The FCA has fined corporate finance advisory and brokerage firm Sapien Capital Ltd £178,000 for failings which led to the risk of it facilitating fraudulent trading and money laundering. The figure was arrived at following a 30% settlement discount and a further reduction due to serious financial hardship, Were it not for the reductions, the FCA would have imposed a fine of £236,740.
The FCA found that between 10 February 2015 and 10 November 2015 (the Relevant Period), Sapien executed "purported" equity trades totalling more than £6.39 billion in Danish and Belgian equities for a large number of clients without having adequate systems and controls in place to identify and mitigate the risk of being used to facilitate fraudulent trading and money laundering. The trading in question was characterised by a circular pattern of extremely high value trading involving EU equities trades on or around the last day the securities were cum-dividend. This was in order to demonstrate apparent shareholding positions that would be entitled to receive dividends for the purposes of submitting a reclaim for withholding tax.
In the Final Notice, the FCA referred to the trading as "purported" as there was no evidence of ownership of the shares by the Solo Group clients or settlement of the trades by the Solo Group. The FCA's view was that this, coupled with the high volumes of shares purported to have been traded, was "highly suggestive of sophisticated financial crime".
As a result, the FCA found that Sapien had breached:
- Principle 2 (skill, care and diligence) by failing to exercise due skill, care and diligence in applying its anti-money laundering (AML) policies and procedures, and in failing properly to assess, monitor and mitigate the risk of financial crime in relation to Solo Group clients and the purported trading.
- Principle 3 (management and control) by failing to have adequate systems and controls in place to identify and mitigate the risk of being used to facilitate fraudulent trading and money laundering in relation to business introduced by four authorised entities.
The FCA found that over a 3 month period (February 2015 to April 2015), Sapien onboarded 166 clients introduced to it by four authorised firms (Solo Capital Partners LLP, West Point Derivatives Ltd, Old Park Lane Capital Ltd and Telesto Markets LLP) collectively referred to as the Solo Group. The Solo Group purportedly provided clearing and settlement services to clients and many of the Solo Group clients emanated from jurisdictions which did not have AML requirements equivalent to those in the United Kingdom.
In reviewing Sapien's onboarding process, the FCA identified failings around its customer due diligence procedures and that it had failed to detect or question numerous red flags whilst onboarding the 166 Solo Group clients. One such red flag was that each of the clients sent Sapien an identical email asking to be onboarded for brokerage services, despite the fact that the clients were supposedly separate entities. It was the FCA's view that in an effort to obtain the Solo Group business, Sapien demonstrated a willingness to cut corners by bypassing its standard KYC forms and its compliance manual (which required information regarding the source of funds and the nature and purpose of the trading) in circumstances where it perceived a risk that a delay in onboarding the clients would possibly cause the loss of the business. Sapien purportedly executed high-volume trades worth more than £6 billion and received commissions of £297,044 which made up 13% of Sapien's total revenue during the Relevant Period.
The FCA made numerous critical findings in respect of Sapien's Principle 2 and 3 failings, including that Sapien had:
- Failed to gather information to enable it to sufficiently understand the business that the Solo Group clients were going to undertake or the source of funds;
- Failed to undertake a document risk assessment for each of the Solo Group clients;
- Failed to complete EDD for any of the Solo Group clients despite the fact that none of the clients were physically present for identification purposes; and
- Failed to identify clear risk factors including that some of the Solo Group clients disclosed that they had a net worth of less than €2 million but were purportedly going to execute 25 trades of €100 million.
Because Sapien failed both to have and apply appropriate AML systems and controls in relation to the Solo Group clients, there was an unacceptable risk that Sapien could be used by clients to launder the proceeds of crime. The FCA found that the way the trades were conducted by the Solo Group and their clients, in combination with their scale and volume, were highly suggestive of sophisticated financial crime, and appeared to have been undertaken to create an audit trail to support WHT reclaims in Denmark and Belgium.
This Notice represents a warning (as if one were even needed) that authorised firms must have in place effective systems and controls to identify and mitigate the risks of being abused by those who seek to conduct financial crime. It describes fighting financial crime as an issue of "international importance".
As for regulatory repercussions of this cum-ex trading, there appears to be plenty more to come. Whilst this is the first time the FCA has issued a penalty in relation to cum-ex trading, dividend arbitrage and withholding tax reclaim schemes, there are currently a number of ongoing and overlapping investigations. Following a recent Freedom of Information Act request, the FCA revealed that, as of 24 February 2021, eight individuals and fourteen firms were under investigation for their alleged involvement in cum-ex trading. The Sapien decision looks likely to be the first outcome of many over the months and years ahead.