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FSA fines Bank of Ireland £375,000

for breaches of anti-money

laundering requirements

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The Financial Services Authority (FSA) has today fined the Bank of Ireland (BoI) £375,000 for failing to have in place systems to detect a series of high-risk, cash transactions worth approximately £2 million, which were undertaken in breach of their policies and procedures. These transactions appear to be suspicious and are currently being investigated by law enforcement.

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Philip Robinson, financial crime sector leader at the FSA, said:

"Adequate systems and controls are fundamental to the UK anti-money laundering regime's effectiveness and firms must identify the money laundering risks in their business and take appropriate action to reduce these.
"These transactions were high-risk in terms of providing scope for money laundering and were in breach of BoI's policies and procedures. Furthermore, they continued for a period of four years. BoI did not establish adequate systems and controls to monitor the issuing of bank drafts and did not check that its staff understood fully their anti-money laundering responsibilities in relation to the recognition and reporting of suspicious transactions."

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The FSA found that between 1998 and 2002, 40 bank drafts were issued for cash for one of the branch's largest customers. The drafts were made payable to the BoI and, because the identity of the owner of the cash was disguised, were an effective means of money laundering. Bank staff that were aware of the circumstances of the transactions did not identify them as suspicious.

The cash used to purchase the bank drafts was deposited in an internal branch account without first passing through the customer's account. This practice, in breach of BoI's policies and procedures, allowed the customer to use the drafts outstanding account as a deposit account, which could have prevented Law Enforcement Agencies from establishing the true owner and source of the funds.

The transactions were outside the normal business activity of the customer and the customer had asked staff at the branch not to use the customer's name on any cheques or correspondence relating to the draft transactions, which failed to arouse suspicion.

BoI failed to detect the misuse of the draft facility until it was identified during a branch audit in March 2003, when drafts issued to the customer worth £1.8 million were found to be outstanding. There was a high risk that these transactions could have been used to facilitate money laundering and they are being investigated by the appropriate law enforcement agency.

The bank did not take appropriate steps to ensure that it had in place a system to check that staff had understood the money laundering training that was delivered to them, specifically the recognition and reporting of suspicious transactions.

The systems and controls to monitor the issuing of bank drafts and staff training were the same across BoI's branch network but the misuse of bank drafts only occurred in one branch. Upon discovering the breaches, BoI notified the FSA and has devoted significant resources to investigating the matter and ensuring that the misuse is not replicated elsewhere in the branch network. The bank has also taken steps to introduce a revised training programme that involves checking that staff understand their responsibility to recognise and report suspicious transactions.

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1. The full text of the Final Notice, dated 31 August 2004, includes the background to the case, the relevant statutory provisions and the regulatory requirements contravened and the factors taken into account by the RDC when setting the level of the fine.
2. The FSA concluded that the BoI's failures demonstrated a material breach of Rule 3.2.6 of the FSA's Senior Management Arrangements, Systems & Controls Rules.

   Rule 3.2.6 states

   A firm must take reasonable care to establish and maintain effective systems and controls for compliance with applicable requirements and standards under the regulatory system and for countering the risk that the firm might be used to further financial crime.

   Section 206(1) of the Act states

   If the Authority considers that an authorised person has contravened a requirement imposed on him by or under this Act, it may impose on him a penalty, in respect of the contravention, of such amount as it considers appropriate.

3. Financial penalties are not treated as income by the FSA. They are applied for the benefit of authorised persons (or the issuers of securities admitted to the official list) as appropriate, and so given back to the industry in subsequent years.
4. Enforcing breaches of the Money Laundering Rules is only one aspect of the FSA’s work in reducing the extent to which regulated firms can be used for the purpose of money laundering and terrorist financing. The FSA is also developing policy on reducing fraud in regulated firms. FSA's views on the development of the UK's AML regime were set out in a speech in April 2004.
5. Other FSA initiatives include:

• Discussion Paper 26 in April 2004 on developing the FSA's policy on fraud and dishonesty.

• The results of an FSA review of current practices across a number of banks and building societies in the retail banking sector.

• Discussion Paper 22 in August 2003 on KYC and anti-money laundering monitoring.

• With the Treasury & NCIS, joint public information materials on the reasons for identification.