UT-2022-00097 - [2024] UKUT 00352 (TCC)

Authorised firms are required to conduct ongoing monitoring of the business relationship with their customers, including scrutiny of transactions undertaken through the course of the relationship to ensure that transactions are consistent with the firm’s knowledge of the customer, its business and risk profile. This requirement was during the Relevant Period set out in Regulation 8 of the MLRs and SYSC 6.3.1R(1) and reflected in the JMLSG Guidance. The Applicant was also required to have appropriate and risk sensitive policies and procedures relating to ongoing monitoring, including procedures to identify and scrutinise (i) complex or unusually large transactions, (ii) unusual patterns of transactions which have no apparent or visible lawful purpose, and (iii) any other activity that is likely to be related to money laundering or terrorist financing: see Regulation 20 of the MLRs.

The Applicant’s Anti-Money Laundering policy required it to monitor customer activity by reviewing transactions to ensure that they are consistent with the customer’s business and risk profile. That policy also stated that a factor that could affect the level of risk that a particular client presents was “unusually large transactions compared to what might reasonably be expected of customers with a similar profile.”

Mr Meadows accepts that, although there was some transaction monitoring, it was inadequate. Between the commencement of trading on 25 February and 6 May 2015, no transaction monitoring was undertaken in respect of the Solo Trading transactions.

After Compliance Asset was engaged, some transaction monitoring took place on 6 May 2015 onwards. Mr Meadows accepts that Compliance Asset was instructed by the Applicant to monitor the trading of the Solo Clients, primarily for the purposes of preventing market abuse. He observed that such monitoring involved a substantial overlap with Anti-Money Laundering and associated risks. The representative of Compliance Asset who undertook the monitoring said in interview with the Authority that he did regard it as part of his responsibility to alert the Applicant to anything which was suspicious unless it related to market abuse. The invoices provided by Compliance Asset only make mention of KYC checks and transaction monitoring in relation to market abuse. Likewise, the trade monitoring reports sent to Mr Lawrence only referred to price monitoring rather than any specific Anti-Money Laundering transaction monitoring.

It is clear that there was a lack of clarity regarding Compliance Asset’s role. Had they been given a wider brief regarding transaction monitoring, then it may have been the case that more specific concerns would have been raised by Compliance Asset. Mr Meadows accepts that the Applicant failed to consider the trading activity within the wider context of the KYC information received from the Solo Clients and the feasibility of the trading activity generally. He says that, had that exercise been done, the Applicant would have reassessed the business being undertaken. Solo’s regulated status and the Applicant’s subsequent reliance on what the Solo Group said, prevented his firm from taking a more inquiring approach.

During the Relevant Period, the Applicant executed trades with the Solo Clients worth approximately £52 billion. Of the Solo Clients for which the Applicant traded (24 in total) there are only 6 underlying beneficial owners. The Applicant understood the Solo Clients to be acting independently of one another. However, on any given cum dividend date, it was often the case that most of or all 6 underlying beneficial owners would be trading very large volumes of the same stock. The Solo Clients trading sizes were typically approximately £16 million of shares (or more). However, most of the Solo Clients had only recently been incorporated and, in a number of instances, were managed or beneficially owned by individuals with a connection to the Solo Group.

The Applicant accepts that the size and volume of transactions, in tandem with the KYC packs received from the Solo Group, were “red flags” which should have been sufficient to have generated further enquiry from a financial crime perspective.