Barclays Fined £72 Million For Poor Scrutiny Of Rich Clients

Amisha Mehta Assistant Editor London 26 November 2015

Barclays Fined £72 Million For Poor Scrutiny Of Rich Clients

The UK's financial regulator has handed out its largest fine yet for financial crime failings to Barclays.

Barclays has been fined £72,069,400 ($108,663,511) for failing to conduct sufficient checks on ultra-high net worth clients, putting further pressure on firms to adopt best practice in "know-your-client" checks.

The UK-listed banking giant arranged a £1.88 billion transaction for these clients in 2011 and 2012 without performing proper levels of due diligence on them. The UK's Financial Conduct Authority, the financial regulator, said the wealthy clients involved were “politically exposed persons” i.e. politically high risk, and therefore should have been subject to greater scrutiny.

Barclays did not follow its standard procedures and instead took on the clients as quickly as possible, generating £52.3 million in revenue. The watchdog added that the bank, which kept details of the transaction strictly confidential, overlooked “obvious red flags” because it did not wish to inconvenience the clients.

“Firms will be held to account if they fail to minimise financial crime risks appropriately and for this reason the FCA has required Barclays to disgorge its revenue from the transaction,” said Mark Steward, director of enforcement and market oversight at the FCA.

The FCA made no finding that financial crime was involved or facilitated by Barclays.

Barclays said it had cooperated fully with the FCA and that it “continues to apply significant resources and training to ensure compliance with all legal and regulatory requirements”.

The fine will be an embarrassment for a bank that was punished in June 2012 for manipulating interbank interest rates (LIBOR); in May this year, the bank was fined again, along with other banks, for rigging the global foreign exchange market. The LIBOR scandal led to the resignation of the bank's high-profile chief executive, Robert Diamond, in late 2012. Last year, the bank carried out a large restructuring operation. Diamond's successor was Antony Jenkins, who was ousted from his post earlier this year following demands from non-executive directors for faster change. 

Chris Hamblin, editor of Compliance Matters, sister publication to this news service, gives the following analysis: 

"When it [the bank] asked the politically exposed persons to explain their source(s) of wealth, Barclays allowed itself to be fobbed off with a vague reference to `landholdings, real estate and business and commercial activities'. It sought to verify this by nothing more than a few printouts of Internet searches, presumably from Google and similar search engines. It did not obtain independently verified documents that contained good evidence of the clients’ sources of wealth such as evidence of titles, copies of trust deeds, audited accounts and/or bank statements. It did not, despite the dicatates of its internal procedures, make a referral to the relevant Barclays risk committee, use Barclays’ internal risk experts to conduct a detailed analysis, or commission an independent third-party intelligence report to fill in any gaps in its understanding of the amount of wealth that the PEPs held. The standard of 'extra/enhanced due diligence' or EDD (required by regulations whenever there is a PEP) that it applied was lower than it was for other clients - even those who were not considered to be 'sensitive PEPs' and who wanted to undertake far smaller transactions."

"Interestingly, in its final notice, the FCA goes out of its way to mention the self-justification that Barclays staff used to avoid asking the PEPs detailed questions - they claimed not to want to 'irritate' them. After this fine, it is unlikely that any British bank will ever attempt to use this excuse when talking to the regulator again," Hamblin said. "This reticence extended even to the provision of verifying documents themselves. Barclays did not bother to obtain a full copy of the relevant trust deed from the PEPs, even though they themselves had agreed to change it at Barclays' request. The changes related to the ultimate beneficial owners of the proceeds of the transaction and the circumstances in which the beneficial owners could change - a crucial AML control," he added.

The onerous task of keeping track of the activities of actual or potential PEPs has spawned innovation in technology firms providing banks with systems for this purpose, such as smartKYC, for example, as well as LexisNexis Risk Solutions.

For a list of miscreants in the financial services industry, click here. 

The publisher of this news service has issued a research paper on compliance issues in wealth management. See here.


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