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FSA review into anti-bribery and corruption systems and controls in investment banks and proposed new guidance for all firms

The Financial Services Authority (FSA) yesterday publishes the findings of its thematic review into anti-bribery and corruption (ABC) systems and controls in investment banks.

In response to those findings, the FSA will consult on proposed amendments to the FSA’s regulatory guidance, ‘Financial crime: a guide for firms’. This proposed new guidance applies to all firms within scope of our financial crime rules, not just investment banks.

From August 2011, the FSA visited 15 firms, including eight major global investment banks and a number of smaller operations, to examine how firms mitigate bribery and corruption risk.  Bribery and corruption risk is the risk of the firm, or anyone acting on the firm’s behalf, engaging in bribery and corruption.

The FSA found that, despite a long-standing regulatory requirement to mitigate financial crime risk, the majority of firms in our sample had more work to do to implement effective anti-bribery and corruption systems and controls. In particular, we found the following common weaknesses:

• most firms had not properly taken account of our rules covering bribery and corruption, either before the implementation of the Bribery Act 2010 or after;
• nearly half the firms in our sample did not have an adequate ABC risk assessment;
• management information on ABC was poor, making it difficult for us to see how firms’ senior management could provide effective oversight;
• only two firms had either started or carried out specific ABC internal audits;
• there were significant issues in firms’ dealings with third parties used to win or retain business;
• though many firms had recently tightened up their gifts, hospitality and expenses policies, few had processes to ensure gifts and expenses in relation to particular clients/projects were reasonable on a cumulative basis.

Although firms in our sample had been slow and reactive in managing bribery and corruption risk, our visits and the introduction of the Bribery Act had acted as a trigger for firms to focus on ABC issues.

The FSA is considering whether further regulatory action is required in relation to certain firms in its review.

Tracey McDermott, acting director of enforcement and financial crime, said:

“It is imperative that firms have adequate arrangements to control the risks of financial crime. We have seen examples of good practice and some examples of poor practice. Overall, despite the high profile of the issue, the investment banking sector has been too slow and too reactive in managing bribery and corruption risks.

“Firms across all sectors must have appropriate controls to manage their financial crime risks, whether related to bribery and corruption or otherwise. The FSA and, from next year, the Financial Conduct Authority will continue to focus on financial crime risks in this sector and beyond to ensure firms are meeting their legal and regulatory obligations.”

Notes for editors

1. The thematic review into anti-bribery and corruption systems and controls in investment banks.
2. The consultation on “Anti-bribery and corruption systems and controls: Proposed guidance and amendments to “Financial crime: a guide for firms”.  It is relevant to all firms regulated by the FSA.
3. The FSA requires firms to establish and maintain effective systems and controls to mitigate financial crime risk. Financial crime risk includes the risk of bribery and corruption. In addition to these regulatory requirements, bribery, whether committed in the UK or abroad, is a criminal offence under the Bribery Act 2010, which has consolidated and replaced previous anti-bribery and corruption legislation in the UK. The FSA does not enforce, or give guidance on, the Bribery Act. 
4. FSA Principles require FSMA authorised firms to conduct their business with integrity and with due skill, care and diligence; and to take reasonable care to organise and control their affairs responsibly and effectively with adequate risk management systems.
5. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; securing the appropriate degree of protection for consumers; fighting financial crime; and contributing to the protection and enhancement of the stability of the UK financial system.