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New Financial Crime Guide

30 January 2012

The FSA Financial Crime Guide (the Guide) came into effect on 9 December 2011 following a consultation period over the summer.

The Guide pulls together into one document the FSA’s views and experience on various aspects of preventing financial crime and the FSA intends that the Guide will underline its continued commitment to combating financial crime and to help firms better understand its expectations.

A two-part Guide

Part 1 of the Guide sets out guidance in the form of self-assessment questions with examples of good and poor practice and case studies. It includes chapters on the following subjects: Financial crime systems and controls; Money laundering and terrorist financing; Fraud; Data security; Bribery and corruption; and Sanctions and asset freezes.

  • Self-assessment questions – designed to help firms consider whether their approach to counter different types of financial crime is appropriate, and the FSA has indicated that it may follow similar lines of inquiry when discussing financial crime issues with firms.
  • Examples of good practice – drawn from conduct which the FSA has seen in firms during thematic work in relation to financial crime and the FSA says that it “would draw comfort from seeing evidence that these practices are taking place”. However, if these practices prove to be lacking the FSA says that it would consider whether a firm has taken other measures to meet its obligations.
  • Examples of poor practice – also drawn from the FSA’s thematic work. Some examples of poor practice show a lack of commitment, others fall short of FSA expectations and some may breach regulatory requirements or even be criminal offences. The Guide states that the examples of poor practice do not identify all cases where conduct may give rise to regulatory breaches or criminal offences.

Part 2 of the Guide provides summaries of, and links to, a number of financial crime thematic reviews that the FSA considers are still relevant. Changes from the original published thematic reports are black-lined so users can see if – and how – the FSA’s guidance has changed.

Status of the Guide

The status of the Guide is somewhat grey; it is “general guidance”, not binding guidance. But the FSA expects firms to be aware of what the Guide says where it applies to them and to consider applicable guidance when establishing, implementing and maintaining their anti financial crime systems and controls. We anticipate that the FSA will refer to the Guide in future enforcement cases.

In an attempt to address concerns about lack of clarity around the status of the Guide, a new “About the Guide” summary box at the beginning of the Guide confirms that it:

  • is not binding (“we will not presume that a firm’s departure from our guidance indicates that it has breached our rules”);
  • should not be used as a “tick-box exercise” by firms or as a checklist by supervisors;
  • is not exhaustive; and
  • that firms should apply the examples of good and poor practice in a risk-based, proportionate, outcomefocused way.

To whom does it apply?

The Guide provides guidance to firms of all sizes, across all FSA-supervised sectors.

One of the main criticisms of the draft Guide during the consultation period was that the FSA should more clearly emphasise the types of firm to which the different chapters of the Guide relate. There now appears at the beginning of each chapter a “Who should read this chapter” box and, if guidance is specific to certain types of firm, this is indicated in italic.

What are the key messages of the Guide?

The Introduction to the Guide emphasises that the FSA focus, when supervising firms, “is on whether they are complying with our rules and their other legal obligations. Firms can comply with their financial crime obligations in ways other than following the good practice set out in this Guide”. Underlining this, a new section flags the Handbook rules and principles that are referred to in the Guide.

While the supremacy of the Handbook rules and legislation is without doubt, it would be unwise for firms to ignore the Guide itself. Set out below is a very brief summary and some of the key messages in each crime-specific chapter. (The Guide does not cover market misconduct because detailed rules and guidance are contained in the Market Conduct (MAR) sourcebook.)

Money laundering and terrorist financing

In addition to the governance and risk assessment issues which appear in most chapters of the Guide, this chapter covers a large number of topics such as MLROs, customer due diligence checks, ongoing monitoring, handling higher-risk associations, record keeping and countering the financing of terrorism. In terms of governance, the strong message is that the FSA expects senior management to take responsibility for the firm’s anti-money laundering measures.

There is much emphasis on the fact that this chapter is not intended to replace, compete or conflict with the Joint Money Laundering Steering Group (JMLSG) guidance. New wording in the Introduction spells out in detail that the Guide is not “relevant guidance” as described in the Money Laundering Regulations. In contrast, the JMLSG guidance is “relevant guidance” under these regulations and the FSA will continue to have regard to whether firms have followed the relevant provisions of the JMLSG guidance when deciding whether conduct amounts to a breach of relevant requirements.

Fraud

Despite first appearances, the fraud chapter in the Guide does not only deal with mortgage fraud and, to emphasise this, the first section of the chapter is now entitled “General – preventing losses from fraud”. This includes as examples of good practice that firms should take a view on what areas of the firm are most vulnerable to fraudsters and tailor protective measures accordingly, engage with relevant cross-industry efforts to combat internal and external fraud and have fraud response plans and investigation procedures which set out how the firm will respond to incidents of fraud. However, the content in this chapter is light and the FSA itself admits that it is “limited in scope”. The FSA intends to expand this chapter in future versions of the Guide. For example, it plans to include examples of good and poor practice from its current thematic review into how banks handle the risk that they might be used to facilitate investment fraud.

Data security

Despite protests during the consultation on the Guide about the inclusion of this chapter and some of its content (which several respondents thought to be out-of-date), the chapter remains in the final version of the Guide because one of the key concerns arising from the FSA’s thematic work was that firms were failing to consider adequately the financial crime risks to which poor information security exposed them and their customers. The key message in this chapter is that firms must take special care of their customers’ personal data, and comply with the Data Protection Act 1998. In terms of governance, it is good practice for there to be a “clear figurehead championing the issue of data security”.

Bribery and corruption

The chapter on bribery and corruption emphasises that the FSA’s role is wider than the scope of the Bribery Act 2010. In particular, it may take action against a firm with deficient anti-bribery and corruption systems in place regardless of whether or not bribery or corruption has occurred.

Key messages in this chapter are that a single senior manager who ultimately reports to the board should be responsible for anti-bribery procedures and that there should be greater focus on senior management awareness and management information. In terms of risk assessment, one point of interest is the suggestion that the firm should assess and manage the risk of remuneration structures that could potentially reward staff for taking unacceptable corruption and bribery risks to generate business. Other topics covered in this chapter are policies and procedures and dealing with third parties, and it ends with a reminder of the GBP 5.25 million Aon Ltd fine and the GBP 6.9 million Willis Ltd fine as case studies.

We understand the FSA has started its thematic review on bribery and corruption.

Sanctions and asset freezes

This chapter covers screening customers against sanctions lists, matches and escalation and weapons proliferation and, in relation to risk assessment, states that a firm should consider which areas of its business are most likely to provide services or resources to individuals or entities on the consolidated list maintained by the Treasury of financial sanctions targets. In terms of governance, the Guide says that it is good practice for “an individual of sufficient authority” to be responsible for overseeing the firm’s adherence to the sanctions regime.

The FSA does not consider that the guidance in this chapter conflicts with the JMLSG guidance, which it says provides greater practical detail than the Guide and should continue to be a key resource for firms on sanctions compliance.

Concluding thoughts

The FSA has committed to keeping the Guide up-to-date, alerting firms to all changes to the Guide by using the FSA website and other resources as appropriate.

Despite the constant assurances in the Guide that the guidance is not binding, the Guide – and any updates – should be taken seriously by firms. A thread running through the Guide is the suggestion that identified individuals are given responsibility for compliance in particular areas. In combination with the FSA’s recent action of fining individual compliance officers, the FSA is continuing to flag its determination to put individuals under the spotlight as a way to achieve its objectives.

We would recommend that the Guide is reviewed in detail and that firms identify the areas which apply to them and whether any changes in policy or practice need to be made.

This type of proactive approach should find favour with the FSA (and its successor the FCA) in any future discussions about a firm’s financial crime controls.

Where on the web

You can read the Guide in full at: http://www.fsa.gov.uk/pubs/policy/ps11_15.pdf (Financial Crime: a guide for firms).

Further information

This case summary is part of the Allen & Overy Litigation Review, a monthly update on interesting new cases and legislation in commercial dispute resolution.  For more information please contact Sarah Garvey sarah.garvey@allenovery.com, Arnondo Chakrabarti or tel +44 (0)20 3088 3710.