Royal Blues at GBP 0.75 million fine

It could have been worse, says the UK's Financial Services Agency. The Royal Bank of Scotland may consider it bad enough.

The FSA fined The Royal Bank of Scotland plc (RBS) £750,000 for breaches of its Money Laundering Rules in the first financial penalty levied by the FSA for money laundering control failings since the FSA acquired this power on 1 December 2001. "The good news in this case is the prompt and effective way in which the shortcomings were addressed once senior management became aware of them. As a result of this, and RBS's open and constructive approach to the FSA's investigation, the fine imposed is very substantially lower than it otherwise would have been. The other good news is that there is no evidence of actual money laundering having taken place," Carol Sergeant the FSA's managing director said.

"The FSA"s investigation revealed weaknesses in RBS"s anti-money laundering controls across its retail network. The investigation found that RBS failed either to obtain sufficient ‘know your customer" ("KYC") documentation adequately to establish customer identity, or to retain such documentation, in an unacceptable number of new accounts opened across its retail network in early 2002. There was insufficient evidence to show that the clients were who they had claimed to be, whilst in some cases RBS were unable to supply copies or details of the documents (such as a valid passport, a driving licence, a recent utility bill) it had used to verify identity. Examples of inadequate verification of identity are where the bank only verified a client"s name but not his address, or where the documents the bank obtained were not capable of verifying identity," the FSA says.

"In mitigation,"says the FSA, "RBS discovered the problems through its own testing in December 2001. Additionally, although the breaches revealed weaknesses in RBS"s anti-money laundering controls, in most cases at least some attempt had been made to identify the customers. RBS devoted considerable resources at an early stage to correct the problem and has instituted Group-wide monitoring of ‘know your customer" compliance rates in an effort to ensure that a similar problem does not occur again. This action has caused the failure rate to fall significantly from April 2002 and the FSA is satisfied that the bank has dealt with the issue effectively."

An interesting sidelight on this fine is that the UK's six biggest banks, which include RBS, have agreed to undertake a common approach to customer identification including the re-identification of customers who held accounts before April 1994 and who, it has generally been considered, were exempt KYC procedures under the UK's Money Laundering Regulations 1994. The FSA's money laundering rules are in some respects more stringent than the criminal law.

Not only is the fine the first for failing to comply with the FSA's Rules but also it is one of the largest fines ever levied by a UK regulator for any breach of any rule.

The FSA has expressly said that the application of the Joint Money Laundering Steering Group Guidance Notes would not provide a safe harbour where breaches of the FSA's own rules were concerned.

Royal Bank has been on the takeover trail of late. It has digested National Westminster Bank, one of the UK's big four, so leap-frogging into the big league at number three (NatWest itself owned Coutts and several other brands), Royal Bank's Direct Line insurance took over Royal and Sun Alliance's Italian motor insurance business gaining 300,000 customers to become Italy's second biggest direct insurer, US subsidiary Citizen's Financial Group bought part of Mellon's US operations and in Sept 2002, Citizen's agreed to buy Commonwealth Bancorp Inc for about USD450million.

The Royal Bank is one of the UK's note issuing banks. In England, only the Bank of England issues bank notes. But in Scotland, the Royal Bank and Clydesdale issue notes.

The Royal Bank was granted its charter in 1727 and has acquired and grown many businesses on the way to its present position as one of Europe's top ten banks. It is not at this point clear in which of its divisions the problems occurred.

The lesson for all other UK financial services businesses is in opaque language on the FSA's website. "The breaches occurred despite increased regulatory emphasis on the importance of effective anti-money laundering controls in anticipation of the FSA"s new powers to make Rules relating to the prevention of money laundering which took effect from 1 December 2001."

This translates into a blunt message from the FSA: "we warned you that we would require businesses to be in compliance with our Rules as of N2. And if you were not ready by that date, then there is no leeway."

We can expect to see more.