November 26, 2015 / 12:10 PM / 2 years ago

Barclays fined for lax crime checks in 'deal of century'

A view of the exterior of the Barclays U.S. Corporate headquarters in the Manhattan borough of New York City, May 20, 2015.Mike Segar

LONDON (Reuters) - Britain's financial watchdog has fined Barclays (BARC.L) 72 million pounds ($109 million) for cutting corners in vetting wealthy customers in order to win a huge transaction described by one senior manager as potentially the "deal of the century."

Barclays arranged the 1.9 billion pound transaction in 2011 and 2012 for a number of rich clients deemed by the regulator to be politically exposed persons (PEPs), or people holding prominent positions that could be open to financial abuse.

That should require a bank to conduct more detailed checks on them, but Barclays failed to do so and in fact cut corners with its compliance procedures, Britain's Financial Conduct Authority (FCA) said in a damning report on Thursday.

"Barclays did not follow its standard procedures, preferring instead to take on the clients as quickly as possible and thereby generated 52.3 million pounds in revenue," the FCA said.

It said the bank took unusual steps to keep the details of the clients and the transaction off its computer system, where it would normally be recorded.

These included buying a safe specifically for storing some documents relating to the clients and agreeing to pay the clients 37.7 million pounds if their names were ever revealed.

"Barclays went to significant lengths to accommodate the client to ensure that it won their business," the FCA said in a 37-page notice on the bank's failings.

"Barclays' approach was to request information only if it was absolutely necessary and did not want to 'irritate' the clients with multiple requests," it added.

Just over 52 million pounds of the penalty comprised disgorgement, meaning clawing back the profit Barclays made on the transaction. That is the largest disgorgement penalty ever imposed by the FCA.

The watchdog made no criticism of the clients, and gave few clues on their identity. It said Barclays described their wealth as coming from "landholdings, real estate and business and commercial activities."

Barclays, which received a 30 percent discount on the fine for settling early, said the FCA made no finding that the bank facilitated any financial crime in relation to the transaction or the clients on whose behalf it was executed.

"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," it said.

The FCA said the failings were not identified by Barclays, however. It was only after the regulator discussed the transaction with the bank that it gathered more information on the relationship with the clients.

The deal's size meant "very significant" harm could have been done to the integrity of the UK finance system and society if it had been related to criminal activity, the FCA said.

"ELEPHANT DEAL"

The fine is the seventh significant penalty imposed on Barclays by Britain's regulator in the past six years, including penalties for allegedly manipulating Libor interest rates and foreign exchange prices.

The series of scandals means improving standards and culture will be a key task of the bank's new Chief Executive Jes Staley, who starts on Tuesday.

The FCA said several members of Barclays' senior management were aware of and endorsed the transaction, and said five individuals were identified as giving part approval for it, but it did not name any individuals at fault.

It said the bank set up "a select team", including senior managers, to carry out checks and arrange and execute the deal, which was known by those involved within Barclays as an "elephant deal" because of its size.

Bob Diamond was the chief executive of Barclays from the start of 2011 until he left in July 2012. The head of its wealth management business in 2011 and 2012, which oversees dealings with rich clients, was Tom Kalaris. He stepped down in May 2013.

A spokesman for Diamond declined to comment, while Kalaris could not immediately be reached for comment.

The deal was the largest Barclays had ever executed for wealthy clients and in its early stages one senior manager said it could be "the deal of the century," according to the FCA.

The bank failed to establish adequately the purpose and nature of the deal and did not sufficiently corroborate the clients’ stated source of wealth and source of funds for the transaction, the FCA said.

It was a structured finance deal comprising investments in notes backed by underlying warrants and third party bonds. The aim was to deliver a specific rate of income with a full guarantee on the capital over a number of decades.

The regulator listed nine features that should have raised red flags for Barclays, including its complex structure involving offshore companies, and that at one point clients requested Barclays make a payment of several tens of millions of dollars to a third party, which was not made.

Editing by Mark Potter

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