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:
- Disgorgement (deprivation of any financial benefit obtained by TJM from the regulatory breaches), which was calculated to be £1,198,277.
- Seriousness of the breaches, deemed to be at level 4 of 5 in this case and requiring an additional payment of 15% of TJMs relevant revenue for the period under review, calculated at £200,121.
- Mitigating and aggravating factors. The FCA highlighted the myriad of published documents from the FCA and the JMLSG on the risk of financial crime and the expected standards when dealing with those risks. It highlighted good practice examples that were available to TJM on CDD, monitoring transactions and customer activity and guidance on high-risk situations. It also highlighted the role of TJM’s senior managers and the inaction that they took, even where they were aware that the firm was conducting high risk activities. It identified no mitigating factors and added a further £240,145 on this basis.
- Adjustments made for deterrence – perhaps most interestingly, the FCA felt that the mitigation payment was not sufficient to act as a credible deterrent and a multiple of 5 was applied, adding a further £1,200,729.
- Settlement discount, a 30% discount was applied given agreement was reached with TJM to settle the matter, bringing the total fine down to £2,038,700.
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.
What can firms learn from TJM?
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:
- To review your systems and controls on a regular basis and identify weaknesses. If your business is conducting high-risk transactions, it should have processes in place that are commensurate with that risk and are able to monitor and flag any irregular activity.
- To report any suspicious activity and ensure all staff know and are encouraged to do the same.
- If you or your clients are operating outside of the UK, consider whether your policies on due diligence are sufficient and your processes for enhanced due diligence and client onboarding are robust enough.
- Ensure that there is sufficient training and awareness across the firm of the importance of combating financial crime.
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.
