Coutts, the bank famed for handling the finances of the Queen and around half the England football team, was fined £8.75m for "serious, systemic" money-laundering failures yesterday.
The Financial Services Authority said the bank, owned by the state-backed Royal Bank of Scotland, was lax in checking whether funds paid in by foreign politicians came from legitimate sources.
The fine is Coutts' second dressing down by the City watchdog in a matter of months. In November, it was fined £6.3m for mis-selling savings products linked to the collapsed US insurer AIG. In that instance it also paid compensation to clients.
Tracey McDermott, acting director of enforcement and financial crime at the FSA, said: "Coutts' failings were significant, widespread and unacceptable. Its conduct fell well below the standards we expect and the size of the financial penalty demonstrates how seriously we view its failures."
In particular, the bank didn't properly manage accounts with so-called Peps – politically exposed persons. This might typically be the relative of a politician from a country such as Nigeria.
The FSA found that in at least two cases Coutts failed to identify "serious criminal allegations" against customers. There were another five cases "where adverse intelligence about a customer had been identified from credible sources, including allegations of criminal activity. In each case the customers were approved without proper consideration of whether further steps were necessary".
Coutts said it "accepts the findings" but that it "has found no evidence money laundering took place".
Rory Tapner, chief executive of the wealth division of Royal Bank of Scotland, said: "We are disappointed that Coutts & Co did not meet the FSA's standards ... in relation to high risk clients. Since the FSA first raised its concerns, we have implemented a number of improvements to prevent any recurrence of these failings."