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Coutts' AML and PEP transgressions and fines in historical perspective
12/04/2017 , Ian Orton

The judgements of financial regulators, and especially those of the UK’s Financial Conduct Authority (FCA) and its predecessor the Financial Services Authority (FSA), have a tendency of being delivered in an extremely portentous manner.

The misdemeanour may be trifling and the sanction inconsequential. But the accompanying admonishment will almost certainly be scathing as London-based Coutts, a private banking and wealth management arm of Royal Bank of Scotland (RBS), should know only too well.

Coutts has certainly received a lot of admonishments from regulators, not to mention fines, in recent years. Take the past four months, for example.

Back in December 2016 the bank received a fine of S$2.4 million from the Monetary Authority of Singapore (MAS) for breaching anti-money laundering regulations in its relationship with 1MDB, the scandal-tainted Malaysian sovereign wealth fund. It then received a CHF 2.4 million from FINMA, the Swiss regulator for the same offence in February 2017.

Now it has to pay another HK$7 million to the Hong Kong Monetary Authority (HKMA) for failing to establish and maintain procedures for determining if “its customers or the beneficial owners of its customers were politically exposed persons”.   

No doubt some of Coutts’ competitors will be enjoying a little schadenfreude. Others will probably recognise that fines of this nature are just a cost of doing business in the jurisdictions concerned (especially if they had ANY relationship with IMDB). And besides they enable the regulatory authorities to justify their existence.

The fines are not really that significant. Coutts could even get change out of £5 million after paying all three fines. So notwithstanding the nature of any admonishments given the misdemeanours committed are not that significant if, as the regulators usually claim, the size of the punishment fits the crime.

Furthermore, all three fines shouldn’t have been unexpected. Five years ago in March 2012 Coutts received the full portentous ire of the FSA, along with an £8.75 million fine for “failing to take reasonable care to establish and maintain effective anti-money laundering systems and controls relating to high risk customers, and especially politically exposed persons (PEPs).”  

If head office is found wanting by one of the world’s leading financial regulators the likelihood is that the situation will be at least as bad in branch offices.

But was the situation really that bad at head office in the first instance? There should be no surprise that the FSA thought it was.

“The failings at Coutts were serious, systemic and were allowed to persist for almost three years,” it said in the release that accompanied details of the fine. “They resulted in an unacceptable risk of Coutts handling the proceeds of crime.”

Whether or not Coutts did handle the proceeds of any crime was never disclosed, however.

Moreover, a forensic reading of its press release suggests that the FSA was attempting to generalise from the particular. And in the case of PEPs, or “prospective” PEPs, these particulars didn’t really extend to more than one, or possibly two, as the following passage demonstrates (emphasis added).

“The FSA identified deficiencies in nearly three quarters of the PEP and high risk customer files reviewed.  Specifically, in one or more of each inadequate file Coutts failed to:

  1. gather sufficient information to establish the source of wealth and source of funds of its prospective PEP and other high risk customers;
  2. identify and/or assess adverse intelligence about prospective and existing high risk customers properly and take appropriate steps in relation to such intelligence;
  3. keep the information held on its existing PEP and other high risk customers up-to-date; and
  4. The failings at Coutts were serious, systemic and were allowed to persist for almost three years.” 

Given current attitudes, especially in the wake of the release of the Panama Papers, the lack of effective AML controls at Coutts especially in relation to PEPs, or even “prospective” PEPs, appears to not only be negligent but irresponsible as well given its regulatory requirements.

But all that was a long time ago. If, to paraphrase Harold Wilson, a former British Prime Minister, a week is a long time in politics, five years should be the equivalent of an epoch in private banking.

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