Aon Limited Fined £5.25 Million by the Financial Services Authority
Issue Discussed: Financial Services Authority
Submitted by Kirsten Addison-Smith
Date Promulgated: January 6, 2009
Aon Limited Fined £5.25 Million by the Financial Services Authority
On 6 January 2009, the Financial Services Authority (“FSA”) issued a final notice to Aon Limited (Aon Corporation’s principal UK subsidiary), and, pursuant to section 206 of the Financial Services and Markets Act 2000 (“FSMA”), imposed a financial penalty of £5.25 million for failure to implement and maintain internal risk controls in relation to potentially corrupt payments to third parties.
As set forth in the FSA’s final notice, Aon Ltd is a UK company and a wholly-owned subsidiary of the Aon group of companies, the ultimate parent of which is Aon Corporation. It is one of the largest insurance brokers in the London market and is authorized by the FSA to carry on insurance mediation activities.
As part of these activities, Aon Ltd routinely pays third parties (other brokers or consultants) who assist in the placement of insurance, effect client introductions or provide relevant market and other information. In this case, some of the business units within Aon Ltd’s Aviation and Energy divisions made payments to non FSA-authorized overseas third parties (“Overseas Third Parties”), some of which were state owned entities or otherwise had government connections. Although it was not unusual or necessarily inappropriate for Aon Ltd to make payments to Overseas Third Parties, the FSA considered that there was a significant risk in some countries that the monies might be used to bribe public officials or for other potentially inappropriate purposes.
Statutory and Regulatory Provisions
Market confidence and reduction of financial crime are statutory objectives of the FSA under section 2(2) FSMA. Section 206(1) FSMA provides that:
“If the [FSA] considers that an authorized person has contravened a requirement imposed on him by or under this Act…it may impose on him a penalty, in respect of the contravention, of such amount as it considers appropriate.”
The FSA’s Principles for Businesses are general statements of the fundamental obligations of firms under the regulatory system. They derive their authority from the FSA’s rule-making powers as set out in FSMA and reflect the FSA’s regulatory objectives. Principle 3 states that:
“A firm must take reasonable care to organize and control its affairs responsibly and effectively, with adequate risk management systems.”
The FSA’s Findings
The FSA found that from 14 January 2005 to 30 September 2007 (“the Relevant Period”), Aon Ltd breached Principle 3 as a result of the following failures:
- 1.Inadequate levels of due diligence were carried out either before relationships with Overseas Third Parties were entered into or before payments were made. 2.Insufficient monitoring of its relationships with Overseas Third Parties in respect of specific bribery risks. 3.Insufficient guidance or training on bribery/corruption risks for staff in business divisions that dealt with Overseas Third Parties. 4.Ineffective information procedures and/or assessments by the committees appointed to oversee these risks.
The FSA determined that, as a result of these failings, Aon Ltd made various suspicious payments to a number of Overseas Third Parties in Bahrain, Bangladesh, Bulgaria, Burma, Indonesia and Vietnam amounting to approximately US$2.5 million and €3.4 million during the Relevant Period. The commission earned by Aon Ltd over the course of the Relevant Period from business that was secured or retained as a result of these suspicious payments was approximately US$7.2 million and €1 million.
Aon Ltd’s Internal Controls and Procedures
The FSA found that Aon Ltd was, or should have been, aware of this risk, especially given previous enforcement action by the Lloyd’s of London Disciplinary Board in the 1990s against Aon Ltd’s predecessor firms for the same type of activity.
This prior behavior influenced the FSA’s review of Aon Ltd’s existing controls and internal procedures. For example, although Aon Corporation maintained and distributed a Code of Business Conduct to its subsidiaries and employees, which prohibited “improper payments” and the use of agents to perform acts that employees were prohibited from doing directly, the FSA found that the Code did not go far enough in providing examples of the specific bribery risks involved.
Aon Ltd was also cited for failing to train its employees and management sufficiently in adequate risk controls relating to payments to Overseas Third Parties. According to the FSA, the Code should have been supplemented by adequate training and written guidance, robust procedures for authorization of third party payments and proper monitoring of areas where risks were high, such as overseas jurisdictions.
Furthermore, the FSA criticized Aon Ltd for failing to detect the suspicious payments and amend internal procedures earlier. For instance, in June 2006, an internal review turned up some of the potentially inappropriate payments. However, a month later, the decision was made to close the matter without alerting the appropriate committee or the board of directors. It was not until April 2007, when an overseas law enforcement agency commenced an enquiry into an Indonesian group of transactions, that the matter was formally brought to the attention of Aon Ltd’s senior management. The board subsequently began an internal investigation, which eventually led to a notification to the FSA in July 2007.
Agreement to Settle and Mitigation
The FSA recognized that Aon Ltd’s senior management had taken steps to mitigate the seriousness of the firm’s failings once the payments came to light. The payments were promptly notified to the FSA and the UK anti-money laundering regulator, the Serious Organized Crime Agency. The board formed a steering committee and hired accountants and lawyers to advise on a strategy for improving internal controls and avoiding further suspicious payments. Responsive action was also taken in relation to staff that were involved in making the potentially inappropriate payments. Aon Ltd implemented new and enhanced systems and controls, including a written policy on anti-corruption/bribery, enhanced third party processes and payment controls, increased accountability for individuals, improved training and regular evaluation of the policies going forward.
Other factors taken into consideration by the FSA in determining the penalty that was ultimately imposed were the significant costs both in financial terms and in management time expended as well as the full cooperation offered by Aon Ltd’s senior management.
Additionally, Aon Ltd agreed to settle at an early stage of the FSA’s investigation, which qualified it for a 30% discount under the FSA’s executive settlement procedures. Were it not for the early settlement, the FSA would have imposed a financial penalty of £7.5 million on Aon Ltd.
The Aon Ltd penalty represents the FSA’s first completed bribery case and is part of a wider implementation of anti-bribery/corruption laws in the UK. This enhanced supervision is echoed by the FSA’s stern warning included in the Aon Ltd final notice:
“The involvement of UK financial institutions in corrupt or potentially corrupt practices overseas undermines the integrity of the UK financial services sector. Unless they have in place robust systems and controls which govern the circumstances in which payments may be made to third parties, UK financial services firms that conduct business internationally risk contravening UK and/or overseas anti-bribery laws. The FSA’s financial crime and market confidence statutory objectives are both endangered by UK firms’ failures in this regard.”
As a consequence, the FSA indicates that it will continue to enforce these laws and impose penalties that will “promote high standards of regulatory conduct” and “deter other firms from committing similar breaches”.
1Kirsten Addison-Smith is an associate in the Crowell & Moring London office and a member of the firm’s Insurance and Reinsurance Practice Group. Ms Addison-Smith advises international insurers and reinsurers on global D&O/FI/E&O policy wordings in relation to coverage, and acts as monitoring counsel on underlying litigation before the London courts.