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Court in the Act

Older readers may well remember this as the title of a great song by English folk rock band, Lindisfarne, on their Dingly Dell album.

One line in the song reads:

So the next time that you feel good, don’t forget the fact

There’s a man in blue and he wants you to be caught in the act

The song came to mind when I read that the UK Financial Conduct Authority (FCA) recently fined Barclays Bank £72,069,400 for failing to minimise the risk that it (the bank) may be used to facilitate financial crime.

The information below was extracted from a FCA media release on the matter.

The failings relate to a £1.88 billion transaction that Barclays arranged and executed in 2011 and 2012 for a number of ultra-high net worth clients. The clients involved were politically exposed persons (PEPs) and should therefore have been subject to enhanced levels of due diligence and monitoring by Barclays.

The circumstances of the transaction gave rise to a number of features which, together with the PEP status of the individuals, required Barclays to adhere to a higher level of due skill, care and diligence which Barclays failed to do. In fact, Barclays applied a lower level of due diligence than its policies required for other business relationships of a lower risk profile as it did not wish to “inconvenience” the clients. Barclays did not follow its standard procedures, preferring instead to take on the clients as quickly as possible and thereby generated £52.3 million in revenue.

The transaction involved investments in notes backed by underlying warrants and third party bonds. It was the largest of its kind that Barclays had executed for individuals.

Barclays did not obtain information that it was required to get from the clients to comply with financial crime requirements. The bank agreed to keep details of the transaction strictly confidential, even within the firm, and agreed to indemnify the clients up to £37.7 million in the event that it failed to comply with these confidentiality restrictions. Few people knew of the existence and location of the firm’s due diligence records which were kept in hard copy and not on Barclays’ systems. This had a detrimental impact on how the business relationship was monitored by Barclays and also meant that Barclays could not respond promptly to the FCA’s request for this information.

The fine comprises disgorgement of £52.3 million, which is the amount of revenue that Barclays generated from the Transaction, and a penalty of £19,769,400. This is the largest fine that has been imposed by the FCA and its predecessor the FSA for financial crime failings.

The FCA specifically found that:

  • senior management at the relevant time failed to oversee adequately Barclays’ handling of the financial crime risks associated with the Business Relationship and that it was unclear which senior managers were in charge of doing so
  • failed to respond appropriately to a number of features of the Business Relationship that indicated a higher risk of financial crime
  • followed a less robust process than it would have done for other Business Relationships that had a lower risk profile
  • failed to establish the purpose and nature of the transaction and did not sufficiently corroborate the clients’ stated source of wealth and source of funds for the Transaction
  • failed to monitor sufficiently on an ongoing basis the financial crime risks associated with the Business Relationship

Barclays agreed to settle at an early stage of the FCA’s investigation and therefore qualified for a 30% (stage 1) discount. Were it not for this, the financial penalty would have been £80,542,000.

Sky News notes that the fine comes just a week after Barclays was handed a new $150m (£99m) penalty by US authorities over foreign exchange rate rigging – to add to a £1.53bn settlement with US and UK regulators over forex earlier this year.

In 2012, Barclays was fined a total of £290m over the Libor scandal in which traders manipulated the key interbank lending rate.

Barclays’ new chief executive, Jes Staley, prepares to take office on 1 December. The American banker said improving trust in the bank is part of his mandate.

The term “hot seat” appears to be appropriate in this case.

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