Why am I getting this horrible creeping feeling that the Financial Conduct Authority (FCA) is another busted flush?
Why do I get the impression that they are going to be just another big bag of wind?
Could it be their own mission statement about their intentions towards dealing with Money Laundering and Financial Crime? I quote;
"...All FSMA-authorised firms must put in place systems and controls to prevent financial crime. Financial crime includes money-laundering.
In addition, all firms who are subject to the Money Laundering Regulations 2007 must put in place systems and controls to prevent and detect money laundering. Money laundering is the process by which the proceeds of crime are converted into assets which appear to have a legitimate origin.
We regulate and supervise firms to reduce financial crime, including money-laundering..."
Is that it?
Is this the hard-line policy statement from the agency that is going to clean up the god-awful mess which its predecessor, the much lamented and frankly unmissed Financial Services Authority left behind?
I don't know whether you agree with me, but it seems to be somewhat lacklustre in its approach, there doesn't seem to be a burning desire to get after the criminals and the wiseguys!
I want to focus in this blog on the powers of the FCA to go after and prosecute criminals.
I believe it is vital in any society which aspires to define a level playing field for the public conduct of all its citizens that where a criminal offence is committed, then that offence should be the subject of criminal investigation and criminal proceedings.
It is simply not good enough for a regulatory agency charged with a responsibility to maintain public confidence in financial markets, to ignore widespread criminality among its regulated institutions, and to refuse to do anything about it.
The FCA, like its predecessor, has the power to prosecute a wide range of financial crimes. They don't need to have those offences spelt out and defined in statute, because they are already determined in public law.
The FCA have assumed the FSA’s statutory remit to prosecute offences of insider dealing and misleading the market. The new law does not therefore alter the other powers available to the FCA to effectively prosecute instances of financial crime. It is likely that the FCA will, as the FSA has done, rely upon the decision of the Supreme Court in R v Rollins to seek to prosecute money laundering offences and conspiracies which relate to FSMA and insider dealing activity.
Using this inchoate power, the FCA can also investigate and prosecute other offences including offences under the Fraud Act and the Theft Act.
One of the most striking elements of the conduct of the FSA was its continued unwillingness to accept and seize the responsibility to prosecute ordinary fraud offences where they were identified.
This is very important because the FSA left behind a very bad message to the financial markets, and that was if you committed ordinary crimes while operating under their aegis, it was highly unlikely that you would be prosecuted for them. So it was that market participants who stole client's money or made false or fraudulent statements about the way they had dealt with client's affairs, resulting in loss to the clients, were allowed to walk away scot free!
No-one was prosecuted for PPI fraud, or indeed any of the other frauds which have been allowed to masquerade under the weasel-worded title of 'mis-selling'.
The FSA bent over backwards to disassociate themselves from any responsibility for dealing with the LIBOR crimes, and they manifestly refused to investigate HSBC for money laundering the proceeds of Mexican drug trafficking.
As a result, they ended up with a very poor reputation, they were roundly criticised for their poor performance by the Parliamentary Commission on Banking Culture, and now, having been replaced by the FCA, they must rebuild their reputation for taking on the financial criminals and doing something effective, otherwise they will quickly become another lame duck among regulators.
They cannot afford to allow this to happen, because it was beginning to smell as if the FSA was not just a failing agency, but an agency that was being required to fail, in order not to scare off the geese that laid the golden eggs for the Treasury and the Exchequer. The problem was that they were being directed in this policy by the very banking failures who had presided over the biggest financial fuck up since 1929, men whose best interests lay in making sure that nothing about their incompetence was allowed to become public knowledge, so that the ordinary member of the public remained in a state of blissful ignorance.
So, it has come as a great disappointment to read the first two deliberations of the FCA following their taking over the reins of control.
The Financial Conduct Authority (FCA) has fined EFG Private Bank Ltd (EFG) £4.2 million for failing to take reasonable care to establish and maintain effective anti-money laundering (AML) controls for high risk customers. The failings were serious and lasted for more than three years.
EFG is the UK private banking subsidiary of the EFGI Group, a global private banking group, based in Switzerland. EFG provides private banking and wealth management services to high net worth individuals including some from overseas jurisdictions recognised as presenting a higher risk of money laundering and/or bribery and corruption.
At the end of 2011 around 400 of EFG’s 3,342 customer accounts were deemed by the firm to present a higher risk of money laundering or reputational risk, and of these 94 were held by politically exposed persons (PEPs).
As part of a thematic review of how UK banks were managing money laundering risk in higher risk situations, the Financial Services Authority (FSA) visited EFG in January 2011. That visit and further investigation caused serious concern to the FSA.
The investigation found that EFG had not fully put its AML policies into practice. Of particular concern was that 17 of 36 reviewed customer files, opened between December 2007 and January 2011, contained customer due diligence that highlighted significant money laundering risks, but insufficient records of how the bank’s senior management had mitigated those risks.
So, over a period of 3 years, the bank knew about serious money laundering risks but had taken no steps to identify how they had dealt with the threat of those risks. One is entitled to say, as indeed a judge would do, '...In the absence of any evidence showing what you did, we must assume you did nothing..."
Of these 17 files, the FSA found that the risks highlighted in 13 files related to allegations of criminal activity or that the customer had been charged with criminal offences including corruption and money laundering.
For example in one account, EFG’s due diligence highlighted that a prospective client had acquired their wealth through their father, about whom there were allegations of links with organised crime, money-laundering and murder. However there was insufficient information on file to explain how the bank concluded that this risk was acceptable or how it was mitigating the risks.
EFG also failed to appropriately monitor its higher risk accounts. Of the 99 PEP and other high risk customer files reviewed by the FSA, 83 raised serious concerns about EFG’s monitoring of the relationship.
As a result of these failures, EFG breached FSA Principle 3, requiring it to take reasonable care to organise and control its affairs responsibly and effectively.
As usual, an FCA employee was called upon to make a comment and one Tracey McDermott, who is described as 'head of enforcement and financial crime', said:
"One of the FCA's objectives is to protect and enhance the integrity of the UK financial system. This includes ensuring money in the UK system is clean.
"Banks are the first line of defence to make sure that proceeds of crime do not find their way into the UK. In this case while EFG’s policies looked good on paper, in practice it manifestly failed to ensure that it was addressing its AML risks. Its poor implementation of its agreed policies risked the bank handling the proceeds of crime. These failures merited a strong penalty from the FCA.
"Firms that accept business from high risk customers must have systems, controls and practices to manage that risk. The FCA will continue to focus on high risk customers and business."
This is a classic box-ticking example of the old style of regulation, the systems looked good on paper, but in practice, they were worthless. What is horribly clear about this case is that the bank had wilfully ignored its duties and responsibilities to put its house in order. They had been given a significant opportunity to remedy the failings identified in the earlier inspection and they had done little about remedying those failures.
Apart from their being in breach of the FCA's rules and Principles, they were also clearly in breach of the Money Laundering Regulations, and specifically those sections that carried criminal sanctions.
While it is accepted that H.M Government reiterates the point made by the Crown Prosecution Service that it is not necessarily in the public interest to prosecute employees of regulated businesses for minor, procedural or accidental regulatory failures, in a case such as this where the conduct complained of was so wanton and egregious, one is forced to wonder why the Directors of the bank were not investigated for the criminal breaches of the Money Laundering Regulations.
They should have been prosecuted, and it would have sent a strong message to the rest of a criminogenic industry sector to get their house in order, but the FCA have failed to grasp the opportunity!
Another case which poses just as many concerns about the way the FCA views the use of its criminal power of prosecution is that of Douglas Jones and his son Derek Jones who previously ran 'Which Mortgage Limited', in Bearsden, Greater Glasgow.
On April 29 2013, the Times reported that the FCA had banned two former directors of a mortgage brokerage for submitting fraudulent applications, providing a stark reminder of the consequences for both professionals and customers who are dishonest.
The Financial Conduct Authority (FCA) found that they had submitted mortgage applications to high street lenders which contained false and misleading information.
Derek Jones has been banned from performing any “significant influence” roles within firms, such as becoming a chief executive, director or partner. He would have received a financial fine, but the regulator accepted that he was already facing serious financial hardship.
Douglas Jones, his father, was found to have acted dishonestly by altering some historic client files after a high street lender raised the alarm. He has been banned from any regulated financial services roles and fined £13,300.
Commenting on the latest broker fines, Bill Sillet the acting head of retail enforcement at the FCA, said: “Mortgage fraud poses a serious threat to the FCA’s integrity objective of protecting and enhancing the integrity of the financial system.”
Putting all this official spokesperson gobbledegook aside, the simple question I ask is why these two men were not investigated and prosecuted for fraud under the Scottish legal system. In Scotland, most criminal offences of fraud are dealt with under the Common Law. Mortgage Fraud investigations are well established in the country and there would have been no difficulty in involving the Glasgow Police in this case.
Merely fining and banning these two men sends a host of wrong messages to other mortgage fraudsters, and yet again sends out the line that there is one law for the financial fat-cats and one for the rest of us.
The FCA simply cannot afford to be adopting the same mealy-mouthed approach to financial crime that the FSA gloried in. They must understand that financial crime, indeed any crime, is an offence against the public weal, and should be treated accordingly. Society has a right to see criminals punished, it is an important social mediating process, and sends important messages that crime will not be permitted to go unprosecuted.
The problem with our modern standards is that everything now has a price component, and civil servants and other apparatchiks with their wizened minds, decide that certain activities become too expensive to handle. It is only a short jump from that kind of thinking into the state of mind where it becomes accepted that certain institutions are too big to investigate, too big to jail.
We have already reached that state of affairs with regard to the major banks, although quite how, I do not know. We have a duty to ourselves and our families to insist that the FCA do better, and start sending a message to the financial criminals that if they cross the line that puts them in the criminal space, then they had better get used to the idea that they will be investigated and prosecuted.
Then and only then will we begin to reclaim the moral space that identifies the no-go area for financial criminals. If we can begin to deconstruct the tacit acceptance by the Regulators that they can get away with doing nothing about financial crime, or worse, doing nothing about the crimes of the powerful because their friends in Whitehall feel it is expedient, then we will begin to reconstruct the paradigm which demands that banksters acknowledge the same laws as those which the rest of us have to obey!
Please help the cause by spreading the word and demanding that the FCA does a whole lot better!