The Financial Services Authority (FSA) is fining Royal Bank of Scotland (RBS) £5.6 million for failures in the IT systems and procedures it used to screen for criminal and terrorist financing, as required in the Money Laundering Regulations 2007. According to the watchdog RBS Group didn’t have adequate systems and controls in place to stop breaches of UK financial sanctions at its NatWest, Ulster Bank, main RBS and Coutts divisions, between 15 December 2007 and 31 December 2008. RBS also announced pre-tax profits of £1.14bn and continued its disposal programme, selling 318 branches for £1.65bn to Santander, and its WorldPay payments processing unit to private equity firms Bain Capital and Advent International for £2bn, including £200m that is contingent on future returns.

RBS failed to screen both its customers, and the incoming and outgoing payments made, against the UK government’s Treasury sanctions list, necessitating the £5.6 million FSA fine. The bank even failed to screen any payments remitted from outside the country at all over the disputed one year period. This “unacceptable risk” could have financed terrorists and criminals on the proscribed list, explained the regulator.

The primary problem appears to have been that manual entry for SWIFT payments was often used, bypassing screening software, which was in any case inadequate as it didn’t cater for all financial message types and payment instructions. Infrequent or non-existent updating of the Treasury’s sanctions list was also cited as a problem.

The FSA considers that RBSG’s failings in relation to its screening procedures were particularly serious because of the risk they posed to the integrity of the UK financial services sector. “The involvement of UK financial institutions in providing funds, economic resources or financial services to designated persons on the sanctions list undermines the integrity of the UK’s financial services sector,” confirmed Margaret Cole, FSA director of enforcement and financial crime. “By failing to screen relevant customers and payments against the HM Treasury sanctions list, RBSG left itself open to the risk that it was facilitating terrorist financing. The scale of the fine shows how seriously the FSA takes this issue and should act as a warning to other firms to ensure that they have adequate screening procedures.”

As RBSG agreed to settle at an early stage of the FSA investigation, it qualified for a 30 per cent reduction in the penalty, which otherwise would have been £8 million.

“The FSA has shown in recent months it is prepared to fine financial institutions significant sums for failings in their business systems and data management [see £33m JPM fine HERE],” says Colin Rickard, managing director, EMEA, at the BI vendor, DataFlux. “The issue relates to a bank’s ability to understand the interrelationships between its business information, something which must be mastered.”

“In my opinion, the next major hurdle for the banks is going to be complying with the Single Customer View changes to the Financial Services Compensation Scheme (FSCS) by 31 January 2011, which is a far greater data management challenge than watch-list screening or transaction reporting as the numbers involved are greater. Our research shows that 65 per cent of UK institutions believe failure to comply with the FSCS regulation will result in financial penalties but only half of UK institutions began to prepare for the required changes to systems this year, despite the requirement to lodge plans with the regulator by year end.”

RBS sells branches to Santander & WorldPay to private equity
RBS' sale of the old Williams & Glyn network to Santander for £1.56bn includes 318 branches, 40 SME banking centres, more than 400 relationship managers, four corporate banking centres and three private wealth banking centres. It is part of the disposal programme forced upon the bank by the EC as a quid pro quo for the state aid it received in preventing its collapse during the banking crisis. The WorldPay sale, also demanded by the EC, will cost Bain Capital and Advent International £2.025bn, with £200m of that payable if returns are as expected. The sale is due to complete by year end.

Set up just over 20 years ago the WorldPay unit processed 6.8bn transactions last year and is active in more than 30 countries around the world. It has a throughput of 680 transactions per second in 133 currencies, covering 72 different payment methods, so is highly versatile and scalable. With the death of cheque and gradual decline of cash, electronic transactions are expected to be a lucrative and growing area for the future, hence the relatively high price.

The Santander purchase involves the transfer of 1.8 million retail customers and almost 250,000 business customers. The migration and re-branding of all the branches is expected to take 18 months to complete.

Rival bids from NAG and other banks lost out during the bidding process. Santander now has approximately 1600 branches in the UK, meaning it now has the fourth biggest network after its earlier acquisitions of Abbey, Alliance & Leicester and part of Bradford & Bingley.

The disposal of RBS' WorldPay international payments business is expected in the near future too, with Advent and other private equity firms understood to be in negotiations to buy the unit for £2.5bn.

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