The Financial Services Authority have recently fined Aon Ltd a total of £5.25m for failing to have effective systems and controls in place to counter the risks of bribery and corruption.
This fine must surely sound warning bells not just to the insurance industry but to all firms who use the services of overseas contacts to win new or maintain existing business
The Problem
- Aon Ltd, in common with other institutions, often relies on third party agents to win new and renewal business from overseas customers. Some of the countries in which it does business are high risk jurisdictions and many of the agents are unregulated.
- The company’s standard practice was to pay the overseas agents to assist in obtaining reinsurance business for its aviation and energy operations.
- The risk that was not previously identified was that such payments could potentially have been used by the agents for bribery or other corrupt purposes. The problem with this approach was that Aon Ltd had not carried out an effective risk assessment of the potential risks involved in dealing with these overseas third parties and consequently they did not implement effective controls to mitigate those risks.
No criminal actions….
It is not claimed that Aon either engaged in bribery to secure overseas business or that the company was aware that such activities could be taking place. However, the deficiencies highlighted by the FSA (see below) contributed to a weak control environment in the area of making payments to third parties overseas and gave rise to an unacceptable level of risk that the company could become involved in potentially corrupt payment traffic to win or retain business.
the numbers
Potentially “corrupt or suspicious” payments of around $7m (£4.6m) were paid to both businesses and individuals in
- Bahrain,
- Bangladesh,
- Bulgaria,
- Indonesia,
- Myanmar (Burma) and
- Vietnam –
Payments which could have been used for bribes.
A total of 66 transfers were made between January 2005 and September 2007. Whilst it is not unusual for companies to make payments to third parties, particularly abroad, the countries Aon was working in should have called for greater scrutiny so the group was absolutely sure bribery or corruption was not taking place.
Deficiencies highlighted by the FSA
In its “Final Notice”, The FSA listed the following deficiencies in Aon’s policies and procedures:
- Adequate levels of due diligence were not carried out by the company either before relationships were established with overseas third parties or before payments were made. Its payment authorisation process did not take account of higher risk countries in which certain parts of their business operated.
- Once a relationship had been established and approved, no further monitoring of the relationship or payment traffic was carried out.
- Insufficient guidance or training was provided to staff who dealt with overseas third parties about bribery and corruption risks.
- The company did not ensure that committees responsible for overseeing these risks were provided with relevant management information nor did they assess if bribery and corruption risks were being managed effectively.
The Fine
The fine is the first of its kind by the FSA, and the sixth largest in the regulator’s history. Aon co-operated fully with the FSA investigation, and by agreeing to settle at an early stage of the enquiry qualified for a 30 per cent reduction from the full fine of £7.5m.
The regulator also praised Aon’s efforts to improve its controls, describing its approach as “a model of best practice that other firms may wish to adopt”. Margaret Cole, the FSA’s director of enforcement, said:
- “This is the largest financial crime related fine imposed by the FSA to date and it sends a clear message to the UK financial services industry that it is completely unacceptable for firms to conduct business overseas without having in place appropriate anti-bribery and corruption systems and controls.” “The involvement of UK financial institutions in corrupt or potentially corrupt practices overseas undermines the integrity of the UK financial services sector,” Ms Cole said.
- “The FSA has an important role to play in the steps being taken by the UK to combat overseas bribery and corruption. We have worked closely with other law enforcement agencies in this case and will continue to take robust action focused on firms’ systems and controls in this area.” “Aon Ltd failed adequately to question the purpose and nature of these suspicious payments in circumstances where it ought to have been reasonably obvious to Aon Ltd that there was a significant risk that the overseas third party might bribe the insured, the insurer or a public official,” the FSA said.
Further FSA Action
1. The risks of bribery and corruption have already been highlighted by the FSA in its Financial Risk Outlook 2008:
“As understanding of financial crime risk evolves, the scope of the risks that firms are expected to assess and to mitigate has increased. While this increase in scope should facilitate a more comprehensive approach to combating financial crime it may also increase the challenges for firms. International efforts to combat corruption combined with the continuing development of the UK’s legal framework on corruption may increase the level of interest in the financial services sector’s efforts to combat corruption and bribery. There is a risk that firms could come under pressure to pay bribes, especially if they are operating in jurisdictions where paying bribes is widely expected. In addition, financial services firms may launder the proceeds of corruption or be used to transmit bribes”.
2. The FSA is keen to use the Aon case to caution all institutions that they should take the necessary steps to keep track of their activities. A recommendation to all insurance companies to scrutinise their operations for similar oversights, sent out by the FSA in November 2007, is now being followed up by an industry-wide report.
What action do you need to take?
If you use overseas third parties, you should have policies, procedures and training in place to make staff aware of the risks of bribery and corruption. You should check that these include:
- Effective due diligence being carried out prior to establishing new relationships, including the involvement of third parties and the purpose and destination of payments.
- Proper authorisation procedures that are carried out prior to a payment being made.
- Third party relationships and payments being monitored appropriately.
- Carrying out regular risk assessments on third parties relationships and countries dealt with to assess bribery and corruption risks.
- Regular reviews of compliance with policies and procedures by senior management / committees receiving appropriate management information.
- Training and guidance for staff working in relevant business areas.
http://www.fsa.gov.uk/pages/Library/Communication/PR/2009/004.shtml
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