Select Committee on International Development Minutes of Evidence

Memorandum submitted by the Financial Services Authority (FSA)


  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.


  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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