The Financial Conduct Authority (FCA) has issued a Final Notice against ADM Investor Services International Limited (ADMISI) and fined the firm £6,470,600 for financial crime control failings relating to inadequate anti-money laundering (AML) systems and controls. ADMISI agreed to resolve all issues of fact and liability and therefore qualified for a 30% settlement discount. Were it not for this discount, the Authority would have imposed a financial penalty of £9,243,738 on ADMISI.
Factual Background
ADMISI is an investment brokerage firm providing derivative trading services across a wide range of sectors including energy, base metals, foreign exchange and cocoa. ADMISI's extensive market coverage meant that its client base included a number of high risk customers, including Politically Exposed Persons (PEPs).
In February and March of 2014, the FCA conducted a periodic assessment of ADMISI's AML systems and controls, focusing on client on-boarding and compliance monitoring. Following the assessment, the FCA notified ADMISI that it identified weaknesses in its risk management processes, including a degree of informality when classifying clients and an ineffective defence model. Consequently, ADMISI were required to complete a Risk Mitigation Programme which required the firm to implement:
- a formalised AML client risk-rating procedure within client on-boarding to drive intensity of AML checks and frequency of reviews, including maintaining a country risk list;
- a compliance monitoring plan; and
- a risk management framework identifying the firm's risk appetite including, policies and procedures to manage identified risks, a mechanism to review those policies and procedures and set the parameters for management information in relation to risk management.
In 2016 the FCA returned to re-assess the adequacy of ADMISI's AML systems and controls. The FCA found significant failings and questioned the quality of the corrective work undertaken by ADMISI following the 2014 assessment. The FCA concluded that whilst ADMISI had introduced an AML client risk assessment following the 2014 assessment, it was inadequate in design and implementation. The FCA also found little evidence of on-going compliance monitoring. Moreover, the FCA identified new and more systemic failings in its 2016 re-assessment, such as the absence of a firm wide money laundering risk assessment and outdated polices referring to repealed legislation. In the FCA's view, these inadequacies exposed ADMISI to a high money laundering risk.
As a result, the FCA required ADMISI to revise its deficient client risk management within one month and asked it to enter into a voluntary requirement (VREQ) prohibiting ADMISI from conducting business with new or existing customers who were: (i) resident, domiciled or incorporated in one of the 97 countries on ADMISI’s High-Risk Country List; (ii) PEPs; or assessed as “high risk” in accordance with ADMISI’s revised client risk assessment matrix.
The FCA also launched an enforcement investigation which has ultimately led to ADMISI being found to have breached FCA Principle 3 (management and control) by failing to comply with applicable regulatory and legal AML requirements, principally those contained in the Money Laundering Regulations.
Comment
The FCA's approach of seeking to prevent ADMISI from conducting business with new or existing high risk customers, until such time as the FCA was satisfied the firm was compliant, is an approach that we have seen the FCA take with other firms across all regulated sectors, including mainstream retail firms. Whether or not the FCA is minded to modify its approach, in light of recent complaints by some domestic PEPs of being refused access to financial services, remains to be seen.
The FCA identified clear failings on the part of ADMISI, and it is not surprising that the firm agreed to settle on the basis that it did not challenge the FCA's finding of facts and the firm's liability. However, the firm did take advantage of the focused resolution procedure which permits it to challenge the level of penalty before the FCA's Regulatory Decision's Committee (RDC) whilst still being entitled to the full 30% settlement discount. In the event, ADMISI was clearly right to do so because it was successful in persuading the RDC to reduce the penalty by half.
The firm's challenge to penalty was on multiple grounds, including an argument that a substantial proportion of its revenue should be excluded from the calculation of penalty on the basis that it comprised exchange and clearing fees which it was required to pass on to third parties. Whilst the RDC rejected this and other arguments on the basis that the FCA's formulaic approach should generally be followed, it nevertheless chose to impose a proportionality override permitted under the FCA penalty regime and decided that "having regard to all relevant factors in this matter and taking into account previous cases", the penalty should be reduced by 50%.
Also of note, is the time the FCA took to achieve an outcome in this matter, notwithstanding the clear nature of the breaches and the admissions made by the firm. ADMISI sought to rely on this delay as a mitigating factor, pointing out that the uncertainty of outcome and penalty was hanging over the firm for over six years. ADMISI was also required (and did) fully cooperate with the investigation for over six years. Whilst the RDC acknowledged the length of time that had passed, it did not consider that detracted from the failings or amounted to a mitigating factor. Seasoned regulatory lawyers will be amused to note the RDC's comment that ADMISI could pursue its concerns by referring the matter to the FCA's complaints scheme.