Speech by Margaret Cole, Director, Enforcement and Financial Crime Division, FSA
British Bankers Association
19 November 2009
I am going to talk today about the FSA’s role in fighting financial crime. And I intend to say something about a current hot topic for debate in the criminal fraud arena: Who should be prosecuting what?
It’s important to be clear that our work in relation to financial crime is not just about enforcement and criminal prosecutions. Much of what we do is less glamorous and doesn’t always grab the headlines, but it is of vital importance for our Financial Crime objective, which mandates us to work to reduce the extent to which it is possible for regulated businesses – or those which should be regulated but aren’t – to be used for purposes connected with financial crime. The objective is focused on crime prevention and I am going to start today by saying something about the frontline work we do to achieve this in our roles, first as gatekeeper and second as supervisor.
Gatekeeper
British Bankers Association
19 November 2009
I am going to talk today about the FSA’s role in fighting financial crime. And I intend to say something about a current hot topic for debate in the criminal fraud arena: Who should be prosecuting what?
It’s important to be clear that our work in relation to financial crime is not just about enforcement and criminal prosecutions. Much of what we do is less glamorous and doesn’t always grab the headlines, but it is of vital importance for our Financial Crime objective, which mandates us to work to reduce the extent to which it is possible for regulated businesses – or those which should be regulated but aren’t – to be used for purposes connected with financial crime. The objective is focused on crime prevention and I am going to start today by saying something about the frontline work we do to achieve this in our roles, first as gatekeeper and second as supervisor.
Gatekeeper
We are the gatekeeper of the UK financial system. Firms or individuals wishing to operate in the UK must meet our 'fit and proper' standard. Those who don't, stand to be rejected during our authorisation, approval or change of control processes. There are numerous aspects to fitness and properness – competence, integrity and the ability to establish the right culture and tone at the top are important features.
A murky past, a reputation for unscrupulous business methods or sailing close to the wind will also call fitness and properness into question. Applications from countries where personal histories are obscure or controverted, or corruption is endemic in business life, add to the challenge.
We address these challenges by building stronger links with overseas law enforcement and regulatory agencies, by devoting more people and resources to the cases that call for heightened due diligence and, above all, as you would expect from an intrusive regulator, by a sceptical, questioning approach that does not shy away from making decisions that will be contested. In this we are aided by the fact that the burden of proof is on the applicant to satisfy us of their integrity. That puts us in a strong legal position to take robust decisions, and we have been doing so.
People seeking to bypass the FSA as gatekeeper can expect little sympathy. In September this year we brought our first prosecution against an individual for acquiring a controlling interest in a regulated firm without giving the FSA prior notice and for making false and misleading statements – and we obtained a conviction. A second prosecution is under way.
But we don’t or shouldn’t perform the gatekeeper function in isolation – we do expect authorised firms to work with us in the fight against financial crime and to assist us in keeping undesirable companies and individuals away from UK authorised firms and their customers.
Supervision
A murky past, a reputation for unscrupulous business methods or sailing close to the wind will also call fitness and properness into question. Applications from countries where personal histories are obscure or controverted, or corruption is endemic in business life, add to the challenge.
We address these challenges by building stronger links with overseas law enforcement and regulatory agencies, by devoting more people and resources to the cases that call for heightened due diligence and, above all, as you would expect from an intrusive regulator, by a sceptical, questioning approach that does not shy away from making decisions that will be contested. In this we are aided by the fact that the burden of proof is on the applicant to satisfy us of their integrity. That puts us in a strong legal position to take robust decisions, and we have been doing so.
People seeking to bypass the FSA as gatekeeper can expect little sympathy. In September this year we brought our first prosecution against an individual for acquiring a controlling interest in a regulated firm without giving the FSA prior notice and for making false and misleading statements – and we obtained a conviction. A second prosecution is under way.
But we don’t or shouldn’t perform the gatekeeper function in isolation – we do expect authorised firms to work with us in the fight against financial crime and to assist us in keeping undesirable companies and individuals away from UK authorised firms and their customers.
Supervision
The second strand of our financial crime work to mention today is in the FSA core activity of supervision. As you know, the FSA has strengthened its supervisory philosophy and operating model. We are committed to intensive, intrusive, outcomes-focused supervision. Under this model our supervisors focus on what really matters. Not tick-box compliance with individual rules – but on what firms and individuals do and the real world impact of those outcomes. This means we will focus on risks inherent in firms’ business models and we will be proactive in making sure those risks are managed. So that where we find issues of concern, we will act to bring about mitigation of risks.
To strengthen these changes further, last month we reorganised our core activities: we integrated our retail and wholesale firm supervision into one Supervision Business Unit. These supervisors are supported by subject matter specialists in a new Risk Business Unit, as well as by financial crime specialists in my area – the merged Enforcement and Financial Crime Division.
The Financial Crime and Intelligence Department provides specialist support to supervisors on the financial crime risks faced by firms. We have dedicated staff who work alongside supervisors during visits or ARROW risk assessments. They also investigate what has gone wrong in cases of crystallised financial crime risk. And we also have policy experts who make sure that our supervisors are fully appraised on relevant issues relating to financial crime.
So that brings me to the outcomes we expect to see from firms. First of all, senior management should take clear responsibility for managing financial crime risks, whether they arise from launderers and fraudsters, or corrupt intermediaries. These risks should be treated like any other risk faced by the business – they should be understood, assessed and monitored, and judgements should be made about how best to mitigate them.
We expect to see senior management demonstrating leadership on financial crime issues. We look for evidence that senior management understand and are shaping their firm’s approach to financial crime risks. And we want to see suitably senior and independently-minded staff with sufficient resources taking responsibility for mitigating financial crime risks.
If a supervisor decides to probe on financial crime issues, where might this attention turn?
One real-life example is money laundering. The 2007 anti-money laundering regime has now bedded down to the point where the Treasury have launched a review of how well it is functioning. We believe the regime is more sensitive to risks than was once the case. But the risks posed by money launderers have not gone away. And where we see weaknesses in anti-money laundering systems and controls we will act.
In the case of our action against Sindicatum Holdings Ltd last year, we fined the Money Laundering Reporting Officer personally – that’s the first time this has happened.
One important element of firms’ anti-money laundering defences is the identification of customers who are ‘politically exposed persons’. These are senior public officials who may abuse their position for their own personal gain and that of their close associates. Clearly, only a minority of such customers will be corrupt, but firms must subject these customers to more thorough monitoring. This legal duty stems from the great damage that corruption does to political systems and economies throughout the world.
So it is no surprise that we will treat very seriously the discovery that a regulated firm is itself involved in financial crime. Our action against Aon earlier this year showed our resolve on this point. This insurance intermediary made payments to third parties when, in the words of our Final Notice, it ‘ought to have been reasonably obvious [to Aon Ltd] that there was a significant risk that the Overseas Third Party might bribe the insured, the insurer, or a public official’.
Our penalty of £5.25m for failing to maintain adequate systems to counter the risk of bribery and corruption is the highest corruption-related penalty in the UK to date.
In light of this case, we envisage that supervisors may in the future be asking whether a firm’s geographical reach, customer base, product lines, or sales channels make it vulnerable to the risk that staff pay or receive bribes. Firms that use go-betweens to generate new business in jurisdictions associated with systemic levels of corruption may receive particular attention. I would expect firms in this position to be actively implementing measures to mitigate the threat.
To conclude on the subject of corruption, and to be absolutely clear, the FSA is not a criminal prosecutor for bribery and corruption. Where we find evidence of criminal matters we refer them to the Serious Fraud Office (SFO) who are the UK lead agency for criminal prosecutions for corruption. So far as financial services firms and individuals are concerned, our role is focused on prevention.
The law in the UK places other obligations on financial firms. For example, the asset-freezing regime and directions issued under the new Counter Terrorism Act restrict firms’ ability to do business with certain customers. An FSA supervisor’s role is to oversee the systems and controls firms must put in place in order to comply with these requirements. Our recent thematic work on firms’ efforts to comply with UK financial sanctions was not reassuring – we are concerned it remains possible for sanctioned individuals to slip through the net. We published our findings in April. Firms should be in no doubt that, where we continue to identify systems and control weaknesses, we will use our enforcement tool.
And data security is another area where we can, and will, use enforcement action to support the work of our supervisors. We expect firms to consider how their actions or failures leave others open to the threat of fraud. We continue to learn of data security lapses that put customers’ personal information at risk. This summer’s enforcement action against three units of HSBC saw substantial fines paid for weak controls over the security of customer data. And we will follow up with further enforcement cases to demonstrate the importance of this subject.
Enforcement and criminal prosecutions
To strengthen these changes further, last month we reorganised our core activities: we integrated our retail and wholesale firm supervision into one Supervision Business Unit. These supervisors are supported by subject matter specialists in a new Risk Business Unit, as well as by financial crime specialists in my area – the merged Enforcement and Financial Crime Division.
The Financial Crime and Intelligence Department provides specialist support to supervisors on the financial crime risks faced by firms. We have dedicated staff who work alongside supervisors during visits or ARROW risk assessments. They also investigate what has gone wrong in cases of crystallised financial crime risk. And we also have policy experts who make sure that our supervisors are fully appraised on relevant issues relating to financial crime.
So that brings me to the outcomes we expect to see from firms. First of all, senior management should take clear responsibility for managing financial crime risks, whether they arise from launderers and fraudsters, or corrupt intermediaries. These risks should be treated like any other risk faced by the business – they should be understood, assessed and monitored, and judgements should be made about how best to mitigate them.
We expect to see senior management demonstrating leadership on financial crime issues. We look for evidence that senior management understand and are shaping their firm’s approach to financial crime risks. And we want to see suitably senior and independently-minded staff with sufficient resources taking responsibility for mitigating financial crime risks.
If a supervisor decides to probe on financial crime issues, where might this attention turn?
One real-life example is money laundering. The 2007 anti-money laundering regime has now bedded down to the point where the Treasury have launched a review of how well it is functioning. We believe the regime is more sensitive to risks than was once the case. But the risks posed by money launderers have not gone away. And where we see weaknesses in anti-money laundering systems and controls we will act.
In the case of our action against Sindicatum Holdings Ltd last year, we fined the Money Laundering Reporting Officer personally – that’s the first time this has happened.
One important element of firms’ anti-money laundering defences is the identification of customers who are ‘politically exposed persons’. These are senior public officials who may abuse their position for their own personal gain and that of their close associates. Clearly, only a minority of such customers will be corrupt, but firms must subject these customers to more thorough monitoring. This legal duty stems from the great damage that corruption does to political systems and economies throughout the world.
So it is no surprise that we will treat very seriously the discovery that a regulated firm is itself involved in financial crime. Our action against Aon earlier this year showed our resolve on this point. This insurance intermediary made payments to third parties when, in the words of our Final Notice, it ‘ought to have been reasonably obvious [to Aon Ltd] that there was a significant risk that the Overseas Third Party might bribe the insured, the insurer, or a public official’.
Our penalty of £5.25m for failing to maintain adequate systems to counter the risk of bribery and corruption is the highest corruption-related penalty in the UK to date.
In light of this case, we envisage that supervisors may in the future be asking whether a firm’s geographical reach, customer base, product lines, or sales channels make it vulnerable to the risk that staff pay or receive bribes. Firms that use go-betweens to generate new business in jurisdictions associated with systemic levels of corruption may receive particular attention. I would expect firms in this position to be actively implementing measures to mitigate the threat.
To conclude on the subject of corruption, and to be absolutely clear, the FSA is not a criminal prosecutor for bribery and corruption. Where we find evidence of criminal matters we refer them to the Serious Fraud Office (SFO) who are the UK lead agency for criminal prosecutions for corruption. So far as financial services firms and individuals are concerned, our role is focused on prevention.
The law in the UK places other obligations on financial firms. For example, the asset-freezing regime and directions issued under the new Counter Terrorism Act restrict firms’ ability to do business with certain customers. An FSA supervisor’s role is to oversee the systems and controls firms must put in place in order to comply with these requirements. Our recent thematic work on firms’ efforts to comply with UK financial sanctions was not reassuring – we are concerned it remains possible for sanctioned individuals to slip through the net. We published our findings in April. Firms should be in no doubt that, where we continue to identify systems and control weaknesses, we will use our enforcement tool.
And data security is another area where we can, and will, use enforcement action to support the work of our supervisors. We expect firms to consider how their actions or failures leave others open to the threat of fraud. We continue to learn of data security lapses that put customers’ personal information at risk. This summer’s enforcement action against three units of HSBC saw substantial fines paid for weak controls over the security of customer data. And we will follow up with further enforcement cases to demonstrate the importance of this subject.
Enforcement and criminal prosecutions
So that brings me to the subject of enforcement activity – and an important subset of that activity – criminal prosecutions.
The Enforcement and Financial Crime Division takes the lead for the FSA in pursuing the strategy of credible deterrence. And I have already mentioned some of our regulatory enforcement outcomes this year in support of our financial crime objective.
But the FSA is not just a regulator – there are some types of financial misconduct we can prosecute criminally. I started by saying this is something of a hot topic at the moment. We were accused recently of having transformed ourselves into an assertive criminal prosecutor – something I took as a compliment until I saw it was qualified by the statement that this had happened in the absence of public debate. Our credentials for prosecuting have also been questioned, although I am not sure how seriously, on the basis that we are not superintended by the Attorney General, lack the powers some other prosecutors have, and are not funded by the public purse.
It is not clear what the basis for these propositions is, since the original statutory provisions which underpin the prosecution powers (and their funding) were debated in parliament in 2000, the FSA is accountable to parliament through the Treasury, judicial approval has recently been given to the FSA’s prosecutorial actions and I have been articulating the FSA’s prosecution policy over the last three years, in response to which there have been no discernible dissenting voices.
The FSA is, of course, a prosecutor with a limited remit, a remit we are very clear about. But there is no reason why this should be seen as a bad thing. There are a number of other specialist prosecutors reflecting the view that it is important to have specialist fraud authorities rather than one jack of all trades. Almost every prosecutor other than the CPS prosecutes a limited range of offences.
At the FSA we decided three or so years ago that we should take stronger action in relation to markets offences – in particular insider dealing, a crime we have specific statutory remit to investigate and prosecute. We recognised that the history of insider-dealing prosecutions in the UK has not been a distinguished one, and that it continues to be difficult to root out and prove insider dealing. But despite the risks, we have taken steps to become a heavyweight criminal prosecutor.
Our successes in this area are the result of a joint venture approach in which Markets, Financial Crime and Intelligence, and Enforcement work intensively together to deliver throughput of cases and public outcomes.
Two essential elements in the investigation process for insider dealing and other markets offences are: access to good intelligence; and the ability to analyse it. This is a highly specialised area, in which the FSA can claim to have massive experience, not least from conducting numerous market abuse enquiries since 2000. Our Markets Division maintains close liaison with all the major exchanges, and can follow up suspicious trading activity quickly and expertly.
The Financial Crime and Intelligence Department (FCID), which joined the Enforcement Division on 1 October, has access to intelligence across a broad spectrum. Both Markets and FCID have extensive analytical skills. Lawyers and investigators in the Wholesale Department of Enforcement have long experience of dealing with these cases, and they have wide-ranging investigatory powers under the Financial Services and Markets Act 2000 (FSMA). There are several ongoing large enquiries, two cases have successfully been brought to trial and convictions achieved, and there are three more going through the court process this year. This work has been done at no cost to public funds. And it is work which the police and other prosecutors do not have spare resources to tackle – and lacking current experience in a complex field, it makes no sense for them to take it on. They have many other important areas of fraudulent activity to tackle, including, for example, the current emphasis on international corruption.
The FSA has the tools it needs to prosecute markets cases. Importantly, we also have the option to take cases down the regulatory market abuse route (an option which we have used frequently since 2000), and can apply civil recovery and fines to these cases. Where the offenders are authorised by the FSA, that authorisation can be removed.
If the decision is taken to prosecute – and I should say we strictly follow the guidance laid down in the Code for Crown Prosecutors and the FSA Enforcement Guide, charges of money laundering can be added to charges of insider dealing where appropriate, and recovery of the proceeds of crime can be achieved through the confiscation process, backed up by restraint orders. And, with Royal Assent being given last week to the Coroners and Justice Act, we will soon be able to make use of the immunity from prosecution and assisting offender powers in Part 2 of the Serious Organised Crime and Police Act 2005.
We have also received significant judicial approval for our prosecution policies. The Court of Appeal, in R v Rollins and R v McInerney, has confirmed that the FSA has the power to prosecute money-laundering offences and conspiracies which relate to FSMA and insider dealing activity. And our policy of credible deterrence has received clear backing from the Lord Chief Justice, who has clearly stated that insider dealing is a serious offence demanding a custodial sentence (R v McQuoid).
The FSA’s role in the market abuse area is a vital part of the widespread assault being conducted by various authorities on fraudulent activity and financial crime. And that is why we will continue to pursue our prosecution strategy for insider dealing and markets offences resolutely and assertively. And, as I have said before, it is a long-term plan.
So it is clear that we can and should prosecute insider dealing. But what about other species of fraud?
Our interest is always primarily to make sure that criminal offences are prosecuted by the right authority – and by that I mean the prosecutor with clear remit and mandate, skills, specialisation and resource. That way a prosecution is more likely to be conducted skilfully and effectively and has better prospects of succeeding and thereby sending the deterrence message that criminal prosecutions are intended to deliver.
We are not, and do not aspire to be, a general fraud prosecutor. Very often frauds that we discover, for example, investment frauds, are more suitable for another prosecutor, usually the SFO or the Fraud Prosecution Unit of the Crown Prosecution Service (CPS). And we regularly refer cases to them and assist them in the preparation of their cases. But we do, of course, recognise that our financial crime statutory objective also requires us to focus on reducing the extent to which unauthorised businesses can be used for a purpose connected with financial crime.
Our strategy in respect of unauthorised business is known as the 3D strategy.
The three Ds are:
The Enforcement and Financial Crime Division takes the lead for the FSA in pursuing the strategy of credible deterrence. And I have already mentioned some of our regulatory enforcement outcomes this year in support of our financial crime objective.
But the FSA is not just a regulator – there are some types of financial misconduct we can prosecute criminally. I started by saying this is something of a hot topic at the moment. We were accused recently of having transformed ourselves into an assertive criminal prosecutor – something I took as a compliment until I saw it was qualified by the statement that this had happened in the absence of public debate. Our credentials for prosecuting have also been questioned, although I am not sure how seriously, on the basis that we are not superintended by the Attorney General, lack the powers some other prosecutors have, and are not funded by the public purse.
It is not clear what the basis for these propositions is, since the original statutory provisions which underpin the prosecution powers (and their funding) were debated in parliament in 2000, the FSA is accountable to parliament through the Treasury, judicial approval has recently been given to the FSA’s prosecutorial actions and I have been articulating the FSA’s prosecution policy over the last three years, in response to which there have been no discernible dissenting voices.
The FSA is, of course, a prosecutor with a limited remit, a remit we are very clear about. But there is no reason why this should be seen as a bad thing. There are a number of other specialist prosecutors reflecting the view that it is important to have specialist fraud authorities rather than one jack of all trades. Almost every prosecutor other than the CPS prosecutes a limited range of offences.
At the FSA we decided three or so years ago that we should take stronger action in relation to markets offences – in particular insider dealing, a crime we have specific statutory remit to investigate and prosecute. We recognised that the history of insider-dealing prosecutions in the UK has not been a distinguished one, and that it continues to be difficult to root out and prove insider dealing. But despite the risks, we have taken steps to become a heavyweight criminal prosecutor.
Our successes in this area are the result of a joint venture approach in which Markets, Financial Crime and Intelligence, and Enforcement work intensively together to deliver throughput of cases and public outcomes.
Two essential elements in the investigation process for insider dealing and other markets offences are: access to good intelligence; and the ability to analyse it. This is a highly specialised area, in which the FSA can claim to have massive experience, not least from conducting numerous market abuse enquiries since 2000. Our Markets Division maintains close liaison with all the major exchanges, and can follow up suspicious trading activity quickly and expertly.
The Financial Crime and Intelligence Department (FCID), which joined the Enforcement Division on 1 October, has access to intelligence across a broad spectrum. Both Markets and FCID have extensive analytical skills. Lawyers and investigators in the Wholesale Department of Enforcement have long experience of dealing with these cases, and they have wide-ranging investigatory powers under the Financial Services and Markets Act 2000 (FSMA). There are several ongoing large enquiries, two cases have successfully been brought to trial and convictions achieved, and there are three more going through the court process this year. This work has been done at no cost to public funds. And it is work which the police and other prosecutors do not have spare resources to tackle – and lacking current experience in a complex field, it makes no sense for them to take it on. They have many other important areas of fraudulent activity to tackle, including, for example, the current emphasis on international corruption.
The FSA has the tools it needs to prosecute markets cases. Importantly, we also have the option to take cases down the regulatory market abuse route (an option which we have used frequently since 2000), and can apply civil recovery and fines to these cases. Where the offenders are authorised by the FSA, that authorisation can be removed.
If the decision is taken to prosecute – and I should say we strictly follow the guidance laid down in the Code for Crown Prosecutors and the FSA Enforcement Guide, charges of money laundering can be added to charges of insider dealing where appropriate, and recovery of the proceeds of crime can be achieved through the confiscation process, backed up by restraint orders. And, with Royal Assent being given last week to the Coroners and Justice Act, we will soon be able to make use of the immunity from prosecution and assisting offender powers in Part 2 of the Serious Organised Crime and Police Act 2005.
We have also received significant judicial approval for our prosecution policies. The Court of Appeal, in R v Rollins and R v McInerney, has confirmed that the FSA has the power to prosecute money-laundering offences and conspiracies which relate to FSMA and insider dealing activity. And our policy of credible deterrence has received clear backing from the Lord Chief Justice, who has clearly stated that insider dealing is a serious offence demanding a custodial sentence (R v McQuoid).
The FSA’s role in the market abuse area is a vital part of the widespread assault being conducted by various authorities on fraudulent activity and financial crime. And that is why we will continue to pursue our prosecution strategy for insider dealing and markets offences resolutely and assertively. And, as I have said before, it is a long-term plan.
So it is clear that we can and should prosecute insider dealing. But what about other species of fraud?
Our interest is always primarily to make sure that criminal offences are prosecuted by the right authority – and by that I mean the prosecutor with clear remit and mandate, skills, specialisation and resource. That way a prosecution is more likely to be conducted skilfully and effectively and has better prospects of succeeding and thereby sending the deterrence message that criminal prosecutions are intended to deliver.
We are not, and do not aspire to be, a general fraud prosecutor. Very often frauds that we discover, for example, investment frauds, are more suitable for another prosecutor, usually the SFO or the Fraud Prosecution Unit of the Crown Prosecution Service (CPS). And we regularly refer cases to them and assist them in the preparation of their cases. But we do, of course, recognise that our financial crime statutory objective also requires us to focus on reducing the extent to which unauthorised businesses can be used for a purpose connected with financial crime.
Our strategy in respect of unauthorised business is known as the 3D strategy.
The three Ds are:
- disruption – where we use our powers to disrupt ongoing activity;
- deterrence – where we seek to deter those planning to engage in such activity by seeking the toughest and most effective penalties in our cases); and
- discouragement – where we focus on discouraging the public from dealing with unauthorised businesses.
We have recognised this year an increase in the unauthorised business frauds coming to our attention and we have responded by creating a new Unauthorised Business Department, focusing on share frauds such as boiler rooms and deposit-taking scams.
So to conclude, I hope I have given you a clear understanding this morning of the scope of our financial crime mandate, the breadth of work we do in this area and our visible commitment to this important area of the FSA’s work.
Our aim is to be considered and proportionate, and to make good use of all the tools available to us. And as I have made clear, that does where appropriate include the Enforcement tool in all its forms, both regulatory and criminal.
So to conclude, I hope I have given you a clear understanding this morning of the scope of our financial crime mandate, the breadth of work we do in this area and our visible commitment to this important area of the FSA’s work.
Our aim is to be considered and proportionate, and to make good use of all the tools available to us. And as I have made clear, that does where appropriate include the Enforcement tool in all its forms, both regulatory and criminal.
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