The Times - UK (2021-12-18)

the times | Saturday December 18 2021 65

Business

An investigation by HM Revenue & Customs found that a customer had a key role in a criminal gang trying to steal millions

JASON HAWKES/GETTY IMAGES

Nearly a quarter of audits ‘falling short’

The quality of company audits
improved slightly during the pandemic
but nearly a quarter are still not up to
scratch, an industry body has said.
The Institute of Chartered Account-
ants in England and Wales (ICAEW)
reviewed audits carried out by 538
accountancy firms between the start of
2020 and March 2021. It does not look
at the work involving public interest en-
tities — listed companies and big cor-
porates — which are monitored instead
by the Financial Reporting Council.
It found 76 per cent of them were sat-
isfactory or generally acceptable. That
was a better performance than in previ-
ous years: in 2018 and 2019, 74 per cent
of audits were deemed good enough.
The improvement came despite the
pandemic, which prevented auditors
from visiting their clients as usual.
“Auditors’ already critical role in
underpinning confidence in financial

reporting by companies has been

heightened by the significant addition-

al risks presented by the Covid-19 pan-

demic,” the ICAEW said in its annual

audit monitoring report. It also praised

auditors for finding “new and innova-

tive ways to do their work remotely”.

Nearly a quarter of the audits looked

at by the ICAEW required some level of

improvement. Some of those were in

need of “significant improvement”.

However, just because an audit was

found to require improvement, it does

not mean that the audit opinion was

invalid or that the accounts were

wrong. It may just be that the ICAEW

was not satisfied with the evidence used

by the auditor to support its findings.

The quality of the audits carried out

by the UK’s seven biggest accountancy

groups — the Big Four of Deloitte,

PWC, EY and KPMG as well as BDO,

Grant Thornton and Mazars —

dropped off slightly in 2020, although

88 per cent of their audits were found to

be up to standard. However, that was a

reduction from 90 per cent in 2019.

For a second year, the quality of the

auditing of local councils’ financial

statements fell. In 2018, 100 per cent of

local authority audits were satisfactory

but this percentage fell to 92 per cent in

2019 and slipped to 88 per cent in 2020.

In each of the previous two years,

none of those audits required

significant improvements but 6 per

cent of them did this time around.

In the FRC’s most recent inspection

results of big company audits, pub-

lished in July, it found 29 per cent of

those looked at required improvement.

Tom Howard

It wasn’t exactly the normal pattern of
bank account use by a supposed con-
struction company executive on a
modest £40,000 a year. The unnamed
director, known only as Customer A in
the Financial Conduct Authority’s
description, typically had £1,500 a
month put into his HSBC account.
Suddenly, that pattern drastically
changed. In the month of April 2010
alone, 18 payments totalling £127,000
were made into A’s bank account. Six-
teen of those payments were all made
on the same day. They were big round-
number payments too, eight of £10,000
each, eight of £5,000 each.
These were glaring red flags — just
the kind of suspicious activity that
should have alerted HSBC to ask ques-
tions and perhaps report the transac-
tions to the authorities. But not a bit of
it. The elaborate automated system at
the bank, known as Camp, which was
supposed to detect and flag up just
these kinds of activities, was not trig-
gered at all.
It was only a separate investigation by
HM Revenue & Customs which discov-
ered that A had a leading role in a crimi-
nal gang involved in an attempt to steal
several million pounds by setting up
fake construction companies. Custom-
er A eventually pleaded guilty to VAT
fraud and received a custodial sentence
in May 2014, but no thanks to the bank.
It was one episode in a catalogue of
failings by HSBC reported by the City

HSBC missed

red flags and

kept officials

in the dark

For eight years the

bank oversaw a flawed

system for detecting

money laundering,

Patrick Hosking writes

regulator yesterday as it fined Britain’s

biggest bank £63.9 million. For eight

years until March 2018 the bank had

overseen a seriously flawed system for

detecting suspected money laundering

by criminal gangs, terrorists and fraud-

sters.

Worse, said the FCA, the system at

fault was the same one that allowed

bank tellers in its Mexico branches to

accept sackfuls of cash from drug gangs

— an error which was to lead to a then

record fine of $1.9 billion in 2012 and

force HSBC to submit to a deferred

prosecution agreement and scrutiny by

an independent monitor appointed by

the US Department of Justice.

One of the biggest problems was a

system introduced in Camp to weed out

alerts that were deemed likely to be

false alarms. By 2015, 65 per cent all un-

usual transactions initially flagged up

by Camp were then de-escalated and

ignored because of these so-called sup-

pression rules. In one particularly egre-

gious case it was found that the system

was suppressing every single suspicious

transaction in Wales for a time in 2011.

HSBC “incorrectly suppressed 89,000

alerts”, the FCA found, and in the end

1,780 suspicious activity reports, which

were sent to law enforcement agencies

for further investigation, had to be filed

when the mistake was rectified.

“Although transactions for an entire

region were not being monitored, this

was not reported in the 2011 Skilled Per-

son report that was being undertaken at

the time,” the regulator added. Compli-

ance experts pointed out yesterday that

to fail to alert the regulator to such a de-

bacle was almost as bad as allowing it to

happen in the first place.

In 2014 HSBC carried out a “look-

back” investigation as a result of

another episode of wrongly suppressed

information. That led to 68 suspicious

activity reports being filed including

one focused on a customer already cat-

egorised by HSBC as a high-risk indi-

vidual with potential links to a known

terrorist organisation. Another was a

customer categorised by HSBC as

having connections to a person subject

to a National Crime Agency unex-

plained wealth order.

Thresholds were set spectacularly

wrongly, the FCA found. In the bank’s

retail banking and wealth management

division, most retail customers and

more than half a million corporate cus-

tomers would have to record a 500,000

per cent increase in their yearly peak

transactional activity to trigger an alert.

A customer previously deemed “low

risk” but big-spending would have to

spend 791,900 per cent more — almost

8,000 times more — in a year com-

pared with the previous year to set

alarm bells ringing, the FCA found.

HSBC’s failings fell into three broad

categories, the FCA concluded — scen-

ario coverage, parameters and data.

Scenario coverage difficulties were

exemplified in the bank’s failure to set

the automated rules used by Camp in

such a way that it would indeed flag up

the most likely transactions where

money laundering or terrorist financ-

ing was taking place. Until 2016 HSBC

stuck with the same six inadequate sce-

narios which failed to be adequate for

its scale and complexity. It then added

15 new scenarios but these were not

tailored to risks in the UK.

Parameter failings included the set-

ting, monitoring and reviewing of

thresholds to ensure the most suspi-

cious transactions were flagged. “Cer-

tain thresholds were set in such a way

that it was almost impossible for the rel-

evant scenarios to identify potentially

suspicious activity,” the regulator said.

The quality of data relied upon by

HSBC also came under fire. Some data

on customers was incomplete or was

not being fed into Camp. About 4,500

global processing services transactions

with a value of about £1.1 billion were

not sent to Camp for monitoring, it

found, while other transactions were

sent multiple times confusing the pic-

ture. HSBC failed to check the accuracy

of its own data, the FCA discovered.

HSBC saved itself £27.4 million by

choosing not to dispute any of the FCA’s

findings and agreeing to settle at the

earliest opportunity. It played down the

findings, however, saying they related

to “legacy” systems and controls. It was,

it said, “deeply committed to combating

financial crime”.

The failings began shortly before

Lord Green of Hurstpierpoint retired

as chief executive, continued into the

era of Stuart Gulliver, and ended soon

after his succession by John Flint. On its

current profit-generating form, HSBC

will make sufficient profits to cover the

cost of the fine in one and a half days.

The Times reported in 2016 how HSBC

was accused of failing to take action

over customers with links to terrorism

Pandemic is great leveller

in how economy is judged

The pandemic has levelled perceptions

of economic health between the north

and the south of the UK, according to

research from the Bank of England.

People in the north had much more

negative perceptions of the health of

the economy than in the south before

the pandemic, according to a monthly

survey of 487 people conducted by the

Bank between September 2019 and

August 2020.

However, views aligned across the

country after a series of coronavirus

lockdowns, loss of business and

uncertainty about when any sense of

normality would return.

Respondents to the citizens panel in

the south of England, who previously

had positive forecasts for the country’s

economic future, judged the impact of

the pandemic to be greater than those

in the north. The results were published

in the Bank’s quarterly bulletin.

Londoners, who were the most posi-

tive before the pandemic, were the most

negative when surveyed in the summer

of last year. In contrast, residents of

Scotland and the northeast of England,

who were previously the gloomiest,

reported a neutral or positive outlook

on the future. All other regions of

England made bleak projections for the

economy after having been either neu-

tral or positive before the pandemic.

“We see a general reversal on pre-

lockdown perceptions,” officials said.

“The previously more ‘upbeat’ south

judged the impact of the pandemic

larger than the north. Overall, the pan-

demic seems to have acted as a ‘great

leveller’, at least in perceptions.”

Arthi Nachiappan

Economics Correspondent

76%

Percentage of reviewed audits rated

satisfactory or generally acceptable

Source: Institute of Chartered Accountants in England and Wales