IMPACT ANALYSIS: Coutts fined for defective beneficial ownership and PEP procedures

The Hong Kong Monetary Authority (HKMA) has reprimanded and fined Coutts & Co Hong Kong (Coutts) HK$7 million for contravening five provisions of the Anti-Money Laundering and Counter Terrorist Financing Ordinance (AMLO).

The disciplinary action follows an investigation by the HKMA in relation to contraventions of the AMLO between April 2012 and June 2015. Firms need to review AML/CTF controls and especially in circumstances when they are dealing with politically exposed individuals (PEPs).

Overview

The investigation found that Coutts failed to establish and maintain effective procedures for the following:
• Determining whether its customers or the beneficial owners of its customers were PEPs.
• Obtaining senior management approval to continue a business relationship with a customer after Coutts had come to know that the customer or beneficial owner of an account of the customer was a PEP.

The investigation found Coutts failed to identify PEPs despite relevant information being publicly available and failed to follow-up or conduct due diligence on PEPs or on PEP alerts received from commercially available databases to which Coutts subscribed. As a result, there was a delay in identifying PEPs and also in obtaining senior management approval to continue the business relationship with the PEPs.

Due diligence

The investigation found that these compliance failures showed the Coutts AML procedures were deficient. The HKMA investigation also found contraventions arising from the failure to carry out customer due diligence before establishing a business relationship or obtain senior management approval to continue the business which had a number of high risk and red flag factors.

It is questionable how Coutts staff appeared to overlook basic procedures and not implement controls that have been in use across the industry for at least a decade. It was only last year that the Financial Actions Task Force (FATF) put out alerts for Asia that more needed to be done in improving beneficial ownership procedures and opening accounts for PEPs.

“This is a case about deficiencies in the AML/CTF systems and controls which led in some cases to the failure to identify PEPs and in other cases to the failure to seek senior management approval to continue business relationships with PEPs. PEPs are individuals whose prominent position in public life may make them vulnerable to corruption and they therefore pose a higher risk of money laundering. Banks are expected to have in place AML/CTF systems and controls that are commensurate with the risks presented and the HKMA will take enforcement action where appropriate to reinforce this message,” said Meena Datwani, executive director, enforcement and AML, of the HKMA.

Analysis

Regulators want to send clear messages in this area and improve the standards of AML/CTF procedures. Already, in Singapore, banking licences have been withdrawn and at least four bankers jailed over intentional breach of procedures of anti-money laundering requirements.
This case shows there was a flagrant disregard by some staff to consider the red flags of beneficial accounts and the PEPs who operated those accounts. It raises questions when an international firm deliberately fails to conduct simple procedural searches concerning the names of individuals or fails to obtain senior management approval in relation to the operation of accounts.

The AMLO imposes important customer due diligence and record keeping requirements on financial institutions and firms and it is clear regulators will not hesitate to take action if there are obvious failures in procedures.

It may be appropriate for firms, if there are numerous breaches in procedures, to engage an external consultant to conduct a review on client files and policies and procedures to ensure that they are acting in accordance with the requirements of the AMLO.

Published 19-Apr-2017 by
Niall Coburn, Regulatory Intelligence

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