IN JULY Transparency International published Transparency in Corporate Reporting, a report on anti-bribery and corruption (ABC) policies and controls at financial institutions and other multinationals. This followed the FSA’s 2011 investigation into ABC controls in the insurance sector, the release of its Financial Crime Guide and its recent publication of the report on Anti-Bribery and Corruption Systems and Controls in Investment Banks.
With LIBOR investigations underway in the UK, US and elsewhere, recent activity in the US regarding money laundering allegations and alleged sanctions abuses by investment banks, and the SFO showing signs of greater activity, the Transparency International report emerges at a period of heightened public focus on banks’ activities. In terms redolent of recent media coverage, it contains sharp criticism of certain financial institutions.
Transparency International is a global organisation that works with governments and multinationals to battle corruption. Its recent publication addresses issues of perception, i.e. the extent to which organisations have published details of their ABC activities and rather than whether those activities are effective in practice.
The report analysed the disclosure of details of ABC programmes by 24 banks and other financial service providers, concluding that, of all the industry sectors examined, financial services was the least transparent. In many jurisdictions, reporting on ABC systems by financial institutions was considered voluntary. Further, and significantly in the context of the UK’s Bribery Act, Transparency International’s report found little evidence that financial institutions had extended their ABC systems to agents and intermediaries or third parties with whom they do business.
The report does have its limitations. It was compiled mainly from public sources – principally the organisations’ websites – at a time (June to October 2011) when many were still implementing the new Bribery Act legislation. However, it highlights a growing public desire for transparency. In approaching the implementation and monitoring of ABC procedures, organisations will wish to consider the extent to which their ABC procedures could be made public.
Enter the FSA
The SFO has been slow to provide much in the way of substantive comment on the Bribery Act. This, of course, shouldn’t be viewed as a lack of action. In November 2011, for example, Richard Alderman, then SFO director, confirmed that Bribery Act activity was underway and stated his intention to tackle the ‘more difficult cases’. That said, absent prosecutions under the Bribery Act, we need to look at the FSA’s recent activity to gauge the visible level of regulatory interest in ABC issues.
From 2007 to 2011, the FSA undertook detailed investigations into wholesale insurance brokerages, with a focus on ‘improper’ payments to non-UK third parties. Substantial penalties were imposed on brokers Aon and Willis in the wake of these investigations.
The investigations were based not upon the Bribery Act, but upon the FSA’s Rules and its Principles for Businesses. The FSA found that the organisations’ systems and controls, particularly regarding the need to counter the risk of financial crime, were flawed.
Both Aon and Willis had written codes of conduct that, in theory, covered these areas. They may, therefore, have felt that they were not at risk of regulatory sanction. However, the FSA based its decision on inadequacies in their training procedures, monitoring failures, and insufficient senior management involvement.
The following year, the FSA produced a report on ABC systems in the sector, which highlighted its findings and, usefully, attached examples of good and bad practice.
Expansion to Investment Banks
Between August 2011 and January 2012, the FSA extended its investigations into ABC systems to investment banks and smaller financial organisations working in areas that exposed them to high levels of corruption risk.
Its findings were published in its report Anti-bribery and Corruption Systems and Controls in Investment Banks in March 2012. Given that the Bribery Act had been in force during the period of its review, the conclusions were surprising. While many investment banks had ABC policies and systems in place, problems persisted with training and monitoring, lack of senior management involvement, and weaknesses in dealings with third parties – mirroring closely those criticisms levelled during the Aon and Willis investigations.
Having started with the insurance brokers and then moving on to investment banks, and even putting aside any action by the SFO, the FSA, shows little sign of reducing its focus on ABC issues.
Instead, all signs point to the FSA increasing its scrutiny of financial institutions. The 2012/2013 FSA Business Plan promises a further report on ABC issues this year. Further, the recent public emergence of regulatory investigations into LIBOR, money laundering and sanctions abuses are likely to place greater pressure on the FSA to investigate banks’ behaviour, particularly in the ABC area. These recent events come at a time when the FSA Enforcement Division appears in buoyant mood, following a series of successes, notably in the area of market abuse. There will also be a regulatory desire to demonstrate ‘business as usual’ with the transition to the new Financial Conduct Authority and Prudential Regulatory Authority in 2013.
Against this background, Transparency International’s report focuses further unwelcome attention on ABC issues. Not only will banks need to continue work on substantive ABC issues, they will also need to address the extent to which they should publish such work to answer the calls for greater transparency.
Justin McClelland is a partner and Dan Meagher, associate, at Winston & Strawn, London
A look at the reasons why MiFID II was introduced and how Brexit will affect the application of the legislation in the UK
The value of an intercompany agreement often only becomes apparent when things go wrong, which is why they are crucial, explains expert
A new criminal offence for companies and directors kicked in on April 6 as the Reporting on Payment Practices and Performance Regulations 2017 came into effect
Commercial disputes are part of business, so it's essential CFOs manage the financial impact of litigation risk - VP at Burford Capital, Leeor Cohen, explains how