In Focus Risk
Foreseeability was also a feature of our
Carphone Warehouse case because the incidence of complaints and cancellations after the ‘Geek Squad’ policy was sold should have alerted the firm to the potential that the policy was being mis-sold. While this type of warning is perhaps not as explicit as the warning in the Tesco Bank case, they were clear red flags, making mis-selling a predictable and likely cause. In December 2018, we fined Santander
£32.8m for failing to effectively process the accounts and investments of deceased clients. Santander failed to transfer funds totalling over £183m to beneficiaries when it should have done. In total, 40,428 deceased clients were directly affected. In some cases, funds were held for many years depriving beneficiaries of their use for lengthy periods. The case highlighted what occurs when a firm has inadequate escalation processes and inadequate horizon scanning by senior management. Again, senior management reacted well to the problem once they had actual knowledge of it. But they should have been alerted to it or they should have found out about it much sooner. And finally, we fined UBS £27.6m for
transaction-report failings that occurred over a nine-year period and we fined Goldman Sachs just over £34m for similar failings over a 10-year period. Transaction reporting concerns lifeblood questions for these firms: do you know who are you transacting with, for whom, in what markets, in what volumes and at what prices? What does it mean if you cannot answer those questions accurately? These cases demonstrate, yet again, that transaction reporting is not just about the fight against market abuse: it is also about whether firms are able to regulate, supervise, and understand their own activities properly. These problems should never have persisted for such long periods of time. Firms should implement regular, six-monthly reconciliations to detect reporting issues and to prevent breaches becoming endemic. These cases highlight three issues:
l Firstly, firms will be held accountable for foreseeable harm, and what happened in both Tesco and in Carphone Warehouse was or should have been foreseeable. l Secondly, reasonable systems and controls do not work well all by themselves: they need to be accompanied by strong escalation
June 2019
protocols. In each case, senior management was either invisible or lacking influence as there had been little or no escalation or management data was not sufficient to alert senior management that problems had not only arisen, they were persisting without solution. Conceptually, this observation could be used to build a useful metric of management capability: how long does it take for a problem to be detected and then to be escalated to the person who is sufficiently authorised and resourced to fix it properly? Hours, days, weeks, months, or years? l Finally, the cases raise the related question of whether poor escalation protocols and inadequate lines of sight into the heart of the business are consistent with the senior management obligation to take ‘reasonable steps’ to prevent a breach. While these cases involve conduct that pre-dates the senior managers’ regime, these cases signal that in any assessment of ‘reasonable steps’, escalation and senior management sight lines over problems that are not being solved effectively will be an issue.
Current pipeline We have a large number of investigations on foot, some of them entering important phases, tackling some very serious issues, including suspected financial crime in our markets, suspected false or misleading statements by listed issuers, and suspected significant AML system and control issues under the Money Laundering Regulations (MLR). I have been asked to say something about
the money-laundering investigations given we are now conducting ‘dual track’ AML investigations, that is to say, investigations into suspected breaches of the MLR that might give rise to either criminal or civil proceedings. I do not think there should be anything controversial here. It would be
inconsistent with the investigative mindset to narrow the scope of potential outcomes provided for by the law before you have made any inquiries or been able to assess the nature of the matter under investigation. Moreover, this practice brings AML investigations into line with the FCA’s practice in market abuse investigations which have been conducted on a ‘dual track’ basis for many years as well. More importantly, I think it is time we gave
effect to the full intention of the MLR which provides for criminal prosecutions. In making poor AML systems and controls potentially a criminal offence, the MLRs are signalling, in egregious circumstances, MLR failures let down the whole community and in this sense, they may constitute: “a breach and violation of public rights and duties which affect the whole community, considered as a community; and are distinguished by the harsher appellation of crimes and misdemeanours”. (Commentaries on the Laws of England (1765-69), William Blackstone.) This does not mean every investigation
Senior management reacted well to the problem once they had actual knowledge of it. But they should have been alerted to it or they should have found out about it much sooner
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where we think there is a case to answer will or should be prosecuted in this way. I suspect criminal prosecutions, as opposed to civil or regulatory action, will be exceptional. However, we need to enliven the jurisdiction if we want to ensure it is not a white elephant and that is what we intend to do where we find strong evidence of egregiously poor systems and controls and what looks like actual money-laundering. CCR
Edited from a speech given at the Global Investigations Review Live event, London
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