Lessons to learn from Coutts

Coutts – the Queen’s bank – has been fined £8.75m by regulators for taking unacceptable risks in handling the proceeds of crime. Tania Hayes highlights some of the lessons accountants can learn from the case

I’m not entirely sure if I was surprised or not to read that Coutts, the bank with a target audience of high net worth individuals, has been fined £8.75m by the FSA for failure to conduct proper checks on approximately 75% of clients who held politically sensitive positions.

Surely it would’ve been glaringly obvious to a bank whose philosophy is based on understanding [its] clients’ financial objectives in order to design a wealth strategy to meet their goals.  But understanding a client’s financial objectives is very different from understanding their business, and this is the lesson all in the regulated sector can learn from Coutts mistake.

The challenge for practitioners is identifying the right information to effectively discharge due diligence obligations.  And newspaper headlines are not the be all and end all for these purposes.  Nor is the fact that you have a passport and utility bill gathering dust in the filing cabinet.   Due diligence broadly falls into three categories:

• Knowing your client
• Knowing the source of funds
• Ongoing monitoring of the above.

On a basic level, the requirement to know your client can be discharged with checks against identity, if you are dealing with a person (famous or otherwise). Typically people will have experienced the trawl to find their passport, long since buried in a drawer since the last holiday; and the “right type” of utility bill to put at ease the mind of the regulated practitioner attempting to ensure they comply with their anti-money laundering duties.

The challenge is identifying and understanding legal entities which can be used by person X (famous or otherwise) to channel their funds in a tax efficient way (or illegally to evade tax, which, of course, is a predicate crime for commission of a money laundering offence under the Proceeds of Crime Act).

And it is probably in this area that Coutts fell foul of the Regulations.  Knowing the source of funds and identity of the ‘beneficial owner’ (as well as those with the controlling interest in the legal entity) is key to ensuring that your client is not being used as a conduit to facilitate money laundering.

‘Professional scepticism’ is a phrase coined by professional accountants in ensuring compliance with their ethical obligations, and this in itself is a safeguard in the context of anti money laundering compliance.  It is your duty as a practitioner (regardless of profession) in the regulated sector to prevent criminals from accessing legitimate financial services and questions are something we know criminals don’t like answering.  Once satisfied that the initial due diligence hurdle has been passed, you are not home and dry.

The Money Laundering Regulations require ongoing monitoring of the client and their transactions.  This is iterative risk based monitoring based on the initial score given to the client, but also the pattern of behaviour (and/or transactions) that emerges.

If anything appears to be out of the ordinary, ask a question – the answer or lack thereof might speak volumes, either affirming your knowledge of the client, or affirming your lack of knowledge of the client, at which point you or your firm can make an informed decision.

Report if you have suspicion that the client is laundering the proceeds of crime by virtue of the relationship and/or transaction, or decline to continue the engagement where in the absence of suspicion the client’s risk profile exceeds the risk appetite of the firm. Alternatively, use the newly-acquired information to build on the risk profile of the client and continue with the relationship.

Coutts has made very public assurances, ratified by the FSA that their systems and controls relating to client due diligence are now in place, which should act as a deterrent to criminals who may have been rubbing their hands in glee at the opportunity Coutts presented them.

It has, however, tarnished the reputation and brand that Coutts has built since its establishment in 1755 with the significant media coverage this regulatory failing has attracted.

Tania Hayes is Head of Conduct & Compliance at AAT.

Tania Hayes is AAT's Head of Professional Standards & Strategy.