Britain’s Financial Services Authority has fined Goldman Sachs International £17.5 million for failing to notify the FSA of an investigation by the U.S. Securities and Exchange Commission.

The FSA said on Thursday that it fined the firm for breaching FSA principles, specifically, failing to ensure that it had in place adequate systems and controls to enable it to comply with its British regulatory reporting obligations. This lack of compliance resulted in a failure to notify the FSA about the SEC’s investigation into the Abacus synthetic collateralized debt obligation. That investigation, and the subsequent charges brought against the firm, resulted in a US$550 million settlement with the SEC.

The regulator says that GSI has obligations to disclose relevant information to the FSA, but that its systems for compliance with those obligations “were inadequate to ensure that other group members would bring to its attention relevant matters which might have an impact on GSI in the U.K.”

The Abacus CDO was structured by Goldman Sachs & Co. in the U.S., and marketed, in part, by the British affiliate to institutional investors. Also, Fabrice Tourre, who was part of the team that structured Abacus in the U.S., and still faces SEC charges over his part in the deal (the allegations have not been proven), later transferred to GSI in London and became an FSA approved person in November 2008.

The SEC had begun making enquiries regarding Abacus in August 2008. And, over the next year, the SEC obtained documents and witness evidence about Abacus from Goldman in the U.S., and from its London-based personnel.

“Despite the involvement of GSI in the marketing of Abacus and the involvement of U.K. approved people in the SEC investigation, no one at GSC or GSI considered the potential regulatory implications of the SEC investigation for GSI,” it says.

As a result, the regulator said that Goldman breached two FSA principles. In particular, it said, “GSI did not have effective procedures in place to ensure that its compliance department was made aware of the SEC investigation so that it could consider whether any notifications needed to be made to the FSA in compliance with GSI’s regulatory reporting obligations.”

Additionally, it says that GSI did not inform the FSA when the SEC issued Wells Notices (indicating that it intends to file charges) to the firm and Tourre containing allegations of violations of U.S. securities law relating to Abacus. “As a consequence of GSI’s failure to notify, Mr. Tourre remained approved in the U.K. and able to perform a controlled function for several months without further enquiry or challenge from the FSA,” it says.

GSI’s compliance department only became aware of the SEC investigation when the SEC announced that it had commenced enforcement proceedings in the U.S. courts earlier this year. The firm has since settled, while Tourre continues to deny the allegations against him.

The FSA investigation found that GSI did not deliberately withhold any information from the FSA. It co-operated fully with the FSA and agreed to settle at an early stage. As a result, it qualified for a 30% discount. Without the discount the fine would have been £25 million.

“We have repeatedly stressed the importance of firms self-reporting regulatory issues to the FSA in a timely way,” said Margaret Cole, managing director of enforcement and financial crime at the FSA. “GSI did not set out to hide anything, but its defective systems and controls meant that the level and quality of its communications with the FSA fell far below what we expect of an authorised firm. The fact that senior business people at GSI in London knew about Mr. Tourre’s Wells Notice, but did not consider the obvious regulatory implications for GSI is very disappointing. Had GSI complied with its UK obligations, the outcome for it would have been very different.”

“This penalty should send a message – particularly to the senior management of large institutions – of the need to have their firm’s U.K. reporting obligations at the forefront of their minds,” she added.

IE