Barclays on Thursday got hit with a £72 million fine from watchdog the Financial Conduct Authority (FCA) for failing to make sure the deal wasn’t being used to fund criminal activity or terrorism.
Alongside the fine, the FCA released a damning document setting out just what the case involved.
The case, dating from the Bob Diamond era, involved creating a complex, £1.88 billion fund structure that would pay out regularly to a group of politically connected individuals over many decades. Those involved went to extraordinary lengths to hide their identities.
We don’t know the names of any of the clients involved, as the FCA has not published them. Only a handful of senior Barclays figures ever knew their names, or that the deal even existed.
Little detail is given on the deal itself too, but the FCA says it involved “investments in notes backed by underlying warrants and third party bonds. A number of companies were used to make the investments and the proceeds of the investments were held in a Trust of which the Clients were beneficiaries.” It’s not clear how much the clients stood to earn from the structure.
Barclays comes off terribly in the FCA’s report, with senior management painted as wilfully blind at times to the risks involved in a deal that one manager called the possible “deal of the century.” At other points, Barclays handling of the deal simply seems inept.
Barclays said in a statement today: “The FCA made no finding that Barclays facilitated any financial crime in relation to the transaction or the clients on whose behalf it was executed.
“Barclays has cooperated fully with the FCA throughout and continues to apply significant resources and training to ensure compliance with all legal and regulatory requirements.”
From the outset, the politically connected persons involved in the deal were identified as particularly at risk of “exposure to bribery or corruption.” But rather than put extra security measures in place, the bank radically relaxed its due diligence measures, motivated by the huge fee that they felt would be at risk if they pushed too hard.
The FCA makes no allegations against the clients involved and there is no suggestion of any wrongdoing on their part. But the report paints a worrying picture of a bank whose security measures could easily be bypassed by would-be criminals or terrorist financiers, provided a big enough fee is at stake.
The deal in question began in 2011 when Barclays was approached by the unnamed clients about arranging a complex structure of funds that would guarantee a certain income to those involved over several decades.
Deals above £20 million are referred to as “elephants” within Barclays — making this one a super-elephant. The deal was eventually worth £1.88 billion but at one point was going to be even bigger. When it was eventually executed in 2012, it was the single largest deal Barclays had ever carried out on behalf of individuals, as opposed to companies.
An unnamed senior manager said it could be “the deal of the century”, according to the FCA report, and the watchdog says: “It was also recognised by some within Barclays that the Transaction could open the door to similar significant business opportunities for Barclays.”
But the deal came with plenty of strings. The clients didn’t want their names to be made public under any circumstances and Barclays agreed to sign “an unprecedented” confidentiality agreement that bound it to pay the clients £37.7 million if their names got out.
Management agreed that only “a very limited number of people within Barclays and its advisers” should ever know who the clients were and kept all details of the transaction off its computer systems. Everything was on paper, stored in a special safe bought just for the deal.
A small team including senior managers were tasked with overseeing the transactions and anti-money laundering checks were to be carried out by this group, rather than through the bank’s traditional channels.
With any form of financial deal, banks have a legal obligation to make sure they aren’t laundering money and to make sure their customers are who they say they are. They must also make sure the cash has been legally obtained and isn’t being used to fund any criminal activity, such as terrorism.
The nature of the “deal of the century” meant that, from the start, the stakes were much higher than normal and Barclays needed to tread extra carefully. The small group charged with overseeing the deal had to make extra sure they were covering themselves.
Why? The FCA says: “Large transactions are not necessarily problematic but if firms do not undertake adequate EDD [enhanced due diligence] and it is later discovered that funds invested were associated with criminal or terrorist activity, the harm that could be caused to the integrity of the UK financial system and to society could be, commensurately, very significant.”
The fact that the identities of those involved were so obscured also posed challenges. The FCA says there’s “nothing inherently wrong” with such discretion, but it makes conducting due diligence on the deal and monitoring the structure after that much more difficult.
And Barclays itself classified the clients as “Sensitive PEPs” — high-risk politically exposed persons. This internal classification means the person carries a “greater level of risk or exposure to bribery or corruption because, for example, they reside or are located in certain high-risk countries, occupy particular senior ranking roles or whose occupation involves an industry that is especially susceptible to bribery or corruption,” according to the FCA.
‘Obvious red flags’
From the start, there were also numerous “obvious red flags” about the deal, according to the FCA.
Once again, it’s important to stress that the clients themselves are not accused on any wrongdoing. But they were cagey about providing information. Barclays “experienced difficulties obtaining adequate documents, details and explanations it required” to find out where the money came from and where it was going.
Rather than setting off alarm bells, it made Barclays worry that its nagging would drive the client into the arms of a rival. The bank became “reluctant to obtain information due to perceived sensitivities.”
The FCA says:
Barclays went to significant lengths to accommodate the Clients to ensure that it won their business. Barclays’ approach was to request information only if it was absolutely necessary and did not want to “irritate” the Clients with multiple requests for due diligence information.
In other words, it was willing to bend the rules to hang on to the “deal of the century.”
At one point, the clients agreed with Barclays to make a change to the Trust Deed, which related to who ultimately got a pay-out from the transaction and under what circumstances the beneficiary could be changed.
The bank asked for a copy of the Trust Deed to make sure the changes had been made, but none was forthcoming. Barclays eventually just “accepted that it was too difficult to obtain a complete copy” — it gave up trying to check who would or could get paid by this mammoth transaction.
Then there were requests from the clients that just didn’t smell right. The initial structure of the deal was that one of the clients — identified as A — would get a payout from the transaction but wouldn’t put any money up for the deal. That seemed strange. When Barclays questioned the setup, the clients simply changed the structure so A would put some money in. Barclays dropped its questions.
There were offshore shell companies “set up solely to transfer funds and then closed” and at one point the clients asked Barclays to pay tens of millions of US dollars to a third party. From the FCA: “When Barclays questioned the rationale for that payment, the request for the payment to be made to the third party was withdrawn.”
Once again, the clients are not accused of any wrongdoing. But these “high risk” activities and “red flags” should have led to enhanced checks and measures from Barclays to ensure everything was above board. In almost all cases it led to a relaxation of the rules.
Part of the problem was it was never clear who exactly was responsible for making sure this deal was legally sound. Bankers interviewed by the FCA pointed the finger at five different managers when asked who was responsible for checking the clients met legal requirements. And the people named on records as having OK’d the clients were unaware they apparently had.
The FCA says: “There was a lack of centralised coordination within Barclays to ensure that roles and responsibilities were apportioned appropriately and that the right people had the relevant information to make informed and appropriate decisions about these financial crime risks.”
Barclays also didn’t carry out a proper risk assessment on the deal, bypassing “standard processes for reviewing such risks because of the confidentiality obligations.” In terms of risk assessment, the bank “applied lower standards for giving such approval than it did for its other business relationships.”
Senior managers just wanted to get the deal done, rather than risk losing the fat fee, and one senior manager said they had to “race this through” when it came to due diligence.
No senior managers are identified in the report, but the deal took place during the Bob Diamond era of Barclays.
Diamond, who became CEO in January 2011, cut his teeth in the world of US investment banking and tried to steer Barclays more towards that style of banking. His successor, Antony Jenkins, told MPs that the banks culture at the time was “aggressive” and “self-serving.”
There is no suggestion of any involvement from Diamond in the deal, but it gives an idea of the atmosphere in the bank at that time. (Diamond was forced out in 2012 amid the Libor scandal and a pay controversy that led Lord Mandelson to dub him “the unacceptable face of Banking.”)
The FCA says Barclays failed to adequately satisfy what the “the deal of the century” was for, where the clients’ wealth came from, and where the specific funds used in the deal came from — across the board anti-money laundering failings.
The clients said their wealth came from “landholdings, real estate and business and commercial activities,” an explanation the FCA calls “wholly inadequate and virtually meaningless.” To back this up, Barclays printed off pages and articles from the internet.
One of the measures Barclays satisfied itself would verify where the money was coming from were transfers to the bank that would fund the transaction. The bank and its clients had agreed beforehand that the transfers would come from named bank accounts to verify who was sending the money.
But “the names were omitted on the transfers.” Instead, Barclays relied on letters that “were too general in nature and insufficient.”
Barclays also had a duty to keep check on the deal after it had done the initial structuring — remember, it pays out over decades.
But given the inadequate checks, the secrecy around the deal, and poor record keeping, “Barclays was never in a position to monitor such risks appropriately on an ongoing basis.” Barclays had no adequate way of checking if the clients had been added to sanction or court order lists, for example.
If it had been looking, Barclays would have spotted even more red flags. The FCA says: “A number of significantly large payments made in connection with the Transaction passed through Barclays monitoring system without triggering any alerts.”
It’s not hard to see, then, why the FCA has hit Barclays with the largest ever fine for financial crime failings.
While the FCA is not alleging any financial crimes, Barclays failed to properly safeguard them on pretty much every level and the failings reached right up to senior management.
The fine takes into account the £53.7 million the bank earned from the deal, but the FCA also hiked the fine because of the volume of guidance published specifically highlighting the danger of financial crime associated with politically exposed people, and because of Barclays’ dreadful track record. Barclays has been fined a collective £417.8 million since 2009 for various failings.
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