Interim findings: anti-bribery and corruption in commercial insurance brokers

Anti-bribery and corruption systems and controls in commercial insurance broker firms: interim findings

In late 2008 we began a review of anti-bribery and corruption systems and controls in commercial insurance broker firms. We’ve taken the step of publishing our interim findings as there will be a short delay to the final report, following a secondment of a small number of our Financial Crime Operations team to support the work of our Major Retail Groups Division. We’ve identified some significant weaknesses which firms should be aware of and we hope that the findings will help firms assess their own controls, and strengthen them where necessary.

Key findings to date

Although there are some examples of good practice at the firms we have visited, we have identified a number of concerns that seem to be common across the commercial insurance broker industry.  These and other common issues are set out below.

1. Due diligence and monitoring of third-party relationships and payments are generally very weak, with the following particular concerns:
   
   
• Most firms rely very heavily on an informal ‘market view’ of the integrity of third parties and very basic checks, such as printing the third party websites (which are easy to forge). Few firms conduct detailed checking of higher-risk third parties similar to anti-money laundering ‘enhanced due diligence’. Only one firm used a commercially available intelligence tool as part of their due diligence, though some other firms were considering this.
• At most firms we found no formal checks on whether third parties were connected with the assured, the client or (where relevant) a public official.
• Most firms had historically not taken any steps to establish or review the nature of third parties’ involvement in insurance transactions. However, there were signs this was changing.
• Several firms did not conduct regular reviews of the nature of their relationship with approved third parties. Consequently, redundant third party accounts were often ‘live’ on the accounting system.
• Several firms had not reviewed (or conducted their own) due diligence of third parties when a team or business was acquired from other firms.
• Commission was usually shared 50/50 between firms and third parties, with 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 commission payments to persons other than the third party without a clear understanding of why.
• 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 a central list of all the third parties used to obtain or retain business.
2. Many firms are currently reviewing the adequacy of their anti-bribery and corruption systems and controls in light of the recent AON fine. Overall, the AON fine appears to have had a significant deterrent effect. Some firms failed to review their systems and controls in the light of the Dear CEO letter of November 2007, and several of those that did concluded that their systems and controls were broadly adequate. However, following the AON fine, several firms have conducted gap analyses against the AON Final Notice and are now correcting what appear to be serious weaknesses in their systems and controls.
3. Despite the fact that insurance brokers are not subject to the Money Laundering Regulations, all firms visited had appointed somebody to carry out a Money Laundering Reporting Officer (MLRO) type role. However, no firm visited had ever made a Suspicious Activity Report (SAR) and one firm discussed a suspicious incident with us that, in our view, they should have reported under the Proceeds of Crime Act.
4. Few firms adopt a risk-based approach, for example, by focusing on high-risk jurisdictions and those third parties that are individuals. Most firms adopt a one-size fits all approach to their systems and controls.
5. Compliance and Internal Audit checking of third-party relationships often considers only whether the proper processes have been followed (eg, that an authorised person in the firm has signed off the relationship). Very few firms’ compliance/audit functions consider the adequacy of underlying due diligence and some firms’ compliance/audit functions had never examined bribery and corruption and/or third party issues.
6. Nearly all firms receive bank details from third parties through informal channels, usually email. There is usually no requirement for bank details to be submitted, for example, on official letterheads signed by an authorised signatory. This exposes firms to significant risk of fraud and means that payments meant for an approved third party could in fact be made unwittingly to somebody else.
7. Vetting of staff in broker firms appears to be weak compared with other financial service sectors. They rely almost entirely on references (even though they view them generally to be of little use) and market gossip/referrals. Several firms also target staff for particular roles, particularly producing brokers. Very few firms carry out formal checks of criminal records or financial soundness and no firms repeated any form of vetting during employment. The two firms that did carry out criminal record checks focused mainly on approved persons and only one checked higher risk non-FSA-approved individuals.
8. Although most firms require staff to take and pass ‘financial crime’ training (usually computer-based with a multiple choice test), there is very little or no specific training provided on anti-bribery and corruption, even for staff in higher risk positions. In addition, staff responsible for training others on financial crime have generally not received any specialist training on bribery and corruption themselves.
9. Systems and controls over staff expenses and accounts payable appear generally to be effective, though some firms have no formal limits on staff entertaining and expenditure. All firms visited require staff to produce receipts for expenditure and expenses to be signed off by an authorised person. (In some cases there may be some flexibility if a receipt is genuinely lost or mislaid.) However, some firms told us that large cash advances are sometimes given to staff to facilitate travel in higher risk overseas jurisdictions where they say credit cards are not readily accepted.
10. Remuneration of broking staff usually consists of salary and a discretionary bonus (determined by a number of factors, not just business production). However, some firms have senior management/MDs who receive large bonuses directly related to the profitability of the business they generate.

AON Ltd

On 8 January, we 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.

Between 14 January 2005 and 30 September 2007, AON Ltd failed to properly assess the risks involved in its dealings with overseas firms and individuals who helped it win business and failed to implement effective controls to mitigate those risks. As a result of AON Ltd’s weak control environment, the firm made various suspicious payments, amounting to approximately US$7 million, to a number of overseas firms and individuals.

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