RegTech Intelligence 
JWG analysis.
According to the notice released on Thursday, the FCA has fined Standard Bank £7,640,400 for failings in its AML systems and controls relating to its treatment of corporate customers connected to politically exposed persons (PEPs).
This notice is particularly relevant given that the FSA’s thematic reviews in 2010 found that “more than a third of banks visited failed to put in place effective measures to identify customers as PEPs”. Will Standard Bank be the first of many firms to be fined over the coming months? Or are they being set as an example?
Being the first AML case that the FCA has enforced since the FSA split, this is a landmark case, showing the sharp teeth of the new penalty regime, which applies to breaches from 2010.
During the relevant period, between 15 December 2007 and 20 July 2011, Standard Bank had business relationships with 5,339 corporate customers of which 282 were linked to one or more PEPs. Given that the majority of these relationships were African-based (generally higher risk for money laundering), the FCA felt that they failed to put in place effective systems, controls and practices in accepting business from high risk customers. Specifically, Standard Bank failed to:
► Carry out adequate enhanced due diligence (EDD) measures before establishing business relationships with corporate customers that had connections with PEPs; and
► Conduct the appropriate level of ongoing monitoring for existing business relationships by keeping customer due diligence up to date.
The thematic reviews conducted in 2010 resulted in two sets of specific guidance documents. “Banks’ management of high money-laundering risk situations” and “PS11/15 Financial crime: a guide for firms”, both released in 2011, contained specific guidance on dealings with high risk and PEP customers.
The 4th Money Laundering Directive, which could come into European law as soon as March, continues to focus on the importance of PEPs by altering the definition of what can be considered ‘political exposure’. The new definition of politically exposed persons (PEPs), that has been amended to include domestic politicians and members of international organisations, has the ability to vastly increase the volumes of accounts requiring due diligence.
Whilst this is a minor change when taken in isolation, the requirement for PEP checks is no longer vitiated by automatic low risk status, meaning that the cost quickly rises. The identification and subsequent reviews to uncover all new PEPs within firms’ client bases, as well as new accounts, will significantly increase the cost, complexity and latency of acquiring customers (e.g. UK Firm A conducting Enhanced Due Diligence (EDD) on all directors of UK Firm B may require 200 document checks and take 3 more weeks).
However, alongside these changes, there is a new proposal that regulators will provide a list of PEPs for firms to screen against. This is of huge benefit for firms. The definition of PEPs has long been a grey area in money laundering regulation, with separate definitions and very hazy guidance on just how to measure ‘political exposure’ and what the associated risk is. Firms have had to grapple with questions such as whether, for example, the nephew of an ex-minister of Luxembourg creates money laundering risk. The fact that the updated legislation has been expanded to include domestic politicians and members of international organisations as PEPs makes this job even harder. A centralised, and maintained, database of PEPs would make conducting due diligence significantly easier, and arguably, more effective.
Standard Bank’s considerable fine has shown that AML continues to be top of the agenda for supervisors, and that banks can and will be punished for systems and controls breaches under the new, harsher regime.