Andrew Procter, FSA Director of Enforcement, said: "The FSA requires firms to maintain records of customer identification because these records are vital to the investigation, detection and prevention of financial crime. The records can help law enforcement agencies by identifying individuals involved in money laundering and linking them with criminal funds passing through the UK financial system.
"The failure by Bank of Scotland to keep proper records of customer identification could have seriously undermined its ability to comply with the requirements of orders served by law enforcement agencies under the Proceeds of Crime Act.
"The size of the fine demonstrates that failure by firms to put in place and maintain effective systems and controls will be dealt with severely by the FSA. I note, however, that Bank of Scotland has taken prompt and effective remedial action to resolve this problem."
The FSA's investigation confirmed weaknesses in BoS' record keeping systems and controls across its retail, corporate and business banking divisions. In over half of the sample of accounts tested in late 2002, BoS had failed to retain either a copy of the customer identification evidence or a record of where this evidence could be obtained. These failings were made worse by BoS' inability to determine the areas in which the breakdown in its record keeping systems had occurred.
After the failings were discovered, BoS promptly and effectively implemented a robust remedial action plan across the whole of the HBOS Group. This action has caused compliance rates to improve significantly from January 2003 and the FSA is satisfied that the bank has dealt with the issue appropriately.
The failings occurred despite increased regulatory emphasis on the importance of effective anti- money laundering controls since the introduction of the FSA's Money Laundering Rules.
Background
- The FSA has concluded that BoS had contravened Rule 2.1.1. of the FSA's Money Laundering Rules. Rule 2.1.1. provides that:
A relevant firm must set up and operate arrangements, including the appointment of a money laundering reporting officer (MLRO) in accordance with the duty in ML7, which are designed to ensure that it, and any appointed representatives that act on its behalf, are able to comply, with the rules in this source book.
- The FSA also concluded that BoS had contravened Rule 7.3.2. of the FSA's Money Laundering Rules. Rule 7.3.2 provides that:
- (1) A relevant firm must make and retain, for the periods specified in (2), the following records:
(a) in relation to evidence of identity:
(i ) a copy of the evidence of identity obtained under ML3; or
(ii) a record of where a copy of the evidence of identity can be obtained; or
(iii) when it is not reasonably practicable to comply with (i) or (ii), a record of how the details of the evidence can be obtained; and when it has concluded it should treat a client as financial excluded (ML3.1.5G to ML3.1.7G financial exclusion), a record of the reasons for doing so;
(2) The specified periods are:
(a) in relation to evidence of identity, five years from the end of the relevant firm's relationship with the client.
- Documents that can be used to verify a customer's identity - that is, his or her name and address - are set out in the Joint Money Laundering Steering Group Guidance Notes and include a valid passport, a driving licence and a recent utility bill. For businesses, evidence of the identities of the principal beneficial owners/controllers should generally be obtained as should evidence of the trading address of the business.
- Enforcing breaches of the Money Laundering Rules is only one aspect of the FSA's work in reducing the extent to which regulated firms can be used for the purpose of money laundering and terrorist financing. The FSA also works with the financial services industry to develop anti-money laundering initiatives, share best industry practice and provide training. Recent FSA projects include:
- Publishing the results of an FSA review of current practices across a number of banks and building societies in the retail banking sector (further details at http://www.fsa.gov.uk/pubs/other/ml_domestic_banking.pdf)
- Publishing Discussion Paper 22 in August 2003 on KYC and anti-money laundering monitoring.
- Issuing with the Treasury & NCIS joint public information materials on the reasons for identification.
- Further information about the FSA's anti-money laundering work can be found on the FSA website at http://www.fsa.gov.uk/what/ml_terrorist.html
- Bank of Scotland's registered office is The Mound, Edinburgh EH1 1YZ. More information on Bank of Scotland can be found on its website at the following address: http://www.hbosplc.com
- Copies of the Final Notice in this case are available on the FSA website at http://www.fsa.gov.uk/pubs/final/bos_12jan04.pdf.
- The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection of consumers; and fighting financial crime.
- The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.
