Lawyers must fix the problems with gagging orders before it is too late
Following on from the fines of Coutts Bank and Habib Bank, the FSA’s AML thematic review has another scalp with the Turkish Bank (UK) Ltd (TBUK) fined for breaches of the Money Laundering (ML) Regulations.
The FSA’s AML thematic review published in June 2011 focused on correspondent banking relationships, wire transfer payments and high-risk customers including politically exposed persons (PEPs). This is the first enforcement action in relation to AML failures in correspondent banking arrangements.
In the period between 15 December 2007 and 3 July 2010, the FSA considered that TBUK breached the ML Regulations because it did not take reasonable care to establish, maintain and apply appropriate AML controls over its correspondent banking activities by failing to: establish and maintain appropriate and risk-sensitive AML policies and procedures for its correspondent banking relationships; carry out adequate due diligence or ongoing monitoring; or maintain adequate records relating to the above.
There were no findings that actual money laundering took place but the failings gave rise to an unacceptable risk that TBUK could have been used to further money laundering.
Correspondent banking involves non face-to-face business and as such TBUK acted as an agent for its respondents and providing their underlying customers with services they could not provide themselves in the UK. The core failing was that TBUK erroneously relied on its respondents’ AML controls over their underlying customers.
TBUK’s respondents were from Turkey and Northern Cyprus which did not have UK-equivalent AML requirements in place at the material time. The ML Regulations acknowledge that the nature of correspondent banking with a respondent institution in a non-EEA state (such as Turkey and Northern Cyprus) presents a high risk of money laundering requiring enhanced customer due diligence and ongoing monitoring of the relationship.
Inappropriate AML policies and procedures.
The FSA found that TBUK had in place an AML Handbook dated January 2008 which did not establish policies and procedures that appropriately reflected the high risk of money laundering posed by TBUK’s correspondent banking relationships with respondents in Turkey and Northern Cyprus. The AML Handbook contained erroneous and inconsistent policies.
Inadequate due diligence and ongoing monitoring requirements
TBUK’s AML procedures for customer due diligence and ongoing monitoring applicable to existing respondents were inadequate.
Failures included not satisfactorily identifying and verifying the identity of its respondents and their beneficial owners or seeking to understand the ownership and control structure of its respondents. Therefore TBUK was not in a position to conduct and did not conduct PEP and sanction screening on relevant persons linked to its respondents. In addition, TBUK did not conduct the enhanced due diligence required by the ML Regulations.
TBUK’s ongoing monitoring of its correspondent banking relationships were inadequate, for example AML questionnaires were not sent to each respondent on a regular basis and, of those that were sent, the responses were often not considered, were incomplete or did not provide sufficient detail and unanswered questions were not challenged.
TBUK engaged in limited transaction monitoring of its respondents’ accounts, for example it checked the underlying customer’s name against its own watch list but did not use an appropriate official database, such as the Consolidated Sanctions lists maintained and published by HM Treasury.
Failure to keep adequate records
This included the absence of risk assessments of the relevant respondent, records of the evidence of the respondents’ identities, or supporting records in respect of the correspondent banking relationships or the respective responsibilities of its respondents and TBUK.
As the majority of the misconduct occurred before the introduction of the FSA’s new penalty regime on 6 March 2010, the FSA has applied the penalty regime that was in place as at 15 December 2007. Relevant factors considered included deterrence and seriousness and impact of the breaches but the FSA did not consider that the misconduct was deliberate or reckless. Mitigation included that TBUK worked in an open and cooperative manner with the FSA, fully accepted that it did not meet the requirements of the ML Regulations, had taken steps to establish detailed procedures that comply with the ML Regulations and had taken disciplinary action against the senior managers responsible for its AML controls, including withholding their annual bonus for the year 2011.
TBUK agreed to settle with the FSA at an early stage of the investigation and thereby receive a 30% discount. Without this early settlement and the firm’s co-operation, the fine would have been £420,000.
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