NatWest Markets Plc

On 2 August 2010 the FSA imposed a financial penalty of £5,600,000 on four members of the Royal Bank of Scotland Group (RBSG) for breaches of the Money Laundering Regulations 2007 (the Regulations) which occurred between 15 December 2007 and 31 December 2008. The breaches related to the systems and controls put in place by RBSG to prevent breaches of UK financial sanctions. RBSG agreed to settle at an early stage of the FSA's investigation. It therefore qualified for a 30% (Stage 1) discount under the FSA's executive settlement procedures. Were it not for this discount, the FSA would have imposed a financial penalty of £8,000,000 on RBSG. RBSG failed to consider properly what policies and procedures were required to comply with their obligations under the Regulations and the UK financial sanctions regime. Consequently, RBSG failed, for an extended period of time, to put in place adequate systems and controls to screen both its customers and the payments they received against the list of sanctioned entities maintained by HM Treasury (the Treasury list). In particular, RBSG failed to establish and maintain appropriate and risk-sensitive policies and procedures relating to the following matters: (1) RBSG failed properly to implement and oversee the systems used to screen relevant customers and payments against the Treasury list. As a result, notwithstanding that RBSG were one of the largest processors of foreign payments among UK banks, they did not screen the following cross-border payments: (a) any incoming payments to customers; (b) Sterling payments made by customers (except those going to US based institutions); and (c) Euro payments made by customers (until 9 June 2008). Whilst these issues were identified by RBS Group Security & Fraud (GS&F) within RBS Group's Manufacturing Division, and GS&F had put in place a plan to address them, such actions were not taken in a sufficiently timely manner. (2) RBSG's automated screening failed to screen the majority of trade finance SWIFT messages generated in the international trade transactions that it carried out. (3) RBSG did not consistently record sufficient information relating to the directors and beneficial owners of its corporate customers. Where information relating to directors and beneficial owners was recorded, RBSG failed to ensure that such individuals were screened against the Treasury list on an ongoing basis. (4) After the screening systems used to check customers and payments against the Treasury list had initially been set up, RBSG failed to ensure that the design and implementation of the 'fuzzy matching' capabilities in the screening software - used to identify close matches to the Treasury list - continued to operate satisfactorily. After the initial set up, the results produced by the screening filters were not routinely reviewed or monitored by RBSG to ensure that they were appropriate. This meant that over time the 'fuzzy matching' parameters initially set by RBSG became significantly less effective at identifying potential matches. The lack of adequate policies and procedures in respect of these matters gave rise to an unacceptable risk that RBSG could have breached the UK financial sanctions regime. The FSA considers these failings to be particularly serious because: (1) The involvement of UK financial institutions in providing funds, economic resources or financial services to designated persons on the Treasury list undermines the integrity of the UK financial services sector. Unless they have in place robust systems and controls, UK financial institutions risk being used to facilitate transactions involving sanctions targets, including terrorist financing. As the Joint Money Laundering Steering Group (JMLSG) guidance advises, small amounts of funding could be sufficient to finance terrorist activities and hence the sanctions-related systems and controls implemented by firms need to be robust enough to capture sucpyments. The FSA's financial crime and market confidence statutory objectives are both endangered by firms' failures in this area. Adequate systems and controls relating to financial sanctions is an integral part of complying with the FSA's requirements on financial crime. (2) The systems and control failings at RBSG presented a serious risk to the FSA's financial crime and market confidence statutory objectives. During 2007, the London division responsible for processing payments for RBSG dealt with the largest volume of foreign payments of any financial institution in the UK. For example, it processed £7.6 trillion of inward Euro payments and £8.6 trillion of outward Euro payments, across a total volume of 1.8 million payment transactions. (3) RBSG, through GS&F, were aware of deficiencies in the screening systems used during the Relevant Period but did not act on these deficiencies in a timely manner. This contributed to the above failings in systems and controls remaining in existence for one year and not being remedied earlier. For example, GS&F raised issues relating to their sanctions screening software with the software provider but failed to ensure that these issues were resolved promptly. Further, after GS&F instructed a leading firm of accountants in early 2008 to carry out an independent review to benchmark RBSG's screening software against a peer group, the key issues identified in the review were not appropriately escalated and as a result were not considered by the relevant committees within RBSG who would have overseen remedial action. The required remedial action was not taken until a number of months later. RBSG's failings therefore merit the imposition of a significant financial penalty. In deciding the level of disciplinary sanction, the FSA recognises that RBSG have taken action to mitigate the seriousness of their failings, including: (1) once the failings came to the attention of the current management within RBSG, they promptly reported them to the FSA; and (2) RBSG took expedient and appropriate remedial action in respect of screening payments, improving the effectiveness of the software and improving governance and oversight of UK sanctions compliance. This included implementing screening of all inbound payments, outbound domestic Sterling payments, various Trade Finance messages and payments entered directly into the gateway application for SWIFT messages. Since the discovery of its failings in December 2008, RBSG and its current senior management have fully cooperated with the FSA's investigation.