The FCA’s Fining of The TJM Partnership

Niall Hearty of Rahman Ravelli details the approach taken by the Financial Conduct Authority in imposing its largest fine so far relating to Cum-Ex.

The Financial Conduct Authority (FCA) fined The TJM Partnership Limited (in liquidation) £2,038,700 million for serious financial crime control failings in relation to Cum-Ex trading.

The financial penalty was imposed for TJM’s failure to ensure it had effective systems and controls to identify and reduce the risk of financial crime and money laundering in its business. This is the third case brought by the FCA in relation to Cum-Ex trading - and the largest fine so far.

The Case

The FCA found that TJM did not have adequate procedures, systems and controls to identify and mitigate the risk of it being used to facilitate fraudulent trading and money laundering in relation to trading on behalf of clients of the Solo Group between January 2014 and November 2015. It also failed to adequately apply its anti-money laundering policies and did not properly assess, monitor and mitigate the risk of financial crime.

Trading executed by TJM on behalf of the Solo Group’s clients throughout this period was, according to the FCA, characterised by a pattern of purported trades that were highly suggestive of financial crime. The regulator believed that the trades appeared to have been carried out to allow the arranging of withholding tax reclaims in Denmark and Belgium – the practice known as Cum-Ex.

TJM executed trading to the value of approximately £59 billion in Danish equities and £20 billion in Belgian equities and received commission of £1.4 million. It also failed to identify or escalate any potential financial crime concerns and money laundering risks in two other instances related to Solo Group business. This related to transactions with no apparent economic purpose other than to transfer windfall profits of €4.3 million among the company’s clients. TJM also accepted payment from a third party without appropriate due diligence.

Settlement Discount

As TJM agreed to resolve all issues of fact and liability, it qualified for a 30% discount under the FCA’s Settlement Discount Scheme.

The FCA operates a scheme to give discounts on financial penalties, suspensions, restrictions conditions and disciplinary prohibitions (prohibitions under s123A FSMA) for early resolution – referred to as Stage 1 - of part or all of a case.

A financial penalty can be reduced by up to 30% in Stage 1 for:

• Full agreement of facts, liability and penalty.
• Full agreement of facts and liability (but not penalty).
• Full agreement of facts (but not liability or penalty).
• Partial agreement as to facts, liability and penalty (leaving a narrow set of issues in dispute).

There can be no reduction if there is no agreement on facts, liability or penalty in Stage 1 and there are no stages beyond Stage 1 where discounts are available

TJM’s Breaches

TJM breached Principle 2 and Principle 3 of the FCA’s Principles for Business between January 2014 and November 2015.

Principle 2 states that “A firm must conduct its business with due skill, care and diligence.’’ Principle 3 states that “A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.’’

Under the full list of FCA principles, a firm must:

• Conduct its business with integrity.
• Conduct its business with due skill, care and diligence.
• Take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.
• Maintain adequate financial resources.
• Observe proper standards of market conduct.
• Pay due regard to the interests of its customers and treat them fairly.
• Pay due regard to the information needs of its clients and communicate information to them in a way which is clear, fair and not misleading.
• Manage conflicts of interest fairly, both between itself and its customers and between a customer and another client.
• Take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgment.
• Arrange adequate protection for clients' assets when it is responsible for them.
• Deal with its regulators in an open and cooperative way and must disclose to the FCA appropriately anything relating to the firm of which that regulator would reasonably expect notice.

Conclusion

The case is yet another reminder of the need for businesses to have procedures, systems and controls in place that are fit for purpose when it comes to identifying and preventing wrongdoing. Other companies may find themselves in similar situations if and when the authorities begin to investigate – if they have not ensured they have such controls in place.