Knowing me, not knowing you – Barclays edition

Izabella Kaminska

| Nov 26 11:01

http://ftalphaville.ft.com/2015/11/26/2145951/knowing-me-not-knowing-you-barclays-edition/

Barclays was slammed with a £72m FCA fine over financial crime risks on Thursday, this time for “ignoring its own process” over how to handle risky very rich clients and basically, allowing the (theoretical) risk of money laundering to creep in via an elephant deal of the century with a “Politically Exposed Person”.
Corporate governance fears aside, the FCA case file makes for fascinating reading (as usual).

For one thing, we learn the important lesson that NO, doing an internet search on someone’s background isn’t quite the same thing as doing actual due diligence:

Barclays also relied on printouts from publicly available internet pages to verify the Clients’ sources of wealth. However, while internet research can be a useful source of information for firms carrying out EDD, the articles used by Barclays did not provide sufficiently detailed, meaningful or reliable information as to the size and source of the Clients’ wealth.

That’ll teach those fintech companies planning to credit check you based on your not-at-all manipulatable Facebook and Linkedin profiles.
With respect to the specific nature of the failing:

2.2. The Transaction was the largest of its kind that Barclays had executed for natural persons. Deals over £20 million were commonly referred to within Barclays as “elephant deals” because of their size and the Transaction, which was for an amount of £1.88 billion, was also referred to as an “elephant deal”.

Other notable snippets:

2.7. Barclays went to significant lengths to accommodate the Clients. It did this to win the Clients’ business and for the significant revenue that it would generate from the Transaction. In the early stages of arranging the deal, when it was suggested that the Transaction might be for a larger sum, one senior manager recognised that it could be “the deal of the century”. It was also recognised by some within Barclays that the Transaction could open the door to similar significant business opportunities for Barclays.

In fact, the FCA adds the size of the deal was exceptional in that it comprised of a £1.88bn transaction for a number of ultra high net worth PEPs.
And …

c) Barclays expected to generate a significant amount of revenue from the Business Relationship by providing similar services to other clients; and

So, what do we know about the politically exposed person involved?
Watch closely because, remember, the clues are there, as we go through… the Barclays keyhole.
First there’s the period during which the deal was structured:

4.10. During 2011 Barclays was asked to arrange and execute the Transaction. Barclays was keen to do so for various reasons, in addition to winning the Clients’ business and the significant revenue that it would generate from the Transaction.

What was going on in the political environment at that time?
Second, there’s the internal confidentiality arrangements that came with it:

4.11. Prior to Barclays arranging the Transaction, Barclays agreed to enter into the Confidentiality Agreement which sought to keep knowledge of the Clients’ identity restricted to a very limited number of people within Barclays and its advisers. In the event that Barclays breached these confidentiality obligations, it would be required to indemnify the Clients up to £37.7 million. The terms of the Confidentiality Agreement were onerous and were considered by Barclays to be an unprecedented concession for clients who wished to preserve their confidentiality.

Then there’s THE ENTIRELY MANUAL PROCESS Barclays decided to dedicate to the maintenance of the deal:

In view of these confidentiality requirements, Barclays determined that details of the Clients and the Transaction should not be kept on its computer systems. A select team, including representatives from senior management, was brought together from across Barclays’ divisions and offices around the world to carry out the checks required to establish the Business Relationship and to arrange and execute the Transaction.

(They even bought a special safe!)

Some documents relating to the Business Relationship were held by Barclays in hard copy in a safe purchased specifically for storing information relating to the Business Relationship. This was Barclays’ alternative to storing the records electronically.

(Which hardly anyone knew existed!)

While there is nothing inherently wrong with keeping documents in hard copy, they must be easily identifiable and retrievable. However, few people within Barclays knew of the existence and location of the safe.

Then there’s the nature of the legal entity obfuscation:

4.13. The Transaction involved the use of a number of companies and a trust across multiple jurisdictions, which Barclays understood was to preserve the Clients’ confidentiality. It was a structured finance transaction comprised of investments in notes backed by underlying warrants and third party bonds. The target investment objective for the Transaction was a specified rate of income with full capital guarantee over a number of decades. The proceeds of the investment were held in the Trust of which the Clients were beneficiaries.

The FCA adds that some of the accounts into which funds were received as part of this structure were set up solely to transfer funds and then closed.
And, finally, a surprising amount of liquidity services offered to the clients to boot:

c) the Credit Side Letter, which stated that, if required, Barclays would provide one of the companies involved in the Transaction with an open line of credit, in the amount of up to 60% of the value of the assets invested in the Transaction, for the life of the investment and secured against all or any part of those assets. If Barclays was unable to provide the credit referred to in the letter, Barclays agreed to pay several millions of US dollars to the relevant company.

So what do we know? We know the deal occurred between 2011 and 2012. We know the clients had a certain penchant for liquidity and secrecy. We also know they weren’t the sort of people who liked to be asked about the nature of their multi-million dollar transfers to third parties.
The above should tell us something, maybe quite a bit, about the persons that benefited from the transaction…
So who would live in a business arrangement like this?
Normally, readers, it’d be over to you. But extremely rich Politically Exposed Persons tend to be quite sensitive about libel, so perhaps don’t say anything in the comment box you might regret later …