The Royal Bank of Scotland (RBS) has been fined £5.6m by the Financial Services Authority (FSA) for not having in place controls that could ensure its financial transactions were not involved in terrorism.

The FSA, which fined RBS group members RBS plc, NatWest, Ulster Bank and Coutts & Co, said they had not checked if customers were on sanctions lists, leading to an "unacceptable risk" of facilitating terrorist financing.

But the watchdog said that it did not consider the failings as deliberate or reckless.

The breach of rules took place for about a year until December 2008. RBS said it had acknowledged the misconduct and was working to improve its systems.

The RBS group processed more foreign payments than any other UK financial institution in 2007, noted the FSA.

As the group admitted its failings, the FSA financial penalty - the first imposed under the Money Laundering Regulations 2007 - was reduced from £8m.

In 2007 the Treasury established a special unit to apply financial sanctions against people and organisations on its watch-list, which contained details of 1,400 people and 500 organisations - including 12 UK-based ones - until last year.