UK’s FSA to target asset management industry

The UK Financial Services Authority is shortly to embark on a thematic review of asset managers, which will focus on the risks of bribery and corruption, sanctions and money laundering, according to law firm Dechert LLP.

A statement from the firm said 22 firms have already been identified for review and the regulator’s report is due to be published in the third quarter of 2013.

Dechert has warned the industry: “All asset managers, whether they are to be visited by the FSA or not, should review their compliance in these areas.”

It said compliance failings in any of the areas “could lead to very significant adverse consequences”. The FSA and other enforcement agencies have focused on these areas in relation to other types of financial firms, but now asset managers are also to be scrutinized.

The UK’s new Bribery Act, in force for just over a year, has put a fresh onus on all commercial organisations to put in place adequate procedures and the Serious Fraud Office has been enforcing previous anti-corruption legislation for a while.

It is also believed to be undertaking a number of investigations under the new Act, Dechert said.

The FSA’s thematic review of bribery and corruption compliance in investment banks, published in March, identified significant weaknesses, including failure to undertake adequate anti-bribery and corruption risk assessments, poor management information, failure to carry out specific anti-bribery and corruption audit and significant issues in firms’ dealings with third parties used to win or retain business.

In addition, the FSA accused firms of being too slow and too reactive in managing bribery and corruption risks. In particular, the regulator felt there was limited understanding of the relevant issues and failure to implement policy and procedures.

A number of institutions have recently been subject to enforcement action for failing to implement effective systems and controls to manage sanctions risk. In August 2010, the FSA fined Royal Bank of Scotland Group £5.6m for failure to implement appropriate, risk-sensitive policies and procedures to prevent activities relating to money laundering and terrorist financing.

Dechert says the stakes are increasing. In June 2012 ING paid $619m to settle accusations it helped Iranian and Cuban companies move billions of dollars through the US financial system in violation of international sanctions.

HSBC currently faces a fine which could be far higher following allegations of providing financial services to banks linked to financing terrorism, processing transactions linked to the Iran’s nuclear programme and assisting Mexican drug dealers to move £1.3bn into Cayman Island accounts.

The FSA requires regulated firms to maintain appropriate policies and procedures in order to prevent funds or financial services being used by those on the sanctions list. They are expected to screen customers and payments against those lists.
The FSA has previously undertaken a thematic review of the banks’ management of high money laundering risk situations which equally may apply to the asset management sector.

In particular, the FSA found the banks were appearing to take unacceptable money laundering risks where potentially profitable relationships were at stake, that the level of enhanced due diligence undertaken in high risk situations was inadequate, and that banks were failing to identify the customers as politically exposed persons.
In relation to asset managers, the FSA could look immediately at compliance with the Money Laundering Regulations and, if recording errors or breaches are found, choose to look more deeply into the affairs of the manager and its attitude to compliance, Dechert warned.

“If the findings of the FSA’s thematic review into asset managers identify as many weaknesses into anti bribery and corruption compliance as the thematic review into investment banks earlier this year, asset managers should be very cautious of any future enforcement action.

“In particular, asset managers should be wary of the risk of enforcement action by the FSA as a result of a firm’s systems and controls failings in addition to, and independently from, the firm’s risk of being prosecuted by the SFO under the Bribery Act itself.”


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