Has Aon's £5m fine changed the market?

It was the fine that shocked an entire industry. And it was supposed to signal a widespread crackdown on poor practice in insurance broking. It is now 18 months since the FSA fined the UK subsidiary of Aon Corporation £5.25m. The company was penalised for what the FSA described as failure “to take reasonable care to establish and maintain effective systems and controls to counter the risks of bribery and corruption associated with making payments to overseas firms and individuals”.

But it could have been far worse: Aon’s management co-operated fully with the investigation, which meant the group received a 30% discount. The FSA concluded that Aon made 66 suspicious payments of up to €3.4m (£2.84m) between 14 January 2005 and 30 September 2007. It had hired companies to act as introductory agents in countries including Bangladesh, Bahrain, Indonesia, Vietnam, Burma and Bulgaria.

Peter Harmer, the UK chief executive at the time, admitted that the company “could not provide certainty” that the payments to these introducers were not later used as bribes. Among the FSA’s criticisms were that payments were unmonitored and that certain Aon staff had received an insufficient level of training to assess the risks involved.

'Normal working practice'

The group was fined because of suspicion and poor practice, rather than proven wrongdoing. The FSA even stated that it did not consider Aon’s conduct either “deliberate or reckless”. Privately, some industry figures admit that backhanders are necessary in countries where such payments are part of normal working practice. Oil companies, for example, have been known to pay so-called underdogs – office-bound civil servants – based in Africa bundles of cash for geological information as otherwise it will not be handed over. Sticking to the letter of the law could even put UK-based insurance intermediaries at a competitive disadvantage against overseas rivals.

There was a sense of injustice at the time; that Aon was a scapegoat, a big scalp, to send shivers down the spines of the rest of the industry. The FSA’s report hinted at this when it stated: “Aon Ltd is one of the largest insurance and reinsurance brokerage and risk management firms in the UK. As such, it has a leading competitive position in the market and the firm’s practices set an example that is seen by other market practitioners and customers.”

But few disagreed with Norton Rose insurance partner Ashley Prebble when he said: “This fine may not be the last.” Little has happened since. Instead, the FSA took 16 months to review anti-corruption controls across the industry, publishing what amounted to little more than a set of guidelines rather than meting out further punishments.

“We looked at 17 brokers,” an FSA spokesman says. “And though we found that brokers have put actions in place, there is more that they can do. There is very weak due diligence.”

The report does warn that the FSA is “considering whether further regulatory action is required” and that further fines “are likely”. The FSA is particularly damning of senior managers, who it feels have a poor understanding of the risks involved in working in difficult territories.

Most of the 17 firms assessed had not even produced business cases to justify using third parties in insurance transactions, suggesting economic as well as moral ineptitude. More surprisingly, given the strong reputation of British brokers around the globe, several firms could not even show the FSA a central list of the third parties they used to obtain or retain business.

Cash advances

Brokers’ records are further undermined by giving staff large cash advances to help them travel in high-risk countries where credit and debit cards are not widely accepted. On top of this, brokers give big bonuses directly related to income or profits, effectively encouraging risk-taking and making it less likely that staff will properly vet third parties that help them win business.

While the report pointed out that brokers had improved systems in light of the Aon fine, it concluded: “At present, we judge that the serious weaknesses identified in some brokers firms’ systems and controls mean that there is a serious risk of illicit payments or inducements being made to, or on behalf of, third parties to win business.” The risk for brokers now is far greater than in 2009. Failure to have suitable measures preventing corruption will shortly become a crime.

One of the pieces of legislation rushed through before the general election was the Bribery Act, which has broad cross-party support. The FSA report states that many brokers are not “in a position to demonstrate procedures to prevent bribery”, which means that they will not have a defence to the new criminal offence of ‘failing to prevent bribery’.

Russell, Jones & Walker partner specialising in white-collar crime, Jeremy Summers, says: “In effect, this makes it even criminal to do the sorts of things that Aon was fined for. Clearly the results would end up being more serious than just a fine. This is a sea change.” It is possible that some brokers have already dealt with the FSA privately. A legal source points out: “The FSA has it in its armoury to issue private warnings. They're like getting a yellow card in football; next time you offend, you’re off.”

But it is thought unlikely that the FSA would have shown favouritism to some brokers when it had been so publicly harsh on Aon. Should it ever emerge that it had, it would face widespread criticism.

Aon compliance director Carol Richmond admits the company did feel that the FSA was “making an example of us”. “We were quite taken aback at the time,” she says.

But Aon appears to have learned from its mistakes. Controls of each stage of the broking process, including point of sales and due diligence, are reviewed by a committee chaired by chief financial officer Mark Chessher. Representatives from the legal, audit and compliance departments sit on the committee.

A training programme, including workshops and computer-based scenarios, has been introduced to ensure that staff avoid every imaginable risk in their work in difficult countries. “We do actually feel that our controls [pre-fine] were in line with the market standard,” Richmond says. “We have now assessed ourselves against best practice and we’re comfortable against this.”

Changing culture

She says that this all has been instrumental in changing Aon’s corporate culture, essentially making it an ultra-conservative organisation. This has had its own frustrations: “We turned away significant amounts of business, and then saw it go elsewhere,” she sighs. It is estimated that Aon refused business worth well into seven figures as it tried to prove to the FSA that it was a clean organisation. Richmond points out that some negative consequences are difficult to quantify but meaningful nonetheless, such as the massive upheaval caused as the company changed its working practices and dragged staff away from client meetings to attend training seminars.

“It is not easy to prevent financial crime,” Richmond argues. “We were more or less shown zero tolerance.” The industry seems to think the problem has been exaggerated. Airmic chief executive John Hurrell says: “I have observed a willingness among brokers to bend over backwards to be transparent. If things are going on at very large organisations that senior executives have not got hold of, then when they do get found out the problem gets fixed.”

And this is one of the difficulties. Hurrell points out that brokers are very big organisations that are, by their nature, decentralised. It is impossible to prevent every fraud, deception and honest mistake. Aon, for example, has 36,000 people working in 500 offices across 120 countries. But Hurrell points out that brokers have been growing ever more diligent since 2004, when New York attorney-general Eliot Spitzer filed charges against Marsh for alleged bid rigging. Marsh ended up paying $850m (£561m) to end Spitzer’s case, while Aon paid $190m and Willis paid $50m.

The Spitzer case briefly ended contingent commissions in the USA, whereby insurers pay brokers to consider their products for recommendation, before the rule was reversed by regulators earlier this year. Although this was very much a US case, it provided a warning to UK brokers that they had to be on their guards. Ever since, argues Hurrell, the industry has tried to ensure it has effective systems in place to avoid any notions of conflicts of interest, let alone corruption or bribery.

The industry has taken a beating from the FSA, though Aon has ended up with most of the bruises. With the new criminal legislation and an FSA hinting at renewed interest in broking activities, Aon might not be the last to be bloodied by allegations that seemingly do not have to prove that any fraud took place. IT