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20th October 2016

Fines for AML system failings

The Financial Conduct Authority has recently imposed penalties on both Sonali Bank (UK) Limited and its former Money Laundering Reporting Officer for serious systems failings with regard to anti-money laundering.

Sonali Bank has been fined £3.25M and had a new customer restriction imposed upon it whilst Mr Steven Smith, the bank’s former money laundering reporting officer (MLRO) has been fined £17.9K and banned from ever performing the MLRO or compliance oversight functions for a regulated firm again.

Had early settlements not been agreed, the fines would have been £4.6M and £25.6K respectively.

The Risk of Financial Crime

As the FCA stress in their Final Notices, “Financial services firms are at risk of being abused by those seeking to launder the proceeds of crime or to finance terrorism.” The result of this is to undermine the integrity of the UK financial services industry thus, firms “are obliged to take appropriate and proportionate steps to manage such risks effectively in order to reduce the risk of financial crime.”

One of the steps firms should take is to ensure they promote a culture which supports the firm’s robust and risk-focused AML systems and controls and that “impresses on all members of staff the importance of complying with them.”

Ignored AML Warnings

It was noted that despite Sonali Bank having received clear warnings about the serious weaknesses in its AML controls on previous occasions, it failed to maintain adequate AML systems between August 2010 and July 2014.

Serious and systemic weaknesses were found to have affected almost all levels of Sonali’s AML control and governance structure including:

The senior management team
Money laundering reporting function
Oversight of its branches
AML policies & procedures

As a result, the firm failed to comply with their operational obligations to not only undertake customer due diligence (CDD) but also transaction & customer monitoring, the making of suspicious activity reports and their obligations of how to identify and treat politically exposed persons (PEPs).

MLRO Requirements

For adequate AML systems and controls to be implemented within a firm, this requires an MLRO who:

takes a robust approach;
ensures that AML responsibilities are understood at all levels of the organisation;
has sound knowledge of the controls;
ensures that regular testing and monitoring is carried out; and
escalates concerns appropriately to senior management

During the period of failure, Sonali Bank’s MLRO and Compliance Officer was Mr Steven Smith, whose responsibilities included the oversight of the day-to-day operations and effectiveness of the Firm’s AML systems and controls.

MLRO Failings

However, despite a number of warnings Mr Smith received from Sonali Bank’s internal auditors, as MLRO he failed to:

put in place appropriate AML monitoring arrangements;
identify serious weaknesses in operational controls;
identify a lack of appropriate knowledge amongst staff members;
report appropriately Sonali Bank’s internal auditors’ concerns and the results of internal testing;
impress upon senior management the need for more resources in the MLRO function; and
take adequate steps to recruit more staff in a timely fashion.

In addition, he also reassured the Board and other Senior Management of Sonali Bank that their AML controls were working well when they were not.

The result of these failings demonstrated that “insufficient management attention was paid to compliance with AML processes”. Thus, the firm failed to conduct adequate CDD and EDD, monitoring of transactions and customer relationships and the making of suspicious activity reports.

Whilst an AML policy and procedure documentation were in place at Sonali Bank, the FCA considered these to be ‘high level’ and thus “failed to provide staff with meaningful practical guidance”.

The FCA notes that whilst they consider “the support of senior management in resourcing and empowering MLROs appropriately is vital to maintaining robust systems”, Mr Smith did not exercise due skill, care and diligence in managing the business of the Firm for which he was responsible and did not take steps to acquire the support and resources that he needed.

As a result of the FCA considered Mr Smith to have demonstrated a serious lack of competence and capability and has thus, not only was he fined, but also prohibited from ever performing the role of MLRO or Compliance Oversight again.

The Director of Enforcement and Market Oversight at the FCA, Mark Steward said: “Ensuring that AML controls are effective and viewed as important throughout the business are fundamental obligations of all regulated firms.” Furthermore he advised “the FCA will not hesitate to take action against firms and senior individuals who fall short of our standards.”

It is clear from reading the Final Notices that the FCA expects firms to demonstrate a culture that supports effective compliance with regulatory requirements.

In addition, the FCA expects senior management to lead from the top down in this regard, thus with respect to AML controls, these should be robustly embedded at all levels of the business, with the importance of compliance with AML requirements stressed to all members of staff.

Compliance Support Services

If you are reviewing your AML systems and controls and would like support or assistance in this matter, please get in touch with our team of experienced compliance consultants.