The Financial Services Authority (FSA) has fined Coutts & Company £8.75 million for failing to establish and maintain effective anti-money laundering (AML) systems and controls for nearly three years.
The Royal Bank of Scotland Group, including Coutts, was fined £5.6 million in August 2010 by the FSA for failing to have adequate systems and controls in place to screen transactions under Money Laundering Regulations.
The systemic failures at the so-called 'Queen's bank' resulted in an "unacceptable risk" of Coutts handling the proceeds of crime, and affected high risk customers, including 'politically exposed persons', according to the FSA.
The FSA visited Coutts in October 2010 as part of a review into banks' management of high money-laundering risk situations. It found that Coutts did not apply robust controls when taking on new high risk clients, and did not consistently apply appropriate monitoring of the new high risk relationships.
For example, the bank did not have a central repository for information about customers. Information was recorded on disparate systems, which made it difficult for bankers to have a complete, single view of a relationship with a customer, and of the risk related to it.
Although Coutts was planning to address this by implementing a new IT system, it did not install it in a timely manner, the FSA said.
"Despite this known time lag, the firm [Coutts] did not implement any mitigating measures, for example, by prompting private bankers to check all relevant systems when reviewing the customer's circumstances.
"The firm did not identify until 2010, when RBS reviewed its processes, that there was a risk that private bankers did not review all relevant information and that monitoring of its high risk customer relationships would, therefore, be ineffective," the FSA final notice stated.
Among its failures, Coutts did not keep the information held on its high risk customers and existing 'politically exposed persons' up-to date.
Furthermore, the bank did not examine closely transactions made through high risk customer accounts appropriately. It also did not identify or assess intelligence about prospective and existing high risk customers properly, nor did it take appropriate steps when it had the adverse information – including allegations about criminal activity – about clients.
The lack of customer due diligence affected 71 percent of 103 files that the FSA reviewed between 15 December 2007 and 15 November 2010.
Tracey McDermott, acting director of enforcement and financial crime, said: "Coutts' failings were significant, widespread and unacceptable.
"Coutts was expanding its customer base, which increased the number of high risk customer relationships. The regulatory environment in relation to financial crime had also changed. It is therefore particularly disappointing that Coutts failed to take appropriate steps to manage its AML risks.
She added: "This penalty should serve as a warning to other firms that, not only should they ensure they constantly review and adapt their controls to changing financial crime risks within their businesses, but that they must also make changes to reflect changing regulatory or other legal standards."
Coutts has since implemented improvements to its systems and controls, to ensure that proper due diligence information about its customers are properly assessed and recorded. It has also exited a number of high risk customer relationships.
By agreeing to settle at an early stage, Coutts avoided a full financial penalty of £12.5 million.