Barclays fined heavily for due diligence failure

The UK's Financial Conduct Authority (FCA) has fined Barclays Bank GBP72 million for failing to conduct proper due diligence checks on a group of ultra-high-net-worth clients who used the bank to move GBP1.88 billion of funds in 2011 –2012.

The fine is the largest ever imposed by the regulator for financial crime failings. It consists of a GBP19.8 million penalty, plus a 'disgorgement' of GBP52.3 million representing the profit Barclays made from the deal.

The FCA is not alleging that any actual financial crime was committed by either the bank or its clients. Rather, the fine reflects the fact that the statutory processes designed to safeguard financial crime were ignored.

The individuals concerned were 'politically exposed persons'; usually officials or ministers of a foreign government, or their families. Such persons are considered by regulators to pose a high risk of corruption and money laundering, and so their financial transactions should be checked especially carefully.

The FCA says that Barclays failed to do this. In fact, it applied a lower than usual level of checking, 'preferring instead to take on the clients as quickly as possible'. In particular, the FCA says, the bank 'failed to establish adequately the purpose and nature of the transaction and did not sufficiently corroborate the clients' stated source of wealth and source of funds for the transaction'.

The investment involved the purchase of secured notes by several offshore companies controlled by the clients. The proceeds were then moved through several temporary bank accounts in different currencies, ending up being held in a trust of which the clients were beneficiaries. These entities were spread across several jurisdictions to maintain the clients' confidentiality.

The bank stood to gain GBP52.3 million from its part in the transaction, the largest of its kind that Barclays had executed for individuals. Such transactions are referred to as 'elephant deals' in the bank's own in-house argot.

At one point the clients asked Barclays to make a payment of several tens of millions of US dollars to a third party. When the bank questioned the rationale for that payment, the request was withdrawn – while the request and subsequent retraction could have been legitimate, the FCA states that the bank should have considered 'whether the reluctance to provide it with an explanation indicated a higher risk of financial crime and whether it needed to apply a higher level of scrutiny in respect of the Business Relationship'.

'Barclays went to unacceptable lengths to accommodate the clients', commented the FCA report. It did not obtain legally required information from the clients, because it did not wish to inconvenience them and thus risk losing the 'elephant deal'. One of these missing documents was a full copy of the trust deed, which Barclays did not get even though it had asked the clients to amend the deed's provisions regarding beneficial ownership.

Moreover, the team handling it kept the whole business confidential from other departments within the bank, even keeping the records on paper instead of digitally so that they were protected from unauthorised access.

'Barclays overlooked obvious red flags to win new business and generate significant revenue', commented FCA enforcement director Mark Steward.

Sources

Financial Conduct Authority

FCA (full report, PDF file)

BBC News