In a case that could be said to be a warning shot to firms working in the financial sector, the FCA has issued its largest fine for breaches of its rules in relation to Cum-Ex trading, in the sum of £2,038,700. Sarah Drew reviews the case and what other firms can learn from it.
The TJM Partnership Ltd has received the fine for breaches of Principles 2 and 3 of the FCA’s Principles for Business, which require authorised firms to conduct their business 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.
The UK based investment brokerage (now in liquidation) was found not to have exercised due skill, care, and diligence in applying its own AML policies and failed to monitor the risk of being used to facilitate financial crime. The FCA deemed it to have inadequate systems and controls to identify and mitigate the risk of being used to facilitate allegedly fraudulent trading and money laundering.
The FCA’s investigation found TJM was being used to facilitate allegedly fraudulent trading and money laundering on behalf of clients of the Solo Group, a group of firms offering clearing and settlement services to its clients via a custom over the counter (OTC) post-trade order matching platform and via a trading and settlement platform known as Brokermesh. The breaches are reported to have taken place between January 2014 and November 2015.
The FCA identified a pattern involving extremely large over the counter (“OTC”) trading. It found there to be very evident red flags, given the size of the trades that were taking place and considered TJM to have had inadequate policies in place which would enable it to effectively assess the risk posed by the Solo Group. The FCA found failings in TJM’s customer due diligence, monitoring of transactions and in identifying unusual transactions, thus heightening their risk of being used to further financial crime. The manner, scale and volume of the Solo trading was, says the FCA “highly suggestive of financial crime”.
The FCA sets out details of the failings under Principle 2 and 3 out in paragraphs 2.16 and 2.17 of its Final Notice. In essence, TJM failed to identify and escalate any suspicions about its clients or the size of the transactions it was handling. No transactions raised any suspicions, and no breaches were reported or observed.
The financial penalty that the FCA have issued was based on the following:
Of note, Germany’s highest court, the Federal Court of Justice, has recently declared the dividend stripping schemes to be illegal, which could see a ripple effect in the UK, with enforcement action intensifying for those involved in Cum-Ex activity in the UK.
The FCA is keen to see all firms creating an effective compliance culture and learning from the mistakes made by other firms. In this case, TJM were undertaking high risk business activities and the systems it had in place failed to recognise when things went wrong.
The case pre-dates the Money Laundering Regulations 2017, which have ensured regulatory obligations on firms are now even tighter, but the key take aways of this decision by the FCA for other firms are:
The FCA specifically noted that huge amounts of literature were available to TJM on the risks of financial crime and where those risks are heightened. As a result, there was little sympathy for a small cog in a larger financial crime operation, which should act as a warning to other firms to be alert to these dangers. If you are concerned about your level of compliance in these areas or want to talk to someone about a review of your compliance procedures in light of the FCA’s decision in this case, please do get in touch with Sarah, Charlotte or Phillippa from the Capital Regulatory Investigations Team. We’d love to talk to you.