Sunrise Brokers LLP
FINAL NOTICE
To: SUNRISE BROKERS LLP
Firm Reference Number: 208265
Address: 5 Churchill Place, London, E14 5RD
Date 12 November 2021
1. ACTION
1.1 For the reasons given in this Final Notice, pursuant to section 206 of the Financial
Services and Markets Act 2000 (“the Act”), the Financial Conduct Authority (“the
Authority”) hereby imposes on Sunrise Brokers LLP (“Sunrise” or “the Firm”), a
financial penalty of £642,400 of which £407,273 is disgorgement.
1.2 Sunrise agreed to resolve this matter and qualified for a 30% (stage 1) discount
under the Authority’s executive settlement procedures. Were it not for this
discount, the Authority would have imposed a financial penalty of £743,200 on
Sunrise.
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. It is therefore imperative that firms have in place effective systems and
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controls to identify and mitigate the risk of their businesses being used for such
purposes, and that they act with due skill, care and diligence to adhere to the
systems and controls that they have put in place, in order to properly assess,
monitor and manage the risk of financial crime.
2.2 Between 17 February 2015 and 4 November 2015 (the “Relevant Period”), Sunrise:
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) did not exercise due skill, care and diligence in applying its AML policies
and procedures and in failing to properly assess, monitor and mitigate the
risk of it being used to facilitate financial crime in relation to the Solo
Trading, the Elysium payment and the German trade (together “the Solo
Group business”), thereby breaching Principle 2.
2.3 The Solo Clients were off-shore companies, including Malaysian incorporated
entities and a number of individual US 401(k) Pension Plans, previously unknown
to Sunrise. They were introduced by the Solo Group, which purported to provide
clearing and settlement services as Custodian to clients within a closed network,
via a custom over the counter (“OTC”) trading and settlement platform known as
Brokermesh. The Solo Clients were controlled by a small number of individuals,
some of whom had worked for the Solo Group, without apparent access to sufficient
funds to settle the transactions.
2.4 During the Relevant Period, on behalf of the Solo Clients, Sunrise executed
purported OTC equity Cum-Dividend Trades to the value of approximately £25.4
billion in Danish equities and £11.2 billion in Belgian equities, and received
commission of £466,652 during the Relevant Period.
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 cumdividend. Following the purported Cum-Dividend Trading that took place on
designated days, the same trades were subsequently reversed over several days
or weeks to neutralise the apparent shareholding positions (the “Unwind Trading”).
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2.6 The purported OTC trades executed by Sunrise 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 companies listed on the Danish stock exchange, and up to 9.6% of
the equivalent Belgian stocks. The volumes also equated to an average of 36 times
and 22 times the volume of all Danish and Belgian stocks respectively, 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 Sunrise, the Solo Group, and five other
Broker Firms that participated in the Solo Trading. The combined volume of the
purported 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, Sunrise executed the purported Cum-Dividend
Trading and the purported Unwind Trading. However, the FCA believes it unlikely
that Sunrise would have executed both the purported Cum-Dividend Trades and
purported Unwind Trades for the same Solo Client in the same stock in the same
size trades, and therefore it is likely Sunrise 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 Sunrise
was aware of the purported stock loans and forwards, these trades were not
executed by Sunrise.
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
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Belgian tax authorities paid approximately £845.90 million and £42.33 million
respectively.
2.10 The Authority refers to the Solo Trading as ‘purported’ as it has found no evidence
of ownership of the shares by the Solo Clients, nor custody of the shares or
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 Sunrise 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 the Solo Group. In addition, Sunrise 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 Sunrise did not have policies and procedures in place to assess properly the risks
of the Solo Group business, and failed to appreciate the risks involved in the Solo
Trading. This resulted in inadequate CDD being conducted and a failure to
adequately monitor transactions 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 Solo Trading.
2.13 The manner in which the Solo Trading was conducted, combined with its scale and
volume is highly suggestive of financial crime. The Authority’s findings are also
made in the context of this finding and in consideration that these matters have
given rise to additional investigations by tax agencies and/or law enforcement
agencies in other jurisdictions as has been publicly reported. Whilst the alleged
underlying misconduct of the Solo Group has not to date resulted in any
determination of fraud, investigations by tax agencies and/or law enforcement
agencies are on-going in other jurisdictions.
Other significant transactions and visits by the Authority
2.14 In addition to the Solo Trading, Sunrise ignored or failed to notice a series of red
flags in relation to a trade in a German stock it executed on behalf of a broker client
on 3 September 2015. The circumstances of the onboarding and trading relating to
that broker client ought to have prompted Sunrise to consider the serious financial
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crime risks this trade posed, particularly given it was executed at nearly twice the
prevailing market value of the stock.
2.15 Sunrise also accepted a payment on 4 November 2015 from a UAE-based entity
connected to the Solo Group called Elysium. This payment was provided by Elysium
in respect of some outstanding debts owed to the Firm by Solo Clients. After
receiving an offer for payment via the Solo Group, Sunrise accepted a payment of
USD 108,000 from Elysium without having heard of the entity before and without
conducting any AML checks or having any agreement in place. Sunrise accepted
this payment from Elysium the same day the Authority conducted an unannounced
visit alerting Sunrise to possible issues within the Solo Group.
2.16 In neither instance did Sunrise identify or escalate any potential financial crime
concerns or suspicions.
2.17 The Authority had also visited Sunrise in November 2014, shortly prior to the
commencement of the Solo Trading, as part of its work to raise standards in the
brokerage sector. The Authority assessed the Firm’s AML, KYC and market abuse
detection arrangements and put Sunrise on notice that its financial crime and AML
controls were weaker than required. After the visit, the Authority notified Sunrise
of a number of areas of concern and in response, Sunrise provided a work
programme which included a review of its AML and KYC framework to be completed
by July 2015. Sunrise failed to carry out any in-depth review of its financial crime
risk controls until April 2016. The commission of this review was driven by
commercial considerations as Sunrise was engaging in acquisition discussions with
a potential buyer.
Breaches and failings
2.18 Principle 3 requires a firm to take reasonable care to organise and control its affairs
responsibly and effectively, with adequate risk management systems. The
Authority considers that Sunrise breached this requirement during the Relevant
Period as its policies and procedures were inadequate for identifying, assessing and
mitigating the risk of financial crime as Sunrise failed to:
a) provide adequate guidance on obtaining and assessing adequate
information when onboarding clients, with reference to the purpose and
intended nature of the business relationship, the anticipated level and
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nature of activity to be undertaken and when it would be appropriate to
enquire as to the source of funds;
b) provide adequate guidance on carrying out risk assessments for clients
including the relevant risk factors to be taken into account in order to
determine the correct level of CDD to be applied, including whether EDD
was warranted;
c) set out adequate processes or procedures detailing how to conduct EDD,
including enhanced monitoring requirements for higher risk clients;
d) provide adequate guidance on its risk-based approach for conducting CDD
on new clients introduced by authorised firms, where reliance may be placed
upon KYC documents provided by the authorised firms for the new clients
and detailing the circumstances when it was appropriate to do so;
e) set out any formal processes or procedures detailing how and/or specify the
circumstances in and frequency with which Sunrise should monitor and
document customer transaction activity, throughout the course of its
relationship with the Firm, in order to assess financial crime and AML risks;
and
f) set out escalation procedures in identifying, managing and documenting
financial crime and AML risks.
2.19 The Authority considers that during the Relevant Period, Sunrise failed to act with
due skill, care and diligence as required by Principle 2 in applying its own (limited)
AML policies and procedures and in assessing, monitoring and managing the risks
of financial crime it was exposed to in respect of Solo Group business. In particular
Sunrise failed to:
a) act promptly in implementing a work programme to address identified
deficiencies within its Compliance function following a visit from the
Authority in November 2014;
b) conduct adequate risk assessments or adequate due diligence when taking
on the Solo Group business which meant they failed to be identified properly
as high risk clients;
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c) carry out adequate CDD when onboarding each Solo Client including the
purpose and intended nature of the business relationship, the anticipated
level and nature of activity to be undertaken, and the source of funds and/or
trading history, in order to provide a meaningful basis for transaction
monitoring;
d) conduct a risk assessment for each of the Solo Clients, as required by the
Compliance Documents, and consequently failed to identify that the Solo
Clients presented a higher risk of financial crime and that EDD ought to have
been completed;
e) conduct any EDD on the Solo Clients that presented a higher risk of money
laundering and subsequently failed to identify what EDD measures might
have been appropriate for the ongoing monitoring of the Solo Clients;
f) assess each of the Solo Clients according to categorisation criteria set out
in COBS 3.5.3 and/or failed to record results of such assessments, including
sufficient information to support the categorisation, contrary to COBS
3.8.2R(2)(a);
g) follow its own compliance policy in that Sunrise started trading on behalf of
the Solo Clients before they had been onboarded;
h) conduct any ongoing transaction monitoring of the Solo Trading throughout
the Relevant Period;
i) recognise numerous red flags with the purported Solo Trading including that
Sunrise did not consider whether it was plausible and/or realistic that
sufficient liquidity was sourced within a closed network of entities for the
scale 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;
j) adequately consider financial crime and money laundering risks in respect
of the German trade, in circumstances which were highly suggestive of
potential financial crime;
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k) adequately consider associated financial crime and money laundering risks
posed in respect of the Elysium payment whereby the Firm accepted a
payment of approximately USD 108,000 from Elysium without any due
diligence or agreement in place and shortly after the Authority had
conducted an unannounced visit alerting Sunrise to its concerns with the
Solo Group; and
l) make and keep adequate, or in some cases any, written records as evidence
of work it may have undertaken specifically relating to the consideration and
discussion of financial crime and AML matters by Sunrise management.
2.20 Sunrise’s failings merit the imposition of a significant financial penalty. The
Authority considers the failings to be particularly serious for the following reasons:
1. Sunrise onboarded 142 Solo Clients over a short time period, some of which
emanated from jurisdictions which did not have AML requirements equivalent
to those in the UK;
2. Sunrise’s AML policies and procedures were not proportionate to the risks in the
business that it was undertaking;
3. Sunrise failed to properly review and analyse the KYC materials that were
provided by the Solo Clients or ask appropriate follow up questions to red flags
in the KYC materials;
4. Even after a number of red flags appeared, Sunrise failed to conduct any
ongoing monitoring, allowing the Solo Clients to purportedly trade equities
totalling approximately £36.6 billion;
5. Sunrise was put on notice following the Authority’s visit in November 2014 that
its financial crime and AML controls were weaker than required. However,
Sunrise failed to improve and apply appropriate AML systems and controls and
onboarded the Solo Clients in the same month it represented to the Authority
it was compliant;
6. Sunrise executed a trade in a German equity, which was nearly twice that of
the prevailing share price, while ignoring numerous red flags that were highly
suggestive of financial crime risk;
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7. Sunrise accepted a payment from Elysium after being alerted to the Authority’s
concerns regarding the Solo Group by an unannounced visit by the Authority
on 4 November 2015; and
8. Finally, none of these failings were identified or escalated by Sunrise during the
Relevant Period.
2.21 Taken together, these failings exposed Sunrise to unacceptable financial crime
risks. Accordingly, to further the Authority’s operational objective of protecting and
enhancing the integrity of the UK financial system, the Authority hereby imposes
on Sunrise a financial penalty of £642,400.
3. DEFINITIONS
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 or a specific regulation therein;
“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;
“Authority” or “FCA” means the Financial Conduct Authority, known prior to 1 April
2013 as the Financial Services Authority;
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“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 Sunrise
and the Broker Firms to 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;
“Compliance Documents” means Risk-based Client Take-on Procedures for
Business Units v1, dated 28 April 2015; Risk-based Client Take-On Procedures for
Business Units, v2, dated 27 April 2015; Anti-money laundering policy v3, dated
22 January 2014; “Compliance Manual V2.doc” or Compliance Manual dated
December 2013; Introduction Certificate form dated 28 April 2015;
“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,
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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” means Elysium Global (Dubai) Limited;
“Elysium payment” means the c. USD 108,000 payment received by Sunrise from
Elysium on 4 November 2015 in relation to debts owed by the Solo Clients to
Sunrise;
“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;
“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
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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;
“German trade” means the EUR 5 million ‘buy’ order executed by Sunrise on behalf
of a broker client (“Client X”) of 146,397 shares in a German stock on 3 September
2015 at a specified intraday price of EUR 34.15;
“Handbook” means the collection of regulatory rules, manuals and guidance issued
by the Authority as in force during the Relevant Period;
“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 will have 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;
“MLRO” means Money Laundering Reporting Officer;
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“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;
“Relevant Period” means the period from 17 February 2015 to 4 November 2015;
“SCP” means Solo Capital Partners LLP;
“Solo Clients” means the entities introduced by the Solo Group to Sunrise and the
other brokers, and on whose behalf Sunrise 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 4.19;
“Solo Group business” means the Solo Trading, the German trade and the
Elysium payment;
“Solo Trading” means the purported Cum-Dividend Trading and the purported
Unwind Trading executed for Solo Clients during the Relevant Period;
“Sunrise” means Sunrise Brokers LLP;
“Tribunal” means the Upper Tribunal (Tax and Chancery Chamber);
“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
weeks to reverse the purported 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
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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
Background
Sunrise
4.1 Sunrise is an interdealer broker and during the Relevant Period, primarily facilitated
trades between counterparties for listed and OTC derivative products, typically for
well-established listed companies, international investment banks, hedge funds and
asset managers.
4.2 Sunrise offered brokerage services in equity, exotic equity, credit, hybrid and
commodity derivatives across multiple asset classes; bonds and execution services
in cash equities. Sunrise did not have permissions to take positions, to trade on its
own account nor to hold any client money. Sunrise was authorised to trade for and
advise eligible counterparty and professional clients in a range of investment types
but not to trade for nor advise retail clients. During the Relevant Period, Sunrise
employed approximately 100 staff in its London office.
Sunrise’s Negligence
4.3 Sunrise 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, Sunrise 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 Group business.
Statutory and Regulatory Provisions
4.4 The statutory and regulatory provisions relevant to this Warning Notice are set out
in Annex B.
4.5 Principle 3 requires firms to 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
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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.
4.6 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
operate those systems and controls with due skill, care and diligence as required
by Principle 2 to protect itself, and properly assess, monitor and manage the risk
of financial crime.
4.7 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.
4.8 As a result, money laundering risk must be taken into account by firms as part of
their day-to-day operations, including in relation to the development of new
products, the taking on of new clients and changes in its business profile. In doing
so, firms should take account of their customer, product and activity profiles and
the complexity and volume of their transactions.
4.9 The Joint Money Laundering Steering Group (“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.
4.10 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.
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Authority visit to Sunrise in November 2014
4.11 The Authority visited Sunrise on 25 November 2014. The Authority “identified areas
that require the firm’s attention” regarding the effectiveness of Sunrise’s AML/KYC
arrangements, and market abuse controls. These areas were set out in a follow-up
letter to Sunrise dated 23 December 2014. This was before Sunrise had been
approached by Solo to take on the Solo Clients or changed their business to
incorporate the Brokermesh activity.
4.12 The key issues the Authority identified regarding the effectiveness of Sunrise’s
AML/KYC arrangements included that:
1) “the apparent lack of Compliance resource appeared to have impinged
on the Firm’s ability to properly implement controls” concerning money
laundering;
2) “there appears to be a need to formalise the whole AML and KYC process.
For example, the risk scoring methodology does not appear to be clearly
documented, and it was unclear whether clients had been assigned a
specific risk rating”;
3) It “did not appear that higher risk clients were subject to transaction
monitoring checks”;
4) the Authority was “unable to establish the firm’s formal stance on the
key AML risks”;
5) “formal AML/KYC information is not regularly reported to the Board”; and
6) Sunrise’s Compliance Officer “is the source of a lot of information
regarding process and decision making, which … represents an
increasing key-man risk”.
4.13 The key issues regarding the effectiveness of Sunrise’s market abuse controls
included that:
1) “it appeared there [was] no current timetable for market abuse training
in operation”; and
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2) The FCA staff “were informed that the firm utilises an automated
monitoring system that screens all transactions. However it is not clear
to us the parameters of [this] system are fully understood by the firm.
For example, it was known whether the system covers all products
brokered, identifies unusual trading patterns … the degree to which it
has been implemented and targeted based on key risks remains
unclear”.
4.14 In its follow-up letter, the Authority informed Sunrise that it expected Sunrise to
set out a work programme to set out the issues addressed which was to cover
(among other things):
1) formalising and documenting its AML/KYC approach, setting out clearly its
risk-based approach to client take-on/review and transaction monitoring
and presenting a formal MLRO report to senior management;
2) assessing and addressing gaps in the market abuse training programme;
and
3) reviewing “pertinent risks that are inherent in the business model” and
ensuring “appropriate transaction monitoring systems and controls are in
place to comply with the STR regime”.
4.15 On 30 March 2015, after onboarding of the Solo Clients had begun and in response
to the Authority’s visit, Sunrise sent the FCA a work schedule, stating (among other
things) that:
1) additional resource had been added to the Compliance department and
further additional resources would be added as required; and
2) its work programmes around the effectiveness of:
a. AML/KYC arrangements would be completed by end of July 2015;
and
b. market abuse controls would be completed by end of May 2015.
4.16 Sunrise considered that its Compliance function required some administrative
support, but other than that it was adequate. Sunrise said the key area for
improvement they identified from the Authority’s visit was that it needed to hire
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extra resource for the Compliance function, mainly to provide additional
administrative support and improve Compliance’s approach to documentation.
Sunrise did not interpret from the Authority’s visit that its approach to client
onboarding (including risk assessments and KYC) was deficient. Sunrise did not
consider from their conversations with the Authority that there was any particular
urgency to address the matters raised but did treat the recruitment of someone to
assist with the administration aspects of compliance as something that they should
action promptly.
4.17 Sunrise stated that it was “at the end of 2015” (i.e. after the Authority’s
unannounced visit) that the Firm realised not everything in the Authority’s letter
had been addressed nor had the work schedule been carried out in a timely manner.
This coincided with Sunrise’s discussions about a potential takeover of their
company by another firm.
4.18 In April 2016, Sunrise instructed an external compliance consultant to carry out an
independent review of its Compliance documentation. The prospect of the takeover
was the main driver for seeking external compliance support and not the Authority’s
visit and follow-up letter (although this letter was used to inform how Sunrise
approached the independent review).
The Solo Group
4.19 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.
4.20 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
18
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.
Background of Dividend Arbitrage and the Purported Solo Trading
Dividend Arbitrage Trading
4.21 The aim of Dividend Arbitrage is to place shares in certain tax jurisdictions around
dividend dates, with the aim of minimising Withholding Taxes (WHT) or to generate
WHT reclaims. WHT is a levy deducted at source from dividend payments made to
shareholders.
4.22 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.
4.23 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
borrower is obliged to supply equivalent shares to the lender at a specified future
date.
4.24 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.
4.25 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 a ‘Dividend Credit Advice Slip’ or ‘Credit Advice Note’. The purpose of the voucher
is for the beneficial owner to produce it to the relevant tax authority to reclaim the
19
Withholding Tax (assuming the existence of a relevant Double Taxation Treaty).
The voucher generally certifies that (i) the shareholder was the beneficial owner of
the share at the relevant time, (ii) the shareholder had received the dividend, (iii)
the amount of the dividend, and (iv) the amount of tax withheld from the dividend.
4.26 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
4.27 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 Sunrise, the Solo Group, and five other Broker Firms that participated
in the Solo Trading. The Solo Trading was characterised by a circular pattern of
extremely large-scale purported OTC equity trading, back-to-back securities
lending arrangements and forward transactions.
4.28 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
Group clients during Cum-Dividend Trading (“Unwind Trading”).
4.29 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.
4.30 As a broker for the Solo Trading, Sunrise executed the purported Cum-Dividend
Trading and the purported Unwind Trading. However, the FCA believes it unlikely
that Sunrise would have executed both the purported Cum-Dividend Trade and
purported Unwind Trades for the same client in the same stock in the same size
trades and therefore it is likely Sunrise only saw one side of the Solo Trading.
20
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 Sunrise was
aware of the purported stock loans and forwards, these trades were not executed
by Sunrise.
4.31 The purpose of the purported Solo 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 WHT reclaims made, the Danish and Belgian tax authorities paid
approximately £845.90 million and £42.33 million respectively.
4.32 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.
Sunrise’s introduction of the Solo Group Business
4.33 In October 2014, the Solo Group approached Sunrise with a business proposal to
join a bespoke trading platform called Brokermesh, whereby Sunrise would be
executing equity trades for “several hundred fund customers” and the Solo Group
would provide custody and clearing services for all trades on the platform. This
proposal was particularly attractive to Sunrise as it had not been able to find an
entity to provide clearing services and additionally would bring in some work to an
area of the Firm which was not bringing in any revenue. According to a staff
member at Sunrise, Solo’s proposal “offered us, you know, a solution in terms of
bringing some revenue in instead of … us sitting there earning nothing, I mean,
literally absolutely nothing and doing nothing every single day”.
4.34 In short, the relevant area of business was largely (if not wholly) reliant on the
business from the Solo Group. As a consequence, there was considerable
commercial pressure to bring in revenue to the relevant desk. In these
circumstances, Sunrise should have been cognisant of the conflict of interests
arising from the absence of revenue in particular areas against the need to ensure
21
that potential business introduced was appropriate for the Firm and in line with the
Firm’s regulatory obligations and relevant policies.
4.35 Sunrise and the Solo Group representatives met to discuss the proposal on two
occasions (30 October 2014 and 16 December 2014). Prior to this introduction,
Sunrise did not have an established business relationship with the Solo Group,
although they had undertaken a couple of trades for Solo Capital. Sunrise did not
document any minutes nor notes of these initial meetings. In the initial email
discussions, Solo told Sunrise that “Solo’s relationship to the brokers is principally
one of a software provider where we happen to have mutual clients. Solo has a
contract with the brokers governing this service”.
4.36 Sunrise estimated that the projected revenue from the Solo Group proposal of
between £500,000 and £1 million per year, which was based on charging the Solo
Clients a quarter basis point of the notional value of each trade. To reach the
projected revenue, Sunrise would have been able to calculate that they would need
to execute trades for the Solo Clients to the value of between £20 billion to £40
billion annually.
4.37 Sunrise did not carry out a formal or documented risk assessment when taking on
the Solo Group business although “commercial discussions and due diligence” took
place ahead of Sunrise making the decision to sign services agreements with the
Solo Group. Sunrise explained “that it took considerable comfort” from the fact that
the Solo Group entities were regulated by the Authority and that other authorised
firms “which it regarded as reputable and assumed would also have undertaken
due diligence” had already signed up to the Brokermesh platform. However, Sunrise
did not have any specific conversations with the other Broker Firms involved to
discuss compliance issues or queries, or to confirm the assumptions on which it
made itself comfortable about the arrangements into which it was entering.
4.38 Sunrise queried the Solo Group’s structure with regard to Brokermesh on a
telephone call with Solo on 6 February 2015. Sunrise could not see the reason why
four Solo Group entities were involved. Solo did not identify a particular reason
other than this was Sanjay Shah’s preference and that it would split the revenue
stream between the four Broker Firms. On another call between the Solo Group and
Sunrise on 9 February 2015, Sunrise queried the rationale behind the structure and
the nature of the arrangements stating “... need to understand … what is being
done is legal … that we’re not participating in anything that hasn’t already gone
22
through a proper due diligence process”. There is no record of if and how this
query was answered.
4.39 On 17 February 2015, Sunrise signed an agreement with the Solo Group whereby
the Solo Group would provide clearing and settlement services in relation to the
Solo Clients (“the Services Agreement”) and on 24 February 2015 Sunrise signed
the terms of the Brokermesh licence. Sunrise understood that it would not be liable
for any settlement failures if a trade did not go ahead and that all trades would be
subject to the Solo Group’s approval.
4.40 The Solo Group informed Sunrise before the Services Agreement was signed that
the trading would involve pan-European equities. Within Sunrise it was assumed
that the trading would involve Dividend Arbitrage. Sunrise did not however seek
any further information from the Solo Group about the intended nature and purpose
of the Solo Trading.
Onboarding of the Solo Clients
Introduction to Onboarding requirements
4.41 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.
4.42 As set out in Regulation 7 of the 2007 Regulations, a firm must conduct CDD when
it establishes a business relationship or carries out an occasional transaction.
4.43 As part of the CDD process, a firm must first 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.
4.44 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 and/or transaction. The firm should also document their risk assessments
and keep their risk assessments up to date.
4.45 If the firm determines through its risk assessment that the customer poses a higher
risk of money laundering or terrorist financing then they must apply EDD. This may
23
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 gathered during EDD
should then be used to inform the firm’s 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 their products for money
laundering and/or terrorist financing.
Chronology of the onboarding
4.46 On 17 February 2015, the onboarding process commenced for the Solo Clients
when the Solo Group started supplying KYC documents to Sunrise. This was the
first time that Sunrise had received information about the names of the Solo Clients
and the jurisdictions in which the Solo Clients were based. The 142 Solo Clients
were onboarded between 10 March 2015 and 6 May 2015 as follows:
Date Number of Clients Onboarded
10 March 2015 12
11 March 2015 69
20 March 2015 28
23 March 2015 6
1 April 2015 24
6 May 2015 3
4.47 The Solo Clients included a total of 81 clients recorded as onboarded over two
working days on 10 and 11 March 2015 and the remaining clients over four nonconsecutive working days on 20 and 23 March 2015, 1 April 2015 and 6 May 2015.
4.48 The Solo Trading commenced on 25 February 2015, which was almost two weeks
before any of the Solo Clients were recorded as onboarded and eight days after the
24
onboarding commenced. Sunrise therefore started trading in respect of some of
the Solo Clients before it had fulfilled its obligations under the 2007 Regulations,
particularly Regulation 7 and in direct contravention of the Compliance Documents.
Sunrise should at this stage have been prepared and willing to refuse to onboard
clients if they presented unacceptable risks.
4.49 Sunrise onboarded the 142 clients introduced by the Solo Group in under two
months. This compared to 48 clients unrelated to the Solo Group that Sunrise
onboarded during the entire Relevant Period. The rate of onboarding also differed,
with the 48 unrelated clients being onboarded over 41 days, whereas the Solo
Clients were onboarded over 6 days. Of the clients unrelated to the Solo Group
onboarded during the Relevant Period, no more than two were ever onboarded on
the same day.
4.50 Sunrise acknowledged that onboarding all the Solo Clients “effectively in one go”
was not a “usual” thing to do and was “a bit rushed”. However, Sunrise was under
pressure from Solo to complete the onboarding of the Solo Clients and Sunrise was
keen to ensure that it did not lose the business being offered to it. Sunrise indicated
concerns that they “risked being dropped from the project” if onboarding was not
done to Solo’s timeline.
4.51 Not only was the large number of clients onboarded unusual for Sunrise, the Solo
Clients also deviated from Sunrise’s normal type of client. Sunrise’s top 20 clients
during the Relevant Period were large investment banks or large institutional funds.
By contrast, the Solo Clients consisted of approximately 118 401(k) Pension Plans
and almost all pension plans and entities had been set up in 2014, which was in
itself a red flag. Whereas during the Relevant Period, Sunrise did not execute any
equity trades in Danish stocks for its top 20 clients, Sunrise purportedly executed
high volume Cum-Dividend Trades to the value of approximately £25.4 billion in
Danish equities for the Solo Clients in the knowledge that a large majority of these
clients were recently established individual pension plans.
4.52 The Solo Clients were all based in the US or Malaysia. Although Sunrise did not
have any Malaysian based clients prior to onboarding the Solo Clients, 24 of the
Solo Clients were registered in Labuan (Malaysia). Sunrise did not give any
additional considerations to the onboarding despite the fact that the Solo Clients
were not UK based.
25
4.53 The KYC material provided to Sunrise showed that almost all the Solo Clients’
entities had only one UBO, with many of those UBOs owning several of those
entities each. A number of the UBOs were connected to the Solo Group. Sunrise
did not recognise or consider that this was unusual at the time.
CDD
4.54 CDD is an essential part of the onboarding process, that 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.
4.55 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
4.56 Regulation 20 of the 2007 Regulations requires that firms establish and maintain
appropriate and risk-sensitive policies and procedures related to customer due
diligence. SYSC 6.3.1R requires that the policies must be comprehensive and
proportionate to the nature, scale and complexity of its activities.
4.57 Sunrise stated that it onboarded prospective clients during the Relevant Period
using a “risk-based approach” in accordance with its client take-on policy and the
JMLSG Guidance. Paragraph 8.1 of Sunrise’s Anti-Money Laundering Policy stated
that the firm needed “to be reasonably satisfied that their clients are who they say
they are” in order to make it “more difficult for the financial services industry to be
used for the purpose of money laundering or for handling the proceeds of crime”
directing employees to Sunrise’s Client Take-on Policy. No further guidance on what
“reasonably” meant was provided in the policy itself.
4.58 Sunrise’s Compliance Manual stated that the Firm had established a client take-on
procedure to satisfy its client identification requirements which were the same
regardless of the business area. The Anti-Money Laundering Policy stated that the
identification process exists to, in part, “help the firm to identify, during the course
of a continuing relationship, what may be unusual” and indicate if a client may be
involved in money laundering, fraud or handling of criminal or terrorist property.
26
4.59 Sunrise’s Client Take-on Procedures purported to contain information which Sunrise
employees were “to attempt to obtain in all circumstances”. The steps (to be
followed in numerical order) included: (i) Determine who the client is and who
needs to be identified; (ii) Determine the overall risk of the proposed client
relationship; (iii) Record the products and services the client is requesting; (iv)
Determine if information provided by another firm can be relied upon instead of
collecting information directly from the client, and if so collect the appropriate
certificate; (v) If another firm cannot be relied on, determine the information
required and collect documents; and (vi) Complete the summary client take-on
form.
4.60 Sunrise, however, acknowledged that there may have been discrepancies and/or
contradictions in the Compliance Documents. This was due to the fact that they
had been sourced, in part, from a member of staff at the Firm who had drafted
parts of them for another firm. As a result, the Compliance Documents had not
been updated, tailored or amended adequately to reflect Sunrise’s business. Key
parts of the Compliance Documents such as checklists appeared to be missing.
Reliance on Solo for due diligence
4.61 Further, the Client Take-on Procedures stated that “in many circumstances, you
will find that due to the low risk nature of the relationship, Sunrise Brokers is able
to rely upon another party for some or all of the client identification”. The Client
Take-on Procedures did not give further details of when Sunrise would rely on
another party for some or all of the client identification, what factors needed to be
taken into account or what particular measures put in place.
4.62 The JMLSG Guidance states that firms should take a risk-based approach when
deciding whether to accept confirmation from a third party that appropriate CDD
measures have been carried out on a customer and this “cannot be based on a
single factor”. They also state that if reliance is placed on a third party, the firm
still needs to know the identity of the beneficial owner whose identity is being
verified; the level of CDD carried out; and have confirmation of the third party’s
understanding of his obligation to make available on request copies of the
verification data, documents or other information.
4.63 Sunrise’s Client Take-on Procedures also stated that with “all customers, it is
essential” that Sunrise “understand the entity type and all parties associated with
27
it”. They also stated that introduction certificates should be obtained by Sunrise
when an equivalent regulated entity confirms that identification and verification has
been undertaken on a specific client. Sunrise has provided no evidence that these
were obtained for the Solo Clients.
4.64 The Client Take-on Procedures also stated that general assurances may be given
by “an undertaking provided by a regulated firm to another regulated firm that for
all current and future customers introduced, sufficient identification has been or
will be obtained and retained by the original owner”. However, these were only
permitted for introductions where there was a one-off transaction for low risk
customers, between clearing and executing brokers in certain limited (but
unspecified) circumstances or where the client was an unregulated fund where
relevant investors may need to be identified (so long as the client is low or medium
risk in nature).
4.65 Sunrise’s approach to onboarding Solo Clients placed unreasonable reliance on the
fact that these Solo Clients were introduced by another regulated firm. The fact
that the introducer was regulated appears to be the only factor Sunrise considered
when deciding on the level of due diligence to apply. Essentially, as the Solo Clients
were introduced by a regulated entity, Sunrise did not treat them as previously
unknown clients and failed to apply the level of due diligence to the Solo Clients as
it would do for other clients. Sunrise admitted that this approach was “in retrospect
… something that we would not do now”.
B. Beneficial Owner and Beneficial Owner Verification
4.66 As stated in paragraph 4.55 above, under Regulation 5 of the 2007 Regulations, a
firm must identify a client’s beneficial owner, if relevant, and verify their identity.
Sunrise’s Client Take-on Procedures stated that: “Identifying and verifying such
owners back to either a source individual, or to a stage where ownership is by a
lower risk entity or range of entities, is of crucial importance in protecting the firm
from money laundering risk”.
4.67 Sunrise represented that “every client documentation was reviewed to find the
beneficial owner, and who the people were authorised to trade on behalf of that.
The documents were reviewed through to understand that they were certified and
notarised and being provided to us, they did include passports and utility bills. …
28
So making sure that, at least on that, the documents we held for the underlying
clients were correct, or I believed them to be correct at the time”.
4.68 During the due diligence process, KYC documents received in relation to the Solo
Trading indicated that the UBO of a Solo Client was a former Solo Group employee
but this did not “really raise any questions … on the suitability of the person” with
Sunrise because the individual in question was considered “a market professional”.
4.69 Nor did Sunrise have concerns when KYC documents showed that the sole
beneficiary of a Solo Client was an 18-year old college student who shared the
same home address as the fund manager. The 18-year old college student was also
the UBO of four other 401(k) Pension Plans that Sunrise onboarded. Sunrise said it
would not have raised any concerns that an 18-year old would be making significant
sized trades on the basis that “the fund had a manager” who would be trading on
the college student’s behalf although said it was “unusual” that the student shared
the home address as the fund manager.
C. Purpose and Intended Nature of a Business Relationship
4.70 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. Firms
should use this information to assess whether a customer’s financial behaviour over
time is in line with their 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.
4.71 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.
4.72 Sunrise’s Compliance Manual stated that it was important for the Firm “to
understand the client’s business in order to assess the consistency of their
transactions and activities undertaken so as to determine what may or may not
seem suspicious or unusual”.
4.73 Sunrise’s Client Take-on Procedures stated that the Firm must obtain and document
“The client’s reason for seeking Sunrise Brokers’ products and/or services. This will
ensure that Sunrise Brokers fully understands the entity, and structure and
29
ownership”. The Compliance Documents however did not set out any framework or
guidance for staff to follow to understand the purpose and intended nature of the
business relationship with each client.
4.74 Sunrise first received KYC documentation for the Solo Clients from the Solo Group
on 17 February 2015. There was no composite written checklist to assist with the
review of KYC documents during the onboarding process although the Compliance
Documents did provide examples of some of the information that Sunrise ought to
obtain when conducting due diligence.
4.75 The CDD Sunrise undertook for the Solo Clients was limited to checking the
documentation received and to carrying out identification checks for the Solo
Clients and for the UBOs of each of the entities being onboarded. Sunrise stated it
had no concerns arising from its review of the KYC documents. It is the Authority’s
view that Sunrise’s review of the KYC documents was rushed, given the commercial
pressure Solo had placed on Sunrise and therefore lacked an adequate level of
scrutiny.
4.76 Sunrise failed to identify numerous red flags which should have been evident from
scrutinising the KYC documents. Sunrise did not question why Solo Clients were
using 401(k) Pension Plans to conduct highly speculative, short term Dividend
Arbitrage as such plans were largely for holding individual savings. Nor did Sunrise
question how plausible it was that individual Solo Clients were conducting trading
that required the Solo Clients to hold such a high level of funds, particularly when
Sunrise did not know the limits on 401(k) Pension Plan contributions or otherwise
check the source of these funds. Had it done so, Sunrise would have identified that
the value of the Solo Trading was many times in excess of the maximum funds that
could have contributed to US 401(k) Pension Plans set up only the year before.
4.77 In not applying this basic level of scrutiny, Sunrise failed to complete the CDD steps
required under Regulation 5 of the 2007 Regulations.
Risk Assessment
4.78 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