FINAL NOTICE






SAPIEN CAPITAL LIMITED

1.
ACTION

1.1
For the reasons given in this Notice, pursuant to section 206 of the Financial

Services and Markets Act 2000 (“the Act”), the Financial Conduct Authority (“the

Authority”) has decided to impose on Sapien Capital Limited (“Sapien” or “the

Firm”) a financial penalty of £178,000.

1.2
The Authority would have imposed a penalty of £236,740 representing £178,000

disgorgement and £58,740 as the punitive element. As Sapien agreed to resolve

all issues of fact and liability, under the Authority’s executive settlement

procedures, it qualified for a 30% discount to be applied to the non-disgorgement

element of the penalty, reducing the penalty to £219,100. As the firm provided

verifiable evidence that the imposition of this penalty figure would cause it serious

financial hardship, the Authority decided to reduce the total penalty to £178,000,

this being the disgorgement figure.

2.
SUMMARY OF REASONS

2.1
Fighting financial crime is an issue of international importance, and forms part of

the Authority’s operational objective of protecting and enhancing the integrity of

the UK financial system. Authorised firms are at risk of being abused by those

seeking to conduct financial crime, such as fraudulent trading and money

laundering. Therefore, it is imperative that firms have in place effective systems

and controls to identify and mitigate the risk of their businesses being used for such

purposes, and that firms will act with due skill, care and diligence to adhere to the

systems and controls that they have put in place, and properly assess, monitor and

manage the risk of financial crime.

2.2
Between 10 February 2015 and 10 November 2015 (the “Relevant Period”), Sapien:

a) had inadequate 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 four authorised entities known as the

Solo Group, thereby breaching Principle 3, and

b) breached Principle 2 as it did not exercise due skill, care and diligence

in applying its AML policies and procedures, and in failing properly to

assess, monitor and mitigate the risk of financial crime in relation to the

Solo Clients and the purported trading.

2.3
The Solo Clients were off-shore companies including BVI and Cayman Islands

incorporated entities and a number of individual US 401(k) Pension Plans previously

unknown to Sapien. They were introduced by the Solo Group, which purported to

provide clearing and settlement services as custodians to clients within a closed

network, via a custom over the counter (“OTC”) trading and settlement platform

known as Brokermesh. They were controlled by a small number of individuals, some

of whom had worked for the Solo Group, without apparent access to funds to settle

the transactions.

2.4
On behalf of the BVI and Cayman Islands Solo Clients, Sapien executed purported

OTC equity trades to the value of approximately £2.5 billion in Danish equities and

£3.8 billion in Belgian equities, and received gross commission of £297,044.

2.5
The Solo Trading was characterised by a purported circular pattern of extremely

high value OTC equity trading, back-to-back securities lending arrangements and

forward transactions, involving EU equities on or around the last day of cum-

dividend. Following the purported Cum-Dividend Trading that took place on

designated days, the same trades were subsequently purportedly reversed over

several days or weeks to neutralise the apparent shareholding positions (the

“Unwind Trading”).

3


2.6
The purported OTC trades that were executed on Brokermesh did not have access

to liquidity from public exchanges, yet the purported trades were filled within a

matter of minutes, almost invariably, and represented up to 20% of the shares

outstanding in the companies listed on the Danish stock exchange, and up to 10%

of the equivalent Belgian stocks. The volumes also equated to an average of 20

times the total number of all shares traded in the Danish stocks on European

exchanges, and 25 times the Belgian stocks traded on European exchanges on the

relevant last cum-dividend trading date.

2.7
The Authority’s investigation and conclusions in respect of the purported trading

are based on a range of information including, in part, analysis of transaction

reporting data, material received from Sapien, the Solo Group, and five other

Broker Firms that participated in the Solo Trading. The combined volume of the

Cum-Dividend Trading across the six Broker Firms was between 15-61% of the

shares outstanding in the Danish stocks traded, and between 7-30% of the shares

outstanding in the Belgian stocks traded. These volumes are considered

implausible, especially in circumstances where there is an obligation to publicise

holders of over 5% of Danish and Belgian listed stocks.

2.8
As a broker for the equity trades, Sapien executed the purported Cum-Dividend

Trading and the purported Unwind Trading. However, the FCA believes it unlikely

that Sapien would have executed both the purported cum-dividend trades and

purported unwind trades for the same client in the same stock in the same size

trades and therefore it is likely Sapien only saw one side of the purported trading.

Additionally, the FCA considers that purported stock loans and forwards linked to

the Solo Trading are likely to have been used to obfuscate and/or give apparent

legitimacy to the overall scheme. Although there is evidence that Sapien was aware

of the purported stock loans and forwards, these trades were not executed by

Sapien.

2.9
The purpose of the purported trading was so the Solo Group could arrange for

Dividend Credit Advice Slips (“DCAS”) to be created, which purported to show that

the Solo Clients held the relevant shares on the record date for dividend. The DCAS

were in some cases then used to make withholding tax (“WHT”) reclaims from the

tax agencies in Denmark and Belgium, pursuant to Double Taxation Treaties. In

2014 and 2015, the value of Danish and Belgian WHT reclaims made, which are

attributable to the Solo Group, were approximately £899.27 million and £188.00

million respectively. In 2014 and 2015, of the reclaims made, the Danish and

Belgian tax authorities paid approximately £845.90 million and £42.33 million

respectively.

2.10
The Authority refers to the trading as ‘purported’ as it has found no evidence of

ownership of the shares by the Solo Clients, or custody of the shares and settlement

of the trades by the Solo Group. This, coupled with the high volumes of shares

purported to have been traded, is highly suggestive of sophisticated financial crime.

2.11
Sapien staff had in place inadequate 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 four authorised entities known as the Solo Group.

In addition, Sapien staff did not exercise due skill, care and diligence in applying

AML policies and procedures and in failing properly to assess, monitor and mitigate

the risk of financial crime in relation to the Solo Clients and the purported trading.

2.12
Sapien did not have policies and procedures in place to assess properly the risks of

the Solo business, and lacked an appreciation of the risks involved in the purported

equity trading that the Solo Clients were engaged in, which resulted in inadequate

CDD being conducted and a failure to monitor transactions adequately and to

identify unusual transactions. This heightened the risk that the Firm could be used

for the purposes of facilitating financial crime in relation to the purported equity

trading (the “Solo Trading”) executed by Sapien between 4 May 2015 and 29

September 2015.

2.13
The way these purported trades were conducted in combination with their scale

and volume are highly suggestive of financial crime. The Authority’s findings are

made in the context of this finding, and in consideration that these matters have

given rise to additional investigation by other Tax Agencies and/or law enforcement

agencies as has been publicly reported.

2.14
The Authority considers that Sapien failed to take reasonable care to organise and

control its affairs responsibly and effectively with adequate risk management

systems, as required by Principle 3, in relation to the purported Solo Trading and

Solo Clients. Its policies and procedures were inadequate for identifying, assessing

and mitigating the risk of financial crime posed by the Solo business as they failed

a) Give adequate guidance on how to conduct risk assessments and what

factors to consider;

b) Set out adequate processes and procedures for EDD;

c) Set out adequate processes and procedures for transaction monitoring
including how transactions are monitored, and with what frequency;
and

d) Set out adequate processes and procedures for how to identify
suspicious transactions.

2.15
The Authority considers that Sapien failed to act with due skill, care and diligence

as required by Principle 2 in that it failed to properly assess, monitor and manage

the risk of financial crime associated with the Solo Clients and the purported

trading, in that the Firm:

a) Failed to properly conduct customer due diligence, by failing to follow

CDD procedures set out in the Firm’s policies, and by amending customer

due diligence forms in response to complaints from Solo Clients, to

reduce the information required in respect of Solo Clients;

b) Failed to gather information to enable it to understand the business that

the customers were going to undertake, the likely size or frequency of

the trading intended by 126 of the Solo Clients or the source of funds

for 126 of the Solo Clients out of 166 clients introduced by Solo;

c) Failed to undertake and document a risk assessment for each of the Solo

Clients;

d) Failed to complete EDD for any of the Solo Clients despite the fact that

none of the Solo Clients were physically present for identification

purposes and a number of other risk factors were present, including that

each of the 40 of the entities disclosed that they had a net worth of less

than €2 million but were purportedly going to execute 25 trades of €100

million;

e) Failed to assess each of the Solo Clients against the categorisation

criteria set out in COBS 3.5.2R and failed to record the results of such

assessments,
including
sufficient
information
to
support
the

categorisation, contrary to COBS 3.8.2R(2)(a);

f) Failed to conduct transaction monitoring of the Solo Clients’ purported

trades;

g) Failed to recognise numerous red flags with the purported trading

including failing to consider whether it was plausible and/or realistic that

sufficient liquidity was sourced within a closed network of entities for the

size and volumes of trading conducted by the Solo Clients. Likewise,

failing to consider or recognise that the profiles of the Solo Clients meant

that they were highly unlikely to meet the scale and volume of the

trading purportedly being carried out, and/or failing to at least obtain

sufficient evidence of the Solo Clients’ source of funds to satisfy itself to

the contrary; and

h) Received the payment from Elysium Global and failed to report the

payment to the Authority after several employees questioned a number

of red flags regarding the payment, and after the Authority had

conducted an unannounced visit alerting Sapien to possible issues with

the Solo Group.

2.16
Sapien’s failings merit the imposition of a significant financial penalty. The Authority

considers the failings to be particularly serious because they left the Firm exposed

to the risk that it could be used to further financial crime;

1.
Sapien onboarded 166 Solo Clients over a three month period, some of

which emanated from jurisdictions which did not have AML requirements

equivalent to those in the UK;

2.
Sapien demonstrated a willingness to cut corners in an effort to obtain this

business by bypassing its standard KYC forms and its compliance manual,

which required information regarding the source of funds and the nature and

purpose of the trading, in circumstances where it perceived a risk that a

delay in onboarding the clients would possibly cause the loss of the business;

3.
Sapien’s AML policies and procedures were not proportionate to the risks in

the Solo business that it was undertaking;

4.
Sapien failed to properly review and analyse the KYC materials that were

provided by the Solo Group or ask appropriate follow up questions to red

flags in the KYC materials;

5.
Even after a number of red flags appeared, Sapien failed to conduct any

ongoing monitoring, allowing these same clients to purportedly trade

equities totalling more than £6 billion;

6.
Because Sapien failed to both have and apply appropriate AML systems and

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controls in relation to the Solo business, there was an unacceptable risk that

Sapien could be used by clients to launder the proceeds of crime;

7.
Sapien accepted a payment from Elysium Global after being alerted to the

Authority’s concerns regarding the Solo trading and after employees raised

concerns regarding the payment; and

8.
Finally, these failings were not identified by Sapien.

2.17
Accordingly, to further the Authority’s operational objective of protecting and

enhancing the integrity of the UK financial system, the Authority has decided to

impose on Sapien a financial penalty of £178,000 (representing the disgorgement

figure) having been reduced from £236,740 due to the settlement discount and

because the full penalty figure would cause the firm serious financial hardship.

3
DEFINITION

3.1
The following definitions are used in this Notice:

“401(k) Pension Plan” means an employer-sponsored retirement plan in the

United States. Eligible employees may make pre-tax contributions to the plan but

are taxed on withdrawals from the account. A Roth 401(k) plan is similar in nature;

however, contributions are made post-tax although, withdrawals are tax-free. For

the 2014 tax year, the annual contribution limit was $17,500 for an employee, plus

an additional $5,500 catch-up contribution for those aged 50 and over. For the tax

year 2015, the contribution limits were $18,000 for an employee and the catch-up

contribution was $6,000. For a more detailed analysis, please see Annex C;

“2007 Regulations” or “Regulation” means the Money Laundering Regulations

2007;

“the Act” means the Financial Services and Markets Act 2000;

“AML” means Anti-Money Laundering;

“AML certificate” means an AML introduction form which is supplied by one

authorised firm to another. The form confirms that a regulated firm has carried out

CDD obligations in relation to a client and authorises another regulated firm to place

reliance on it in accordance with Regulation 17;

“the Authority” means the Financial Conduct Authority, known prior to 1 April

2013 as the Financial Services Authority;

“Broker Firms” means the other broker firms who agreed with the Solo Group to

carry out the Solo Trading;

“Brokermesh” means the bespoke electronic platform set up by the Solo Group

for the Solo Clients to submit orders to buy or sell cash equities, and for the Broker

Firms to provide or seek liquidity and execute the purported trading;

“CDD” means customer due diligence measures, the measures a firm must take to

identify each customer and verify their identity and to obtain information on the

purpose and intended nature of the business relationship, as required by Regulation

5;

“Clearing broker” means an intermediary with responsibility to reconcile trade

orders between transacting parties. Typically, the clearing broker validates the

availability of the appropriate funds, ensures the delivery of the securities in

exchange for cash as agreed at the point the trade was executed, and records the

transfer;

“COBS” means the Authority’s Conduct of Business Sourcebook Rules;

“Compliance Manual” means Sapien’s “Customer FCA Compliance Procedures

Manual 2014”, which was applicable during the Relevant Period;

“Cum-dividend” means when a buyer of a security is entitled to receive the next

dividend scheduled for distribution, which has been declared but not paid. A stock

trades cum-dividend up until the ex-dividend date, after which the stock trades

without its dividend rights;

“Cum-Dividend Trading” means the purported trading that the Solo Clients

conducted where the shares are cum-dividend in order to demonstrate apparent

shareholding positions that would be entitled to receive dividends, for the purposes

of submitting WHT reclaims;

“Custodian” means a financial institution that holds customers’ securities for

safekeeping. They also offer other services such as account administration,

transaction settlements, the collection of dividends and interest payments, tax

support and foreign exchange;

“DCAS” means Dividend Credit Advice Slips. These are completed and submitted

to overseas tax authorities in order to reclaim the tax paid on dividends received;

“DEPP” means the Authority’s Decision Procedure and Penalties Manual;

“Dividend Arbitrage” means the practice of placing shares in an alternative tax

jurisdiction around dividend dates with the aim of minimising withholding taxes

(“WHT”), or generating WHT reclaims. Dividend Arbitrage may include several

different activities including trading and lending equities and trading derivatives,

including futures and total return swaps, designed to hedge movements in the price

of the securities over the dividend dates;

“Double Taxation Treaty” means a treaty entered into between the country

where the income is paid and the country of residence of the recipient. Double

Taxation Treaties may allow for a reduction or rebate of the applicable WHT;

“EDD” means enhanced due diligence, the measures a firm must take in certain

situations, as outlined in Regulation 14;

“Elysium Global” means Elysium Global (Dubai) Limited;


“Executing broker” means a broker that merely buys and sells shares on behalf

of clients. The broker does not give advice to clients on when to buy or sell shares;

“European exchanges” means registered execution venues, including regulated

markets, multilateral trading facilities, organised trading facilities and alternative

trading systems encapsulated in Bloomberg’s European Composite;

“FATCA” means the Foreign Account Tax Compliance Act;


“Financial Crime Guide” means the Authority’s consolidated guidance on financial

crime, which is published under the name “Financial crime: a guide for firms”. In

this Notice, the applicable versions for the Relevant Period were published in

January 2015 (incorporating updates which came into effect on 1 June 2014) and

April 2015. The Financial Crime Guide contains “general guidance” as defined in

section 139B FSMA. The guidance is not binding and the Authority will not presume

that a firm’s departure from the guidance indicates that it has breached the

Authority’s rules. But as stated in FCG 1.1.8, the Authority expect firms to be aware

of the Financial Crime Guide where it applies to them, and to consider applicable

guidance when establishing, implementing and maintaining their anti-financial

crime systems and controls;

“Financial Crime Manual” means Sapien’s “Financial Crime FCA Compliance

Procedures Manual 2014”, which was applicable during the Relevant Period;

“Handbook” means the collection of regulatory rules, manuals and guidance issued

by the Authority;

“JMLSG” means the Joint Money Laundering Steering Group, which is comprised

of leading UK trade associations in the financial services sector;

“JMLSG Guidance” means the ‘Prevention of money laundering/combating

terrorist finance guidance for the UK financial sector’ issued by the JMLSG, which

has been approved by a Treasury Minister in compliance with the legal requirements

in the 2007 Regulations. The JMLSG Guidance sets out good practice for the UK

financial services sector on the prevention of money laundering and combating

terrorist financing. In this Notice, applicable provisions from the version dated on

19 November 2014 have been referred to.

The Authority has regard to whether firms have followed the relevant provisions of

the JMLSG Guidance when deciding whether a breach of its rules on systems and

controls against money laundering has occurred, and in considering whether to take

action for a financial penalty or censure in respect of a breach of those rules (SYSC

3.2.6E and DEPP 6.2.3G);

“KYC” means Know Your Customer, which refers to CDD and EDD obligations;


“KYC pack” means the bundle of client identity information received, which usually

included incorporation documents, certified copies of identity documents, utility

bills and CVs;

“Matched principal trading” means a transaction where the facilitator interposes

itself between the buyer and the seller to the transaction in such a way that it is

never exposed to market risk throughout the execution of the transaction, with

both sides executed simultaneously, and where the transaction is concluded at a

price where the facilitator makes no profit or loss, other than a previously disclosed

commission, fee or charge for the transaction;

“MLRO” means Money Laundering Reporting Officer;


“OTC” means over the counter trading which does not take place on a regulated

exchange;

“Principles” means the Authority’s Principles for Businesses as set out in the

Handbook;

“the RDC” means the Regulatory Decisions Committee of the Authority (see

further under Procedural Matters below);

“Relevant Period” means the period from 10 February 2015 to 10 November

2015;

“Sapien” means Sapien Capital Limited;

“SCP” means Solo Capital Partners LLP;

“Solo Clients” means the entities introduced by the Solo Group to Sapien and the

other brokers on whose behalf Sapien executed purported equity trades for some

of the clients during the Relevant Period;

“Solo Group” or “Solo” means the four authorised firms owned by Sanjay Shah,

a British national residing in Dubai, details of which are set out in paragraph 4.3;

“Solo Trading” means purported Cum-Dividend Trading and the purported Unwind

Trading executed for Solo Clients during the Relevant Period;

“UBO” means ultimate beneficial owner with “beneficial owner” being defined in

Regulation 6;

“Unwind Trading” means purported trading that took place over several days or

week to reverse the Cum-Dividend Trading to neutralise the apparent shareholding

positions;

“Withholding Tax” or “WHT” means a levy deducted at source from income and

passed to the government by the entity paying it. Many securities pay periodic

income in the form of dividends or interest, and local tax regulations often impose

a WHT on such income; and

“Withholding Tax Reclaims” means in certain cases where WHT is levied on

payments to a foreign entity, the WHT may be reclaimed if there is a Double

Taxation Treaty between the country in which the income is paid and the country

of residence of the recipient. Double Taxation Treaties may allow for a reduction or

rebate of the applicable WHT.

4
FACTS AND MATTERS

4.1
Sapien is a UK-based corporate finance advisory and brokerage firm that offered

diverse capital services to its clients. During the Relevant Period, Sapien’s

brokerage services included broking on a ‘matched principal basis’ in (i) fixed

income securities, (ii) convertible bonds, (iii) floating rate notes and (iv) depository

receipts. During the Relevant Period, Sapien was permitted to execute trades for

Professional Clients and Eligible Counterparties only. Before it onboarded 166 Solo

Clients, Sapien only had up to approximately 30 to 40 active on-boarded clients.

Sapien’s Negligence

4.2
Sapien staff had in place inadequate 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 four authorised entities known as the Solo Group.

In addition, Sapien staff did not exercise due skill, care and diligence in applying

AML policies and procedures, and in failing to properly assess, monitor and mitigate

the risk of financial crime in relation to the Solo Clients and the purported trading.

The Solo Group

4.3
The four authorised firms referred to by the Authority as the Solo Group were

owned by Sanjay Shah, a British national currently based in Dubai:

•
Solo Capital Partners LLP (“SCP”) was first authorised in March 2012 and

was a broker.

•
West Point Derivatives Ltd was first authorised in July 2005 and was a

broker in the derivatives market.

•
Old Park Lane Capital Ltd was first authorised in April 2008 and was an

agency stockbroker and corporate broker.

•
Telesto Markets LLP was first authorised on 27 August 2014 and was a

wholesale custody bank and fund administrator.

4.4
During the Relevant Period, SCP and others in the Solo Group at various stages,

held regulatory permissions to provide custody and clearing services. The Solo

Group has not been permitted to carry out any activities regulated by the Authority

since December 2015 and Solo Capital Partners formally entered Special

Administration insolvency proceedings in September 2016. The other three entities

are in administration proceedings.

Statutory and Regulatory Provisions


4.5
The statutory and regulatory provisions relevant to this Notice are set out in Annex

B.

4.6
Principle 3 requires firms take reasonable care to organise and control their affairs

responsibly and effectively, with adequate risk management systems. The 2007

Regulations and rules in the Authority’s Handbook further require firms to create

and implement policies and procedures to prevent and detect money laundering,

and to counter the risk of being used to facilitate financial crime. These include

systems and controls to identify, assess and monitor money laundering risk, as well

as conducting CDD and ongoing monitoring of business relationships and

transactions.

4.7
Principle 2 requires firms to conduct their businesses with due skill, care and

diligence. A firm merely having systems and controls as required by Principle 3 is

not sufficient to avoid the ever-present financial crime risk. A firm must also

carefully apply those systems and controls with due skill, care and diligence as

required by Principle 2 to protect itself, and to properly assess, monitor and manage

the risk of financial crime.

4.8
Money laundering is not a victimless crime. It is used to fund terrorists, drug

dealers and people traffickers as well as numerous other crimes. If firms fail to

apply money laundering systems and controls thoughtfully and diligently, they risk

facilitating these crimes.

4.9
As a result, money laundering risk should be taken into account by firms as part of

their day-to-day operations, including those in relation to the development of new

products, the taking on of new clients and changes in their business profile. In

doing so, firms should take account of their customer, product and activity profiles

and the complexity and volume of their transactions.

4.10
The JMLSG has published detailed guidance with the aim of promoting good

practice, and giving practical assistance in interpreting the 2007 Regulations and

evolving practice within the financial services industry. When considering whether

a breach of its rules on systems and controls against money laundering has

occurred, the Authority will have regard to whether a firm has followed the relevant

provisions in the JMLSG guidance.

4.11
Substantial guidance for firms has also been published by the Authority regarding

the importance of AML controls, in the form of its Financial Crime Guide, which cites

examples of good and bad practice, publications of AML thematic reviews and

regulatory notices.

Background of Dividend Arbitrage and the Purported Solo Trading

Dividend Arbitrage Trading

4.12
The aim of dividend arbitrage is to place shares in certain tax jurisdictions around

dividend dates, with the aim of minimising withholding taxes or to generate WHT

reclaims. WHT is a levy deducted at source from dividend payments made to

shareholders.

4.13
If the beneficial owner is based outside of the country of issue of the shares, they

may be entitled to reclaim that tax if the country of issue has a relevant treaty (a

“Double Taxation Treaty”) with the country of residence of the beneficial owner.

Accordingly, dividend arbitrage aims at transferring the beneficial ownership of

shares temporarily overseas, in sync with the dates upon which dividends become

payable, in order that the criteria for making a withholding tax reclaim are fulfilled.

4.14
As the strategy is one of temporary transfer only, it is often executed using ‘stock

lending’ transactions. While such transactions are structured economically as loans,

the entitlement to a tax rebate depends on actual transfer of title. The legal

structure of the ‘loan’ is therefore a sale of the shares, on condition that the seller

is obliged to sell back equivalent shares to the buyer at a specified future date.

4.15
Dividend arbitrage may give rise to significant market risk for either party as the

shares may rise or fall in value during the life cycle of the loan. In order to mitigate

this, the strategy will often include a series of derivative transactions, which hedge

this market exposure.

4.16
A key role of the share custodian in connection with dividend arbitrage strategies,

is to issue a voucher to the beneficial owner which certifies such ownership on the

date on which the entitlement to a dividend arose. The voucher will also specify the

amount of the dividend and the sum withheld at source. This is sometimes known

as ‘Dividend Credit Advice Slip’ or ‘Credit Advice Note’. The purpose of the voucher

is for the beneficial owner to produce it (assuming the existence of a relevant

Double Taxation Treaty), to the relevant tax authority to reclaim the withholding

tax. The voucher generally certifies that, 1) the shareholder was the beneficial

owner of the share at the relevant time, 2) the shareholder had received the

dividend, 3) the amount of the dividend and, 4) the amount of tax withheld from

the dividend.

4.17
Given the nature of dividend arbitrage trading, the costs of executing the strategy

will usually be commercially justifiable only if large quantities of shares are traded.

The Purported Solo Trading

4.18
The Authority’s investigation and understanding of the purported trading in this

case is based, in part, on analysis of transaction reporting data and material

received from Sapien, the Solo Group, and five other Broker Firms that participated

in the Solo Trading. The Solo Trading was characterised by a circular pattern of

purported extremely large-scale OTC equity trading, back-to-back securities

lending arrangements and forward transactions.

4.19
The Solo Trading can be broken into two phases:

(i) purported trading conducted when shares were cum-dividend, in order to

demonstrate apparent shareholding positions that would be entitled to receive

dividends, for the purposes of submitting WHT reclaims (“Cum-Dividend Trading”),

and

(ii) the purported trading conducted when shares were ex dividend, in relation to

the scheduled dividend distribution event which followed the Cum-Dividend

Trading, in order to reverse the apparent shareholding positions taken by the Solo

Clients during Cum-Dividend Trading (“Unwind Trading”).

4.20
The combined volume of the purported Cum-Dividend Trading across the six Broker

Firms were between 15 and 61% of the shares outstanding in the Danish stocks

traded, and between 7 and 30% of the shares outstanding in the Belgian stocks

traded.

4.21
As a broker for the equity trades, Sapien executed the purported Cum-Dividend

Trading and the purported Unwind Trading. However, the FCA believes it unlikely

that Sapien would have executed both the purported cum-dividend trades and

purported unwind trades for the same client in the same stock in the same size

trades and therefore it is likely Sapien only saw one side of the purported trading.

Additionally, the FCA considers that purported stock loans and forwards linked to

the Solo Trading are likely to have been used to obfuscate and/or give apparent

legitimacy to the overall scheme. Although there is evidence that Sapien was aware

of the purported stock loans and forwards, these trades were not executed by

Sapien.

4.22
The purpose of the purported trading was to enable the Solo Group to arrange for

DCAS to be created, which purported to show that the Solo Clients held the relevant

shares on the record date for dividend. The DCAS were in some cases then used to

make WHT reclaims from the tax agencies in Denmark and Belgium, pursuant to

Double Taxation Treaties. In 2014 and 2015, the value of Danish and Belgian WHT

reclaims made, which are attributable to the Solo Group, was approximately

£899.27 million and £188.00 million respectively. In 2014 and 2015, of the

reclaims made, the Danish and Belgian tax authorities paid approximately £845.90

million and £42.33 million respectively.

4.23
The Authority refers to the trading as ‘purported’ as it has found no evidence of

ownership of the shares by the Solo Clients, or custody of the shares and settlement

of the trades by the Solo Group.

Sapien’s Introduction to the Solo Group business

4.24
In 2014, Sapien took on a new trading desk. The individuals working on the desk

reported directly to Sapien management. The new trading desk was taken on to

conduct futures derivatives trades for Sapien. While at prior firms, these individuals

had acted as brokers for the Solo Group. Upon joining Sapien, they were keen to

continue their prior relationship with the Solo Group.

4.25
On 23 October 2014, Sapien had its first meeting with representatives from the

Solo Group. During the meeting, representatives from the Solo Group asked Sapien

if it wanted to act as a nominated broker to trade equities. At the meeting, Sapien

was not informed of the nature or location of the clients, the volume of trading, or

the trading strategy that they would employ.

4.26
Despite the lack of information, after the meeting, a representative of Sapien sent

an email confirming that it would like to be added to Solo’s broker list.

4.27
On 24 November 2014, the Solo Group sent Sapien a custody agreement, pursuant

to which the Solo Group would act as a custodian for Sapien. Sapien did not

understand the purpose of the custodian agreement and did not sign it.

4.28
Sapien arranged to have a second meeting with the Solo Group to try to gain clarity

as to what type of business Solo wanted Sapien to perform and the purpose of the

custody agreement. Sapien proposed that it would assist the Solo Group with

futures derivatives. Again, Sapien left the meeting without clarity about what type

of trading the Solo Group wanted Sapien to perform or who Solo would be

settlement agent or custodian for.

4.29
Sapien arranged a third meeting with the Solo Group in December 2014 to, again,

try to understand what type of business it would be performing for the Solo Group.

For a third time, Sapien left the meeting without clarity about what the relationship

would be.

4.30
It was not until the end of January 2015, that Sapien understood that there would

be approximately 160 clients who would be introduced through the Solo Group.

They were going to be trading equities, not futures derivatives, as had been

proposed by Sapien. The firm understood that the clients would then have a

custody arrangement with Solo. Sapien understood that the clients wanted Sapien

to enter transactions for them on a matched-principal basis. Sapien further

understood the clients would be located across various countries.

4.31
The Solo Group informed Sapien that the clients would be entering trades in excess

of €100 million. The Solo Group told Sapien that it should expect to earn

approximately €600,000 to €700,000 per annum in brokerage fees.

4.32
During this time period, Sapien saw the financial statements of the Solo Group and

were aware that Solo had limited financial resources to cover the size of trades that

they had referred.

4.33
The Solo Group made clear that Sapien would have to onboard its clients and

trade using an electronic trading system. The Solo Group would act as the

custodian for the trades.

Onboarding of the Solo Clients

Introduction to Onboarding requirements

4.34
The 2007 Regulations required authorised firms to use their onboarding process to

obtain and review information about a potential customer to satisfy their KYC

obligations.

4.35
As set out in Regulation 7 of the 2007 Regulations, a firm must conduct Customer

Due Diligence (“CDD”) when it establishes a business relationship or carries out an

occasional transaction.

4.36
As part of the CDD process, first, a firm must identify the customer and verify their

identity. Second, a firm must identify the beneficial owner, if relevant, and verify

their identity. Finally, a firm must obtain information on the purpose and intended

nature of the business relationship.

4.37
To confirm the appropriate level of CDD that a firm must apply, a firm must perform

a risk assessment, taking into account the type of customer, business relationship,

product or transaction. The firm must also document its risk assessments and keep

its risk assessments up to date.

4.38
If the firm determines through its risk assessment that the customer poses a higher

risk of money laundering or terrorist financing, then it must apply Enhanced Due

Diligence (“EDD”). This may mean that the firm should obtain additional

information regarding the customer, the beneficial owner to the extent there is one,

and the purpose and intended nature of the business relationship. Additional

information gained during EDD should then be used to inform its risk assessment

process, in order to manage its money laundering/terrorist financing risks

effectively. The information firms are required to obtain about the circumstances

and business of their customers is necessary to provide a basis for monitoring

customer activity and transactions, so firms can effectively detect the use of its

products for money laundering and/or terrorist financing.

Chronology of the onboarding

4.39
In early February 2015, the onboarding process commenced for the Solo Clients,

none of which had any prior relationship with Sapien.

4.40
To start the process, Sapien received an identical email from each of the Solo

Clients stating, “I would like to be onboarded for brokerage services. I authorise

[Name of Solo Group entity] to release any KYC you required”. The only difference

in the emails from the Solo Clients was which one of the four Solo entities was

authorised to release the information to Sapien.

4.41
Sapien did not question why 166 purported separate entities drafted identical

emails requesting to be a client. In fact, in some cases, the emails included the

wrong Solo entity as custodian that was authorised to release KYC information, and

Sapien was then sent amended instructions. Even in these cases, Sapien did not

appear to question why the client did not know which Solo entity it had a

relationship with.

4.42
As Sapien had not obtained any information about the Solo Clients prior to

onboarding, it was only after it received the initial request to be onboarded that

the Firm started to receive information about the names and jurisdictions of the

Solo Clients.

4.43
By the end of February 2015, Sapien learned that the Solo business was seasonal,

and it would only occur between February to August or September. Sapien realised

that its onboarding was taking too long, and it was going to miss the season if they

delayed any further. Because of this, Sapien wanted the KYC checks done as

quickly as possible.

4.44
When it started the Solo onboarding process, Sapien only had approximately 30

active clients. The number of clients it typically onboarded varied. Some months it

might onboard three or four clients, other months it might onboard one client. In

some months, it did not onboard anyone. With the introduction of the Solo

business, Sapien onboarded 166 Solo Clients in three months.

4.45
On 3 March 2015, Sapien had received KYC material from one of the Solo Clients.

After reviewing the material, Sapien determined that the signature on the client’s

passport did not match the signatures of the Power of Attorney, the Foreign Account

Tax Compliance Act (“FATCA”) form and the Customer Declaration Form. Sapien

informed the Solo Group about the mismatched signatures, and Sapien merely

asked the Solo Client to re-sign the forms. Sapien failed to ask for an explanation

as to why the signatures were inconsistent. In internal communications, there was

reference to the mismatched signatures being a “touchy subject.” Despite this

obvious red flag which meant that Sapien could not be satisfied that it had

established the identity of the customer, it continued to onboard this client and the

other Solo Clients.

4.46
Throughout the onboarding process, Sapien maintained a list of potential clients.

By March 2015, Sapien had received a list of 167 potential Solo Clients. Of the 167

clients, 10 were based in the Cayman Islands, 12 were based in the British Virgin

Islands, 24 in Malaysia, and 117 in the United States. Over half of the entities were

trusts.

4.47
By 8 April 2015, Sapien had concluded its review of 111 of the Solo Clients and

decided to onboard them. By this date, it was clear that over 100 of the clients

were managed by three single individuals, and in total there were only 15

individuals controlling all 166 Solo Clients. Sapien did not meet a single Solo Client.

4.48
Additionally, Sapien was aware that some of the Solo Client representatives were

former Solo employees. In fact, the KYC materials provided to Sapien showed that

an ex-Solo employee was the ultimate beneficial owner of four of the Malaysian

companies. His CV was included in the KYC materials showing that he was an ex-

employee of Solo. Further, the KYC materials provided to Sapien showed that

Sanjay Shah was a former director of at least one entity that Sapien onboarded.

4.49
Sapien completed the onboarding of 166 Solo Clients on 30 April 2015.

CDD

4.50
CDD is an essential part of the onboarding process, which must be conducted when

onboarding a new client. Firms must obtain and hold sufficient information about

their clients to inform the risk assessment process and manage the money

laundering risks effectively.

4.51
As part of the CDD process first, under Regulation 5 of the 2007 Regulations, a firm

must identify the customer and verify their identity. Second, a firm must identify

the beneficial owner, if relevant, and verify their identity. Finally, a firm must obtain

information on the purpose and intended nature of the business relationship.

A.
Customer Identification and Verification

4.52
Regulation 20 of the 2007 Regulations requires that firms establish and maintain

appropriate and risk-sensitive policies and procedures related to customer due

diligence, and SYSC 6.3.1 requires that the policies must be comprehensive and

proportionate to the nature, scale and complexity of its activities.

4.53
Sapien’s Compliance Manual during the Relevant Period contained a CDD policy.

This required that Sapien complete a “Customer Due Diligence Know Your Client

File Note”, which provides information on why the client is setting up an account

and where the funds will be coming from” for each new client.

4.54
Sapien’s Financial Crime Manual also noted that “Prior ... to entering into any

business relationship with a customer, the firm will ensure that it has sufficient

information on the customer, i.e. there is evidence on file to confirm that, firstly,

the customer has been identified”.

4.55
As part of its standard CDD process, Sapien provided new clients with a checklist,

a standard form and a categorisation letter. Of the Solo Clients, 40 returned

Sapien’s Customer Information Disclosure Form. All 40 of these clients responded

identically to a number of questions. First, the form asked what products were to

be traded. All of the Clients ticked the box “Securities (DVP Equity/Cash Bonds)”.

Then, the form asked for the “Anticipated volume of transactions per product”, all

of the 40 Solo Clients responded with “25”. Most importantly, the Solo Clients were

asked the “Anticipated size of transactions per product”, and all 40 of these clients

replied “€100,000,000”.

4.56
Several pages later in the form, it asked, “Are the Company/Trust/Fund’s total

Balance Sheet assets of Euro 20,000,000 ‘or more.’” All 40 of the clients replied

“no”. Then, they were asked, “Is the Company/Trust/Fund’s Net Turnover Euro

40,000,000 ‘or more.’” Again, all 40 of the clients replied “no”. Then, the form

asked, “Is the Company/Trust/Fund’s Net Worth of Euro 2,000,000 ‘or more.’” All

40
of
the
clients
replied
“no”.
Finally,
the
form
asked,
“Does
the

Company/Trust/Fund have a financial instrument portfolio (as defined below) which

can currently be valued in excess of Euro 500,000?” All 40 of the clients replied

“yes”.

4.57
No one at Sapien questioned any of the Solo Clients as to why all 40 of these clients

gave an identical response or how it was possible that the Solo Clients would be

executing 25 trades of €100,000,000 each if they did not have a net worth of

€2,000,000 or more. Despite the obvious disparity between intended trading versus

financial position, Sapien continued to onboard these Solo Clients.

4.58
The ‘Customer Information Disclosure Form’ also asked each of the clients to

specify the source of the investment funds. All 40 clients had an identical answer.

They stated, “Any Contributions from sponsoring employer will be from revenue

generated by such employer during the current taxable year. Contributions from

the beneficiary including any rollover contributions from beneficiary, may be from

income earned from sponsoring employer and from income earned from

employment in prior years at other employers.” Again, Sapien did not question why

40 purported separate entities gave an identical response.

4.59
Although 40 of the Solo Clients completed the Customer Information Disclosure

Form, during the onboarding process, some of the Solo Clients complained that the

forms were too lengthy. As a result, Sapien shortened its 12 to 13-page form to

require a one-page form from the Solo Clients.

4.60
This cut out key KYC information including all the questions above: 1) “Are the

Company/Trust/Fund’s total Balance Sheet assets of Euro 20,000,000 ‘or more’”;

2) “Is the Company/Trust/Fund’s Net Turnover Euro 40,000,000 ‘or more’”; 3) “Is

the Company/Trust/Fund’s Net Worth of Euro 2,000,000 ‘or more’”; 4) “Does the

Company/Trust/Fund have a financial instrument portfolio (as defined below+)

which can currently be valued in excess of Euro 500,000”; 5) “please specify the

source of investment funds”; 6) what are “[a]nticipated volume of transactions per

product”, and 7) please specify the “[a]nticipated size of transactions per product.”

4.61
Sapien’s Compliance Manual contained a ‘Know Your Customer File Note’ that

required the following questions be answered: 1) “What is the purpose and reason

for opening the account and establishing the relationship?”; 2) “What is the

anticipated level and nature of the activity that is to be undertaken?”; and 3) “What

is the expected origin of the funds to be used within the relationship?” Despite its

policy, these questions were noticeably absent from shorter form sent to the

majority of the Solo Clients. As to 126 of the Solo Clients, Sapien failed to ask the

anticipated level of activity that was to be undertaken. Moreover, despite the

requirement in its compliance manual, Sapien failed to complete the Know Your

Customer File Note for any of the Solo Clients.

4.62
Furthermore, Sapien never questioned why the Solo Clients were complaining

about the forms. Instead, Sapien showed a willingness to cut corners in its financial

crime controls in order to appease the Solo Clients and ensure it got the Solo Clients

onboarded quickly.

4.63
Because the question regarding origin of funds was removed from the information

gathered, Sapien did not gather any information from the remaining clients

regarding the source of funds, nor did it perform any checks on the sources of client

funds that were being used to execute the trades. Contrary to what was required

by its policy, Sapien had the misconception that because Sapien was not holding

the clients’ funds, it was not required to conduct such checks. It failed to appreciate

the risks that the Firm could be used to facilitate financial crime regardless of

whether the funds passed through the Firm or not. Sapien accepts that it should

have been checking the source of funds and that failure to do so was a serious

shortcoming in the onboarding process.

B. Purpose and Intended Nature of a Business Relationship


4.64
As part of CDD, Regulation 5(c) of the 2007 Regulations requires firms to obtain

information on the purpose and intended nature of the business relationship. The

firm should use this information to assess whether a customer’s financial behaviour

over time is in line with its expectations, whether or not the client is likely to be

engaged in criminal activity, and to provide it with a meaningful basis for ongoing

monitoring of the relationship.

4.65
Regulation 20 of the 2007 Regulations requires that firms establish and maintain

appropriate and risk-sensitive policies and procedures related to customer due

diligence, and SYSC 6.3.1R requires that the policies must be comprehensive and

proportionate to the nature, scale and complexity of its activities.

4.66
Sapien’s Financial Crime Manual required that “[p]rior therefore to entering into

any business relationship with a customer, the firm will ensure that it has sufficient

information on the customer, i.e. there is evidence on file to confirm that, firstly,

the customer has been identified and, secondly, that the nature of the business the

customer is expected to undertake, including the expected or predictable pattern

of transactions”.

4.67
Sapien’s Compliance Manual contained a Know Your Customer File Note that

required the following question be answered: “What is the purpose and reason for

opening the account and establishing the relationship?”

4.68
There is no evidence that Sapien sought to comply with its policies by taking steps

to understand the business that the customers were expected to undertake. Sapien

did have one conversation with Solo Group where they told Sapien to expect some

trades exceeding €100 million. Additionally, as discussed above in paragraph 4.55,

40 of the 166 Solo Clients completed Sapien’s Customer Information Disclosure

Form. All 40 of the clients responded identically to a number of questions. First,

the form asked what products were to be traded. All of the Clients ticked the box

“Securities (DVP Equity/Cash Bonds)”. Then the form asked for the “Anticipated

volume of transactions per product”, all of the 40 Solo Clients responded 25. The

Solo Clients were asked the “Anticipated size of transactions per product”, and all

40 clients replied €100,000,000.

4.69
Aside from that one conversation and the 40 completed Customer Information

Disclosure Forms, Sapien had no other information regarding the expected pattern

of transactions for 126 of the Solo Clients.

4.70
Even with the information that was completed with respect to 40 of the Solo Clients,

Sapien did not request or receive sufficient information from the Solo Clients about

the purpose and intended nature of their proposed trading relationship or what kind

of business they were trying to undertake. Sapien confirmed that its review of the

KYC documents was for identification purposes only, and it did not conduct

sufficient analysis of the information that had been obtained. This meant that

Sapien had insufficient information on which to adequately evaluate whether the

purported trading was in line with expectations and to identify unusually large

transactions.

4.71
The JMLSG states: “if a firm cannot satisfy itself as to the identity of the customer;

verify that identity; or obtain sufficient information on the nature and intended

purpose of the business relationship, it must not enter into a new relationship and

must terminate an existing one”. Despite the obvious issues with the lack of

information available to Sapien about the nature and intended purpose of the

business relationship, Sapien onboarded every Solo Client.

Risk assessment

4.72
As part of the onboarding and due diligence process, firms need to undertake and

document risk assessments for every client. Such assessments should be based on

information contained in the clients’ KYC documents.

4.73
Conducting a thorough risk assessment for each client assists firms in

determining the correct level of CDD to be applied, including whether EDD is

warranted. If a customer is not properly assessed, firms are unlikely to be fully

apprised of the risks posed by each client, which increases the risk of financial

crime.

4.74
Under Regulation 20 of the 2007 Regulations, firms are required to maintain

appropriate and risk-sensitive policies and procedures related to risk assessments

and management.

4.75
Sapien’s Compliance Manual stated, “Completed Identification Verification Form(s)

which will include a risk assessment of the client and the business to be undertaken.

Additional verification will be required where the risk assessment indicates that

there is a higher than standard risk for that client and/or business.” The “ID and

Verification Checklists” then each had three separate questions, which formed the

basis of the risk assessment. These questions were “8.1 Does the client present a

higher than standard money laundering risk? 8.2 Does the business to be

undertaken with the client present a higher than standard money laundering risk?

8.3 Do geographic risks associated with the customer and/or connected individuals

and/or other impersonal entities present a higher than standard money laundering

risk?”

4.76
Sapien’s policies and procedures failed to set out any factors, aside from

geography, or any guidance that would help anyone at Sapien conclude why a client

would present a higher money laundering risk or why the particular business

undertaken with the client would pose a higher money laundering risk. Even as to

geography, the policies and procedures failed to identify any geographic regions

that would pose a heightened risk of money laundering. Without such guidance,

Sapien was not in a position to properly assess the risks either at the onboarding

stage when the Solo Clients presented themselves or the risks once the Solo Clients

began the purported trading.

4.77
In fact, despite having policies which required risk assessments, Sapien did not

carry out risk assessments on the Solo Clients and instead relied on the introduction

certificates provided by Solo. Sapien confirmed its review of the KYC documents

was for identification purposes only. No consideration was given as to how the KYC

documents affected each client’s risk assessment, even where companies had been

incorporated in places without regulatory equivalence such as the BVI or the

Cayman Islands.

4.78
Sapien did not conduct sufficient analysis to determine whether the Solo Clients

posed a higher risk of financial crime. Even a brief analysis shows the following risk

•
Sapien management had no former relationship with the Solo Clients, and

Sapien failed to have the Solo Clients complete information regarding the

nature of the business the Solo Client was to undertake. Therefore, Sapien

did not have a profile against which to base an assessment of their

purported trading for the purposes of ongoing monitoring.

•
The Solo Clients’ KYC material showed that almost all of the Solo Clients

had just a single director, shareholder and/or beneficiary.

•
The Solo Clients were introduced by the Solo Group, where there was a

possibility of a conflict of interest as some UBOs were former employees of

SCP, as set out in paragraph 4.48. Sapien relied on the AML certificates that

were given by Solo for their ex-employees. Because of Solo’s relationship

with their former employees, they were not in a position to provide an

unbiased view.

•
Over half of the Solo Clients were US 401(k) Pension Plans, linked to trusts.

The JMSLG has noted that “some trusts established in jurisdictions with

favourable tax regimes have in the past been associated with tax evasion

and money laundering”.

•
Additionally, Sapien had no awareness of how 401(k) Pension Plans

operated, the rules for their establishment or the limits for investment. It

had not previously encountered 401(k) Pension Plans, but still made no

enquiries at all concerning them.

•
None of the Solo Clients were physically present for identification purposes

as the onboarding process was conducted via email. This is identified in the

2007 Regulations as being indicative of higher risk, and therefore firms are

required to take measures to compensate for the higher risk associated with

these clients.

•
As described above, all the Solo Clients, despite purportedly being separate

entities controlled by different beneficial owners, presented themselves with

identical emails.

•
The Solo Clients purportedly sought to do OTC equity trading which under

JMLSG guidance needs a more considered risk based approach and

assessment.

•
40 of the Solo Clients stated that they wanted to execute trades totalling

€100,000,000; however, they admitted that they did not have net worth of

€2,000,000.

4.79
In failing to conduct risk assessments, Sapien did not identify any risk factors for

the Solo Clients; therefore, it was not able to determine whether or not the Solo

Clients required EDD.

EDD

4.80
Firms must conduct EDD on customers which present a higher risk of money

laundering, so they are able to judge whether or not the higher risk is likely to

materialise.

4.81
Regulation 14(1)(b) states that firms “must apply on a risk-sensitive basis

enhanced customer due diligence and enhanced ongoing monitoring in any …

situation which by its nature can present a higher risk of money laundering or

terrorist financing”. The 2007 Regulations further require firms to implement EDD

measures for any client that was not physically present for identification purposes.

4.82
Regulation 20 of the 2007 Regulations requires firms to maintain appropriate and

risk-sensitive policies and procedures related to customer due diligence measures,

which includes enhanced due diligence. SYSC 6.3.1R further requires that the

policies must be comprehensive and proportionate to the nature, scale and

complexity of its activities.

4.83
Sapien’s Compliance Manual stated: “Additional verification evidence will be

required where the risk assessment indicates that there is a higher than standard

risk for that client and/or business”. If the firm concluded after conducting a risk

assessment that the client posed a higher than standard money laundering risk,

the business undertaken by the client presented a higher than standard money

laundering risk, or there was a geographic risk associated with the customer, then

the Customer Verification forms required Sapien to 1) “verify [the] identity of all

directors/persons operating the account and others as required”, 2) “verify the

beneficial owners as required” and 3) “any further evidence required”.

4.84
Other than the brief references, Sapien’s policies failed to set out processes or

procedures for EDD of a client or any examples of what further evidence would be

required per point three above.

4.85
Sapien’s policies were deficient in that they did not provide sufficient guidance to

staff on the types of information required to satisfy the EDD process. The policies

were also deficient as they did not require, in accordance with the 2007

Regulations, that if a client was not present for identification purposes then the

firm was required to implement EDD. As a result, the policies and procedures on

EDD were not comprehensive enough to deal with the risks they were supposed to

minimise.

4.86
Because Sapien did not meet a single Solo Client, Sapien was required to implement

EDD. However, even if a client had been present, for the reasons set out in

paragraph 4.78, a number of risk factors indicated that the Solo Clients may have

presented a higher risk of money laundering, and therefore Sapien ought to have

applied EDD by obtaining additional information about the Solo Clients and the

proposed trading. In view of the connections between some of the Solo Clients and

the Solo Group, this should have included independent enquiries on the sources of

funds for the Solo Clients to ensure that they were not still financially connected to

the Solo Group as employees, and had sufficient funds to conduct the anticipated

trading.

4.87
Sapien failed to apply any scrutiny as to the plausibility of the Solo Clients being

able to conduct professional trading, particularly in relation to the level of funds

that they would need to hold. For example, as to 40 of the 401(k) Pension Plans,

Sapien knew or should have known that those 40 clients had disclosed that they

did not have a net worth of Euro 2,000,000 or more, yet they had disclosed that

they intended to execute trades totalling Euro 2.5 billion. It is implausible that an

entity would be able to execute trades of that size with such a small net worth.

4.88
Additionally, one example of a client that was onboarded by Sapien was a 401(k)

Pension Plan where an identity document showed that the sole beneficiary was a

19-year-old college student. The individual was also the sole beneficiary for four

other pension plans onboarded by Sapien.

4.89
Instead of making enquiries as to how the beneficiary had sufficient funds given

the contribution limits for 401(k) Pension Plans and experience to conduct

purported trading as a per se professional client, the purpose of such trading, or

his reason for having five 401(k) Pension Plans, no one at Sapien acknowledged

seeing the documents or giving any consideration to the client’s age.

4.90
Sapien believed at the time that because it was not holding client funds and it was

relying on the introduction certificates from the Solo Group that it did not need to

question the source of funds for any of the Solo Clients. Because of what it

describes as a ‘misconception’, it accepts that there was no verification as to source

of funds.

4.91
Furthermore, many of the Solo Clients’ KYC documents contained a number of red

flags. For example, one trustee was responsible for fifteen separate clients. Upon

reviewing KYC packs for these 15 clients, it is clear that all of the 401(k) Pension

Plans had been set up in September, November and December of 2014 shortly

before the onboarding process. For five of the 401(k) Pension Plans related to this

single trustee, the UBO was a UK citizen, who only provided a UK ID containing a

UK address for the purposes of identification. Although there was one piece of mail

indicating a US address for that individual, the piece of mail was for her as a trustee

for a trust in someone else’s name. No one questioned why this UK citizen needed

five 401(k) Pension Plans, which are used solely for US income tax purposes, to be

established in September, November and December 2014. Sapien failed to ask any

basic questions including whether she continued to live at her UK address.

4.92
For these same entities, the documents contained additional red flags. For example,

for all the LLC agreements provided in the KYC packs, which was the employer for

the 401(k) Pension Plan, the documents had blank spaces where the amount of the

capital contributions for the LLC should have been completed. Similarly, the

percentage interests of the members were also left blank. Again, Sapien did not

ask any questions why these pieces of information had been omitted.

4.93
Sapien failed to conduct any EDD on the Solo Clients that presented a higher risk

of money laundering, and therefore was unable to judge whether the higher risk

was likely to materialise.

Client Categorisation

4.94
Part of the onboarding process also includes categorising clients according to the

COBS rules, which is a requirement additional and separate to carrying out risk

assessments. Pursuant to COBS 3.3.1R, firms must notify customers of their

categorisation as a retail client, professional client or eligible counterparty.

Authorised firms must assess and categorise clients based on their level of trading

experience, risk knowledge and access to funds, in order to ensure suitable

products are offered. Proper application of the rules also ensures that firms only

act for clients within the scope of their permissions. Firms are required to notify

clients as to the categorisation made by the Firm. Pursuant to COBS 3.8.2R, firms

must also keep records in relation to each client’s categorisation, including

sufficient information to support that categorisation.

4.95
Sapien is authorised to deal as an agent for professional clients and eligible

counterparties, which are types of clients that are considered to have experience,

knowledge and expertise to make their own investment decisions. Sapien was

aware that it could not accept clients unless they were in one of these categories.

There are two types of professional clients: per se professionals and elective

professionals. Each of these categories has prescriptive criteria, as listed in the

COBS rules.

4.96
Sapien’s Compliance Manual contained its policy regarding client categorisation.

The policy required Sapien to assess, document its assessment and maintain

evidence supporting its classification of prospective and current clients.

4.97
For the type of business conducted by Sapien, per se professional clients would

include authorised firms, government bodies, institutional investors or large

undertakings meeting two of: a balance sheet total of EUR 20,000,000; and/or a

net turnover of EUR 40,000,000; and/or own funds of EUR 2,000,000.

4.98
With respect to the Solo business, Sapien sent out a letter to the Solo Clients

requesting that they affirm they were professional clients. The Solo Clients merely

signed and returned the letter stating that they were professional clients. There

was no attempt by Sapien to determine if the Solo Clients actually met the rules

set out in COBS or to comply with the assessment process in its policy.

4.99
Sapien accepted that when it went back to assess if the client categorisation had

been done properly, it held insufficient details about the clients to confirm whether

the Solo Clients were properly categorised.

Ongoing monitoring

4.100 Regulation 8(1) requires firms to conduct ongoing monitoring of the business

relationship with their customers. Ongoing monitoring of a business relationship

includes scrutiny of transactions undertaken throughout the course of the

relationship (including, where necessary, the source of funds) to ensure that the

transactions are consistent with the firm’s knowledge of the customer, his business

and risk profile.

4.101 Monitoring customer activity helps identify unusual activity. If unusual activities

cannot be rationally explained, they may involve money laundering or terrorist

financing. Monitoring customer activity and transactions that take place throughout

a relationship helps firms know their customers, assist them to assess risk and

provides greater assurance that the firm is not being used for the purpose of

financial crime.

Transaction monitoring

4.102 As part of a firm’s ongoing monitoring of a client relationship, Regulation 8 requires

that firms must scrutinise transactions undertaken throughout the course of the

relationship (including, where necessary, the source of funds) to ensure that the

transactions are consistent with the relevant person’s knowledge of the customer,

his business and risk profile.

4.103 Furthermore, Regulation 14(1) states that enhanced ongoing monitoring must be

applied in situations, which can present a higher risk of money laundering or

terrorist financing.

4.104 Regulation 20 requires firms to have appropriate risk-sensitive policies and

procedures relating to ongoing monitoring. These policies must include procedures

to identify and scrutinise: 1) complex or unusually large transactions; 2) unusual

patterns of activities which have no apparent economic or visible lawful purpose;

and 3) any other activity which the relevant person regards as likely by its nature

to be related to money laundering or terrorist financing.

4.105 Sapien’s Compliance Manual required that the Firm scrutinise “transactions

undertaken throughout the course of the relationship (including, where necessary,

the source of funds) to ensure the transactions are consistent with the firm’s

knowledge of the customer and the customer’s business and risk profile and the

Suitability and Appropriateness assessments carried out by the Firm”.

4.106 However, Sapien’s policy regarding transaction monitoring failed to set out any

procedures regarding how, or the frequency with which, client activity should have

been monitored, even for higher risk clients, which created a risk that transaction

monitoring would not be conducted consistently or at all.

4.107 The policies also failed to require that Sapien compare the size of the trades to the

client profiles. The policies also did not give guidance on how to identify a suspicious

transaction or any risk factors to consider.

4.108 Sapien did not conduct transaction monitoring for AML purposes. Sapien did not

perform any scrutiny of the transactions undertaken throughout its relationship

with the Solo Clients (including of the source of funds).

The Purported Solo Trading

4.109 During the Relevant Period, Sapien purportedly executed high volume Cum-

Dividend Trades for the Solo Clients worth £6.39 billion, £2.55 billion in Danish

equities and £3.84 billion in Belgian equities and received commissions of

£297,044, which made up 13% of Sapien’s total revenue for the period.

4.110 Sapien purportedly started executing trades with respect to the Solo Clients on 4

May 2015. From May 2015 forward, Sapien purportedly executed trades in 3 Danish

securities and 11 Belgian securities on the last day of Cum-Dividend Trading. In

addition, Sapien purportedly executed unwind trades in 15 Danish and 15 Belgian

securities over the course of 2015.

4.111 Although Sapien had a brief conversation with the Solo Group prior to onboarding

any Solo Clients that the level of purported trading would exceed €100 million,

Sapien did not question the individual clients either before or after the trading

started regarding their level of trading or their financial capacity and

characteristics.

4.112 For example, one of the Cayman entities purportedly traded between 1 July 2015

and 3 July 2015 totalling approximately £1,312,659,119.79, and Sapien failed to

ask any questions about the trading or the source of funds.

4.113 Although Sapien stated that it monitored the purported trades from a commercial

perspective, “it conducted no ongoing monitoring for AML purposes”.

4.114 All the purported trading that Sapien executed for the Solo Clients was done on the

Solo Group’s Brokermesh system. Brokermesh was an electronic platform,

developed by an entity associated with the Solo Group, which generated trade

orders from clients which were transmitted to brokers, including to Sapien. The

purported trading on the platform was conducted via an automated process

whereby once an order appeared on the system, a broker would seek liquidity from

the Solo Clients available on the system. Then, once the liquidity was established,

the order would be matched subject to trade authorisation from the relevant

custodian.

4.115 Sapien has confirmed that liquidity was typically sourced within five to fifteen

minutes despite having orders over £230 million. In one case, an order for £237

million was filled in three minutes only among the other Solo Clients. Sapien did

not question how the liquidity could be met so quickly, especially given that all of

the orders were only matched between Solo Clients and none of the trades ever

went to public exchanges.

4.116 In another example, on 22 June 2015, Sapien was attempting to sell 3.9 million

shares of a particular stock worth approximately £310 million on behalf of a Solo

Client. Within two minutes, it received an email from another Solo Client trading

on the Brokermesh platform that they could fill the entire order. Sapien confirmed

that it had no concerns about the size of the trade, and it gave no consideration to

how that amount of stock was available.

A. Trade sizes

4.117 Between May and August 2015, Sapien used Brokermesh to purportedly execute

Cum-Dividend Trading to the value of £2.55 billion in Danish equities and £3.84

billion in Belgian equities.

4.118 Analysis of the Cum Dividend Trading reveals the following:

•
Between May and August 2015, Sapien purportedly executed only ‘buy’ orders

on behalf of Solo Clients in 3 Danish stocks over 3 cum-dividend dates. An

average of 17.55% of the available shares in each stock was traded, which were

cumulatively worth a total of £2.55 billion. The volumes also equated to an

average of 20 times the total number of all shares traded in those stocks on

European exchanges.

•
Between May and June 2015, Sapien purportedly executed ‘buy’ orders on

behalf of Solo Clients in 11 Belgian stocks over 7 cum-dividend dates. An

average of 6.25% of the available shares in each stock was traded, which were

cumulatively worth total of £3.84 billion. The volumes also equated to an

average of 25 times the total number of all shares traded on European

exchanges.

4.119 Sapien did not evaluate any of the trades cumulatively by the Solo Clients

generally, or by each individual stock. As a result, it did not appreciate a number

of key facts including but not limited to the total sizes that were being traded, the

amount of shares outstanding and any applicable disclosable thresholds.

4.120 The Authority considers that it is significant for market surveillance and visibility

that individual trades were below the applicable disclosable thresholds. For

example, section 29 of the Danish Securities Trading Act required shareholders

holding over 5% of Danish-listed stock to be publicised. Similarly, Belgian law

requires pursuant to Article 6 of the ‘Law of 2 May 2007 on disclosure of major

holdings in issues whose shares are admitted to trading on a regulated market and

laying down miscellaneous provisions’ holders of more than 5% of the existing

voting rights to notify the issuer and the Belgian Financial Services Markets

Authority of the number and proportion of voting rights that he/she holds.

4.121 Furthermore, the Firm failed to recognise the implausibility that liquidity for such

volumes could be found within a closed network of approximately 166 entities,

most of which only had a single shareholder. The closed network did not have

access to liquidity from public exchanges, yet the trades were filled within a matter

of minutes and represented up to 20% of the shares outstanding in the companies

listed on the Danish exchanges, and up to 10% of the equivalent Belgian stocks.

4.122 Sapien was not concerned regarding the size of the trades and never raised any

concerns with the Solo Group. Sapien was told by the Solo Group that if any of the

Solo Clients had insufficient funds or didn’t have the stock to deliver, then the

trades would be cancelled. Because none of the trades had been cancelled once the

purported trading commenced, Sapien did not have concerns, nor did it ever

question if it was a normal practice for trades to be cancelled between parties if

one party was short on funds.

4.123 Sapien also took comfort that the four Solo entities and the five brokers engaging

in the purported trading were all FCA registered.

4.124 Sapien took the view that because it was the executing broker, and the trades were

subject to custodian approval, the size of trades was not something that it needed

to consider or have responsibility for. As Sapien perceived that it bore no risk of

loss, it failed to recognise more general risks, including financial crime risk, which

applies to all regulated firms. Consequently, it failed to appreciate the potential risk

that it might be used to ‘further money laundering’.

4.125 Although execution-only broking may reduce counterparty risk, all regulated firms

must consider and mitigate the risk that they could be used to facilitate financial

crime, even if client monies do not flow through the firm. The Authority has

published considerable guidance on managing the risk of financial crime,

particularly in its Financial Crime Guide, which was first published in December

2011 and of which Sapien ought to have been aware.

4.126 Sapien should have considered whether the size and volume of the transactions

were in line with expectations for the Solo Clients and whether the Solo Clients had

sufficient funds.

4.127 An additional consideration ought to have been whether it was realistic that the

Solo Group had been able to source a network of clients who were of sufficiently

high net worth to be able to trade sizes in the way that they purported to do.

B. Trading Red Flags

4.128 Once the purported Solo Trading commenced, a number of red flags in relation to

the trading ought to have alerted Sapien to the possibility that it could be used for

the purposes of financial crime and should have prompted it either to obtain

explanations from the Solo Group or the Solo Clients on a number of matters,

decline to execute particular trades, or cease its trading relationship with the Solo

•
The Solo Clients placed extremely high value trades, yet most of them had

only been recently incorporated, were based in non-EU/EEA countries

(making them higher risk clients) and in a number of instances, were

managed or owned by former employees of SCP.

•
For the recently incorporated 401(k) Pension Plans, the value of the

purported trades far exceeded the investment amounts which could

reasonably have accrued given the annual contribution limits and limited

number of ultimate beneficial owners, which should have alerted Sapien as

to the unrealistic nature of the trades.

•
Sapien purportedly traded an average of 17.55% of the shares outstanding

in the market on major listed Danish stocks, in circumstances where share

ownership over 5% required publication. This was an average of 20 times

higher than were reported on European exchanges for the same Danish

stocks.

4.129 Solo Group purported to have sourced a custom automatic trade matching and

settlement platform from an entity owned by Sanjay Shah. Brokermesh was always

able to locate liquidity for OTC trades worth over £6.3 billion that were executed

by Sapien, even though access to the platform was closed, being limited to clients

introduced to the brokers by the Solo Group.

Elysium Global Payment

4.130 On 23 September 2015, a Sapien employee telephoned one of the Solo Clients

about outstanding second quarter invoices for commissions. After being asked

about the status of the second quarter invoices, the beneficial owner stated, “I

spoke to somebody and they said that those were invoices that were owed by Solo.

I wasn’t sure, and they were dealing with it, but I have spoken to somebody about

it within, within Solo”.

4.131 The Sapien employee failed to question why the commissions were owed by the

Solo Group and not the individual clients.

4.132 The beneficial owner went on to state, “I was under the impression that all these

things were just being paid . . . directly from the account. I don’t have bank

accounts for my entities, so you know, this, this was just going to be paid directly

from my trading account”.

4.133 The Sapien employee also failed to question how it was possible that the Solo

Clients’ entities were able to fund trading accounts and execute trades between 1

July 2015 and 3 July 2015 totalling approximately £1,312,659,119.79, if he did not

have a bank account for his entity.

4.134 On 29 October 2015, two employees of Sapien spoke with each other on the

telephone regarding the outstanding Solo Client commission invoices. On the call,

the first employee said that they had just had a conversation with a Solo Group

employee who stated that:

Employee 1: “. . . Elysium Global, is taking on the debts of the four custodians
to settle the invoices.”

…

Employee 1: “So, um we’re just waiting to hear from Elysium Global but we’ve
just been, as part of the AML we need to find out, you know, a bit about this
company cause obviously we don’t know where the monies… but we’ve just,
I’ve literally just gone on, we’ve just come off the phone from her, I’ve just
done a search on Elysium Global and Sanjay [Shah] is a director of the
company.”

Employee 2: “Crikey. I mean what is all this about?”

Employee 1: “I have no idea, but er, I think the best thing is just get out
money and just leave it.”

Employee 2: “Yeah, well I think so too.
I can’t help feeling this was all
premeditated.”

Employee 1: “I don’t know, this is, as [another Sapien employee] said, nothing
is every straight forward with them is it.”

Employee 2: “No, why would it… I, I just can’t understand why they would do
this. Why would they take on the debts of all those different companies?”

Employee 1: “I don’t know, I have no idea.”

…

Employee 2: “Absolutely right, yeah, I think we’ve got to grab the money while
we can.”

Employee 1: “Definitely.”

4.135 In addition to this call, there was a further call ten minutes later in which the same

two employees considered this payment, initially questioning its nature. On the

call, they determined the payment was not suspicious and did not report it

4.136 Despite these red flags and Sapien’s awareness of the need to do AML checks on

the receipt of the monies, on 30 October 2015, arrangements were made to receive

£112,840 commission for its purported trading for the Solo Clients from Elysium

Global.

4.137 On 3 November 2015, the Authority conducted an unannounced visit to the

offices of Sapien regarding its dealings with the Solo Clients. On 10 November

2015, Elysium Global, a corporate vehicle connected to Mr Shah paid Sapien

the £112,840.

4.138 Between the Authority’s visit on 3 November 2015 and the payment on 10

November 2015, no one at the Firm considered whether it was appropriate to

continue to receive the payment. Sapien also failed to notify the Authority of its

intention to receive the money.

4.139 Sapien’s Compliance Manual directed staff to report suspicions to the Firm’s MLRO;

however, the policy did not provide adequate detail on the types of behaviour that

could be indicative of suspicious activity.

4.140 It was not until 14 February 2017 that Sapien notified the Authority of the details

and nature of the payment.

4.141 The firm admitted that “having been made aware of the concerns surrounding Mr

Shah by the Authority at the regulatory visit on 3 November 2015 the Firm should

have notified the Authority of its intention to receive the monies (representing the

brokerage fees as per the factoring arrangement made on 30 October 2015) before

the transaction actually proceeded”.

End of the Purported Solo Trading

4.142 Sapien executed its last trade for a Solo Client on 29 September 2015. The Solo

Clients ceased the purported trading with all the brokers after an unannounced visit

by the Authority to the offices of the Solo Group entities and the Broker Firms on

3 - 4 November 2015.

Sapien failed to Identify Any of the Above Issues

4.143 Sapien failed to identify any of the above issues. With respect to AML, in both the

2014 to 2015 and 2015 to 2016 fiscal years, Sapien did not identify any

transactions raising any suspicions and no breaches were reported or observed.

5
FAILINGS

5.1
The statutory and regulatory provisions relevant to this Notice are referred to in

Annex B.

5.2
The JMLSG Guidance has also been included in Annex B, because in determining

whether breaches of its rules on systems and controls against money laundering

have occurred, and in determining whether to take action for a financial penalty or

censure in respect of a breach of those rules, the Authority has also had regard to

whether Sapien followed the JMLSG Guidance.

Principle 3

5.3
Principle 3 requires a firm to take reasonable care to organise and control its affairs

responsibly and effectively, with adequate risk management systems.

5.4
Sapien breached this requirement during the Relevant Period, in relation to the

purported Solo Trading and Solo Clients, as its policies and procedures were

inadequate for identifying, assessing and mitigating the risk of financial crime as

they failed to:

a) Give adequate guidance on how to conduct risk assessments and what

factors to consider;

b) Set out adequate processes and procedures for EDD;

c) Set out adequate processes and procedures for transaction monitoring
including how transactions are monitored, and with what frequency;
and

d) Set out adequate processes and procedures for how to identify
suspicious transactions.

Principle 2

5.5
The Authority considers that Sapien failed to act with due skill, care and diligence

as required by Principle 2 to properly assess, monitor and manage the risk of

financial crime associated with the Solo Clients and the purported trading, in that

the Firm:

a) Failed to properly conduct customer due diligence, by failing to follow CDD

procedures set out in the Firm’s policies and by amending customer due

diligence forms, in response to complaints from Solo Clients, to reduce the

information required in respect of Solo Clients;

b) Failed to gather information to enable it to understand the business that the Solo

Clients were going to undertake, the likely size or frequency of the purported

trading intended by 126 of the Solo Clients or the source of funds for 126 of the

Solo Clients out of 166 clients introduced by Solo;

c) Failed to undertake and document a risk assessment for each of the Solo

Clients;

d) Failed to complete EDD for any of the Solo Clients despite the fact that none of

the Solo Clients were physically present for identification purposes and a

number of other risk factors were present including that each of the 40 entities

disclosed that they had a net worth less than €2 million but were purportedly

going to execute 25 trades of €100 million;

e) Failed to assess each of the Solo Clients against the categorisation criteria set

out in COBS 3.5.2R and failed to record the results of such assessments,

including sufficient information to support the categorisation, contrary to COBS

3.8.2R(2)(a);

f) Failed to conduct transaction monitoring of the Solo Clients purported trades;

g) Failed to recognise numerous red flags with the purported trading including

failing to consider whether it was plausible and/or realistic that sufficient

liquidity was sourced within a closed network of entities for the size and

volumes of trading conducted by the Solo Clients. Likewise, failing to consider

or recognise that the profiles of the Solo Clients meant that they were highly

unlikely to meet the scale and volume of the trading purportedly being carried

out, and/or failing to at least obtain sufficient evidence of the clients’ source of

funds to satisfy itself to the contrary; and

h) Received the payment from Elysium Global and failed to report the payment to

the Authority. Several employees discussed the payment internally and initially

questioned a number of red flags regarding the payment and then did not

determine it to be suspicious and did not report it. This determination was made

after the Authority had conducted an unannounced visit alerting Sapien to

possible issues with the Solo Group.

6
SANCTION

6.1
The Authority has considered the disciplinary and other options available to it and

has concluded that a financial penalty is the appropriate sanction in the

circumstances of this particular case. The principal purpose of a financial penalty is

to promote high standards of regulatory conduct by deterring persons who have

breached regulatory requirements from committing further breaches, helping to

deter other persons from committing similar breaches, and demonstrating

generally the benefits of compliant behaviour.

6.2
The Authority’s policy on the imposition of financial penalties is set out in Chapter

6 of DEPP. In determining the proposed financial penalty, the Authority has had

regard to this guidance.

6.3
DEPP 6.5A sets out a five-step framework to determine the appropriate level of

financial penalty.

Step 1: disgorgement

6.4
Pursuant to DEPP 6.5A.1G, at Step 1 the Authority seeks to deprive a firm of the

financial benefit derived directly from the breach where it is practicable to quantify.

6.5
The financial benefit derived directly by Sapien from its breaches is quantifiable by

reference to the revenue figure derived from the Solo Clients’ purported trading as

described in paragraph 4.109 of this Notice, minus custody and consultant fees,

totalling £178,000.

6.6
The figure after Step 1 is therefore £178,000.

Step 2: the seriousness of the breach

6.7
Pursuant to DEPP 6.5A.2G, at Step 2 the Authority determines a figure that reflects

the seriousness of the breach. Where the amount of revenue generated by a firm

from a particular product line or business area is indicative of the harm or potential

harm that its breach may cause, that figure will be based on a percentage of the

Firm’s revenue from the relevant products or business area.

6.8
The Authority considers that the revenue generated by Sapien is indicative of the

harm or potential harm caused by its breach. The Authority has therefore

determined a figure based on a percentage of Sapien’s relevant revenue during the

period of the breach.

6.9
Sapien’s relevant revenue is the revenue derived from the purported Solo Trading.

The period of Sapien’s breach was from 10 February 2015 to 10 November 2015.

The Authority considers Sapien’s revenue for this period to be £178,000.

6.10
In deciding on the percentage of the revenue that forms the basis of the Step 2

figure, the Authority considers the seriousness of the breach and chooses a

percentage between 0% and 20%. This range is divided into five fixed levels which

represent, on a sliding scale, the seriousness of the breach; the more serious the

breach, the higher the level. For penalties imposed on firms there are the following

five levels:

Level 1 – 0%

Level 2 – 5%

Level 3 – 10%

Level 5 – 20%

6.11
In assessing the seriousness level, pursuant to DEPP 6.5A.2 the Authority takes into

account various factors which reflect the impact and nature of the breach, and

whether it was committed deliberately or recklessly. The factors that the Authority

considers to be relevant to the Firm’s breaches are set out below.

Impact of the breach

6.12
There is no evidence of direct consumer harm arising from the breaches.

Nature of the breach

6.13
During the Relevant Period, the Firm had inadequate systems (Principle 3) and did

not exercise due skill, care and diligence (Principle 2).

6.14
The Firm failed to identify any AML issues during the Relevant Period (a 9-month

period).

6.15
The breaches identified demonstrate systemic weaknesses in the Firm’s policies,

procedures and management systems for tackling fraudulent trading and money

laundering.

6.16
The purported share trading attributed to the Solo Group was highly suggestive of

sophisticated financial crime.

Reckless or deliberate breach

6.17
The Authority does not consider that the breaches were either deliberate or

reckless.

Level of Seriousness

6.18
DEPP 6.5A.2G(11) lists factors likely to be considered ‘level 4 or 5 factors’. Of

these, the Authority considers the following factors to be relevant:

(1) The breaches revealed serious or systemic weaknesses in the Firm’s procedures

and the management systems or internal controls relating to the Firm’s

governance of financial crime risk.

(2) The breach created a significant risk that financial crime would be facilitated,

occasioned or otherwise occur.

6.19
DEPP 6.5A.2G(12) lists factors likely to be considered ‘level 1 factors,’ ‘level 2

factors’ or ‘level 3 factors’ of which the Authority considers the following to be

relevant:

(c) There was no, or limited, actual or potential effect on the orderliness of, or

confidence in, markets as a result of the breach.

6.20
Taking all of these factors into account, the Authority considers the seriousness of

the breach to be level 4 and so the Step 2 figure is 15% of £178,000.

6.21
Step 2 is therefore £26,700.

Step 3: Mitigating and aggravating factors

6.22
Pursuant to DEPP 6.5A.3G, at Step 3, the Authority may increase or decrease the

amount of the financial penalty arrived at after Step 2, but not including any

amount to be disgorged as set out in Step 1, to take into account factors which

aggravate or mitigate the breach.

6.23
The Authority considers that the following factor aggravates the breach:

a) Given the number and detailed nature of the Authority and the JMLSG’s

publications on financial crime risks and the standards expected of firms,

and past enforcement action taken by the Authority in respect of similar

failings by other firms, Sapien should have been aware of the importance

of appropriately assessing, managing and monitoring the risk that the Firm

could be used for the purposes of financial crime.

6.24
The Authority does not consider there to be any mitigating factors.

6.25
Having taken into account the aggravating factor, the Authority considers that,

on balance, the Step 2 figure should be increased by 10%.

6.26
Step 3 is therefore £29,370.

Step 4: adjustment for deterrence

6.27
Pursuant to DEPP 6.5A.4G, if the Authority considers the figure arrived at after Step

3 is insufficient to deter the firm who committed the breach, or others, from

committing further or similar breaches, then the Authority may increase the

penalty.

6.28
The Authority considers that DEPP 6.5A.4G(1)(a) is relevant in this instance and

has therefore determined that this is an appropriate case where an adjustment for

deterrence is necessary. Without an adjustment for deterrence, the financial

penalty would be £29,370. In the circumstances of this case, the Authority

considers that a penalty of this size would not serve as a credible deterrent to

Sapien and others. A penalty of such small size would not meet the Authority’s

objective of credible deterrence. As a result, it is necessary for the Authority to

increase the penalty to achieve credible deterrence. The Authority considers that a

multiplier of two should be applied at Step 4.

6.29
Step 4 is therefore £58,740.

Step 5: settlement discount

6.30
Pursuant to DEPP 6.5A.5G, if the Authority and the firm on whom a penalty is to

be imposed agree the amount of the financial penalty and other terms, DEPP 6.7

provides that the amount of the financial penalty which might otherwise have been

payable will be reduced to reflect the stage at which the Authority and the firm

reached agreement. The settlement discount does not apply to the disgorgement

of any benefit calculated at Step 1.

6.31
The Authority and Sapien did reach agreement to settle so a 30% discount applies

to the Step 4 figure.

6.32
The Authority has rounded down the final penalty to the nearest £100. Step 5 is

therefore £219,100 (including disgorgement of £178,000).

6.33
Pursuant to DEPP 6.5D.4(1), the Authority will consider reducing the amount of a

penalty if a firm will suffer serious financial hardship as a result of having to pay

the entire penalty. The Authority accepts from the verifiable evidence provided by

Sapien that the payment of a penalty of £219,100 including disgorgement of

£178,000 would cause it serious financial hardship. Whilst the Authority considers

it appropriate to reduce the penalty for serious financial hardship, the Authority

does not consider it appropriate to allow Sapien to retain the financial benefit

derived directly from its breaches. The Authority therefore considers that a

financial penalty of £178,000, this being the disgorgement element, is the

appropriate penalty figure. The Authority will allow the financial penalty of

£178,000 to be paid over a three-year period.

6.34
The Authority has therefore decided to impose a total financial penalty of £178,000

on Sapien for breaching Principle 3 and Principle 2.

7
REPRESENTATIONS

7.1
Annex D contains a brief summary of the key representations made by Sapien and

how they have been dealt with. In making the decision which gave rise to the

obligation to give this Notice, the Authority has taken into account all of the

representations made by Sapien, whether or not set out in Annex D.

8
PROCEDURAL MATTERS

8.1
This Notice is given under section 208 of the Act and in accordance with section

388 of the Act. The following paragraphs are important.

Decision maker

8.2
The decision which gave rise to the obligation to give this Notice was made by the

RDC. The RDC is a committee of the Authority which takes certain decisions on

behalf of the Authority. The members of the RDC are separate to the Authority staff

involved in conducting investigations and recommending action against firms and

individuals. Further information about the RDC can be found on the Authority’s

Manner and time for payment

8.3
The Authority will allow the financial penalty to be paid over a three-year period

in scheduled payments with the final payment due to be paid by Sapien Capital

Limited no later than 31 March 2024.

If the financial penalty is not paid

8.4
If any or all of the scheduled instalments of the financial penalty is outstanding

after its due date for payment, the full amount outstanding of the financial penalty

shall then become immediately due and payable including all future instalments,

and the Authority may recover the outstanding amount as a debt owed by Sapien

Capital Limited to the Authority, including interest thereon.

8.5
Sections 391(4), 391(6) and 391(7) of the Act apply to the publication of

information about the matter to which this notice relates. Under those provisions,

the Authority must publish such information about the matter to which this notice

relates as the Authority considers appropriate. The information may be published

in such manner as the Authority considers appropriate. However, the Authority

may not publish information if such publication would, in the opinion of the

Authority, be unfair to you or prejudicial to the interests of consumers or

detrimental to the stability of the UK financial system.

Contacts

8.5
For more information concerning this matter generally, contact Evan Benge (direct

line: 02070661660 / evan.benge@fca.org.uk ) or Natalie Birtle (direct line: 020

7066 6856/ natalie.birtle@fca.org.uk) of the Enforcement and Market Oversight

Division of the Authority.

Elizabeth France
Deputy Chair, Regulatory Decisions Committee

2008
Sapien was incorporated and authorised by the Authority.

September 2014
A new trading desk joined Sapien.

23 October 2014
Sapien held its first meeting with the Solo representatives.

24 November 2014
Solo provided the custody agreement to Sapien for signature.

4 December 2014
Sapien held its second meeting with Solo to discuss the business.

20 January 2015
Solo advised Sapien that there was potential for it to execute trades
as a broker for clients of Solo.

27 January 2015
Solo informed Sapien that there will be 160 clients to onboard.

29 January 2015
Solo informed Sapien of fee structure. Sapien commission was 1/64
of Solo Clients’ orders. Order would be large, potentially over Euro
100 million and above. Solo estimated Sapien would make Euro
600/700k net.

10 February 2015
Sapien began onboarding the Solo Clients.

12 March 2015
Sapien indicated to Solo that Sapien had completed onboarding of
approximately 69 clients.

30 April 2015
Sapien completed the onboarding of 166 Solo Clients.

4 May 2015
Purported trading of Belgian stocks commenced.

6 May 2015
Purported trading of Danish stocks commenced.

16 July 2015
First invoice from Solo to Sapien.

23 September 2015
Sapien employee telephoned a Solo Client regarding an outstanding
invoice. The Solo Client stated he did not have bank accounts for
his entities.

29 October 2015
The two Sapien employees spoke on the telephone regarding
Elysium Global taking on the debts of the Solo Clients.

30 October 2015
Sapien made arrangements to receive £112,840 Elysium Global
payment.

3 November 2015
Unannounced visit by FCA Enforcement

10 November 2015
Elysium Global sent £112,840 payment to Sapien.

14 February 2017
FCA first notified of the detail, nature and context of payment from
Elysium Global.

ANNEX B: RELEVANT STATUTORY AND REGULATORY PROVISIONS

1.
RELEVANT STATUTORY PROVISIONS

The Financial Services and Markets Act 2000

1.1
Pursuant to sections 1B and 1D of the Act, one of the Authority’s operational
objectives is protecting and enhancing the integrity of the UK financial system.

1.2
Pursuant to section 206 of the Act, if the Authority considers that an authorised
person has contravened a requirement imposed on it by or under the Act, it may
impose on that person a penalty in respect of the contravention of such amount
as it considers appropriate.


The Money Laundering Regulations 2007

1.3
Regulation 5 provides:

Meaning of customer due diligence measures

“Customer due diligence measures” means—

(a) identifying the customer and verifying the customer’s identity on the basis of
documents, data or information obtained from a reliable and independent
source;

(b) identifying, where there is a beneficial owner who is not the customer, the
beneficial owner and taking adequate measures, on a risk-sensitive basis, to
verify his identity so that the relevant person is satisfied that he knows who the
beneficial owner is, including, in the case of a legal person, trust or similar legal
arrangement, measures to understand the ownership and control structure of
the person, trust or arrangement; and

(c) obtaining information on the purpose and intended nature of the business
relationship.”


1.4
Regulation 7 provides:

Application of customer due diligence measures

(1) …, a relevant person must apply customer due diligence measures when he—

(a) establishes a business relationship;

(b) carries out an occasional transaction;

(c) suspects money laundering or terrorist financing;

(d) doubts the veracity or adequacy of documents, data or information
previously obtained for the purposes of identification or verification.

(2) Subject to regulation 16(4), a relevant person must also apply customer due
diligence measures at other appropriate times to existing customers on a risk-
sensitive basis.


1.5
Regulation 8 provides:

Ongoing monitoring

“(1) A relevant person must conduct ongoing monitoring of a business
relationship.

(2) “Ongoing monitoring” of a business relationship means—

(e) scrutiny of transactions undertaken throughout the course of the
relationship (including, where necessary, the source of funds) to
ensure that the transactions are consistent with the relevant person’s
knowledge of the customer, his business and risk profile; and

(f) keeping the documents, data or information obtained for the purpose
of applying customer due diligence measures up-to-date.

(3) Regulation 7(3) applies to the duty to conduct ongoing monitoring under
paragraph (1) as it applies to customer due diligence measures. “



1.6
Regulation 14 provides:

Enhanced customer due diligence and ongoing monitoring

“(1) A relevant person must apply on a risk-sensitive basis enhanced customer
due diligence measures and enhanced ongoing monitoring—

(a) in accordance with paragraphs (2) to (4);

(b) in any other situation which by its nature can present a higher risk of
money laundering or terrorist financing.

(2) Where the customer has not been physically present for identification
purposes, a relevant person must take specific and adequate measures to
compensate for the higher risk, for example, by applying one or more of the
following measures—

(a) ensuring that the customer’s identity is established by additional
documents, data or information;

(b) supplementary measures to verify or certify the documents supplied, or

requiring confirmatory certification by a credit or financial institution
which is subject to the money laundering directive;

(c) ensuring that the first payment is carried out through an account
opened in the customer’s name with a credit institution.”


1.7
Regulation 17 provides:

Reliance

“(1) A relevant person may rely on a person who falls within paragraph (2) (or
who the relevant person has reasonable grounds to believe falls within paragraph
(2)) to apply any customer due diligence measures provided that—

(a) the other person consents to being relied on; and

(b) notwithstanding the relevant person’s reliance on the other person, the
relevant person remains liable for any failure to apply such measures.

(2) The persons are—

(a) a credit or financial institution which is an authorised person;
…

(4) Nothing in this regulation prevents a relevant person applying customer due
diligence measures by means of an outsourcing service provider or agent
provided that the relevant person remains liable for any failure to apply such
measures.”

1.8
Regulation 20 provides:

Policies and Procedures

“(1) A relevant person must establish and maintain appropriate and risk-sensitive
policies and procedures relating to—

(a) customer due diligence measures and ongoing monitoring;

(b)
reporting;

(c) record-keeping;

(d) internal control;

(e) risk assessment and management;

(f) the monitoring and management of compliance with, and the internal
communication of, such policies and procedures,

in order to prevent activities related to money laundering and terrorist financing.

(2) The policies and procedures referred to in paragraph (1) include policies and
procedures—

(a) which provide for the identification and scrutiny of—

(i) complex or unusually large transactions;

(ii) unusual patterns of transactions which have no apparent economic
or visible lawful purpose; and

(iii) any other activity which the relevant person regards as particularly
likely by its nature to be related to money laundering or terrorist
financing;”


2.
RELEVANT REGULATORY PROVISIONS

2.1
In exercising its powers to impose a financial penalty, the Authority has had
regard to the relevant regulatory provisions published in the Authority’s
Handbook. The main provisions that the Authority considers relevant are set out
below.

Principles for Business (“Principles”)

2.2
The Principles are a general statement of the fundamental obligations of firms
under the regulatory system and are set out in the Authority’s Handbook.

2.3
Principle 2 provides:

“A firm must conduct its business with due skill, care and diligence.”

2.4
Principle 3 provides:

“A firm must take reasonable care to organise and control its affairs responsibly
and effectively, with adequate risk management systems.”



Senior Management Arrangements, Systems and Controls (“SYSC”)

2.5
SYSC 3.2.6E provides:

“The FCA, when considering whether a breach of its rules on systems and controls
against money laundering has occurred, will have regard to whether a firm has
followed relevant provisions in the guidance for the UK financial sector issued by
the Joint Money Laundering Steering Group.”

2.6
SYSC 3.2.6R provides:

“A firm must take reasonable care to establish and maintain effective systems

and controls for compliance with applicable requirements and standards under the
regulatory system and for countering the risk that the firm might be used to
further financial crime.”

2.7
SYSC 6.1.1R provides:

“A firm must establish, implement and maintain adequate policies and procedures
sufficient to ensure compliance of the firm including its managers, employees and
appointed representatives (or where applicable, tied agents) with its obligations
under the regulatory system and for countering the risk that the firm might be
used to further financial crime.”

2.8
SYSC 6.3.1R provides:

“A firm must ensure the policies and procedures established under SYSC 6.1.1 R
include systems and controls that:

(1) enable it to identify, assess, monitor and manage money laundering risk; and

(2) are comprehensive and proportionate to the nature, scale and complexity of
its activities.”

2.9
SYSC 6.3.6 provides:

“In identifying its money laundering risk and in establishing the nature of these
systems and controls, a firm should consider a range of factors, including:

(1) its customer, product and activity profiles;

(2) its distribution channels;

(3) the complexity and volume of its transactions;

(4) its processes and systems; and

(5) its operating environment.”

2.10
SYSC 6.3.7 provides:


“A firm should ensure that the systems and controls include:

(3) appropriate documentation of its risk management policies and risk profile in
relation to money laundering, including documentation of its application of those
policies;

(4) appropriate measures to ensure that money laundering risk is taken into
account in its day-to-day operation, including in relation to:

(a) the development of new products;

(b) the taking-on of new customers; and

(c) changes in its business profile.”

2.11
SYSC 9.1.1 R provides:

“A firm must arrange for orderly records to be kept of its business and internal
organisation, including all services and transactions undertaken by it, which must
be sufficient to enable the appropriate regulator or any other relevant competent
authority under MiFID or the UCITS Directive to monitor the firm's compliance
with the requirements under the regulatory system, and in particular to ascertain
that the firm has complied with all obligations with respect to clients.”



Conduct of Business Sourcebook (COBS)

2.12
COBS 3.5.2 provides:

Per Se Professional Clients

“Each of the following is a per se professional client unless and to the extent it is
an eligible counterparty or is given a different categorisation under this chapter:

(1) an entity required to be authorised or regulated to operate in the financial
markets. The following list includes all authorised entities carrying out the
characteristic activities of the entities mentioned, whether authorised by an EEA
State or a third country and whether or not authorised by reference to a
directive:

(a) a credit institution;

(b) an investment firm;

(c) any other authorised or regulated financial institution;

(d) an insurance company;

(e) a collective investment scheme or the management company of such a
scheme;

(f) a pension fund or the management company of a pension fund;

(g) a commodity or commodity derivatives dealer;

(h) a local;

(i) any other institutional investor;

(2) in relation to MiFID or equivalent third country business a large undertaking
meeting two of the following size requirements on a company basis:

(a) balance sheet total of EUR 20,000,000;

(b) net turnover of EUR 40,000,000;

(c) own funds of EUR 2,000,000;

(3) in relation to business that is not MiFID or equivalent third country business a
large undertaking meeting any1of the following conditions:

(a) a body corporate (including a limited liability partnership) which has (or any
of whose holding companies or subsidiaries has) (or has had at any time
during the previous two years) 1called up share capital or net assets of at
least £51 million (or its equivalent in any other currency at the relevant
time);

(b) an undertaking that meets (or any of whose holding companies or
subsidiaries meets) two of the following tests:

(i)
a balance sheet total of EUR 12,500,000;

(ii)
a net turnover of EUR 25,000,000;

(iii)
an average number of employees during the year of 250;

(c) a partnership or unincorporated association which has (or has had at any
time during the previous two years) net assets of at least £5 million (or
its equivalent in any other currency at the relevant time) and calculated
in the case of a limited partnership without deducting loans owing to any
of the partners;

(d) a trustee of a trust (other than an occupational pension scheme, SSAS,
personal pension scheme or stakeholder pension scheme) which has (or has
had at any time during the previous two years) assets of at least £10 million
(or its equivalent in any other currency at the relevant time) calculated by
aggregating the value of the cash and designated investments forming part
of the trust's assets, but before deducting its liabilities;

(e) a trustee of an occupational pension scheme or SSAS, or a trustee or
operator of a personal pension scheme or stakeholder pension scheme
where the scheme has (or has had at any time during the previous two
years):

(i) at least 50 members; and

(ii) assets under management of at least £10 million (or its
equivalent in any other currency at the relevant time);

(f) a local authority or public authority.

(4) a national or regional government, a public body that manages public debt, a
central bank, an international or supranational institution (such as the World
Bank, the IMF, the ECP, the EIB) or another similar international organisation;

(5) another institutional investor whose main activity is to invest in financial

instruments (in relation to the firm's MiFID or equivalent third country business)
or designated investments (in relation to the firm's other business). This includes
entities dedicated to the securitisation of assets or other financing transactions.”

2.13
COBS 3.8.2R provides:

“(2) A firm must make a record in relation to each client of:

the categorisation established for the client under this chapter, including sufficient
information to support that categorisation;



Decision Procedure and Penalties Manual (“DEPP”)

2.14
Chapter 6 of DEPP, which forms part of the Authority’s Handbook, sets out the
Authority’s statement of policy with respect to the imposition and amount of
financial penalties under the Act. In particular, DEPP 6.5A sets out the five steps
for penalties imposed on firms.

2.15
DEPP 6.2.3G provides:

“The FCA's rules on systems and controls against money laundering are set out in
SYSC 3.2 and SYSC 6.3. The FCA, when considering whether to take action for a
financial penalty or censure in respect of a breach of those rules, will have regard
to whether a firm has followed relevant provisions in the Guidance for the UK
financial sector issued by the Joint Money Laundering Steering Group.”

Enforcement Guide

2.16 The Enforcement Guide sets out the Authority’s approach to taking disciplinary
action. The Authority’s approach to financial penalties and suspensions (including
restrictions) is set out in Chapter 7 of the Enforcement Guide.


JMLSG GUIDANCE– PART I (dated 19 November 2014)

A risk-based approach – governance, procedures and internal controls


2.16
JMLSG Paragraph 4.5 provides:

“A risk-based approach requires the full commitment and support of senior
management, and the active co-operation of business units. The risk-based
approach needs to be part of the firm’s philosophy, and as such reflected in the
procedures and controls. There needs to be a clear communication of policies
and procedures across the firm, along with the robust mechanisms to ensure that
they are carried out effectively, weaknesses are identified, and improvements are
made wherever necessary.”


2.17
JMLSG Paragraph 4.6 provides:

“Although the ML/TF risks facing the firm fundamentally arise through its
important that the firm considers its customer risks in the context of the wider
ML/TF environment inherent in the jurisdictions in which the firm and its
customers operate. Firms should bear in mind that some jurisdictions have close
links with other, perhaps higher risk jurisdictions, and where appropriate and
relevant regard should be had to this.”

2.18
JMLSG Paragraph 4.9 provides:

“The procedures, systems and controls designed to mitigate assessed ML/TF risks
should be appropriate and proportionate to these risks, and should be designed to
provide an effective level of mitigation.”

2.19
JMLSG Paragraph 4.12 provides:

“A risk-based approach takes a number of discrete steps in assessing the most
cost effective and proportionate way to manage and mitigate the money
laundering and terrorist financing risks based by the firm. These steps are to:

 identify the money laundering and terrorist financing risks that are
relevant to the firm;

 assess the risks presented by the firm’s particular

 customers and any underlying beneficial owners*;

 products;

 delivery channels;

 geographical areas of operation;

 design and implement controls to manage and mitigate these assessed
risks, in the context of the firm’s risk appetite;

 monitor and improve the effective operation of these controls; and

 record appropriately what has been done, and why.

* In this Chapter, references to ‘customer’ should be taken to include beneficial
owner, where appropriate.”

2.20
JMLSG Paragraph 4.13 provides:

“Whatever approach is considered the most appropriate to the firm’s money
laundering/terrorist financing risk, the broad objective is that the firm should
know at the outset of the relationship who their customers are, where they
operate, what they do, their expected level of activity with the firm and whether
or not they are likely to be engaged in criminal activity. The firm then should
consider how the profile of the customer’s financial behaviour builds up over
time, thus allowing the firm to identify transactions that may be suspicious.”

2.21
JMLSG Paragraph 4.20 provides:

“In reaching an appropriate level of satisfaction as to whether the customer is
acceptable, requesting more and more identification is not always the right
answer – it is sometimes better to reach a full and documented understanding
of what the customer does, and the transactions it is likely to undertake. Some
business lines carry an inherently higher risk of being used for ML/TF purposes
than others.”

2.22
JMLSG Paragraph 4.21 provides:

“However, as stated in paragraph 5.2.6, if a firm cannot satisfy itself as to the
identity of the customer; verify that identity; or obtain sufficient information on
the nature and intended purpose of the business relationship, it must not enter
into a new relationship and must terminate an existing one.”

2.23
JMLSG Paragraph 4.22 provides:

“While a risk assessment should always be performed at the inception of a
customer relationship (although see paragraph 4.16 below), for some customers
a comprehensive risk profile may only become evident once the customer has
begun transacting through an account, making the monitoring of transactions and
on-going reviews a fundamental component of a reasonably designed RBA. A
firm may also have to adjust its risk assessment of a particular customer based
on information received from a competent authority.”

2.24
JMLSG Paragraph 4.25 provides:

“For firms which operate internationally, or which have customers based or
operating abroad, there are additional jurisdictional risk considerations relating to
the position of the jurisdictions involved, and their reputation and standing as
regards the inherent ML/TF risk, and the effectiveness of their AML/CTF
enforcement regime.”

2.25
JMLSG Paragraph 4.50 provides:

“Where a customer is assessed as carrying a higher risk, then depending on the
product sought, it will be necessary to seek additional information in respect of
the customer, to be better able to judge whether or not the higher risk that the
customer is perceived to present is likely to materialise. Such additional
information may include an understanding of where the customer’s funds and
wealth have come from. Guidance on the types of additional information that may
be sought is set out in section 5.5.”

2.26
JMLSG Paragraph 4.51 provides:

“Where the risks of ML/TF are higher, firms must conduct enhanced due diligence
measures consistent with the risks identified. In particular, they should increase

the degree and nature of monitoring of the business relationship, in order to
determine whether these transactions or activities appear unusual or suspicious.
Examples of EDD measures that could be applied for higher risk business
relationships include:

 Obtaining, and where appropriate verifying, additional information on
the customer and updating more regularly the identification of the
customer and any beneficial owner

 Obtaining additional information on the intended nature of the business
relationship

 Obtaining information on the source of funds or source of wealth of the
customer

 Obtaining information on the reasons for intended or performed
transactions

 Obtaining the approval of senior management to commence or
continue the business relationship

 Conducting enhanced monitoring of the business relationship, by
increasing the number and timing of controls applied, and selecting
patterns of transactions that need further examination

 Requiring the first payment to be carried out through an account in the
customer’s name with a bank subject to similar CDD standards”


2.27
JMLSG Paragraph 4.61 provides:

“Firms must document their risk assessments in order to be able to demonstrate
their basis, keep these assessments up to date, and have appropriate
mechanisms to provide appropriate risk assessment information to competent
authorities.”

Enhanced due diligence

2.28
JMLSG Paragraph 5.5.1 provides:

“A firm must apply EDD measures on a risk-sensitive basis in any situation which
by its nature can present a higher risk of money laundering or terrorist financing.
As part of this, a firm may conclude, under its risk-based approach, that the
information it has collected as part of the customer due diligence process (see
section 5.3) is insufficient in relation to the money laundering or terrorist
financing risk, and that it must obtain additional information about a particular
customer, the customer’s beneficial owner, where applicable, and the purpose
and intended nature of the business relationship.”

2.29
JMLSG Paragraph 5.5.4 provides:

“In practice, under a risk-based approach, it will not be appropriate for every
product or service provider to know their customers equally well, regardless of
the purpose, use, value, etc. of the product or service provided. Firms’
information demands need to be proportionate, appropriate and discriminating,
and to be able to be justified to customers.”

2.30
JMLSG Paragraph 5.5.5 provides:

“A firm should hold a fuller set of information in respect of those business
relationships it assessed as carrying a higher money laundering or terrorist
financing risk, or where the customer is seeking a product or service that carries
a higher risk of being used for money laundering or terrorist financing purposes.”

2.31
JMLSG Paragraph 5.5.6 provides:

“When someone becomes a new customer, or applies for a new product or
service, or where there are indications that the risk associated with an existing
business relationship might have increased, the firm should, depending upon the
nature of the product or service for which they are applying, request information
as to the customer’s residential status, employment and salary details, and other
sources of income or wealth (e.g., inheritance, divorce settlement, property sale),
in order to decide whether to accept the application or continue with the
relationship. The firm should consider whether or not there is a need to enhance
its activity monitoring in respect of the relationship. A firm should have a clear
policy regarding the escalation of decisions to senior management concerning the
acceptance or continuation of high-risk business relationships.”

2.32
JMLSG Paragraph 5.5.9 provides:

“The ML Regulations prescribe three specific types of relationship in respect of
which EDD must be applied. They are:

 where the customer has not been physically present for identification
purposes (see paragraphs 5.5.10ff);

 in respect of a correspondent banking relationship (see Part II, sector
16: Correspondent banking);

 in respect of a business relationship or occasional transaction with a
PEP (see paragraph 5.5.18ff).”

Reliance on third parties

2.33
JMLSG Paragraph 5.6.4 provides:

“The ML Regulations expressly permit a firm to rely on another person to apply
any or all of the CDD measures, provided that the other person is listed in
Regulation 17(2), and that consent to be relied on has been given (see paragraph
5.6.8). The relying firm, however, retains responsibility for any failure to comply
with a requirement of the Regulations, as this responsibility cannot be delegated.”

2.34
JMLSG Paragraph 5.6.14 provides:

“Whether a firm wishes to place reliance on a third party will be part of the firm’s
risk-based assessment, which, in addition to confirming the third party’s
regulated status, may include consideration of matters such as:

 its public disciplinary record, to the extent that this is available; the
nature of the customer, the product/service sought and the sums
involved; any adverse experience of the other firm’s general efficiency
in business dealings; any other knowledge, whether obtained at the
outset of the relationship or subsequently, that the firm has regarding
the standing of the firm to be relied upon.”

2.35
JMLSG Paragraph 5.6.16 provides:

“In practice, the firm relying on the confirmation of a third party needs to know:

 the identity of the customer or beneficial owner whose identity is being
verified; the level of CDD that has been carried out; and confirmation
of the third party’s understanding of his obligation to make available,
on request, copies of the verification data, documents or other
information.

In order to standardise the process of firms confirming to one another that
appropriate CDD measures have been carried out on customers, guidance is given
in paragraphs 5.6.30 to 5.6.33 below on the use of pro-forma confirmations
containing the above information.”

2.36
JMLSG Paragraph 5.6.24 provides:

“A firm must also document the steps taken to confirm that the firm relied upon
satisfies the requirements in Regulation 17(2). This is particularly important
where the firm relied upon is situated outside the EEA.”

2.37
JMLSG Paragraph 5.6.25 provides:

“Part of the firm’s AML/CTF policy statement should address the circumstances
where reliance may be placed on other firms and how the firm will assess
whether the other firm satisfies the definition of third party in Regulation 17(2)
(see paragraph 5.6.6).”

Ongoing Monitoring

2.38
JMLSG Paragraph 5.7.1 provides:

“Firms must conduct ongoing monitoring of the business relationship with their
customers. Ongoing monitoring of a business relationship includes:

 Scrutiny of transactions undertaken throughout the course of the
relationship (including, where necessary, the source of funds) to
ensure that the transactions are consistent with the firm’s knowledge
of the customer, his business and risk profile; Ensuring that the
documents, data or information held by the firm are kept up to date.”

2.39
JMLSG Paragraph 5.7.2 provides:

“Monitoring customer activity helps identify unusual activity. If unusual activities
cannot be rationally explained, they may involve money laundering or terrorist
financing. Monitoring customer activity and transactions that take place
throughout a relationship helps firms know their customers, assist them to assess
risk and provides greater assurance that the firm is not being used for the
purposes of financial crime.”

2.40
JMLSG Paragraph 5.7.3 provides:

“The essentials of any system of monitoring are that:

 it flags up transactions and/or activities for further examination;

 these reports are reviewed promptly by the right person(s); and

 appropriate action is taken on the findings of any further examination.


2.41
JMLSG Paragraph 5.7.4 provides:

“Monitoring can be either:

 in real time, in that transactions and/or activities can be reviewed as
they take place or are about to take place, or

 after the event, through some independent review of the transactions
and/or activities that a customer has undertaken

and in either case, unusual transactions or activities will be flagged for
further examination.”

2.42
JMLSG Paragraph 5.7.7 provides:

“In designing monitoring arrangements, it is important that appropriate account
be taken of the frequency, volume and size of transactions with customers, in the
context of the assessed customer and product risk.”

2.43
JMLSG Paragraph 5.7.8 provides:

“Monitoring is not a mechanical process and does not necessarily require
sophisticated electronic systems. The scope and complexity of the process will be
influenced by the firm’s business activities, and whether the firm is large or small.
The key elements of any system are having up-to-date customer information, on

the basis of which it will be possible to spot the unusual, and asking pertinent
questions to elicit the reasons for unusual transactions or activities in order to
judge whether they may represent something suspicious.”

JMLSG Part II – Wholesale Markets

2.44
JMLSG Part 2 Paragraph 18.14 provides:

“OTC and exchange-based trading can also present very different money
laundering risk profiles. Exchanges that are regulated in equivalent jurisdictions,
are transparent and have a central counterparty to clear trades, can largely be
seen as carrying a lower generic money laundering risk. OTC business may,
generally, be less well regulated and it is not possible to make the same
generalisations concerning the money laundering risk as with exchange-traded
products. For example, trades that are executed as OTC but then are centrally
cleared, have a different risk profile to trades that are executed and settled OTC.
Hence, when dealing in the OTC markets firms will need to take a more
considered risk-based approach and undertake more detailed risk-based
assessment.”

2.45
JMLSG Part 2 Paragraph 18.21 provides:

“Firms may also wish to carry out due diligence in respect of any introducing
brokers who introduce new customers or other intermediaries and consider
whether there are any red flags in relation to corruption risks.”

Employer Created 401(k) Plans

A 401(k) is a qualified profit sharing plan that allows employees to contribute a portion of

their wages to individual retirement accounts. Employers can also contribute to employees’

accounts. Any money that is contributed to a 401(k) below the annual contribution limit is

not subject to income tax in the year the money is earned, but then is taxable at

retirement. For example, if John Doe earns $100,000 in 2018, he is allowed to contribute

$18,500, which is the 2018 limit, to his 401(k) plan. If he contributes the full amount that

he is allowed, then although he earned $100,000, his taxable income for income tax

purposes would be $81,500. Then, he would pay income tax upon any money that he

withdraws from his 401(k) at retirement. If he withdraws any money prior to age 59 1/2,

he would be subject to various penalties and taxes.

Contribution to a 401(k) plan must not exceed certain limits described in the Internal

Revenue Code. The limits apply to the total amount of employer contributions, employee

elective deferrals and forfeitures credits to the participant’s account during the year. The

contribution limits apply to the aggregate of all retirement plans in which the employee

participates. The contribution limits have been increased over time. Below is a chart of the

contribution limits:

Employer
Contribution
Limit

Catch Up
Contribution
(only for
individuals Age
50+)

1999
$10,000
$20,000
$30,000
0

2000
$10,500
$19,500
$30,000
0

2001
$10,500
$24,500
$35,000
0

2014
$17,500
$34,500
$52,000
$5,500

2015
$18,000
$35,000
$53,000
$6,000

If an individual was aged 30 in 1999, the absolute maximum that he could have

contributed including the maximum employer contributions would be $746,000.

Minimum Age Requirements

In the United States, the general minimum age limit for employment is 14. Because of

this, an individual may make contributions into 401(k) plans from this age if the terms of

the plan allow it. The federal government does not legally require employers to include

employees in their 401(k) plans until they are at least 21 years of age. If you are at least

21 and have been working for your employer for at least one year, your employer must

allow you to participate in the company’s 401(k) plan. As a result, some employers’ plans

will not allow individuals to invest until they are at least 18 or 21 depending upon the

terms of the plan.

A one-participant 401(k) plan are sometimes called a solo 401(k). This plan covers a self-

employed business owner, and their spouse, who has no employees. These plans have the

same rules and requirements as other 401(k) plans, but the self-employed individual wears

two hats, the employer and the employee.

1 Rounded to the nearest £100 in line with FCA policy.

ANNEX D: REPRESENTATIONS

1.
A summary of Sapien’s key representations (in italics) and the Authority’s conclusions
in respect of them, are set out below.

Step 1 of the penalty calculation – disgorgement

2.
Sapien disagrees with the Authority’s proposal that the penalty should include a

figure for disgorgement of £297,044, being what it said were the financial benefits

derived by Sapien directly from its breaches. In fact, the disgorgement figure ought

to be zero because Sapien did not derive any such benefits. Sapien provided the

Authority with accounting documents reviewed by independent accountants who

confirmed that the figures had been properly extracted from Sapien’s books and that

the profit and loss account and balance sheet had been reviewed for reasonableness.

These demonstrated that, while £297,000 of revenue technically came into Sapien

from the Solo business by way of commissions, most was instantly paid out, under

pre-agreed contractual terms, in fees of £94,000 to the team of individuals working

on the trading desk, and custodian and consultant fees of €40,000 to Solo. In

addition, Sapien held part of the revenue (£84,000) on account of further custodian

and consultant fees due to Solo. While it did not pay these, it applied this sum

towards the payment of legal costs incurred in relation to the Solo business. After

deduction of these sums, Sapien received a net revenue of £94,000 from the Solo

business, plus the £84,000 held on account. Its accounting policy was to recognise

only net revenue as income.

3.
In addition, in arriving at a revenue figure for disgorgement purposes, there should

be deducted the remainder of the legal fees paid in connection with the Solo

business, namely £297,000. Once these are deducted, it can be seen that, rather

than receiving any actual benefit from the Solo business, Sapien received a direct loss

of £119,000. The disgorgement amount should be zero.

4.
Sapien does not consider that the gross commission for facilitating the Solo Trading

should be used as the figure for disgorgement. In the market abuse case of FCA v Da

Vinci, the judge adopted a net revenue approach, stating that he did not accept that

a person who had committed market abuse should be required to disgorge benefits

that they had not received. In this case, it cannot be said that Sapien received a

benefit from the funds that were paid out straight away.

5.
The Authority has considered the information provided by Sapien to determine which

is the appropriate figure to calculate as the financial benefit for disgorgement. The

Authority considers that while the gross commission from the Solo business is the

starting point for the appropriate figure for disgorgement, in all the circumstances of

this case, Sapien’s financial benefit ought to be calculated as that amount minus the

sums paid out in respect of fees to the brokers and the custodian and consultant fees

to Solo. The Authority is satisfied that the net figure is appropriate in this case

because of Sapien’s particular business structure, notably its contracts with

independent, self- employed brokers which were specifically introduced on this

business model, which predated the Solo clients, under which they were entitled to

recoup their commission share. The Authority accepts Sapien’s argument that it did

not receive a benefit from those funds, notwithstanding the fact they were technically

received by Solo before being paid on. It considers a similar approach should be

taken in this case to the custodian and consultant fees. The Authority considers that

the £84,000 held by Sapien as provision towards further payments due to custodians

and consultants also forms part of the relevant revenue, as these monies were a

benefit received by Sapien. This gives a direct financial benefit of £178,000.

6.
The Authority does not agree that it is appropriate to deduct legal fees incurred in

connection with the Solo business when calculating the revenue figure for the purposes

of disgorgement.

Step 2 of the penalty calculation – seriousness

7.
No risk was caused to consumers by Sapien’s breaches. The Authority has

acknowledged that the fraud was a sophisticated international financial crime, which

has impacted other banks and brokers. Sapien was an innocent victim, and took

responsibility because of the severity of the issue, and has since invested in corrective

procedures.

8.
Sapien’s pre-existing accounting policy was to only recognise net revenue as its income

for its broking business. The net revenue figure (as explained and calculated above)

should also be used for the purposes of ascertaining the relevant revenue for the

purposes of the Step 2 calculation, and accordingly the appropriate figure is zero.

9.
The Authority recognises that there was no evidence of direct consumer harm arising

from the breaches, though considers that Sapien ought to have been aware of the

potential for a firm of its nature to be used for illegitimate purposes, and the potential

for loss to the public purse.

10.
The Authority considers that Sapien’s breaches revealed weaknesses throughout the

firm’s procedures and controls that were serious and systemic, and also created a

significant risk that a financial crime would be facilitated.

11.
The Authority will ordinarily take the revenue figure for the purposes of DEPP 6.5A.2G

as being the revenue figures prepared by the firm in accordance with the firm’s

accounting policies. The Authority recognises that Sapien received £94,000 of revenue

from the Solo business. The Authority also considers it appropriate in the particular

circumstances of this case to include in the revenue figure the £84,000 due to Solo that

Sapien received, as that sum was retained “on provision” by Sapien and thus became

part of its revenue. The Authority does not agree that it is appropriate to deduct legal

fees paid by Sapien in connection with the business represented by that revenue, as

they do not reduce the revenue actually received by Sapien. The Authority considers

that £178,000 is the relevant revenue figure for the Step 2 calculation.

Step 3 of the penalty calculation – Mitigating features

12.
Sapien has accepted its mistakes, and its breaches were neither intentional nor

malicious.

13.
Additionally, Sapien has taken responsibility for its mistakes by instructing legal and

compliance consultants at great expense to rectify its practices. Sapien engaged

external consultants and incurred expenses of more than £500,000 on legal and

compliance costs in order to improve the firm’s systems and processes. Sapien also

engaged consultants to review and suggest improvements to its CASS systems and

processes, as well as its risk management system. Sapien undertook the compliance

review voluntarily, which ought to be a mitigating factor, in the same way that the

remedial action taken by RBS was identified as a mitigating factor in the RBS Final

Notice dated November 2014.

14.
Sapien takes responsibility for its failings in its systems and controls, and it is only with

the benefit of hindsight that the shortcomings in relation to the Solo business have

become apparent.

15.
Sapien’s shareholders are not seeking to avoid a penalty; they did not draw down the

reserves as dividends, demonstrating the shareholders and directors’ commitment to

the firm’s improvement.

16.
The Authority accepts Sapien’s position that its breaches were not intentional or

malicious. But it regards them as serious, for the reasons set out in this Notice.

17.
Although Sapien has taken steps to improve its systems and processes, the Authority

considers that these were steps to be expected of Sapien, and so do not merit any

mitigation discount. The Authority noted that, as is apparent from the Final Notice in

the case referred to, RBS had taken significantly more steps to remedy their breaches

than Sapien has done, such as introducing an IT Resilience programme, taking the

initiative to launch a customer and non-customer redress and remuneration

programme. The Authority considers that Sapien ought to have been aware from the

JMLSG Guidance and the Financial Crime Guide, of how to implement good practices

in managing and mitigating money laundering risks, monitoring customer activity and

ensuring the firm is not being used to further financial crime.

18.
The Authority does not consider that there are any mitigating factors present. Taking

the aggravating factor set out at para 6.22 of this Decision Notice, the Authority

considers that an increase of 10% to the step 2 figure is appropriate. The step 3 figure

is therefore £29,370.

Serious Financial Hardship

19.
Any financial penalty imposed would cause Sapien to become insolvent. A financial

penalty would be a disproportionate outcome and would not assist the Authority in

advancing its statutory objectives, especially as Sapien has taken significant steps to

improve its systems and controls.

20.
Sapien’s financial position deteriorated significantly due to certain market events which

occurred between 5th and 9th February 2018. Despite attempts to safeguard the

firm’s capital by holding 2-3 times the margins to cover client positions, the firm tried

to liquidate positions to minimise their clients’ exposure, but faced difficulties with lack

of liquidity and extreme price movements. Sapien’s clients were exposed to material

losses, and Sapien could not meet its legal obligations to fund shortfalls. Sapien lost a

significant amount of capital and had to raise emergency capital to bridge the client

money shortfall. The firm had used $6.2million of its capital and borrowed unsecured

emergency financing of $7.5million to fund client money shortfalls, which resulted in

money being returned to clients in full. Despite a period of 18 months without financial

activity, the Firm had to continue to meet its contracted expenses and liabilities whilst

the two directors took minimal income from the firm.

21.
Sapien is not in a position to seek loans in order to fund the payment of any financial

penalty. It has outstanding liabilities for office lease payments. It entered into

compromises with its creditors pursuant to which it is contractually obliged to pay a

profit share of 80% to the creditors. Any penalty imposed by the Authority would be

categorised as an expense to be deducted before arriving at the profit and loss for the

financial year (which is currently sufficient to allow it to meet its capital adequacy

requirements and rebuild the business), rendering it insolvent.

22.
The payment of the entire proposed penalty would cause serious financial hardship and

the insolvency of the firm.

23.
Sapien has learnt a salutary lesson, and does not require any additional deterrence,

especially as the firm has incurred significant expense and management time towards

remedial action. There has been no criminal element to this matter on Sapien’s behalf.

The seriousness of the breaches does not outweigh the serious financial hardship

caused to Sapien. Sapien has been fully co-operative with the Authority, providing

thorough and frank disclosure of any documents requested.

24.
DEPP 6.5D.1(2) states that the Authority will only consider whether to reduce a

proposed penalty if it would cause serious financial hardship to a firm, if the firm

provides verifiable evidence that payment of the penalty will cause them serious

financial hardship, and the firm provides full, frank and timely disclosure of the

verifiable evidence, and cooperates fully in answering any questions asked by the

Authority about its financial position. DEPP 6.5D.4(1) states that the Authority will

“…consider reducing the amount of a penalty if a firm will suffer serious financial

hardship as a result of having to pay the entire penalty.” As set out in DEPP 6.5D.1(3),

the onus is on Sapien to satisfy the Authority that payment of the penalty will cause it

serious financial hardship.

25.
The Authority considers that Sapien has been fully co-operative with the Authority in

answering questions about its financial position, and that it has provided full, frank and

timely disclosure of evidence of serious financial hardship. The Authority has considered

those documents, and is satisfied of Sapien’s ongoing liabilities to its creditors, its

capital adequacy requirements, and its limited funds available.

26.
The Authority considers that a penalty of £219,100 (including the disgorgement

element) is the appropriate and correct penalty to impose, given the behaviour of the

firm, to mark the Firm’s breaches, and for the purposes of deterrence. However, the

Authority has taken into account DEPP 6.5D.4(1) and is satisfied from the financial

documents updated as of November 2020, that imposing the full penalty figure

of£219,100 would render the firm insolvent.

27.
However, whilst the Authority accepts Sapien’s representations that the full penalty

figure would cause it serious financial hardship, the Authority does not consider it

appropriate to permit Sapien to retain the financial benefit derived directly from its

failings. The Authority therefore considers it appropriate to reduce the penalty figure

to the disgorgement element of £178,000 only. The Authority has taken into account

Sapien’s financial position, and considers that Sapien should be allowed to pay the final

penalty figure of £178,000 over a three-year period, with an initial lower payment in

the first year.