The Bradford Laundromat was raided on 9th September 2016 by the West Yorkshire Police Economic Crime Unit, shutting down the cash for gold and jewellery business of Fowler Oldfield a business that had operated in the City of Bradford in the UK for more than a 100 years. Fowler & Oldfield had washed hundreds of millions of pounds in suspected UK illegal drug and other illicit proceeds through its Nat West Bradford commercial bank account.
This week Nat West Bank was fined £265 million for AML breaches and next year those involved with Fowler Oldfield will stand trial on money laundering charges. It is therefore a good time to take stock and look at what happened at Fowler Oldfield, including those arrested, at Nat West, the FCA investigation and fine, and some key Takeaways.
With all the criticism that has come Nat West’s way due to is failures in this case, lets not forget to give credit where its due to those in Law Enforcement, that identified and took action targeting serious and organised crime and money laundering and putting the Bradford Laundromat out of action.
A Background & Context:
1. Fowler & Oldfield
Bradford jewellers Fowler and Oldfield can trace their roots back to 1897 when owner Gregory Frankels great grandfather established the business during the Diamond Jubilee of Queen Victoria. Frankel was a former chairman of Bradford Retail Action Group, & traded in the city of Bradford for 40 years. He also owned Sydneys, another Jewellers in the city, which had been owned by Frankels since 1947. Trading in the city was becoming harder, especially for jewellers, with Fowler & Oldfield temporarily closing in 2012, & other city jewellers such as Fattorini jewellers and the former Mappin & Webb store also closing. But Gregory Frankel also had a cash for gold trading business run from a warehouse just outside the city centre, which was doing much better.
2. Relationship with Nat West
The business was expected to generate a turnover of £15 million a year, a figure given to and accepted by Nat West that opened accounts for Fowler & Oldfield on 11 November 2011, with a risk rating of ‘high’, after initially declining it – wanting to avoid “high cash turnover businesses (eg ‘cash for gold’ operations)”, which would automatically designate the account as “high risk” under Nat West AML Policies. It should be noted that Nat West later from 2012 expanded its high risk customer definitions to also include “businesses involved in the extraction, manufacture and wholesale buying / selling of jewellery”. Nat West relented after the relationship manager tried again and opened the account provided activity didn’t exceed expected business and avoided cash transactions.
Nat West’s relationship managers were responsible to manage the account to agreed conditions, I.e. no cash and based on expected turnover around £15 million a year. The account was opened and designated initially as “high” risk. By November 2013, figures of up to £1.8m a day were being banked but despite this on the 13th December 2013 the customer risk rating changed from “High” to “Low”, which appears to be the result of a programme and system error incurred during a large scale remediation exercise, where this accounts’ industry segment was mapped incorrectly from “precious metals” to “wholesale of metals and metal ores.”
On 21 December 2011, a secured credit facility was agreed for the customer to provide funding for equipment to be used to analyse and refine gold;
On 17 April 2014, the Relationship Manager amended the risk rating to “medium” and then in March 2016 back to “high risk”. For the period 7 December 2013 to 3 March 2016, the account was under rated by NatWest.
Between January 2012 and 6 November 2013, the transactions on the account predominantly consisted of electronic payments into the account (over £36m) and cash withdrawals (over £25m) out of the account. In addition, The customer made just £170,000 of cash deposits, and over £78,000 in international payments which were mostly made to companies related to precious metals.
By 2014 things changed, with big increases in cash deposits, much of it in cash, and electronic wire transfer withdrawals. The cash deposits included a lot of Scottish notes with a musty smell as if they had been stored under floorboards being banked at over 50 branches including those close by in Halifax but also elsewhere in Walsall, Piccadilly and New Bond Street in London. Staff at the Walsall branch reported in 2015 that cash was brought into the branch uncounted in big black bin liners; the weight was so great that the bags would break and staff had to move the cash into stronger hessian sacks. The branch in Southall in greater London had received GBP42 million in cash between January 2015 to March 2016. By June 2016, Fowler Oldfield had deposited in cash over £240 million and £365 million overall.
This level of activity generated a significant number of internal red flags, both from those responsible for cash deposits, and for those investigating alerts generated from the Banks transaction monitoring system. In all more than 20 internal escalations were raised, but in each and every case, the investigation was closed and no external SARs were filed. There were numerous reasons for this. The Relationship Manager was happy to take explanations from the customer largely at face value without corroboration, and investigators didn’t have sufficient data and adequate technology to see the bigger picture, or better put the alerts into a wider context. Investigators were also more focused on processing and closing alerts within a given timeframe, rather than prioritising quality, as well as their being training, capability, attrition and motivation issues that affected the broader investigations group. Periodic and dynamic risk reviews were not carried out despite changes in directorships, customer risk ratings and customer changes and activity.
Despite the many weaknesses, which allowed the accounts to be used, there are no findings that Nat West staff acted in bad faith or with wilful blindness, with according to the FCA behaviours being more indicative of negligence and at times incompetence.
3. Police Investigation
In June, 2016 Nat West had been informed by West Yorkshire Police of their interest in Fowler Oldfield and the Bank agreed to cooperate with their investigation from 23 June 2016. The customer continued to pay money into its accounts following 23 June 2016 (£66,527,680.87 in total), but the Bank had presumably consent to continue to receive funds. The Bank then filed 13 late SARs which retrospectively reported conduct on the account including conduct dating back to 2013 and eventually sought consent for account closures. NatWest subsequently exited the customer and the Bank notified the FCA that it had discovered “concerns” in the management of this customer relationship.
On 9th September, 2016 West Yorkshire Police raided the Fowler Oldfield premises in Bradford initially arresting 12 in connection with a money laundering investigation supported by the National Crime Agency, based on warrant executed at a premises on Hall Lane, Bradford. The police seized £2 million worth of assets, including cash, gold granules and second hand jewellery at the premises.
Assets of the customer have been taken by West Yorkshire Police. It is not known how much was seized from the bank accounts of Fowler Oldfield or from elsewhere. The police investigation has so far netted 11 people who have so far pleaded guilty to charges relating to the cash deposits and three cash couriers being charged. A further 13 individuals are awaiting trial at Leeds Crown Court on 25 April 2022 in relation to the activities of Fowler Oldfield. This includes Gregory Frankel and others.
Police recovered CCTV equipment from Fowler Oldfield premises and a ledger which identified those involved in the cash operation. This led the police to individuals and then to uncovering how the operation worked. A courier would deliver cash to be dropped off at Fowler Oldfield. He would initially be contacted by text message and given bags to drop off, each one stuffed regularly with more than £250,000 in cash. Once delivered to Fowler Oldfield’s reception the courier would be given an envelope containing a token for proof of delivery. The men were paid for transporting the money. Bags were then unpacked in a counting room behind closed doors at Fowler Oldfield and the amount from each courier recorded in a ledger. The couriers had been targeted for recruitment because of their debts, often from gambling. For example, one courier feared that if he had not delivered the money there would be consequences for him and his family.
4. The FCA Prosecution & Conviction
The FCA first alerted NatWest of its investigation a year later in July 2017. The FCA decided to commence a criminal action against NatWest on 16th March 2021, making it the first bank to be charged under a 2007 money laundering law, accusing NatWest of failing to monitor suspect activity by its customer. No individuals have been charged. Nat West pleaded guilty, pursuant to a Plea Agreement on 6 October 2021. Sentencing was carried out on 13th December, 2021. A fine of £264.7 million was levied plus £460 thousand representing the total net present value of all fees and charges earned on the accounts (Fowler Oldfield was one of the-“most lucrative” clients in the Bradford region by 2014) and £.4.3 million in FCA legal fees, representing costs to Nat West of £270 million, as well as their own costs and expenses.
As to how the level of the fine was arrived at is interesting. The maximum penalty upon conviction of a corporate defendant for breaching the Regulations is an unlimited fine, and where involving charged individuals of 2 years’ imprisonment. The Judge determined the fine on the basis first of the amounts laundered through the account, during the relevant period to 23 June 2016, which was £287,794,887.06. Alternative approaches could have involved calculating the turnover which would have been much higher) or by calculating the likely cost avoided by failing to put in place an effective anti-money laundering programme. Then second a reduction to this amount based on the fact that this case amounted to a breach of regulations and not a substantive case of money laundering itself. The judge stated that in this case “it is not suggested that there has been any deliberate flouting of the rules or that there was any criminal intent. These are strict liability offences. As my summary of the relevant facts underpinning liability demonstrates these are not offences which relate to a lack of commitment by the Bank to the principles underpinning the Regulations.” As a result the figure should be reduced by 40% to £172,676,932.23. Third taking into consideration previous aggregating (prior regulatory action, serious nature of the underlying criminality) and mitigating (co operation, factual admissions, voluntary disclosure though only after police enquiry, taken steps to remediate, overall loss to the Bank, Bank did identify red flags just didn’t act on them, letter from the Board, costs invested and commitments to the future) factors an additional 200% is applied. That produces a figure of £345,353,864.47. Fourth the judge decided on a further uplift of 15%, essentially to reflect the need for appropriate additional punishment and deterrence (to the wider market as well as itself) which produces a figure of £397,156,944.14. Because Nat West pleaded guilty at its first appearance on 7 October 2021, it is entitled to a one third reduction and therefore the final fine was £264,772,619.95.
Mark Seward, Executive Director of Enforcement and Market Oversight at the FCA, said: “NatWest is responsible for a catalogue of failures in the way it monitored and scrutinised transactions that were self-evidently suspicious. Combined with serious systems failures, like the treatment of cash deposits as cheques, these failures created an open door for money laundering. Anti-money laundering controls are a vital part of the fight against serious crime, like drug trafficking, and such failures are intolerable ones that let down the whole community, which, in this case, justified the FCA’s first criminal prosecution under the Money Laundering Regulations.”
5. Nat West Remediation, Action & Enhancement Efforts
Nat West fully co operated with the Police and FCA investigations and received credit for so doing. By also pleading guilty a reduced fine was levied (see above).
The relationship manager’s employment was terminated in 2018 for gross misconduct over his handling of the Fowler Oldfield account. It is not suggested he was involved in the fraud.
Nat West has failed to recover an outstanding loan it had made to its customer of £1.65 million in 2016. The company is now in liquidation.
Nat West had invested £700m 0.7% of operating costs), on its AML systems, processes and controls during the period 2010 to 2015, & a further sum of almost £700m (1.35% of operating costs) in the last five years (2016 -2021) including upgrades to transaction monitoring systems, automated customer screening and new customer due diligence solutions. NatWest currently has more than 5,000 staff (8,000 of total 2020 Headcount) in specialist financial crime roles, dedicated to detecting and preventing financial crime under the leadership and focus of a centralised bank-wide ‘FinCrime Hub’, and appointed a new experienced and talented Head FCC in Marcus Wogart.
As part of a S166 Skilled Persons Review appointed by the FCA to test the effectiveness of the AML Change Programme at Nat West, it was reported that demonstrable progress had been made noting that senior management was serious about improving its AML systems and controls, that there was a clear ‘tone from the top’ and that the Group’s key values of ‘doing the right thing’ and ‘taking risks seriously’ had filtered down to the front line. It did however still note issues for improvement – in particular in relation to remediation of “high risk” files. Since then the Skilled Person has acknowledged positive progress made by the Group in completing the vast majority of the recommendations initially raised by the review although delays in remediation, particularly in relation to high risk files were also flagged.
As part of its ongoing programme of investment in its people, processes and technology, NatWest’s financial plans already include over £1 billion (4% of operating costs assuming 2020 operating costs over 5 years) to further strengthen financial crime controls over the next five years (2022-2027), including investment in new technologies and capabilities to further enhance Customer Due Diligence, Transaction Monitoring, Sanctions and Anti-Bribery and Corruption systems.
B Key Takeaways in Detail
Based on the evidence and the findings set out above the following are my 10 Key Takeaways;
1 – The maximum penalty upon conviction of a corporate defendant for breaching the Regulations is an unlimited fine, and where involving charged individuals of 2 years’ imprisonment. That no individuals were charged probably reflects the challenges such a case would bring with an unlikely guilty plea and the prospect of establishing criminal intent. The fine levied is overall higher than the DB fine of £227 million in 2017 and the SCB fine of £102.2m in 2019 both imposed by the FCA. This seems reasonable bearing in mind the relative seriousness of the suspected underlying activity, though it can also be said that Nat West benefited significantly from the Judges decision to start with the amounts laundered for a given period and not turnover or costs of remediation which likely would have made the fine considerably higher.
2 – When it comes to assessing liability for breaches of regulations, aggregating and mitigating factors do not appear sufficiently to look at the wider context, but focus on the particular case in hand. For example by looking only at what was missed, what has been otherwise found and for example reported in the form of SARs in other cases, where highly useful information is provided to Law Enforcement is essentially ignored and or membership and contribution to JIMLIT is effectively ignored. Conversely systemic weaknesses across core controls, for example customer risk ratings, periodic reviews and transaction monitoring investigations may provide many more opportunities where money laundering prevention or detection is missed. Regulators should apply a balanced scorecard in assessing Banks overall performance and through this prism view and judge regulatory breaches.
3 – In this case, precise details of internal escalations, alerts and investigations as well as whether and when SARs were filed is made publicly available. No SARs were filed until after June 2016 whereupon 13 late SARs on much earlier activity were filed. The information now available was likely available from on or around September 2016 but is only now being shared and likely acted upon by others. The industry has long lobbied for increased information sharing, particularly high quality SARs or the information that forms the basis for the SAR. Why is this information not shared and shared sooner. Why is there not a mechanism, a gateway with adequate privacy and date protection safeguards available to enable highly useful information to be shared between FIs in the UK for the legitimate purpose of fighting financial crime.
4 – The primary failure at Nat West in this case was in the first line of defence, though failures in the second line of defence are also serious. The effectiveness of the third line is also questionable unless these weaknesses were known and appropriate remedial action plans were in progress. The same can be said about the 4th line (external auditors) & the 5th line (the regulators). The industry trend to move ever more resources from the second line into the front line to perform additional controls closer to customer facing activity may bolster a lack of curiosity, diligence and vigilance from front facing units and or may alternatively weaken independent second line staff once they transition into the first line. The relationship manager in this case had become turned and was effectively acting perversely as the customers representative inside the Bank, despite findings that his failure to be curious diligence and vigilant was not through bad faith.
5 – In applying the risk based approach, where permitted and reasonably designed, in particular in risk rating customers high medium or low, attention on monitoring for wrongly risk rated customers is key. The likely biggest risks may not be the “high” risk customers, especially after they have been through a cycle of high risk related controls, but true high risk customers mistakenly described as medium or low risk customers, that go unidentified for too long.
6 – Nat West is significantly increasing its spend and resources to combat AML and Fraud on the top of earlier increased investments. From 2010, costs represented an estimate 0.7% of all costs rising to 1,35% of all costs to 2021 with an expectation that costs will rise further to combat financial crime of up to 4% by 2025. The Board commitment at these levels is strong but ends in 2025 and I’d expect these levels to drop significantly thereafter. Whether Nat West will be able to build and maintain an effective AML Programme by 2025 and then sustain it thereafter will remain a challenge. Most other Banks are experiencing significant challenges sustaining enhancements with significant organisation change and people risks the norm. Ensuring investment funds are spent on effective yet sustainable outcomes, including considering industry collaborations will be key.
7) The second line of defence, in particular the investigators suffered from operating without sufficient data and without the right tools. In short they were trying to operate without necessary context. Next generation approaches to conducting investigations exist and have been successfully deployed. For example see Quantexa. I understand these tools are being deployed within Nat West to fix this problem. Dealing with low morale, staff attrition and capability issues from staff in the investigations function must also be addressed. Here also tools have been successfully deployed to significantly automate risk decision in high functioning levels and should be evaluated too. For example see Caspian Learning. Another weakness was in data lineage in the TM system where cash deposits were only being recognised as cheques. A strong set of controls around each of the main control processes as well as data attributes, lineage and quality is required with regular testing and assurance essential.
8) Whilst Nat West actually lost money in the end on this customer (see later), for a time it was highly profitable. Metrics around the most profitable customers, especially when profitability takes off is an important control. The challenge is poor quality data and identifying reliable sources. For the record whilst fees and charges of approx £460 thousand were received by Nat West, the Judge confiscated this. In addition the Bank lost its loan/overdraft of more than £1.65 million too. It is also not clear why a century old company from Bradford wanted to establish new Banking relationships. Was it being exited from its existing Bank? It is all too often a blind spot for front office relationship managers who can target new onboardings whatever the risk, provided it gets through. Why take on new “high” risk customers? Based on the level of controls that are required to be applied as well as the residual risk with this a case in point, if your customer risk rating model is a good one it’s unlikely you will want to take new high risk clients. That is different from having a responsibility to maintain existing relationships with high risk customers provided they don’t present with real suspicious activity.
9) The cost in terms of additional resourcing, over above fines and penalties is usually at least 3 times the amount, without adding in senior management time, opportunity cost and reputation damage. That also appears to be the case here also. Prevention remains a much smarter option than remediation. If you think compliance is expensive, try none compliance.
10) Credit to Law Enforcement, who in this case were onto the money launderers without any help initially in this case from the Bank.
To discuss this, the findings, the takeaways and how to build and sustain truly effective and sustainable AML programmes please contact Financial Crime News.
For more details in particular about those involved see the FCN In Depth Intelligence Report for details. (see below).
14 December, 2021