Are Large Fines for Banks’ Wrongdoings Really Effective?

Syedur Rahman

Syedur Rahman

The Financial Conduct Authority (FCA) has recently fined Standard Chartered Bank (Standard Chartered) the sum of £102,163,200 for Anti-Money Laundering (AML) breaches in two higher risk areas of its business. This is the second largest financial penalty ever imposed by the FCA for AML controls failings. However, are such large financial penalties for wrongdoing merely being viewed by the banks as a slap on the wrist and nothing more than the cost of doing business? Here, Syedur Rahman questions the effectiveness of fines and the likelihood of criminal prosecutions in the future.

The announcement of the fine, which was made on Tuesday 9 April, follows on from the FCA’s investigations into Standard Chartered’s UK Wholesale Bank Correspondent Banking business and also its branches in the United Arab Emirates (UAE). According to a statement on its website, the FCA found “serious and sustained shortcomings” in Standard Chartered’s AML controls relating to customer due diligence and ongoing monitoring. Again according to the FCA, Standard Chartered “failed to establish and maintain risk-sensitive policies and procedures” and “failed to ensure that its UAE branches applied UK equivalent AML and counter-terrorist financing controls”.

Under the Money Laundering Regulations 2007 (MLRs), Standard Chartered was required to establish and maintain appropriate and risk-sensitive policies and procedures to reduce the risk that the bank may be used to launder the proceeds of crime, evade financial sanctions or finance terrorism.

Furthermore, the MLRs also imposed a duty on Standard Chartered to require its global (non-EEA) branches and subsidiaries to apply policies and procedures in relation to due diligence and ongoing monitoring equivalent to those required of Standard Chartered here in the UK.

“Significant shortcomings”

The FCA found “significant shortcomings” in Standard Chartered’s own internal assessments of the adequacy of its AML controls, its approach towards identifying and mitigating material money laundering risks and its escalation of money laundering risks. The statement on the FCA’s website reads: “These failings exposed Standard Chartered to the risk of breaching sanctions and increased the risk of Standard Chartered receiving and/or laundering the proceeds of crime.”

Examples include the following:

*opening an account with three million UAE Dirham in cash in a suitcase (just over £500,000) with little evidence that the origin of the funds had been investigated

*failing to collect sufficient information on a customer exporting a commercial product which could, potentially, have a military application (this product was in fact exported to over 75 countries, including two jurisdictions where armed conflict was already taking place or was otherwise likely to be taking place)

*not reviewing due diligence on a customer despite repeated ‘red flags’ such as a blocked transaction from another bank indicating a link to a sanctioned entity

For the purposes of clarity, Standard Chartered’s failings occurred in its UK Wholesale Bank Correspondent Banking business during the period running from November 2010 through to July 2013 and in its UAE branches during the period from November 2009 through to December 2014.

The statement issued on the FCA’s website points out that the US authorities have also taken action against the Standard Chartered Group for “significant violations” of US sanctions laws and regulations.

Narrow, slow and reactive

Commenting on the matter, Mark Steward (director of enforcement and market oversight at the FCA) has observed: “Standard Chartered’s oversight of its financial crime controls was narrow, slow and reactive. These breaches are especially serious because they occurred against a backdrop of heightened awareness within the broader global community, as well as within the bank, and after receiving specific attention from the FCA, US agencies and other global bodies about these risks.”

Steward continued: “Standard Chartered is working to improve its AML controls in order to ensure that all issues are fully addressed on a global basis. The FCA has taken into account Standard Chartered’s remediation work and its co-operation in assisting the FCA’s investigation, without which the financial penalty would have been even higher.”

The FCA worked alongside a number of authorities during its investigation process, among them the US Department of Justice, the New York County District Attorney’s Office, the US Board of Governors of the Federal Reserve, the New York State Department of Financial Services and the US Office of Foreign Assets Control.

Standard Chartered didn’t dispute the FCA’s findings and, under the FCA’s partly contested case process, exercised its right to ask the FCA’s Regulatory Decisions Committee to assess the appropriate level of sanction.

Standard Chartered’s agreement to accept the FCA’s findings meant that the bank qualified for a 30% discount. Otherwise, the FCA would have imposed a financial penalty of £145,947,500.

Cost of doing business

Behind all of the big numbers and the column inches it’s hard not to wonder if such a hefty slap on the wrists is viewed by the big banks as nothing more than the cost of doing big business. Standard Chartered is paying $947 million to American agencies over allegations that it violated sanctions against six countries on top of its fine in the UK for AML breaches (including shortcomings in its counter-terrorism finance controls in the Middle East).

These fines had been expected. Standard Chartered said two months before they were imposed that it had set aside $900 million to cover them.

This isn’t the first time that Standard Chartered has had to pay out for wrongdoing. Seven years ago, the bank paid a $667 million fine in the US. Like its latest US penalty, that one related to alleged sanctions breaches. At the time, the bank also entered into a deferred prosecution agreement (DPA) with the US Department of Justice and the New York County District Attorney’s Office over alleged Iranian sanctions breaches beyond 2007. That DPA would have expired by now, but has been extended until April 2021 in the wake of the latest allegations.

An end to the problems?

Will this be the end of Standard Chartered’s problems and the start of a new allegation-free era? Only time will tell.

At this juncture, it’s fair to point out that Standard Chartered isn’t the only bank to be hit by huge fines for wrongdoing and then be found to be repeating its illegal behaviour. That’s precisely why it’s hard to believe that fines are having any real impact on the way in which some of the biggest banks function. If they’re prepared to keep on paying the fines and/or giving assurances about sticking to the Terms and Conditions of a DPA while reaping the benefits of breaking the law then it’s hard to see the cycle of behaviour changing.

Let’s be clear. Any failure by Standard Chartered to abide by the terms of its DPA could see it facing criminal prosecution. Any bank’s demonstrated weak approach to money laundering is now increasingly likely to be pounced upon by the authorities. As stated, the Standard Chartered investigation was a co-ordinated and multi-jurisdictional effort by the FCA, the US agencies and the UAE. While Standard Chartered’s full co-operation with the FCA saw it receive the aforementioned 30% discount on its fine, relying on co-operation to gain a lesser punishment cannot be viewed as a safe approach going forward.

More legal powers

The authorities around the world that investigate the activities of banks and other financial institutions are now more co-ordinated than ever. They have more legal powers than at any time in days gone by and are unlikely to be reluctant to use them against those in the financial marketplace that come to be seen as repeat offenders.

There’s no clear indication or evidence that the era of big fines may be about to pass or that the authorities are set to view convictions as a more effective deterrent to financial crime than hefty financial penalties. There may also be difficulties when it comes to corporate liability which, in the UK, requires proof that those involved in the alleged wrongdoing are sufficiently senior to be considered as the ‘controlling mind and will’ of the company.

All that said, if fines continue to be ineffective in curbing the behaviour of certain banks then it can only be a matter of time before the authorities determinedly rethink their approach towards enforcement.

Syedur Rahman is Senior Associate Solicitor at Rahman Ravelli

About the Author
Brian Sims BA (Hons) Hon FSyI, Editor, Risk UK (Pro-Activ Publications) Beginning his career in professional journalism at The Builder Group in March 1992, Brian was appointed Editor of Security Management Today in November 2000 having spent eight years in engineering journalism across two titles: Building Services Journal and Light & Lighting. In 2005, Brian received the BSIA Chairman’s Award for Promoting The Security Industry and, a year later, the Skills for Security Special Award for an Outstanding Contribution to the Security Business Sector. In 2008, Brian was The Security Institute’s nomination for the Association of Security Consultants’ highly prestigious Imbert Prize and, in 2013, was a nominated finalist for the Institute's George van Schalkwyk Award. An Honorary Fellow of The Security Institute, Brian serves as a Judge for the BSIA’s Security Personnel of the Year Awards and the Securitas Good Customer Award. Between 2008 and 2014, Brian pioneered the use of digital media across the security sector, including webinars and Audio Shows. Brian’s actively involved in 50-plus security groups on LinkedIn and hosts the popular Risk UK Twitter site. Brian is a frequent speaker on the conference circuit. He has organised and chaired conference programmes for both IFSEC International and ASIS International and has been published in the national media. Brian was appointed Editor of Risk UK at Pro-Activ Publications in July 2014 and as Editor of The Paper (Pro-Activ Publications' dedicated business newspaper for security professionals) in September 2015. Brian was appointed Editor of Risk Xtra at Pro-Activ Publications in May 2018.

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