Apr 28 2009 Martin Coyle Complinet exclusive
Robinson: a new focus Firms do not face an immediate risk of enforcement action as a result of their sanctions compliance failures but the Financial Services Authority is set to scrutinise systems and controls issues in the coming months. Philip Robinson, FSA director, who spoke to Complinet following the release of the sanctions thematic review yesterday, said that the regulator would not "rush" to take immediate action against bad practice.
The review highlights a number of areas where firms could improve their systems and controls. The FSA said that some firms had robust systems in place that were appropriate to their business needs, but others, including some large firms, were struggling to integrate legacy systems or had inappropriate procedures. The regulator also found a widespread lack of awareness of the UK financial sanctions regime. Some small firms thought that the financial sanctions regime referred to financial penalties that the FSA issued, for example. The FSA has encouraged firms to use the report to draw on the examples of good practice, learn from the bad practice and take heed of some of the common misconceptions that firms held.
Changes to sanctions regime
Robinson, director of the FSA's financial crime and intelligence division, said that the FSA had decided to focus on sanctions because of the recent changes in the regime and the fact that the government was scrutinising the area more closely. He said that the regulator wanted to ensure that firms were aware of their legal obligations and knew what they were doing.
"This is not us rushing in and saying there are lots of issues we want to be prosecuting people on because it is not us who actually prosecutes the sanctions regime it is the Treasury. If there is a sanctions breach that is the Treasury's responsibility," he told Complinet.
Despite this Robinson said that the results of the review would be fed automatically into the FSA's supervisory area and would be covered as part of the ARROW process. The FSA would then look at any potential systems and controls failings in the sanctions area at firms. "Good practice is great. If firms haven't picked up on this and there is still poor practice then there might be a cause for concern," he said.
The FSA found a number of "disappointing" misconceptions among firms. Many firms believed that they were exempt from the regime if they processed only low value transactions. Some also wrongly thought that individuals and entities on the sanctions list were based overseas. The regulator discovered that some smaller firms thought that financial sanction screening was not necessary as they did not hold client money. This was not the case, the FSA said.
The regulator revealed that one major retail firm failed to understand the difference between financial sanctions, targets and politically exposed persons. Most PEPs are not the subject of financial sanctions, although they can be, the FSA said. Some firms erroneously believed that insurance was not subject to the regime, the FSA added.
Policies and procedures failures
The FSA also found issues with regard to firms' policies and procedures. In its visits to small firms it found that only half of those that said they had written sanctions policies in place actually had. This discrepancy arose primarily because many small firms thought that customer due diligence checks for anti-money laundering purposes were the same as screening against the HMT list. Firms also failed to carry out independent audits of their policies, the FSA noted. There were also problems with some consultants that firms used.
"We found that many small firms were very reliant on compliance consultants who often focused on AML requirements but did not cover financial sanctions requirements. We found some compliance consultants were providing small firms with inaccurate advice. Firms should ensure that they receive appropriate information and advice about financial sanctions and not just about AML requirements," the FSA said.
Turning to client screening the FSA found weaknesses among large and medium firms that had dealt with customers who were already clients of other FSA-authorised firms. Many firms assumed that the first firm had screened the client against the HMT list but had not taken steps to verify this.
"Firms may be relying on others to have done their sanctions vetting for them. We don't think that is a good idea because we think that most firms, particularly small firms are not necessarily doing it well. Larger firms should be aware of their obligations and where they are relying on other people because the regime does not allow them to rely on other people. They need to get clear on that," Robinson said.
There were also IT issues in a number of firms which failed to screen against the HMT list when they took on clients. Some firms screened retrospectively which meant that they provided a service before screening had taken place. In some cases firms were unable to adequately flag individuals and entities on all their systems.
Large firms generally screened their customer databases periodically. Despite this, the FSA said that firms did not extend this to screening the directors and beneficial owners of corporate clients against the HMT list. This increased the risk of firms inadvertently breaching the regime, the FSA asserted.
Firms and senior managers that fail to comply with the sanctions regime can face criminal sanction brought by the government. The FSA was keen to stress that although HM Treasury administers the sanctions regime, it expects firms to have effective risk management systems in place to comply with the regulator's financial crime requirements.
In January, the Law Society looked at AML compliance among the legal community and found that 48 per cent did not check their clients on the Treasury list, while 26 per cent checked all of their clients against the list. Of those that checked the list 69 per cent used an electronic provider, while 31 per cent re-checked their client base at intervals against the list.
The FSA spoke to 228 firms for its review.
