UK's FSA reveals investigation into investment banks

Tracey McDermott

The UK Financial Services Authority (FSA) revealed on 22nd June that it was launching an investigation into the way banks do business. The FSA will be specifically looking at whether the investment banks have taken steps to protect against the risk of bribery and corruption, especially with the UK Bribery Act due to come into effect on 1st July, 2011.

The investigation was announced at a financial crime conference in London by the acting head of enforcement for the FSA, Tracey McDermott.

The Financial Conduct Authority (FCA), one of the three agencies that will take on the FSA's duties when it is broken up, will take on the task of investigating what McDermott called “the use of firms as a conduit for financial crime.”

It will work on “keeping crooks out of finance, encouraging industry to strengthen its defenses, and educating and warning consumers about the dangers they may face,” McDermott said in her speech.

The FSA published a separate review on 22nd June on how banks manage money-laundering risks, and were generally critical of banks' efforts.

The review said lenders “appeared unwilling to turn away, or exit, very profitable business relationships” where “there appeared to be an unacceptable risk of handling the proceeds of crime”, according to Bloomberg.

The review said that seventy-five per cent of the 27 banks whose money-laundering controls were examined did not adequatedly establish the source of their customers' wealth. About a third dismissed “serious allegations” against some of their customers without adequately reviewing them.

The FSA expressed “serious concerns” about the review's finding and two banks, which were not named, were referred to the FSA's enforcement division for “apparent serious weaknesses” in their risk management.

It seems likely that the FSA's review of investment banks will find similar results. According to Adam Greaves of McGuireWoods LLP, banks have been cutting costs since the crisis of 2008, and many do not see the point in spending large sums of money on anticorruption compliance.

Indeed, the fact that the UK's Serious Fraud Office has never prosecuted an investment bank for overseas corruption is part of the problem: banks have been able to get away with complacency.

Other analysts have a more positive perspective. Jeremy Cole, a bribery, corruption and fraud partner at Hogan Lovells said all banks with branches in the UK will be aware of the new legislation and their obligations.

“If there are concerns, it will be in relation to overseas financial institutions headquartered outside the UK who might not be aware they are caught by the Bribery Act,” he told Bloomberg.

Sources: Bloomberg, FSA.gov.uk, McGuireWoods LLP (Lexology)

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