The Hong Kong Authority has reprimanded Coutts for the AML conduct of its local branch and has fined it HK$7 million (US$900,258). The regulator found fault with the bank’s inability to screen customers to see whether they were ‘politically exposed persons.’

The censure was in line with section 21(2)(a and b) of the AntiMoney Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (Chapter 615). The disciplinary action springs from an investigation by Hong Kong’s central bank which found that, between April 2012 and June 2015, Coutts Hong Kong contravened ss3(1), 10(2), 15, 19(1) and 19(3) of Schedule 2 to the ordinance.

Section 19(3)

This section requires a financial institution, in respect of each kind of customer, business relationship, product and transaction, to establish and maintain procedures for AML purposes. Coutts failed to establish effective procedures, especially for ensuring that staff followed up on confirmed alerts regarding politically exposed persons (PEPs) which the branch received from a commercially available database and for complying promptly with the requirements of s10 once it came to know that an existing customer or a beneficial owner of a customer was a PEP or had become a PEP.

One of the branch’s major deficiencies was the absence of a management information system report to track the timeliness of the process of seeking senior management approval to continue a business relationship with a PEP. Periodic reviews and event-driven reviews also proved ineffective in ensuring that PEP alerts were followed up and management approval obtained promptly.

A review conducted throughout the RBS Group in April 2014 identified the bad quality and tardiness of the event-driven reviews. The HKMA’s own investigation found nine PEPs in respect of whom Coutts had failed to obtain prompt senior management approval to continue the business relationship. In five of these cases, Coutts had received earlier PEP alerts but had failed to follow up promptly.

Section 19(1)

This section requires every financial institution to establish and maintain effective procedures for determining whether a customer or a beneficial owner of a customer is a PEP. The regulator spotted deficiencies in the procedures of Coutts for deciding whether a customer or beneficial owner of a customer was a PEP. For example, when the bank introduced a policy of conducting internet searches, it limited them to the process of ‘onboarding’ and did not screen existing customers. Even then, it only conducted internet searches in periodic reviews in respect of customers who were classified as highly risk. Four people were not spotted as PEPs despite relevant information being available at the time, either on commercial databases or from publicly available sources. The four were not classified as highly risk customers and their status as PEPs therefore remained undetected for years.

Section 10(2)

If a financial institution comes to know, from information that is known publicly or information in its possession, that an existing customer or the beneficial owner of an existing customer is a PEP or has become a PEP, it must not continue its business relationship with that customer unless it has complied with this section. It must, among other things, obtain approval from its senior managers. The delay in obtaining approval from the senior management or terminating the relationship ranged from four to 34 months after Coutts had come to know (from publicly known information or information in its possession) that the nine customers were PEPs.

Section 3(1)

This requires a financial institution to carry out the “customer due diligence” (or “know your customer”) measures set out in s2 in certain circumstances. A case was found where Coutts Hong Kong failed to comply.

Section 15

This last section requires a financial institution to take certain measures in a situation that by its nature may present a high risk of money laundering or terrorist financing. These include, in the case of a business relationship being established, the requirement to obtain approval from its senior management to continue the business relationship. The HKMA found a case in which Coutts Hong Kong failed to do so, bringing its list of infractions to an end.

Money off for good behaviour

Without being asked to, Coutts Hong Kong hired an external consultant to conduct an extensive review of its policies and procedures and ‘remediate’ its files on the clients in question. It also co-operated with the HKMA during the investigation. Both these things lightened its penalty to an undisclosed extent.