Enforcement action

Countering the risk of authorised firms being used for financial crime remains at the heart of the Financial Services Authority's regulatory objectives.

Although the FSA has recently become more bullish in prosecuting cases of financial crime - for example, insider dealing and breaches of the Financial Services and Markets Act 2000 - its primary role, and perhaps where it can add the most value, is in forcing regulated firms to identify financial crime risks and use appropriate systems and controls to counter them.

The regulated sector has seen the FSA take enforcement action against high street and private banks for failures in anti-money laundering systems and controls that resulted in sizeable fines. The regulator's attention then moved to anti-fraud procedures, followed by anti-market abuse systems and best practices for restricting the leak of price-sensitive or inside information. It is therefore not surprising that the FSA now has an interest in the hot topic of anti-bribery and corruption in the regulated sector.

Anti-bribery and corruption focus

The FSA's financial crime and intelligence division is currently undertaking a thematic review of the anti-bribery and corruption systems and controls engaged by commercial insurance intermediaries. Part of that review resulted in the largest fine to date for financial crime-related activities imposed by the regulator, when Aon was fined £5.25m for breaching principle three of the FSA's Principles for Businesses (Post, 15 January 2009, p8). This was for failing to take reasonable care to establish and maintain effective systems and controls that would counter the risks of bribery and corruption associated with payments to overseas parties.

The fine was reduced due to the broker's cooperation with the FSA. The regulator commented: "The proactive determination of Aon's current senior management to identify past issues and improve the firm's systems and controls in this area is a model of best practice that other firms may wish to adopt."

Perhaps signalling its intention to take more action, the FSA's director of enforcement added: "The FSA has an important role to play in the steps being taken by the UK to combat overseas bribery and corruption. We have worked closely with other law enforcement agencies in this case and will continue to take robust action focused on firms' systems and controls in this area."

The FCID has indicated that once it has considered the results of its current thematic review it may undertake a wider one. Therefore, now is the time to benchmark and stress-test existing anti-corruption systems and controls against certain areas.

The first is risk identification. While there may be lesser risks when the firm makes direct payments to a third party, making payments or netting off further along the brokerage chain poses a greater risk of illicit and inducement payments. How far the FSA expects firms to investigate and control such payments is currently unclear but it is hoped the results of the FCID thematic report will offer guidance.

Next comes the 'smell test' - if payments are to be made, firms need to ask themselves whether the payment seems appropriate - does it smell right? Simple questions can provide the answer, such as who are we making payment to and why, and is the amount being paid reasonable?

In addition, anti-money laundering and 'know your client' checks can be adapted to undertake sufficient due diligence checks on third parties; once third party arrangements or relationships are established, they need to be carefully monitored.

Furthermore, management information is not just a 'Treating Customers Fairly' tool - senior management requires adequate MI to assess the effectiveness of anti-financial crime systems and controls.

Finally, staff training is essential. Processes and procedures are meaningless if employees are not correctly trained to use them, identify potential corruption risks, undertake appropriate due diligence and report concerns to senior management. Staff training - and not just one-off training during induction - is key to the success of any anti-financial crime system and control.

In addition to attention from the FSA, firms may also face investigations and inquiries from law enforcement agencies. Last year saw a determined drive to tackle corruption; for example, the Serious Fraud Office appointed a new head of anti-corruption and announced its intention to increase the number of investigators focused on this area from 65 to around 100.

Also in 2008, the City of London Police's overseas anti-corruption unit secured its first criminal conviction under the Prevention of Corruption Act 1906 against a company director of a UK security company accused of making illicit payments to Ugandan public officials.

Beyond the regulator

Although UK authorities are pouring more resources into anti-corruption investigations, there is still international criticism of the country's efforts to combat bribery and corruption. In October, for example, the Organisation for Economic Co-operation and Development's working group on bribery criticised the UK for its failure to bring anti-bribery laws in line with international obligations under the OECD's Anti-Bribery Convention. The following month the Law Commission published its final report on bribery offences in the UK. Its recommendations include replacing the current common law and statutory offences with two general offences of bribery and one specific offence of bribing a public official - plus a new corporate offence of negligently failing to prevent bribery.

Ten years earlier, when the Law Commission published its first draft Corruption Bill, this was kicked firmly into the long grass by the parliamentary joint committee; but there now seems to be a greater enthusiasm to bring UK anti-bribery and corruption legislation into line with the international convention. Against the backdrop of heightened regulatory interest in these issues, greater criminal investigative resources directed at tackling corruption and the real prospects of new criminal offences, regulated firms are well advised to review existing systems and controls without delay.

- Richard Burger is a former FSA enforcement lawyer. He is a solicitor with City law firm Reynolds Porter Chamberlain.