BNPP Private Bank Fined Over Fraud Controls

by Philip Morton, Investors Offshore

15 May 2007

The UK's Financial Services Authority (FSA) on Thursday fined BNP Paribas Private Bank (BNPP Private Bank) GBP350,000 for weaknesses in its systems and controls, which allowed a senior employee to fraudulently transfer GBP1.4 million out of clients' accounts without permission.

This is the first time a private bank has been fined for weaknesses in its anti-fraud systems. The 13 fraudulent transactions were carried out between February 2002 and March 2005 using forged clients' signatures and instructions, and by falsifying change of address documents.

During its investigation, the FSA found that BNPP Private Bank did not have an effective review process for large transactions (over GBP10,000) from clients' accounts. It also found that the bank's procedures were not clear about the role of senior management in checking significant transfers prior to payment.

As a result, a number of fraudulent transactions were not independently checked. In addition, a flaw in the bank's IT system allowed the senior employee to evade the normal middle office processes. This meant that basic authorisation and signatory checks were not carried out on internal cash transfers between different customer accounts.

Margaret Cole, FSA Director of Enforcement, observed that:

"BNPP Private Bank's failures exposed clients' accounts to the risk of fraud. This is unacceptable particularly with the overall increase in awareness around fraud and client money risks. Senior management must make sure their firms have robust systems and controls to reduce the risk of them being used to commit financial crime."

"This is a warning to other firms that we are raising our game in this area and expect them to follow suit. We will not hesitate to take action against any firm found wanting."

The FSA recognised, however, that BNPP Private Bank has since taken steps to correct the failings and no customers suffered loss. Additionally, a subsequent independent review of the bank's anti–fraud systems and controls found them to have no significant weaknesses.

The bank brought the fraud to the FSA's attention and has co-operated fully with the investigation. BNPP Private Bank further qualified for a 30% discount under the FSA's executive settlement procedures, by agreeing to settle at an early stage of the investigation.

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