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Enforcement, regulatory sanctions and financial crime round-up, September 2010
There was a slight lull in the level of enforcement activity at the FSA and courts during the month of August - albeit July was a busy month. Given trends over the past few years, and the FSA’s application of its “credible deterrence” mantra, enforcement activity will no doubt pick up again over the Autumn months.
Our round-up of some of the more relevant cases from the past two months features sanctions against approved persons that were found to be not fit and proper, a fine for RBS group companies over anti-money laundering systems and controls failing, a fine for Société Générale over transaction reporting failures and three market abuse cases.
- Fitness and propriety: Simply Trading Group Limited and Northern Rock PLC
Simply Trading Group Limited (‘STG’) was a private client advisory stockbroker that had three Directors – Messrs Coles, Ryan and Yamoah. The FSA determined that the Directors are not fit and proper persons and have banned them from holding any controlled functions that involve the exercise of significant influence (e.g. Director, Partner, Chief executive, Compliance oversight and Money laundering reporting). But for financial hardship the Directors would have been fined £17,000.
STG’s FSA permissions were also cancelled since the firm no longer satisfied Threshold Condition 3 (Adequate Resources).
The FSA found that the Directors failed to demonstrate the requisite levels of competence and capability in relation to their senior management functions. Brief details are as follows:
- Over-reliance on external compliance consultants
As is commonplace with many smaller firms, STG did not have a dedicated compliance department, and retained a third party firm of compliance consultants. However, amongst other things, STG had limited interaction with the consultant (contrary to the service agreement between the two parties) and failed to determine the adequacy of the advice received from the consultant. This led to a failure to realise that STG had breached regulatory requirements and standards.
- Failure to ensure compliance with regulatory requirements and standards
The Directors failed to establish adequate systems and controls over STG. In particular, they:
- Failed to ensure the suitability of staff employed by STG;
- Did not abide by formal recruitment processes when employing staff;
- Failed to ensure that STG retained adequate accounting records, such that STG was unable to determine whether it had adequate financial resources;
- Failed to ensure that the financial resources requirement was met, and
- Failed to consider whether STG was required to hold additional capital as a result of a change of circumstances.
- Inadequate monitoring of appointed representatives
STG also acted as principal to two appointed representatives (‘ARs’) and thus retained regulatory responsibility over the ARs. The ARs specialised in telephone sales of higher risk listed securities to retail clients. The Directors:
- Did not carry out adequate pre-appointment checks to ensure the fitness and propriety of the ARs;
- Failed to ensure that the ARs Directors were registered for the requisite Controlled Function;
- Did not take reasonable steps to ensure the ARs remained suitable after their appointments;
- Failed to ensure the ARs complied with relevant regulatory requirements and standards, and
- Failed to perform monthly compliance reviews of the ARs, as detailed in STG’s compliance procedures.
This sanction provides further evidence of the need for senior management to understand and appreciate their compliance responsibilities. Furthermore, senior management should ensure that its stated policies and procedures are being implemented in practice.
The sanction also acts as a reminder that responsibility for compliance arrangements and compliance oversight always vest with senior management within an FSA regulated firm. These responsibilities can never be delegated to a third party, such as a firm of compliance consultants.
In a separate case, there was a fine of £320,000 meted to a wealthier individual - David Jones, former finance director of Northern Rock PLC. He was also prohibited from performing any function in relation to any regulated activity.
Jones allowed false mortgage arrears figures to appear in the explanatory text published with the 2006 annual accounts and subsequently continued misreporting data both internally and externally to the Council of Mortgage Lenders for nearly a year.
Further to the STG case, this further demonstrates that individuals registered as approved persons must take their individual responsibilities seriously.
- AML systems and controls: Royal Bank of Scotland
On 2nd August 2010, the FSA fined member firms within the Royal Bank of Scotland Group (RBSG) £5.6 million for failing to have adequate systems and controls in place to prevent breaches of UK financial sanctions. RBSG settled at an early stage of the FSA’s investigation and therefore qualify for a 30% discount; otherwise the fine would have been £8 million.
UK firms are prohibited from providing financial services to persons on the HM Treasury sanctions list. The Money Laundering Regulations 2007 require that firms maintain appropriate policies and procedures in order to prevent funds or financial services being made available to those on the sanctions list.
During 2007, RBSG processed the largest volume of foreign payments of any UK financial institution - £16.2 trillion in inward and outward EURO payments alone. However, between 15 December 2007 and 31 December 2008, RBS Plc, NatWest, Ulster Bank and Coutts and Co, which are all members of RBSG, failed to establish and maintain appropriate and risk-sensitive policies and procedures relating to:
- Customer due diligence measures and ongoing monitoring;
- Internal control, and
- The monitoring and management of compliance with, and the internal communication of, such policies and procedures.
This resulted in an unacceptable risk that RBSG could have facilitated transactions involving sanctions targets, including terrorist financing.
The FSA considers that RBSG’s failings in relation to its screening procedures were particularly serious because of the risk they posed to the integrity of the UK financial services sector. This is the biggest fine imposed by the FSA to date in pursuit of its financial crime objective. It is also the first fine imposed by the FSA under the Money Laundering Regulations 2007.
Firms should ensure that their financial crime procedures include checking against the sanctions list maintained by HM Treasury at http://www.hm-treasury.gov.uk/financialsanctions.
- Transactions reporting: Société Générale
On 25th August 2010, the FSA fined the London branch of Société Générale for failing to provide accurate transaction reports to the FSA.
Between November 2007 and February 2010, the firm either failed to report, or inaccurately reported, approximately 80% of its reportable transactions. This is the sixth fine in just over 12 months that the FSA has imposed a fine for transaction reporting failings.
The FSA commented that it will continue to monitor the quality of firm reporting and firms and their management must ensure that they submit quality transaction reporting date. Furthermore, reporting firms are encouraged to review the integrity of the data on a regular basis.
Note that there has been an update on the transaction reporting requirements for investment managers that is covered in a separate article in this newsletter.
- Market abuse cases
The three market abuse cases below highlight several issues, including demonstrating that individuals as well as firms can be sanctioned, the standard of care expected of industry and market professionals in relation to market abuse and that individuals can be sanctioned even where they do not personally gain from committing the abuse.
Photo-me
On 21st June 2010, the FSA fined Photo-me £500,000 for a delay in disclosing inside information.
During the last quarter of 2006 the company made a series of announcements to the market concerning its expectations of higher sales. It became apparent that these sales would not materialise, however the company delayed making an announcement to the market for 44 days. A false market thus developed, evidenced by a 24% drop in the company’ share price when the announcement was actually made.
Henry Cameron
The FSA announced on 6 July 2010 that it had fined Henry Cameron £350,000 for making misleading announcements to the market regarding payments from Sibir, an AIM listed energy company of which Cameron was CEO, to its major shareholder. Cameron settled early with the FSA and received at 30% discount; otherwise the fine would have been £500,000.
Two separate market announcements were made by Sibir in December 2008 and February 2009. Both of these stated that Sibir had paid $115.4 million when in fact the amount was more than $300 million. It was also stated that these payments were advances to purchase real estate when no such agreements were in place – they were effectively unsecured loans.
Cameron’s actions gave a misleading impression as to the nature and value of Sibir’s assets and the risks the company faced; thus creating a false market.
As Sibir’s CEO, Cameron was directly responsible for this market abuse, and should have reasonably known that his conduct amounted to market abuse.
Jeremy and Jeffrey Burley
On 19th July 2010, the FSA announced that it had fined Jeremy Burley £144,200 and his father, Jeffery Burley, £35,000.
Jeremy Burley was managing director of BMS Minerals, a Ugandan company providing vehicles and equipment to oil and gas exploration companies in Uganda, including Tower Resources. Jeffrey Burley operated and managed a share trading account in the UK which he used to trade shares on behalf of his son.
Through his employment with BMS Minerals, around 11 June 2009 Jeremy Burley acquired inside information in relation to problems with Tower Resources’ first oil well in Uganda. Before Tower Resources announced this negative news on 15 June 2009, Jeremy Burley instructed his father to sell his entire holding of 790,000 shares in Tower Resources, thus avoiding a loss of £21,700.
In both cases the FSA did not seek criminal action. In Jeffery Burley’s case, the FSA considered his age, previous good character, state of health and the fact that he did not benefit personally from the misconduct. In Jeremy Burley’s case, the FSA noted that he did not gain the information by abusing a position of trust; however the size of his fine reflected his lack of co-operation with the regulator during the course of the investigation.
Post Script
The UK Government is considering whether to transfer the FSA’s responsibility for prosecuting criminal market abuse and other criminal law breaches to a new Economic Crime Agency; albeit such changes would not take place until 2012. In the meantime, these responsibilities will remain firmly with the FSA who will no doubt be keen to ensure that its lasting legacy will be that of a regulator that took a credible and effective stance against wrongdoing and poor standards of conduct.
