ABBEY National, Britain’s sixth biggest bank, was yesterday fined a record £2.3 million by the Financial Services Authority for failing to provide adequate controls against money laundering and for lapses at its fund management division.

The bank, which recently shortened its name to Abbey, was fined £2 million for breaking the rules governing money laundering, and an additional £320,000 for lax control of its investment division, which led to customers losing money.

The fine is the second biggest levied by the FSA after the £4 million penalty imposed on Credit Suisse First Boston in 2002 for misleading tax authorities. It is the largest fine imposed on a British financial institution, and follows an internal review conducted by Abbey that began in November 2002.

The review found that Abbey had failed properly to identify up to a third of its customers — a clear breach of the FSA’s “know your customer” rules. In addition, the bank failed to report suspicious financial transactions to the National Criminal Intelligence Service (NCIS) promptly enough.

The FSA’s research found that more than half the suspicious transactions at Abbey were reported to the NCIS only after one month, and 12 per cent were reported after three months. The FSA partly blamed the regulatory lapses on a decision by Abbey to allow branch managers to have a greater role in ensuring compliance with money laundering rules.

According to the regulator, Abbey “had shown such a marked lack of regard for its regulatory obligations as to present a substantial risk to the FSA’s statutory objectives, including the reduction of financial crime”.

Andrew Procter, FSA director of enforcement, said: “The FSA has repeatedly made it clear that it expects all financial firms, as part of their compliance regime, to establish and maintain strong and effective anti-money laundering procedures.

“The size of the fine demonstrates that failure by the firms to put in place these fundamental systems and controls will be dealt with severely by the FSA,” he added.

The regulator acknowledged that the new management, under Luqman Arnold, the chief executive who joined in October 2002, had taken steps to tighten controls, but added that it was continuing to monitor the measures the bank was taking to deal with the broader problems in managing risk.

The £320,000 fine levied against Abbey National Asset Managers followed a compliance review again instigated in October 2002. The review found that the desk dealing with investments in Far Eastern companies had failed to carry out nearly a quarter of all trades adequately. In addition, the review found that dealing in some cases had occurred outside the office’s controlled environment. Further failings were uncovered in the overseeing of the Smaller Companies Unit Trust. The company has paid £300,000 in compensation to investors because of the failings.

Abbey said: “The two cases relate to the effectiveness of Abbey’s regulatory control environment in recent years. The broad range of business, operational and risk challenges arising during this period have already been well documented. Abbey is fully committed to putting all these issues right.”