Record penalty follows warning to brokers to guard against graft

LONDON—The Financial Services Authority's record fine on Aon Ltd. for lax anti-bribery and corruption controls should sound an alarm for all insurance intermediaries, experts say.

The U.K. financial regulator, which wrote to the chief executive officers of all U.K. commercial insurance brokers in November 2007 asking them to review their practices, is conducting a study of the adequacy of systems and controls to prevent illicit payments and inducements in place at U.K. brokers.

The results of that study will be made public sometime this year and will include examples of good and bad practices, a spokeswoman for the regulator said. The FSA cannot comment on whether further fines or regulatory actions may follow, she added.

Aon Ltd., the London-based arm of Aon Corp., last week was fined £5.25 million ($7.9 million), the largest financial crime-related fine ever imposed by the FSA.

The fine, which was reduced from £7.5 million ($11.3 million) because Aon settled swiftly, was imposed because the brokerage "failed to properly assess the risks involved in its dealings with overseas firms and individuals who helped it win business, and failed to implement effective controls to mitigate those risks," the FSA said.

As a result of these weak controls, between Jan. 14, 2005, and Sept. 30, 2007, Aon Ltd. made "suspicious payments" amounting to about $7 million to several overseas firms and individuals, the FSA found.

Aon, which has since overhauled its global systems and controls on bribery and corruption, was praised by the FSA for its "proactive determination" to identify past issues and improve its systems and controls. Aon's actions were described by the FSA as "a model of best practice that other firms may wish to adopt."

Ali Sallaway, a lawyer who worked with Aon during the FSA investigation, said all intermediaries in the insurance and reinsurance sector will have to look closely at the adequacy of their anti-bribery systems and controls.

Any firm that has operations in jurisdictions that are at high-risk of bribery exposures will have to examine their systems and ensure individual employees are aware of the potential risks, noted Ms. Sallaway, who is a dispute resolution partner specializing in insurance and reinsurance at Freshfields Bruckhaus Deringer L.L.P. in London.

And the system by which insurance and reinsurance is placed can be especially vulnerable to bribery and corruption risks, which are not always easy to spot, she noted.

It is likely that there will be more regulatory action against other insurance or reinsurance brokerages, Ms. Sallaway said.

Peter Harmer, chief executive officer of Aon U.K., said that while he did not wish to comment on other brokerages, the issue would now be firmly on companies' radar screens because of the FSA's "Dear CEO" letter and subsequent review.

The insurance industry--particularly the London market, where business has frequently been sourced using third parties--needs to address this issue, Mr. Harmer said.

Other sources said it was too early to tell whether the regulator may fine or discipline other insurance brokerages as a result of the review.

"Corruption, of which bribery is just one facet, is sadly not an uncommon human failing," said Gavin Robertson, senior partner at Ongar, England-based surveillance, claim validation and fraud investigation company Robertson & Co. "Because of its insidious nature, it can often be very, very difficult to detect until it is too late and the damage has been done," he said.

The Assn. of Insurance & Risk Managers said that while it would not comment on the specifics of the Aon case, "the broader issue will be of concern to risk managers."

"It highlights the exposure that all international organizations face when seeking to ensure that their businesses are operating in a totally compliant and ethical manner, irrespective of local trading conditions," said John Hurrell, chief executive of London-based AIRMIC.

"This is an issue that is of interest to regulators, particularly in relation to competition policy, and to AIRMIC members from a risk and compliance perspective," he said.