NatWest Markets Plc

Final Notice Issued on 12 December 2002 on the Royal Bank of Scotland plc ('RBS') THE PENALTY 1.1 On 12 December 2002 the FSA imposed a financial penalty on RBS of £750,000 for breaches of Rule 3.1.3 and 7.3.2 of its Money Laundering Rules ('ML Rules'). REASONS FOR THE PROPOSED ACTION Summary 2.1 Following information provided by RBS suggesting that RBS may have contravened the ML Rules, the FSA on 30 May 2002 appointed investigators under section 168 of the Financial Services and Markets Act 2000. 2.2 As a result of that investigation, which was based on a sample of accounts opened between January 2002 and May 2002, the FSA concluded that RBS contravened both Rule 3.1.3 and Rule 7.3.2 of the ML Rules. 2.3 In so doing RBS demonstrated failings which demand a significant financial penalty. These failings are viewed by the FSA as particularly serious in the light of the following factors: · they occurred against a background where statutory requirements for firms to have in place anti-money laundering procedures, including procedures to identify their clients, had been in place for over eight years and where, in anticipation of the FSA's new powers to make Rules relating to the prevention of money laundering with effect from 1 December 2001, there had been a greatly increased emphasis on preventing the use of the financial system for financial crime; · a high level of breaches between January and March 2002; · notwithstanding the systems which RBS had in place, there was a failure adequately to monitor compliance with regulatory requirements; · the FSA believes that the size of RBS and the retail banking market in which it operates presents a serious risk to the FSA's statutory objective to reduce financial crime. 2.4 Were it not for the prompt and effective remedial action taken by RBS once it had identified its failings and for the full and pro-active co-operation demonstrated by RBS in relation to the FSA's investigation, the financial penalty proposed would have been very substantially higher. RBS Actions 2.5 RBS is an authorised deposit taking institution undertaking retail banking and a wide range of other permitted activities. RBS forms part of the Royal Bank of Scotland Group (RBS Group). 2.6 RBS Retail Banking (RBS Retail) uses a process called the New Account Sanctioner (NAS) when opening new accounts. NAS is intended to ensure that the 'Know Your Customer' (KYC) information necessary for verifying identity is in place prior to an account being opened. NAS has been in place for five years. 2.7 NAS procedures in RBS Retail were tested in December 2001. These tests identified a KYC failure rate of 11.2% i.e. either the customer's name or address (or both) had not been verified to the standards laid down in the NAS process within RBS Retail or the required records of identity had not been retained. 2.8 The results of these tests were made available to RBS Group management in January 2002 and a remedial action plan aimed at ensuring adherence to the NAS process was drawn up and implemented during the period January 2002 to March 2002. 2.9 In March 2002 testing was conducted on accounts opened in January 2002, following the implementation of the action plan. These tests indicated that the KYC failure rates had increased further. 2.10 The remedial action plan initiated in January 2002 resulted in KYC failure rates being significantly reduced from April 2002. The Investigation 2.11 The FSA examined account opening documentation in relation to 181 accounts opened between January and May 2002. Having regard to the identification criteria set out in the Joint Money Laundering Steering Group Guidance Notes, the FSA determined whether there was sufficient evidence to show that the client was who he had claimed to be. 2.12 Of the 181 account files examined, 89 were found to have insufficient evidence to show that the client was who he had claimed to be, in breach of Rule 3.1.3 of the MLRules. In respect of 7 account files, RBS was unable to supply copies or details of the documents it had used to verify identity, in breach of Rule 7.3.2. Two of these seven accounts were found to be in breach of both Rule 3.1.3 and 7.3.2, making a total of 94 accounts with one or more failings. The seriousness of the breaches 2.13 In determining that a financial penalty was appropriate and that the amount proposed was proportionate to RBS's contraventions the FSA considered the factors below to be particularly relevant. 2.14 The high level of breaches identified applied across the whole of the RBS Retail network and existed from at least December 2001 until March 2002, with particularly high failure rates in January 2002 and March 2002. 2.15 The breaches revealed weaknesses in the RBS anti-money laundering control system. The FSA considers the failure effectively to monitor the compliance of the RBS Retail network with the requirements of the Money Laundering Regulations 1993 and the FSA Money Laundering Rules to be a serious matter. The seriousness of the breaches is exacerbated by the fact that they took place against a background of increased regulatory emphasis on the importance of effective anti-money laundering controls. 2.16 The FSA noted, however, that RBS itself discovered the breaches through its own GIA/Compliance testing in December 2001. Additionally, in most cases some attempt had been made to identify the customers. The size, financial resources and other circumstances of the firm 2.17 The FSA expects that a bank such as RBS should ensure that its anti-money laundering controls operate effectively across the whole of its network. The FSA believes that a failure in anti-money laundering systems and controls in a large retail bank such as RBS is particularly serious in that it poses a greater risk that financial crime may be facilitated and therefore constitutes a greater risk to the FSA's statutory objective to reduce financial crime. Conduct following the contravention 2.18 RBS informed the FSA of its contraventions and co-operated fully and pro-actively with the FSA's investigation. 2.19 Once it had identified the problem, RBS took it seriously. It devoted considerable resources at an early stage to correct the problem and instituted a remedial action plan of its own accord. The FSA is satisfied that the remedial action plan has appropriately addressed the KYC non-compliance issue. CONCLUSION 3.1 Taking into account the seriousness of the contraventions and the risks they posed but also the prompt and effective remedial steps taken and the co-operation shown, the FSA has decided that a financial penalty of £750,000 be imposed. Without RBS's remedial actions and co-operation, the penalty would have been very substantially greater. 3.2 The full text of the Final Notice is available from the FSA.