FSA spots weaknesses in insurance brokers' anti-bribery controls

The regulator has been reviewing the measures taken by commercial insurance brokers against the risk that payments made to foreign firms and individuals may in fact be bribes paid to win business from overseas clients, particularly in high risk jurisdictions.

In January, the FSA fined Aon Ltd £5.25 million for failing to operate effective anti-bribery controls between 2005 and 2007 which resulted in suspicious payments totalling about US$7 million being made to a number of overseas third parties.

The decision prompted the regulator to undertake a general review of broker firms' systems and controls. The final results are still awaited but the FSA has decided to publish its interim findings so that firms can take the necessary steps to strengthen their own procedures.

Although the investigation found examples of good practice, the FSA found a number of weaknesses common across the industry that need to be addressed.

Few firms, for instance, carry out effective due diligence on their third party relationships, preferring instead to rely on informal market knowledge and very basic checks such as printing website pages, which can easily be forged. Most brokers make no formal checks at all on whether a third party has any connection with the insured, the client or relevant public official. 

The review also showed it is common practice for commission to be shared 50/50 with the third party with no real consideration bring given as to whether the amount reflects the value of the services actually provided. Some, acting on the third party's instructions, agree to pay the amount to another party without clearly understanding why.  

And nearly all the firms investigated were happy to receive bank details from third parties informally, for instance by email, leaving them open to the risk that payments might be made unwittingly to somebody else.  

The FSA found that such compliance and audit checking procedures that do exist often follow a tick-box approach, ensuring only that certain procedures are followed without considering whether the underlying due diligence checks are adequate. Only a few firms have adopted a risk-based approach that focuses on high risk jurisdictions and third parties that are individuals.

The regulator also noted that the vetting of staff in insurance broker firms is weak compared to other financial services. Firms tend to rely almost entirely on references (even though they say they are generally of little use), market gossip and referrals. And although most firms require staff to take financial crime training, there is little or no specific training provided on anti-bribery or corruption.

The publicity given to the Aon fine, however, does seem to have had a deterrent effect, with many firms using the FSA's final notice as a reference point for a review of their own risk management systems.