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Coutts, banker to the Queen, has been given the biggest ever fine – £8.75m – for breaches of money-laundering rules after three years of “serious” and “systemic” problems in handling the affairs of customers vulnerable to corruption because of their political links.The fine on the bank, the private banking division of Royal Bank of Scotland, takes the total penalties levied by the City regulator against the bailed-out institution to £25m in the last 19 months.
The FSA fined Coutts because there was an “unacceptable risk” that the bank could have been handling the proceeds of crime for a three-year period up to November 2010 after failing to deal properly with customers classified as “politically exposed persons”.
These so-called PEPs are defined as “an individual who is or has, at any time in the preceding year, been entrusted with a prominent public function” or a family member of such a person holding a position outside the UK or in a European Community or established international institution.
When individuals fall into this category, banks are supposed to be certain that they can verify the origins of any deposits being made, otherwise they could be allowing funds to be laundered through the account.
The FSA found, after an industry-wide review in October 2010, that Coutts was not conducting robust enough checks on such high-risk customers and was not monitoring relationships with them properly. The regulator reviewed a sample consisting of 103 high-risk customer files, and identified deficiencies in 73 of them.
“Coutts’s failings were significant, widespread and unacceptable. Its conduct fell well below the standards we expect and the size of the financial penalty demonstrates how seriously we view its failures,” said Tracey McDermott, acting director of enforcement and financial crime.
She noted that Coutts was expanding at the time the new regulations came into force in 2007, setting out the definitions of politically exposed persons. “This penalty should serve as a warning to other firms that not only should they ensure they constantly review and adapt their controls to changing financial-crime risks within their businesses,” she went on, “but that they must also make changes to reflect changing regulatory or other legal standards.”
Coutts’s bonus system rewarded bankers for opening accounts, the FSA found, and the division’s anti-money-laundering team was intended to act as a check in identifying high-risk customers. But the FSA found that the anti-money-laundering staff were failing to identify enough “politically exposed persons”.
Lord Oakeshott, the Lib Dem peer, questioned the payment of any bonuses: “How can Stephen Hester and RBS top management dream of taking bonuses when they preside over this serious and widespread ‘ask no questions culture’ at Coutts?”
In two cases reviewed by the FSA, private bankers did not conduct appropriate checks on the customers, and so failed to identify serious criminal allegations against them. There were five cases where sources had provided “adverse intelligence” such as allegations of criminal activity, but in each case the accounts were approved by Coutts.
There was also an instance where RBS, Coutts’s parent company, had issued an internal warning about a family because of its political support for a criminal, but later rescinded the warning.
Coutts, which would have been fined £12.5m if it had not agreed to settle at an early stage, stressed that there was no evidence that money laundering took place as a result of its deficient controls, which it was treating “with the utmost seriousness”.
“We recognise our systems weren’t totally adequate in the past and we’ve taken steps to improve these,” said a spokesman.
After its industry-wide review of compliance with money-laundering rules in 2010, the FSA referred five firms to its enforcement arm for potential fines. RBS is the first to emerge from this action.
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