Time to own up? FCA pursues senior execs in £18m enforcement

In brief

– The FCA has issued a fine against an investment advisory firm, as well as three senior executives for failing to “conduct business with integrity”

– The FCA’s action is the latest in a string of regulatory enforcements against senior individuals, as focus shifts to individual accountability

– As well as regulatory action, a number of issuing bodies have published proposals for increased accountability for CCOs and senior managers

The Chair of the Securities and Exchange Commission (SEC), Gary Gensler has been quoted as saying that “nothing motivates quite like accountability”. This week, it was the turn of the Financial Conduct Authority’s (FCA) to hone in on the topic.

The UK regulator has issued a staggering £18m fine to investment advisory firm, Julius Baer International Limited (JBI), for a string of compliance failures, ranging from a failure to “conduct its business with integrity” to “failing to take reasonable care to organize and control its affairs”.

In short, the FCA found that JBI had facilitated arrangements between Bank Julius Baer (BJB) and an individual named Dimitri Merinson, who was an employee of a number of Yukos Group companies. Under these arrangements, BJB paid Merinson finders’ fees for introducing Yukos Group companies to Julius Baer. This was founded on the understanding that these companies would then place large amounts of cash with Julius Baer – which it could then generate significant revenues from. In some instances, Yukos Group companies were charged inflated rates, with profits shared between Merinson and Julius Baer. Through these agreements, Merinson amassed over $3m in commission payments. The FCA found that, as well as the misconduct, JBI did not have adequate policies and procedures in place to identify and manage the risks that arose.

Commenting on the case, the FCA said that the arrangement fees were “improper” and “showed a lack of integrity in the way in which JBI was undertaking business”. The FCA’s Executive Director of Enforcement and Market Oversight added that the circumstances surrounding JBI showed “weaknesses” in which “financial crime of the most serious kind can flourish”.

Increased accountability for those at the top

What is particularly interesting in this case is that the FCA has charged three senior executives alongside the corporation of JBI. These include Gustavo Raitzin, the former Regional Head for BJB, Thomas Seiler, former BJB Sub-Regional Head for Russia and Eastern Europe, and Louise Whitestone, former Relationship Manager on JBI’s Russian and Eastern European Desk (It is important to highlight that all three senior executives have referred their Decision Notices to the Upper Tribunal).

This action befits a global shift towards increased transparency and accountability within financial services – one which is inspiring a top-down approach to individual liability. Over the past year, the industry has seen a significant move towards senior manager accountability – the days of hiding behind the corporate veil look to be sliding into the distance. Examples include:

No excuses for CO inaction

At the beginning of 2022, FINRA issued an anti-money laundering (AML) compliance officer with a $25,000 fine and a two-month suspension for failing to oversee his employer’s anti-money laundering program. FINRA found that he had failed to familiarize himself with his firm’s day-to-day operations and had failed to supervise its AML analysts. The compliance officer “took no steps to investigate or address” the firm’s surveillance and review process around AML.

No time for burying your head in the sand

In the middle of 2022, the SEC banned a CCO from acting in a supervisory or compliance capacity for five years, and issued him with a $15,000 fine. In this instance, the CCO had been made aware of non-compliant activity but failed to take sufficient remedial action for over a year. The CCO knew, or should have known, that the company’s compliance program was “inadequately implemented”. Despite this, and a number of significant notifications that signified that the compliance program was broken, the CCO did not take steps to fix it. In fact, it was not until the SEC got involved that the company’s compliance program, policies, and controls were reviewed.

Proposed rules for increased liability

Both the UK’s Law Commission and the New York City Bar have issued proposals and frameworks for the increased liability and individual liability of both senior managers and chief compliance officers. This is something that SEC Commissioner, Hester Pierce, took the opportunity to reflect on in a recent publication. Pierce noted that any such new liabilities would only work where charging a CCO directly would “help fulfil the SEC’s regulatory goals”. This is a difficult measure, especially given the subjectivity of many enforcement cases, or the fact that some CCOs fail to act, rather than are proactively non-compliant.

Either way, Pierce added that such individual accountability frameworks could hamper recruitment into the space as “fears of facing someone else’s missteps can dissuade excellent candidates from seeking compliance jobs”. Regardless, these new proposals are on the agenda and have gained support from leading industry figures, including the new DOJ Fraud Section Chief, Glenn Leon.

How can CCOs avoid individual accountability woes?

Whether driven by accountability rules, such as the Senior Manager and Certification Regime (SMCR), or simply by best practice, firms should understand who is responsible for what, from the top down. Having holistic oversight and auditable trails of roles, responsibilities and communication trails will ensure you know where to turn where things go awry.

In the case of bad actors or bad relationships, having watertight surveillance of end-to-end operations will mitigate gaps and minimize opportunity for non-compliant activity to go unnoticed. Having processes in place that demonstrate proactive compliance will also show willing, as will showing that you don’t turn a blind eye to bad practice – regulators will be more forgiving where you can show that you tried.

If you’re worried about increasing individual accountability for compliance and looking for a solution, get in touch.