FCA Announces Second-Largest Fine for Financial Crime Failings
On 21 October 2021, the UK Financial Conduct Authority (“FCA”) announced that it had fined Credit Suisse (the “Bank”) £147,190,200 for “serious financial crime due diligence failings” in connection with loans that the Bank had helped to arrange for the Republic of Mozambique in the period 2012 to 2016 (the “FCA Fine”). The loans are said to have been “tainted by corruption”. The FCA Fine forms part of a multi-jurisdictional settlement involving the U.S. Department of Justice and U.S. Securities and Exchange Commission, and the Swiss Financial Market Supervisory Authority.
The FCA Fine relates to the long-running “tuna bonds” case, which has embroiled the Bank and other parties in multiple sets of criminal, regulatory and civil proceedings. In the period 2012 to 2016, the Bank’s Emerging Markets business helped to arrange approximately US$1.3 billion in loans and bond issuances to enable the Republic of Mozambique, acting through two state-owned entities, to fund coastal surveillance and tuna fishing projects. It later emerged that bribes totalling approximately US$53 million had been paid to three employees of the Bank in connection with the loans and that a significant proportion of the loan monies were misappropriated, and used to pay bribes and purchase military equipment.
Breaches of Principles 3 and 2 of the FCA’s Principles for Businesses
The FCA found that the Bank had breached Principle 3 of the FCA’s Principles for Businesses, which requires firms to take reasonable care to organise and control their affairs responsibly and effectively, with adequate risk management systems; and the financial crime-related systems and controls obligations set out under the FCA’s Senior Management Arrangements, Systems and Controls (SYSC) 6.1.1R. The Bank had also breached Principle 2, which requires firms to conduct their business with due skill, care and diligence.
Two key themes of the FCA’s findings are:
1.A failure on the part of relevant control functions within the Bank (including the financial crime and reputational risk functions) to step back and holistically consider the multiple risk factors presented to them. Whilst the transactions involved were considered relatively extensively by the relevant internal functions, “insufficient weight” was given to the risk factors. Such factors included, among other things, the involvement of a third party whom external due diligence reports had shown had been subject to criminal allegations (albeit dropped by the time of the loans) and whom sources had described as a “master of…kickbacks”, and a lack of transparency and public scrutiny around the loans; and
2. A lack of effective challenge and scrutiny by the relevant functions and the Bank’s European Investment Banking Committee. Importantly, the FCA found that the Bank “had sufficient information from which it should have appreciated that the transactions were associated with a high risk of bribery and corruption”.
One aggravating factor appears to have been the continuation of those failings not only at the time that internal approval was sought for the loans, but also once serious allegations and concerns began to be reported publicly. The FCA found that the Bank had failed to adequately scrutinise or react to press reports, a report by the International Monetary Fund about the alleged misappropriation of funds and reports about the potential use of funds from one of the loans to enrich senior individuals in the Mozambican government.
The FCA also highlighted the Bank’s failure to report to the “relevant authorities” before proceeding with a final transaction in 2016, at a time when it had sufficient information “to ground a reasonable suspicion that [an earlier loan] may have been tainted, either by corruption or other financial crime”.
MoFo Comment
The announcement of the FCA Fine follows a continued focus on the importance of effective financial crime controls by the FCA in 2021 (see, for example, the Final Notice issued to Sapien Capital Ltd; the FCA’s first prosecution under the Money Laundering Regulations; and the speech given by Mark Steward on April 2021). We expect to continue to see more enforcement of this kind, both under the FCA’s Principles and, in some cases, the Money Laundering Regulations.
Effectiveness of financial crime systems and controls
The FCA Fine underscores the need for firms to ensure that existing financial crime-related systems and controls (including in relation to bribery and corruption risks) are effective across their businesses, including unregulated areas of the businesses such as corporate lending. As firms will already be aware, policies and procedures are just one element of the necessary controls. Firms will need to ensure that those policies and procedures are clearly embedded across the organisation and understood by their employees, and to test that they operate effectively. It will continue to be important for firms to ensure that the relevant control functions are adequately resourced to be able to investigate issues sufficiently, and for senior management to foster a culture where challenge and scrutiny are expected and encouraged (including in the context of investment committee sign-offs).
The continued relevance of bribery and corruption risks
The FCA Fine also makes it clear that bribery and corruption remain key financial crime issues that must form part of firms’ financial crime risk assessments. It is clear that the FCA expects firms to take a holistic view of relevant risk factors, and to take active steps to investigate concerns where appropriate. Where firms decide to proceed with a transaction or matter notwithstanding such risk factors, they will need to ensure that they have a clear record as to how they got comfortable with the risks involved. It will be important to be able to point to clear, objective evidence in support of the position taken and to monitor any new evidence that comes to light which may require the firm to reconsider the position.
Where in doubt, firms should consider obtaining external legal advice. They must also be mindful of their reporting obligations both to the FCA (in particular, pursuant to SUP 15.3) and under the Proceeds of Crime Act 2002. Firms should note, however, that such reports will be of limited assistance should they consider that they are at risk of committing offences other than the substantive money laundering offences under sections 327 to 329 of the Proceeds of Crime Act 2002, such as those under the Bribery Act 2010.
By Morrison & Foerster and Sam Jeffreys, London Trainee Solicitor, October 27, 2021
https://www.mofo.com/resources/insights/211027-fca-announces-second-largest-fine.html