The UK's thematic review of how banks in the UK manage money-laundering risk in highly risky situations, which the old Financial Services Authority launched in June 2011, is still disgorging its load of disciplinary cases. The latest is that of a relatively new London bank with a large Nigerian parent, Guaranty Trust Bank (UK) Ltd, which has to pay £525,000 ($812,522) by 22 August.

In its final notice to the bank, published last week, the Financial Conduct Authority, the FSA's successor, does not make it plain
whether the bank caters mainly to high-net-worth individuals, referring in its
preamble to “retail business”. The only actual sum mentioned regarding
someone's account, however, is $500,000, which suggests that high net worth
individuals formed a healthy part of the bank's clientele. Moreover, 18 of the
51 customer files in the old FSA's survey were those of PEPs, who rarely fail
to qualify as high net worth individuals.

As in previous cases, the bank has paid a heavy price for
the investigation. It has spent large undisclosed sums beefing up its
anti-money-laundering systems and controls. It has invested heavily in more IT,
taken on more compliance people and hired a compliance consultant, also
unnamed, to help it manage financial crime risk. As always, the fine is merely
the coup de grace which comes on top of a massive waste of management
time and attention.

Account-opening time

The practice of “feeding customers excuses” during the
account set-up process drew the FCA's wrath. The bank's standard account
application forms included the question “What is the main reason for applying
for the account? (Please specify eg day to day expenses).” To nobody's
surprise, many applicants - 13 Nigerian residents – wrote “day-to-day expenses”
even though this conflicted with their profiles in every case. The bank, which
was grateful for their custom, probed no further until the FSA came on the
scene.

The FCA's emphasis on the need for accuracy in
account-opening procedures is noisier than usual. The reason it gives for this,
and it does so often, is that only a good pad of information given at
account-opening time can help a bank monitor its customers' transactions and
work out whether they are appropriate for their profiles or whether they
diverge suspiciously. This is a very fair point.

Indeed, FSA investigators found that 46 of the 51
investigated files did not have enough documents to back up the information
contained therein. The bank did, however, correctly identify these files as
posing a “higher risk of money-laundering”; it fell down in not giving reasons.
In the final notice it berates the bank for this with the same argument: an
absence of description frustrates the monitoring process after each account has
been opened. In 23 of the 51 “higher-risk” customers' files, the bank failed to
establish and collect documents to verify the purpose and intended nature of
the business relationship. Indeed, the bank did not always seek a reason for
the application for an account.

Sources of wealth and funds

Vague explanations for wealth or the funds that the new
customers were trying to deposit included “sale of business” or “earnings or
profit.” The bank accepted these without further probing, despite its duties to
research them. In other cases, the customers said that their wealth emanated
from their salaries. When a Nigerian HNW or PEP claims that his salary made him
rich, alarm bells should be ringing. General Abacha's annual salary was $25,000
- not enough to explain the billions that he and his family routed through the
City's most illustrious banks in the late 1990s.

Unhelpful vagueness

The final notice is vague in some tantalising areas. It is
well-known, for example, that whenever a bank begins a credit relationship with
a politically-exposed person (PEP), it has to induce a senior executive or
manager to approve it. At 4.13 it says that of the 18 PEP relationships, 13
“did not contain the correct level of senior management sign-off.”
Money-laundering reporting officers are agog to hear how many levels of such
sign-off the FCA thinks there are.

Documents were threadbare in the Guaranty Trust
money-laundering office and the FCA rightly points this out. In its call for
correct verification of identity, however, it relies on vague phrases such as
“information obtained from a reliable and independent source.” This could mean
anything and is too often taken to mean government sources. As the officials of
many third-world countries create government documents (such as passports) at
the jingle of a handful of coins, it seems a mistake to invest such documents
with such credence. Many governments, including Nigeria's federal and state
governments, are far from “independent” of organised crime. The FCA has never
bothered to sift through the official identifying documents of the Third World
with some knowledgeable investigators to earmark the more trustworthy ones.

Comparison with other fines

It is hard to draw many lessons from the size of the fine,
except to speculate that the FCA might be slightly tougher in its fining than
the old FSA. The period in which |Guaranty Trust Bank made its mistakes –
between 19 May 2008 and 19 July 2010 – was roughly the same as Turkish Bank's
period – between 15 December 2007 and 3 July 2010, so the same fining rules
ostensibly apply. The vast majority of misconduct in both cases came before the
introduction of the FSA’s new penalty regime on 6 March 2010.

Turkish Bank UK's fine, however, was only £294,000 despite
the fact that its conduct seems to be more egregious - at no point has the FCA
accused Guaranty Trust Bank of designating its parent country's woeful
anti-laundering efforts as 'equivalent' to the European Union's in the way that
Turkish Bank UK did with Turkey's. On the other hand, the Turkish Bank fine -
doled out in July last year – represented one of the opening shots in the FSA's
drive to stop London boutique banks for HNW individuals from classifying
country risk in any way that suited their customer-bases and the FCA doubtless
believes that it can get away with more now that it has established its
principle.