Memorandum submitted by the Financial
Services Authority (FSA)
INTRODUCTION
1. This Financial Services Authority ("FSA")
paper:
— explains the role of the FSA;
— outlines the criminal law regime
in relation to corruption and money laundering ("ML"),
and explains how the FSA currently fits into that regime;
— describes the FSA's current work
in assessing banks' anti-ML compliance;
— outlines the FSA's new powers under
the Financial Services and Markets Act 2000; and
— describes FSA co-operation with other
agencies, both on the domestic and international fronts.
THE ROLE
OF THE
FSA
2. The FSA is a body established to exercise
statutory powers in the UK in relation to the regulation of financial
services and markets. It currently works under a variety of predecessor
laws: a new Financial Services and Markets Act 2000 was enacted
earlier this year, but is not yet in force. Under those predecessor
laws, the FSA has regulatory responsibilities in respect of some
10,000 financial services firms in total. However, the FSA considers
that the banking sector, and its role in relation to that sector,
is the one of most interest to the Committee. Furthermore, the
role of banks as potential facilitators of ML around the world
has been a particular concern to governments and regulatory authorities
for some years. In describing current FSA work, this paper therefore
focuses mainly on supervision of banks. As banking supervisor,
the FSA is currently working under powers contained in the Banking
Act 1987.
3. The role of banking supervisor is common
to all the developed financial systems in the world. Accordingly,
there is a strong practice of policy co-ordination between different
national supervisors, the main forum for this being the Basel
Committee on Banking Supervision, established in 1975. In 1997,
this Committee published the Core Principles for Effective Banking
Supervision. These Principles underpin the standards of banking
supervision around the world. They comprise 25 basic principles
that need to be in place for a supervisory system to be effective.
The report states that the task of supervision is to ensure that
banks operate in a safe and sound manner and that they hold capital
and reserves sufficient to support the risks that arise in their
business. Core Principle 15 states:
"Banking Supervisors must determine that
banks have adequate policies, practices and procedures in place,
including strict `know your customer' rules, that promote high
ethical and professional standards in the financial sector and
prevent the bank being used, intentionally or unintentionally,
by criminal elements."
4. The FSA is responsible for supervising
banks in the UK in accordance with the Banking Act 1987. Its supervision
is "risk-based". This means that resources are directed
towards areas of a bank's business identified as higher risk.
5. Schedule 3 to the Banking Act contains
the minimum criteria for authorisation. The FSA's Statement of
Principles (issued in accordance with the Act) sets out the FSA's
interpretation of these criteria and the standards expected of
authorised institutions.
6. The functions of banking supervision
include monitoring the compliance of authorised institutions with
these standards and identifying any threats to the interests of
depositors and potential depositors. Where there are concerns,
the FSA as banking supervisor will inform the institution and
tell it where actions of a particular kind, or a programme of
action, needs to be pursued to address the concerns. The power
presently available to the FSA to secure corrective action by
an institution relates to the restriction—or ultimately
revocation—of the institution's authorisation to carry on
banking business in the UK. (In relation to institutions incorporated
elsewhere in the European Union, who are carrying on UK business
by virtue of an authorisation in the "home state", the
position is broadly the same, but with key powers exercisable
by the home state supervisor, not the FSA.)
7. In order to carry out the functions described
above, the FSA liaises closely with overseas supervisors.
The current criminal law regime on corruption
and ML
8. Certain primary laws (Drug Trafficking,
Prevention of Terrorism and Criminal Justice Acts) create "personal"
ML offences of "assistance", "failure to report"
and "tipping off" in relation to proceeds of criminal
conduct—which includes handling the proceeds of corruption.
The FSA is not the prosecuting authority for these offences.
9. Secondary legislation—the ML Regulations
1993—requires banks and a wide range of other financial
institutions to have systems and controls in place to prevent
ML. In order to assist the financial sector to comply with the
Regulations, the Joint Money Laundering Steering Group (JMLSG),
chaired by the British Bankers Association, publishes up-to-date
Guidance Notes on what is considered good industry practice on,
inter alia, customer identification, record keeping and
training of staff. That guidance has quasi-legal status in that
a UK court may take account of it in determining whether an institution
has complied with the Regulations.
10. The combination of primary and secondary
ML legislation supports a formal structure for institutions to
report their knowledge or suspicion of ML to the National Criminal
Intelligence Service ("NCIS"). NCIS collates such reports
with other intelligence and forwards the information to Police
and other Financial Investigation Units for investigation.
11. The FSA currently has no enforcement
role in relation to banks' compliance with the ML Regulations
1993. Rather, its concern is with the minimum criteria for authorisation
of a bank under Schedule 3 of the Banking Act 1987 and, more specifically,
the requirements of adequate systems and controls and of carrying
on banking business with integrity and skill. In assessing compliance
with the Schedule 3 criteria, the FSA has regard to banks' compliance
with the JMLSG's Guidance Notes.
The FSA's current work in assessing banks' anti-ML
compliance
12. A significant element of current supervisory
work is assessing the risks to which a bank is exposed and the
quality of its systems and controls to counter those risks. Within
that overall assessment, the FSA pays close attention to the bank's
susceptibility to financial crime and ML.
13. The FSA's work on ML includes visits
to banks to assess compliance with the JMLSG's Guidance Notes.
Reporting accountants are also used to report on the banks' controls.
Any weaknesses are communicated to the bank and a remedial plan
for remedying the weaknesses put in place. The FSA has carried
out more than 40 such visits since the beginning of this year.
Approximately 30 of these visits have resulted in significant
follow-up action which may consist of:
— a detailed review by Reporting Accountants
under Section 39 of the Banking Act;
— an agreed remedial programme with
a deadline by which the bank has to rectify the deficiencies in
documentation (the most common response); and/or
— formal or informal restrictions on
the business of a bank until such rectifications have taken place.
14. The FSA has no powers under the Banking
Act 1987 to make these actions public.
New powers for the FSA
15. The existing criminal law provisions
proved difficult to enforce, given that regulators, who were well
placed to discover breaches, had no criminal prosecution role.
Accordingly, the Financial Services and Markets Act 2000 provides
the FSA with a range of powers to pursue its objectives and counter
ML risk. (These powers will apply to other sectors of the financial
services industry regulated by the FSA, not just to banks.) These
powers will be:
— the conventional and general regulatory
powers of authorisation, supervision and enforcement;
— specific new power to make Rules
in respect of prevention and detection of ML in connection with
the carrying on of regulated activities by authorised persons.
(Normal regulatory disciplinary measures will be applied to Rules
breaches); and
— specific new power to prosecute breaches
of the ML Regulations 1993.
16. Earlier this year, the FSA consulted
on its proposed approach when these new powers come into effect.
(The FSA is now considering responses to that consultation and
expects to publish its decisions, on both policy and detailed
Rules, in the near future.)
17. In its consultation, the FSA said that
key elements of its approach would be: that the FSA should be
principally a regulatory authority (ie, not intruding into the
work of the criminal authorities in relation to the investigation
and prosecution of the underlying offences); that the regulatory
focus should remain on systems and controls; and that effectiveness
would best be achieved by close co-operation, both with the criminal
authorities and with the financial services industry.
18. The FSA proposals said that systems
and controls should be such that banks and other financial institutions
should:
— take care when commencing business
with new customers;
— give alert and informed consideration
to the possibility of ML by a customer or prospective customer;
— communicate suspicions of ML to the
criminal authorities;
— ensure senior management oversight,
responsibility and control;
— secure and maintain informed participation
in these systems of all relevant employees of the business; and
— keep records which may prove significant
for subsequent criminal investigations and prosecutions.
19. Thus, the proposed new regulatory requirements
will complement the present regime based on the criminal law.
And the FSA will have important new powers to enforce compliance
with the required standards, in relation to both the criminal
and regulatory regimes. The FSA has published a number of documents
about its proposed use of enforcement powers. These make clear
that, in relation to decisions on whether to proceed with a criminal
prosecution or regulatory enforcement, the FSA will use the principles
set out in the Code for Crown Prosecutors. The two considerations
are:
(a) sufficient evidence to provide a realistic
prospect of conviction; and
(b) whether a prosecution would be in the
public interest.
20. Individual decisions will depend on
the circumstances of each case.
FSA co-operation with other agencies
21. Co-operation with NCIS takes place,
in the form of regular liaison meetings with the Economic Crime
Unit (of NCIS) and via the secondment of a member of FSA staff
to that unit. Work on a formal Memorandum of Understanding between
FSA and NCIS is making good progress. And it is expected that
increasing feedback from NCIS to FSA on suspicious transaction
reporting will help target regulatory resources on identified
deficiencies in particular institutions or within broad sectors
of financial services.
22. With regard to the JMLSG, the Guidance
Notes will retain an important role going forward and the FSA
expects already good co-operation to continue. One important aspect
of the guidance will be to ensure that customer identification
measures respond to technical change and innovation eg, in relation
to Internet delivery of financial services.
23. The FSA also plays a full part in various
international fora:
— the Financial Action Task Force's[1]
40 Recommendations deal explicitly with "know your customer"
provisions, and the FATF will need to evolve a common approach
to "politically exposed persons" as part of its forthcoming
review of the Recommendations;
— in the past nine months, the FATF
has been heavily engaged in a programme to identify jurisdictions
that are considered to be unco-operative in the global fight against
ML. The FSA has participated in this work from the outset;
— the Basel Committee's Working Group
on Cross-Border Banking (on which the FSA sits) has been working
on a paper entitled "Customer due diligence standards for
banks" which, when finalised, will be distributed world-wide
as a minimum standard for supervisors to establish national "know
your customer" policies and for banks to design their own
"know your customer" programmes. This paper addresses
the risks of dealing with politically exposed persons;
— the International Monetary Fund ("IMF")
is engaged in a Financial Sector Assessment Programme, aimed at
judging IMF member countries' performance against international
standards including the Basel Core Principles for Effective Banking
Supervision, which include—in Principle 15—policies
and practices, including strict "know your customer"
rules, to guard against the bank being used for criminal purposes.
FSA staff have already participated in some of these assessments;
and
— the IMF is shortly to start a programme
of assessments of offshore financial centres which will evaluate
those centres' compliance with international regulatory standards,
including those relating to "know your customer" and
other anti-ML procedures. The FSA is participating in this work.
Financial Services Authority (FSA)
November 2000
1 The Financial Action Task Force on Money Laundering
("FATF") is an inter-governmental body whose purpose
is the development and promotion of policies to combat ML. Its
membership currently comprises 29 countries and two international
organisations. Back
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