Sapien Capital: FCA fines £170k for allowing Solo Group’s money laundering

Rick Steves

The role of Sapien Capital is that it executed purported OTC equity trades to the value of approximately £2.5 billion in Danish equities and £3.8 billion in Belgian equities.

Sapien Capital Ltd was fined £178,000 by the Financial Conduct Authority, with the fine being reduced from £219,100 due to serious financial hardship.

In the first FCA case in relation to cum/ex trading, dividend arbitrage and withholding tax (WHT) reclaim schemes, the regulator found Sapien Capital’s failings led to the risk of facilitating fraudulent trading and money laundering.

In 2015, Sapien failed to have in place adequate systems and controls to identify and mitigate the risk of being used to facilitate fraudulent trading and money laundering in relation to business introduced by the Solo Group.

Solo Group traded in a circular pattern of extremely high-value trades undertaken to avoid the normal need for payments and delivery of securities in the settlement process.

The trading pattern involved the use of Over the Counter (OTC) equity trading, securities lending, and forward transactions, involving EU equities, on or around the last day securities were cum dividend.

According to the FCA investigation, no change of ownership of the shares traded by the Solo clients, or custody of the shares and settlement of the trades by the Solo Group took place.

In combination with their scale and volume, the practice was suggestive of financial crime, probably undertaken to create an audit trail to support withholding tax reclaims in Denmark and Belgium.

The role of Sapien Capital is that it executed purported OTC equity trades to the value of approximately £2.5 billion in Danish equities and £3.8 billion in Belgian equities.

Without exercising due skill, care and diligence in applying anti-money laundering policies and procedures, Sapien also failed to properly to assess, monitor and mitigate the risk of financial crime in relation to clients introduced by the Solo Group and the purported trading.

Mark Steward, Director of Enforcement and Market Oversight, stated: “These transactions ran money laundering and other financial crime risks which Sapien incompetently failed to see.”

“The FCA expects firms have systems and controls that test the purpose and legitimacy of transactions, reflecting skepticism and alertness to the risk of money laundering and financial crime, and failures here constitute serious misconduct.”

Under the Authority’s executive settlement procedures, Sapien qualified for a 30% discount, with the amount being further reduced from £219,100 to reflect Sapien’s serious financial hardship.

UK banks and financial services firms have often made use of discounts in settlements with the UK Financial Conduct Authority (FCA) over the past eight years, with the mechanism spurring concerns and calls for legislative changes.

The top five discounts applied to individual fines concerning penalties for FX manipulation were all close to £100 million each, for UBS, Deutsche Bank, Citibank, JP Morgan, and RBS.

Companies that are subject to enforcement action by the FCA can receive discounts of as much as 30% on their fines if they settle the case.

In 2017, Lord Sharkey, a co-founder of the think-tank, has proposed an amendment to the Criminal Finances Bill which would oblige banks and other financial firms to take disciplinary action against the employee(s) responsible for the violation before they can receive the entire discount on an FCA fine.

According to Lord Sharkey, the amendment would permit the FCA “to have direct sight of the improvements in process and behavior agreed in any settlement. It would enable it to see that appropriate disciplinary action had been taken against those responsible for the transgressions. It would give the settling firms a powerful incentive to fulfill any settlement conditions. It would do this by making part of any discount withholdable until the settling firm had satisfied the FCA that all appropriate disciplinary actions had been taken. Only then would the full discount be realized.”

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