Compliance failings see finance firm trio fined £700k

Tuesday 16 February 2021

Three finance firms have been fined £719,000 for failing to ensure their lines of defence against financial crime, including money-laundering and terrorist funding, were robust enough.

While the JFSC found no evidence that financial crime had occurred as a result of the compliance failings, it decided that the breaches by the three SG Kleinworth Hambros firms were serious enough to warrant significant fines, warning that Jersey’s reputation could have been jeopardised.

"[The firms'] failures... are considered to be significant and material because it left them under-informed of Compliance Risk and whether they were operating robust systems and controls to, inter alia, mitigate against money laundering and the financing of terrorism. Consequently, [their] conduct increased the risk of failing to identify financial crime, which is of concern given such activity can undermine the integrity and stability of Jersey’s financial services industry," the financial regulator said in a public statement.

The trio, which form part of the Société Générale Group, had been facing a combined fine as high as £1.4m. However, they each received a discount of 50% for agreeing to settle at an early stage. SG Hambros Bank, Trust and Corporate ended up paying out around £510,600, £155,500 and £53,400 respectively.

Concerns over whether the compliance team, which was shared by the three entities, was well-resourced enough first led to JFSC involvement in October 2017. 

Regulatory officials followed up with an on-site examination in May 2019, tasked with assessing the procedures in place from January 2018 to the date of investigation. 

Among the key issues identified was poor board oversight. 

Emphasising that it “places great weight” on boards to ensure the “ongoing fitness and prioriety” of firms and their compliance with Jersey’s anti-money laundering and counter-terrorist financing rules, the regulator commented: “On the facts of the case, the JFSC considers that had robust oversight been exercised by the Boards and had they adequately responded to the issues being raised with respect to the Compliance Function, the matters identified during the On-Site Examination… could have been mitigated.”

Pictured: The JFSC said that, with better board oversight, the issues identified at the trio of firms "could have been mitigated".

During their examination, officials found that the compliance team was still poorly resourced, meaning that some “high priority” projects had been delayed while some staff were working “considerable hours of overtime.” 

The JFSC noted, however, that some of the struggles faced by the team were due to the “turnover of compliance staff and maternity arrangements”, as well as “operational complexities in the business following an earlier merger”.

They found concerns over resourcing referenced in minutes of board meetings, but said that there was “insufficient record” of any steps taken to address this. 

Other board minutes exposed what was described as “minimal” discussion of anti-money laundering and counter-terrorist financing processes, while the JFSC said it was also “unable to locate evidence in any board minutes or compliance reporting that quarterly reviews” of such processes had been conducted. 

The regulator also took issue with Compliance Officer’s regular reports to the board, which were described as “unclear as to the key messages and highest priority items” and missing “key compliance items”. Some items, the JFSC said, were “recurring each quarter with apparent lack of action.” 

Compliance officials’ responsibilities were not clearly set out, while it also emerged the firms had no board-approved compliance policy.  

Pictured: The JFSC identified issues with the compliance reports.

Any attempts to analyse risk were unlikely to be “fully effective”, according to the JFSC, as the tool used by the team to analyse compliance was not Jersey-specific.

Under the code the firms were expected to follow, adherence to anti-money laundering protocols should have been regularly tested and compliance reports produced for each firm. 

However, the regulator found that “there had been no compliance reporting for SGKH Corporate’s client funds/managed entities during 2018.”

The same firm was also unable to demonstrate during the inspection that it had undertaken compliance monitoring in 2018 for its client funds. While it did conduct monitoring for its managed entities, it did so retrospectively. The JFSC concluded that this check was not conducted “within a reasonable time period.”

All of these issues should have been flagged to the JFSC “promptly and completely”, the regulator concluded, but the firms did not “act with the expected candour” by doing so. 

Aggravating the breaches was the boards’ “failure” to “materially recognise and/or address concerns raised by the Compliance Function and the JFSC”, as well as SG Kleinwort Hambros Bank’s “regulatory compliance record”. 

However, the boards’ keenness to “immediately” rectify the issues identified in the on-site inspection, and the fact that significant funding had been pumped into each firm, as well as the compliance team, were counted as points in their favour. 

The JFSC also noted that a consulting firm had been recruited to help the trio identify the root causes of their compliance problems and resolve them, and that no customer or client suffered losses as a result of any of the failings. 

“This is the third time the JFSC has used its powers to fine businesses in Jersey’s financial services industry for breaching regulatory requirements,” JFSC Director General, Martin Moloney commented.

Pictured: JFSC Director General, Martin Moloney.

“The three SG Kleinwort Hambros firms acknowledged their failings at an early stage and have taken steps to make material changes to strengthen their governance arrangements and compliance systems and controls. We do not use this sanction lightly and intend it to be a deterrent for all regulated businesses.

“Whilst there is no evidence the three SGKH firms facilitated financial crime, firms must make sure they are not at risk of being used in this way, as such use would undermine the integrity and stability of Jersey’s financial services industry.”