due diligence checks. A material number of these clients were able to continue to transact with the bank’s London branch due to the implementation of an exceptions process, which was not adequately controlled or overseen and which became 'out of control' by the end of 2016;
- address long-standing weaknesses in its automated tool for monitoring money laundering risk on transactions for clients. For example, in 2015 the London Branch identified that 40 high-risk countries were missing, and 1,110 high-risk clients had not been added to the transaction monitoring tool; and have adequate policies and procedures in place when undertaking customer due diligence on clients.
The London Branch therefore breached Principle 3 of the FCA’s Principles for Businesses, which requires firms to have adequate risk management systems in place.
The London Branch has undertaken a significant remediation exercise to bring its AML controls into compliance. A Skilled Person has been testing the effectiveness of these enhancements, and their work is now complete. It has also conducted an extensive look-back exercise to identify suspicious transactions during the period in question. The London Branch also voluntarily implemented a wide-ranging business restriction, which included temporarily stopping taking on new high-risk customers and suspending all new trade finance business activities.
The London Branch agreed to resolve the matter at an early stage of the investigation and therefore qualified for a 30% discount. Without the discount, the financial penalty would have been £54,007,800.
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FCA to Make Mini-Bond Marketing Ban Permanent
On June 18, 2020, the FCA has announced that it is to make its ban on the mass-marketing of speculative illiquid securities, including speculative mini-bonds, to retail investors permanent.
The FCA has announced that it is to make its ban on the mass-marketing of speculative illiquid securities, including speculative mini-bonds, to retail investors permanent.
The ban was first introduced in January of this year, in response to fears that speculative mini-bonds were being marketed to an investor-base who were unlikely to understand the risks associated with the products, nor could afford the potential financial losses.
The term “mini-bond” refers to a range of investments. The permanent ban will apply to the most complex and opaque arrangements, such as where the funds raised are used to lend to a third party, or to buy or fund the construction of property. There are, however, several exemptions to the ban, such as for listed bonds which are regularly traded, companies which raise funds for their own commercial or industrial activities and products which fund a single UK income-generating property investment.
In making the rules permanent, the regulator is proposing a small number of changes and clarifications to the ban that was introduced in January, by bringing listed bonds with similar features to speculative illiquid securities, and which are not regularly traded, within scope of the ban.
Sheldon Mills, Interim Executive Director of Strategy and Competition at the FCA states:
'We know that investing in these types of products can lead to unexpected and significant losses for investors. We have already taken a wide range of action in order to protect consumers and by making the ban permanent we aim to prevent people investing in complex, high risk products which are often designed to be hard to understand.
'Since we introduced the marketing ban we have seen evidence that firms are promoting other types of bonds which are not regularly traded to retail investors. We are very concerned about this and so we have proposed extending the scope of the ban.'
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FCA Publicly Censures a Firm for Market Abuse
The FCA has issued a public censure to an IT Service provider for committing market abuse between November 9, 2015 and November 7, 2016. The listed entity has agreed to provide compensation to affected investors.
The listed entity issued unaudited interim results and audited final year results which misstated its net debt position and overstated its true asset position in circumstances where it knew, or ought to have known, that the information was false and misleading. Consequently, investors were misled, and the shares were overpriced at the point they were purchased.
On November 7, 2016, the listed entity announced that its audit committee had undertaken an internal review of its interim results for the 6 months ending September 2016, which revealed that its accounting balances had been misstated. Its Board had commenced a forensic review of its current and historic balance sheets and would delay publication of its interim results.
The listed entity knew or could reasonably have been expected to know that the information in respect of cash and net debt, published on November 9, 2015 and June 16, 2016, was false or misleading.
Consequently, the false or misleading information had artificially inflated the market share price. This continued until the listed entity issued its corrective statement on 7 November 2016. Purchasers of shares between November 13, 2015 and November 7, 2016 paid a higher price than they would have paid had the false impression not been created. The FCA estimates the losses to affected shareholders to be approximately £43 million.
The listed entity has agreed to initiate a scheme to provide some compensation to all net purchasers of its shares during the period from November 9, 2015 to 4 November 4, 2016 (the latter being the last trading day before the announcement of November 7, 2016). The listed entity estimates the value of the scheme to potential claimants is £11.4 million and that each Claimant will have a basic entitlement to receive an overall value of approximately 17 pence for each net share purchased.
This is the first time that an AIM listed company has offered to implement its own scheme to pay some compensation to those affected by the harm it caused as a result of market abuse. The FCA has considered the listed entity’s approach to compensate affected shareholders to be fair and has decided to impose a public censure rather than a financial penalty. The FCA also considered the potentially adverse consequences for the listed entity, and therefore its investors and customers, if a substantial penalty was imposed. Those customers provide vital services combatting the coronavirus pandemic and there is a particular public interest in avoiding the risk of disruption to those customers at this time.
The FCA would like to acknowledge the significant and ongoing assistance and cooperation of the Financial Reporting Council (FRC) with its investigation.
In a separate action, the FCA has instituted criminal proceedings against three former employees of the same listed entity, who are scheduled to appear at Westminster Magistrates court on August 28, 2020. Each individual will face charges of two counts of making a false or misleading statement, contrary to Section 89(1) of the Financial Services Act 2012.
One of the individuals will face further charges of four counts of false accounting, contrary to Section 17(1)(a) of the Theft Act 1968; one count of making a false or misleading statement to an auditor contrary to Section 501 of the Companies Act 2006; and one count of fraud by false representation, contrary to Sections 1 and 2 of the Fraud Act 2006.
One of these individuals will face charges of seven counts of making a false or misleading statement to an auditor contrary to Section 501 of the Companies Act 2006; and four counts of false accounting, contrary to Section 17(1)(a) of the Theft Act 1968.
The alleged offending took place between May 1, 2015 and October 31, 2016.
The findings against the listed entity are separate to the action being taking against the individuals. No assumption should be made that a criminal offence has been committed.
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