The Financial Services Authority (FSA), the main financial services regulator in the UK, today gave a huge boost to the various hucksters selling anti-money laundering consultancy and solutions by fining The Royal Bank of Scotland 750,000 for breaches of its Money Laundering Rules. This is the first financial penalty levied by the FSA for money laundering control failings since the FSA acquired this power on 1 December 2001.
By playing its part in the current wave of Al-Qaeda-induced hysteria about money-laundering, the FSA will force banks of all kinds to sink money into solutions which are neither effective nor necessary. But this ids not of course how the FSA sees it. “This fine demonstrates that the FSA takes anti-money laundering compliance very seriously indeed,” says Carol Sergeant, Managing Director of the FSA. “The steps RBS took to satisfy itself that their clients really were who they claimed to be were inadequate. We have made clear that we expect all financial firms to have strong and effective anti-money laundering procedures in place and – equally importantly – to ensure that they are properly implemented. This requires firms to monitor the effectiveness of those procedures to ensure an appropriate standard of compliance. Firms that fail to do this lay themselves open to increased risks of being used for money laundering.”
The enormity of the fine (by regulatory, if not banking, standards) conceals the fact that the FSA found no evidence that any money laundering had actually taken place at the Royal Bank. In fact, RBS discovered the shortcomings not as a result of the FSA investigation at all, but as a result of the testing of its won procedures. The FSA also admits that in “most cases” RBS had made “some attempt” to comply with its rules, and after the fact devoted “considerable resources” at an early stage to correct the problem, including Group-wide monitoring of ‘know your customer’ compliance rates in an effort to ensure that a similar problem does not occur again.
The FSA is now satisfied that the bank has dealt with the issue effectively. “The good news in this case is the prompt and effective way in which the shortcomings were addressed once senior management became aware of them,” admits Sergeant. “As a result of this, and RBS’s open and constructive approach to the FSA’s investigation, the fine imposed is very substantially lower than it otherwise would have been. The other good news is that there is no evidence of actual money laundering having taken place.”
The fact that the alleged breaches of the rules occurred despite the massively increased regulatory emphasis on the importance of effective anti-money laundering controls suggests that banks have more valuable things to do than ask gentlemen of Middle Eastern appearance where they live – which is precisely where RBS fell down.
The FSA says RBS either failed to obtain sufficient ‘know your customer’ documentation to establish the identity of particular customers or, where it did obtain it, failed to retain it. In some cases – horror of horrors -RBS was unable to supply the FSA with copies or details of documents such as a valid passport, a driving licence or a recent utility bill it had used to verify identity. One example of inadequate verification of identity included verifying a client’s name but not his address.
The FSA concluded that RBS had contravened Rules 3.1.3 of the FSA’s Money Laundering Rules. Rule 3.1.3 provides that:
(1) A relevant firm must take reasonable steps to find out who its client is by obtaining sufficient evidence of the identity of any client who comes into contact with the relevant firm to be able to show that the client is who he claims to be.”
The FSA also concluded that RBS had contravened Rule 7.3.2 . Rule 7.3.2 provides that:
(1) A relevant firm must make and retain, for the periods specified in (2), the following records:
(a) in relation to evidence of identity:
(i) a copy of the evidence of identity obtained under ML3; or(ii) a record of where a copy of the evidence of identity can be obtained; or(iii) when it is not reasonably practicable to comply with (I) or (ii), a record of how the details of the evidence can be obtained; and when it has concluded it should treat a client as financial excluded (ML3.1.5G to ML3.1.7G financial exclusion), a record of the reasons for doing so;
(2) The specified periods are:
(a) in relation to evidence of identity, five years from the end of the relevant firm’s relationship with the client.
Documents that can be used to verify a customer’s identity – that is, his or her name and address – are set out in the Joint Money Laundering Steering Group Guidance Notes and include a valid passport, a driving licence and a recent utility bill.