FSA review of investment banks’ anti-bribery and corruption monitoring and risk assessment systems and controls: new guidance for regulated entities

April 2012

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Key industry sectors

Introduction

Following on from global moves to bring the activities of investment banks under closer scrutiny, such as the US Securities and Exchange Commission’s decision to investigate relationships between investment banks and sovereign wealth funds, the Financial Services Authority (FSA) has published a thematic review of investment banks’ management of bribery and corruption risks.

The review looks at the anti-bribery and corruption (ABC) systems and controls that firms have in place to monitor and prevent the risks inherent to their businesses through the actions of their employees or third parties acting on a firm’s behalf.

The FSA emphasised that it can take enforcement action even where there is no evidence that bribery has taken place if it considers that the systems and controls of a firm are inadequate to mitigate bribery and corruption risk. The FSA considered that nearly half of the sampled firms did not have adequate ABC risk assessments in place.

Background

The review was carried out through interviews, questionnaires and onsite visits to a sample of 15 firms, comprising eight global entities and seven smaller firms. These were selected by the FSA on the basis that their businesses were considered to have a high risk of bribery and corruption based on the jurisdictions, sectors and clients they operate in and work with.

The FSA review took place as a prelude to an update of the regulatory guide, Financial Crime: a guide for firms (see FSA conducting thematic review into investment banks’ anti-corruption systems and controls), which contains principles that apply to all regulated firms. It highlights common weaknesses, provides examples of good and bad practices and of the particular systems and controls that the FSA expects firms to have in place.

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Key themes: points to note

An issue raised in the review was the lack of response from regulated firms in other sectors to the FSA’s earlier report on the ABC systems and controls of commercial insurance brokers and its related enforcement actions against Aon Ltd and Willis Ltd. The FSA has therefore made it clear (page 15 of the review 3.2.1 Triggers for risk assessment) that firms should take an active approach to the issues raised in the review without waiting for sector-specific action by the FSA.

The review suggested that firms were heading in the right direction in relation to certain issues such as corporate hospitality but raised particular concerns in relation to the monitoring of third parties, particularly politically exposed persons. The dissemination of management information was also an issue both in the context of the quality of information provided to senior management to facilitate the exercise of their “top down” oversight function and in providing responsible individuals with a global view of cumulative and systemic bribery risks inherent to a firm’s business.

Firms were also criticised for taking a strictly reactive approach to the development of their ABC controls. The paying of lip service to a “zero tolerance” bribery policy in the absence of clear evidence of systems and controls in place to enforce this was highlighted in a number of cases. The FSA also made it clear that firms should adopt a tailored, business specific ABC procedure rather than engaging in a simple box ticking exercise as they would be judged on the result of their efforts.

The review is of interest to a much wider audience than just regulated firms as a result of the specific examples of good and bad practice it contains which, together with the FSA commentary on them, provide a useful steer for smaller businesses and global players on what “adequate procedures” they should have in place to ensure compliance with the Bribery Act.

The full review contains findings and examples that will prove useful to all readers for the reasons outlined above.

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