Monthly Archive for June, 2010

Commercial insurance brokers have been in the cross-hairs of the Financial Services Authority for some time now. The FSA wrote to CEOs of wholesale insurance brokers in late 2007 reminding firms of the criminal offences of bribery and corruption. On 8 January 2008, they fined AON Ltd £5.25 million for failing to take reasonable care to establish and maintain effective systems and controls to counter the risks of bribery and corruption associated with making payments to overseas firms and individuals.

In late 2008, the FSA began a thematic review of anti-bribery and corruption systems and controls in commercial insurance brokerage firms.  The interim report on this was published in September 2009, and the final report on this topic has just been published. Titled ‘Anti-Bribery and Corruption in Commercial Insurance Broking: Reducing the Risk of Illicit Payments or Inducements to Third Parties’, the report focused on 17 broker firms between January 2009 and January 2010 to gather information on current anti-bribery controls.

The main failings identified were as follows:

• Weak governance of anti-bribery and corruption efforts and a poor understanding of bribery and corruption risk among senior managers.
• Failure to implement a risk-based approach to anti-bribery and corruption in practice.
• Poor responses by many firms to significant bribery and corruption events which should have led them to reassess the adequacy of their preventative systems and controls.
• Very weak due diligence on, and monitoring of, third party relationships and payments with a worrying lack of documentary evidence of due diligence taking place.
• Very little or no specific training was provided on anti-bribery and corruption, even for staff in higher risk positions. Anti-bribery and corruption in commercial insurance broking Reducing the risk of illicit payments or inducements to third parties Page 5
• Although payment authorisation controls appeared generally adequate, virtually no firms took steps to identify unusual payments to third parties. As a result, some firms failed to report suspicious activity until after our visit or follow-up work.
• Inadequate compliance and internal audit monitoring of anti-bribery and corruption work.
• Weak vetting of staff compared with other financial sectors, with a heavier reliance on personal referrals and market gossip than usual.
• Although controls over staff expenses and accounts payable generally appeared to be effective, some firms gave large cash advances to staff to assist travelling in higher risk countries where they said credit cards were not readily accepted.
• Some firms awarded their brokers large bonuses directly related to the income or profit they generated. This could encourage risk-taking and negligence, and increase the risk of bribery and corruption, particularly where brokers use third parties to win business.

Due diligence on third party relationships came in for particular scrutiny and criticism:  but the controls found lacking in insurance brokers are in our experience exactly the same as are found lacking in many firms in many varied industry sectors: 

• many firms relied very heavily on an informal ‘market view’ of the integrity of third parties and took no steps to check the accuracy of account opening documentation;
• few firms conducted detailed checking of higher-risk third parties to ensure they were not connected with either the assured, the client or public officials;
• most firms had historically not taken any steps to establish and document the business case for using third parties in insurance transactions. However , there were signs this was changing;
• most firms had historically not conducted regular reviews of their relationships with approved third parties;
• several firms had not reviewed (or conducted their own) due diligence on third parties when teams or business were acquired from other firms;
• there was no real consideration of whether payments made to third parties were commensurate with the services they provided;
• some firms, acting on the instructions of third parties, had made payments to persons other than the approved third party without understanding or verifying the reasons behind the request;
• in some firms, there was no independent checking of due diligence and the approval of third parties outside the producing department;
• some firms did not have – and could not produce – a central list of third parties used to obtain or retain business. Others could not easily produce lists of payments made to third parties; and
• most firms did not take adequate steps to confirm approved third parties’ bank details, increasing the risk that they might unwittingly make payments to somebody else.

The report states  that the FSA will be taking further action against some of the firms reviewed: 

As a result of this review and our concurrent casework, we have commissioned a skilled persons report to assess past payments to third parties made by a firm and issued a formal private warning to another after we became aware of a number of third party payments which were made without an adequate business case being established and documented. We are considering whether further regulatory action is required in relation to other individuals and firms and it is likely that there will be referrals to Enforcement.

We have been saying for some time that companies do not appearing to be taking their very onerous obligations under the Bribery Act seriously enough.  The FSA seems to agree.   

The report can be found here.