Barclays Fined $109 Million for Risk Failings on 'Elephant Deal'

  • Failings are linked to group of `politically exposed' clients
  • FCA fine related to 1.9 billion-pound deal in 2011, 2012
Photographer: Simon Dawson/Bloomberg

Barclays Plc was fined 72.1 million pounds ($109 million) by U.K. regulators for failing to fully probe a group of “politically exposed” ultra-high-net-worth clients tied to a 1.9 billion-pound transaction.

The lender executed the so-called elephant deal in 2011 and 2012 for a number of clients, the Financial Conduct Authority said in a statement on Thursday. While the individuals should have been “subject to enhanced levels of due diligence and monitoring,” Barclays didn’t follow standard procedures aimed at minimizing the risk of money laundering, “preferring instead to take on the clients as quickly as possible” and generating 52.3 million pounds in revenue, the FCA said, without disclosing the customers’ identity.

The latest fine tied to past misconduct comes as a blow to Chairman John McFarlane, who has made a “high performance ethic” one of his three priorities as Barclays seeks to restore investor confidence and bolster earnings growth. The London-based bank said on Oct. 29 that it doesn’t expect costs tied to past misconduct to drop anytime soon, and cut a profitability target for 2016 partly because of higher redress charges.

“Barclays ignored its own process designed to safeguard against the risk of financial crime and overlooked obvious red flags to win new business and generate significant revenue,” Mark Steward, the FCA’s director of enforcement, said in the statement. “This is wholly unacceptable.”

‘Politically Exposed’

The fine is the largest that has ever been imposed by the FCA and its predecessor for failings tied to financial crime, according to the statement. Barclays didn’t facilitate any financial crime or derive any profits from financial crime, according to the FCA. The regulator said it had no criticism of the clients.

The FCA also said the potential issues with the transaction were only discovered after the regulator pressed the bank to review it. Barclays finished investigating the matter in November 2014.

“Politically exposed” persons, or PEPs, are individuals with prominent jobs, often linked to governments, which make them more susceptible targets for bribery or corruption. Family members or associates of such a person are usually also deemed PEPs.

Structured Finance

"This puts financial crime back on the compliance agenda for firms in a very real way," said Richard Burger, a lawyer at London-based RPC who used to work for the FCA. "We’ve heard a lot about systems and controls failings in relation to money laundering, but this is an example of what those failings can really mean in practice."

The transaction was a so-called structured-finance deal involving investments in notes backed by underlying warrants and third-party bonds, according to the statement. It was the largest of its kind that Barclays had executed for individuals, the FCA said.

Under the deal, the wealthy clients would receive a “specified rate of income” over a number of decades while Barclays would provide a “full capital guarantee” as well, the FCA said.

Barclays only requested information if it was absolutely necessary, as it didn’t want to “irritate” the clients, the FCA said. Managers working on the deal agreed to keep details of the transaction and the identities of the clients confidential, even from colleagues. If the executives revealed who the wealthy individuals were, they’d have to pay them 37.7 million pounds in compensation, the regulator said.

Payment Request

The bank’s officials didn’t properly scrutinize the source of the clients’ funds despite the higher risk of financial crime. Managers failed to understand the crime risks involved and were concerned about how long approval of the deal would take, with one executive saying he wished to “race this through," according to the FCA.

“It is the responsibility of U.K. financial institutions to ensure that they minimize the risk of being used for criminal purposes and, in particular, of facilitating money laundering or terrorist financing,” the FCA said.

At one stage in the deal, the clients asked Barclays to pay several tens of millions of dollars to a third party, without explaining why. When Barclays queried the request, it was withdrawn, the FCA said. While the payment could have been legitimate, the bank should have "considered whether the reluctance to provide it with an explanation indicated a higher risk of financial crime" and applied a higher level of scrutiny, said the regulator.

Full Cooperation

“The FCA made no finding that Barclays facilitated any financial crime in relation to the transaction or the clients on whose behalf it was executed,” the lender said in a statement on Thursday. “Barclays has cooperated fully with the FCA throughout and continues to apply significant resources and training to ensure compliance with all legal and regulatory requirements.”

In the early stages of the transaction, one executive said it could be “the deal of the century” for Barclays, which is one of the smaller global banks that manage the fortunes of the wealthy. In 2014, the lender’s private bank managed $130.5 billion of assets, ranking it 25th in the world, according to the Scorpio Partnership, a consulting firm. Wealth-management units at UBS Group AG, Morgan Stanley and Bank of America Corp. all oversee trillions of dollars.

Robert Diamond was Barclays’ chief executive officer for much of the period during which the bank arranged the deal. He exited in July 2012 after regulators fined the lender for manipulating benchmark interest rates. The bank’s board ousted his successor, Antony Jenkins, earlier this year and chose Jes Staley as his replacement.

Barclays shares rose 1.3 percent to 224.4 pence at 1:50 p.m. in London. They have dropped about 8 percent this year.

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