The 2017 Regulatory and Examination Priorities Letter, published by FINRA on January 4th, is a fitting reminder of the resolve of Regulators to better execute their mission of investor protection and market integrity. Although the Libor and FX scandals might seem like distant memories, Regulators have continued on the war path. We would like to share some thoughts based on work we have been involved in last year in a regulatory competition investigation.
Good day all,
Please find attached the June 2017 edition of our very informative Newsletter.
We look forward to your continuing support and comments. Please send all comments and suggestions to training@kawmanagement.com or training.kawmgmt@candw.ag.
Happy reading
Compliance Abhors a Vacuum - If the Void is Filled with Heightened BSA Scruti...CBIZ, Inc.
Bank Secrecy Act (BSA) violations may be the next big regulatory target - and can be very costly. Two cases and takeaways to consider before bank examiners come knocking.
Good day all,
Please find attached the June 2017 edition of our very informative Newsletter.
We look forward to your continuing support and comments. Please send all comments and suggestions to training@kawmanagement.com or training.kawmgmt@candw.ag.
Happy reading
Compliance Abhors a Vacuum - If the Void is Filled with Heightened BSA Scruti...CBIZ, Inc.
Bank Secrecy Act (BSA) violations may be the next big regulatory target - and can be very costly. Two cases and takeaways to consider before bank examiners come knocking.
A42 banks race to defend from further reputational damageFreddie McMahon
The next wave of billion dollar fines is underway
as authorities are coming to the banks, already
armed with evidence of KYC, AML and CFT
systemic failings due to the way international
money transfers flow through correspondent
banks. This growing evidence shows how
money launderers’ businesses are successfully
laundering over a trillion dollars a year by
circumventing the controls of banks across the
world.
Learn what can you do to stay a step ahead of fraudsters without limiting revenue growth. Prevent Financial Fraud in your organization with the help of HLB HAMT
Money Laundering and Its Fall-out - ROLE OF INFORMATION TECHNOLOGY IN ANTI M...Resurgent India
In an effort to detect potential money laundering schemes, financial institutions have deployed anti-money laundering (AML) detection solutions and enterprise-wide procedural programs.
The purpose of this research was to find out the auditor independence challenges faced by external
auditors in auditing accounts of large companies in Zimbabwe. Many stakeholders of large firms are
demanding credible, reliable and accurate audited financial statements and were suspecting that some external
auditors were biased and less independent to the day to day operations of the executive management to meet
corporate governance standards
OFAC Name Matching and False-Positive Reduction TechniquesCognizant
Exploration of Office of Foreign Asset Control (OFAC) compliance and strategies to avoid false positives (and negatives), covering watch lists such as specially designated nationals (SDN), customer due diligence,data mining, probabilistic techniques and anti-money-laundering (AML) software.
Operational innovations in AML/CFT compliance processes and financial inclus...CGAP
This report contains the findings of a research project to identify and categorize leading operational AML* compliance practices among financial service providers for the identification, verification and ongoing monitoring and management of lower income customers. This project began with the hypothesis that an increasing number of financial service providers with products targeting lower income population segments are reducing client acquisition and monitoring costs, and improving efficiency and effectiveness of the processes in scope.
StubbsGazette AML/CFT EBook for Credit UnionsStubbsGazette
A comprehensive guide to Anti Money Laundering/Countering the Financing of Terrorism in the Irish Credit Union Sector (also highly relevant to other regulated sectors)
Edwards Wildman John Hughes LIBOR Litigation: Spotlight on Insurance CoverageEdwards Wildman
In this presentation, John Hughes, a partner in Edwards Wildman's Insurance and Reinsurance Department, analyzes LIBOR litigation and its effects on insurance coverage.
A42 banks race to defend from further reputational damageFreddie McMahon
The next wave of billion dollar fines is underway
as authorities are coming to the banks, already
armed with evidence of KYC, AML and CFT
systemic failings due to the way international
money transfers flow through correspondent
banks. This growing evidence shows how
money launderers’ businesses are successfully
laundering over a trillion dollars a year by
circumventing the controls of banks across the
world.
Learn what can you do to stay a step ahead of fraudsters without limiting revenue growth. Prevent Financial Fraud in your organization with the help of HLB HAMT
Money Laundering and Its Fall-out - ROLE OF INFORMATION TECHNOLOGY IN ANTI M...Resurgent India
In an effort to detect potential money laundering schemes, financial institutions have deployed anti-money laundering (AML) detection solutions and enterprise-wide procedural programs.
The purpose of this research was to find out the auditor independence challenges faced by external
auditors in auditing accounts of large companies in Zimbabwe. Many stakeholders of large firms are
demanding credible, reliable and accurate audited financial statements and were suspecting that some external
auditors were biased and less independent to the day to day operations of the executive management to meet
corporate governance standards
OFAC Name Matching and False-Positive Reduction TechniquesCognizant
Exploration of Office of Foreign Asset Control (OFAC) compliance and strategies to avoid false positives (and negatives), covering watch lists such as specially designated nationals (SDN), customer due diligence,data mining, probabilistic techniques and anti-money-laundering (AML) software.
Operational innovations in AML/CFT compliance processes and financial inclus...CGAP
This report contains the findings of a research project to identify and categorize leading operational AML* compliance practices among financial service providers for the identification, verification and ongoing monitoring and management of lower income customers. This project began with the hypothesis that an increasing number of financial service providers with products targeting lower income population segments are reducing client acquisition and monitoring costs, and improving efficiency and effectiveness of the processes in scope.
StubbsGazette AML/CFT EBook for Credit UnionsStubbsGazette
A comprehensive guide to Anti Money Laundering/Countering the Financing of Terrorism in the Irish Credit Union Sector (also highly relevant to other regulated sectors)
Edwards Wildman John Hughes LIBOR Litigation: Spotlight on Insurance CoverageEdwards Wildman
In this presentation, John Hughes, a partner in Edwards Wildman's Insurance and Reinsurance Department, analyzes LIBOR litigation and its effects on insurance coverage.
"Accounting Theory" is a course of MBA in Jagannath University. This course is very important understanding all the aspects of accounting in business atmosphere.
The Food Safety Modernization Act with Joseph Levitt
The LIBOR Scandal Prosecutors Have a New Plan
Lessons from the Oldest CEO Succession Plan on Record
Food Safety Compliance A Hogan Lovells Roundtable
LEVICK In the News
Blogs Worth Following
Learn what can you do to stay a step ahead of fraudsters without limiting revenue growth. Prevent Financial Fraud in your organization with the help of HLB
AlyousifName Mohammed AlyousifProfessor Conne FarrelCour.docxnettletondevon
Alyousif
Name :Mohammed Alyousif
Professor: Conne Farrel
Course:ENG-100
Date: 11/6/2016
Use of Blackout Periods to Curb Insider Trading
A couple of years back in 2012 a Manhattan office linked to the United States Attorney initiated criminal investigations to establish whether corporate executives from a list comprising of seven different companies engaged in insider trading by trading shares of their own company’s stock. Since then, it is uncommon to pick up a newspaper and miss an insider trading investigation. At a time when a former Yahoo executive pleaded guilty of committing a securities fraud, another trial was underway involving the director of Goldman Sachs who was accused of leaking insider information of both Procter & Gamble and Goldman Sachs to a friend.
In addition, former hedge fund Raj Rajaratnam has been convicted for insider trading proving that Securities and Exchange Commission is putting a lot of effort in investigating and prosecuting cases of insider trading. However, this does not help restore investor confidence in the financial sector. Some other corporate level strategies should be instituted to prevent governmental interventions in the issue. One such appropriate way is use of “blackout periods” to check flow of sensitive information during trading periods.
In all manner and fashion insider trading undermine investor confidence in relation to integrity and fairness of the securities market. Because of this, all jurisdictions around the world have legislations dealing with insider trading. Undisputedly, the United States has been the longest serving victim of the issue of insider trading. Most of the studies carried out on the issue are carried out in the US and some of the toughest legislations formed to deal with the matter originate from the United States of America (CFA Institute 4). Inside trading has a huge influence in the American financial market and other markets around the world.
The concept of insider trading has two major adverse effects. First, it injures investors by undermining their confidence regarding the financial markets of a company, country or a state. Regarding investors, inside trading makes them trade at a “wrong price.” In other words, an investor is duped to make a bad purchase or sale. Even though, this type of effect has been down played it has significant impacts on the change of perception of investors in any particular securities market. Secondly, inside trading injures Issuers this is because it will delay corporate plans by delaying transmission of information to provide sufficient time for manipulation of stock prices (Anderson 358). As a result, a company in question suffers massive reputation damage when the issue becomes common knowledge.
In addition, insider trading is plain theft. Therefore, inside trading is an issue to be addressed not only by the regulatory frameworks provided by the legislative bodies but also individual corporate initiatives. Form the statist.
PAGE 280APPLYING THE CONCEPTTRUTH OR CONSEQUENCES PONZI SCHEM.docxsmile790243
PAGE 280
APPLYING THE CONCEPT
TRUTH OR CONSEQUENCES: PONZI SCHEMES AND OTHER FRAUDS
In the financial world, you always have to be on the lookout for crooks. Fraud is the most extreme version of moral hazard, and it is remarkably common.
The term Ponzi scheme has its origins in a 1920 scam run by serial con artist Charles Ponzi. Promising a 50 percent profit within 45 days, he swindled unsuspecting investors out of something like $250 million in 2014 dollars. Ponzi never invested their money. Instead, he paid off early investors handsomely with the money he obtained from subsequent investors.
Financial laws are now far more elaborate than in Ponzi’s day, and governments spend much more to enforce them, but frauds persist.
Bernie Madoff is the leading recent example. For decades, Madoff was a respected member of the investment community and able to escape detection. In the same manner as Ponzi, Madoff was redeeming requests for funds with the money he collected from more recent investors. Madoff’s con, which may have begun as early as the 1970s, failed only when the financial crisis of 2007–2009 depleted his funds, making it impossible for him to pay off the final cohort of wealthy, sophisticated—yet apparently quite gullible—investors and financial firms. The Madoff scandal dwarfed Ponzi’s racket: at the time the scheme blew up, the losses were estimated at $17.5 billion, and extensive efforts at recovery have put final losses in the neighborhood of $7 billion.
Unfortunately, in a complex financial system, the possibilities for fraud are widespread. Most cases are smaller and more mundane than those of Madoff or Ponzi, but their cumulative size is significant. One source devoted to tracking just Ponzi-type frauds in the United States listed 70 schemes worth an estimated $2.2 billion in 2014 alone.*
We aren’t going to get rid of Ponzi schemes and other frauds (see In the Blog: Conflicts of Interest in Finance). But the mission of ferreting them out and prosecuting those responsible is essential. A well-functioning financial system is based on trust. That is, when we make a bank deposit or purchase a share of stock or a bond, we need to believe that the terms of the agreement are being accurately represented and will be carried out. Economies where property rights are weak and enforcement is unreliable also usually supply less credit to worthy endeavors. That means lower production, lower income, and lower welfare.
imagesIN THE BLOG
Conflicts of Interest in Finance
Financial corruption exposed in the years since the financial crisis is breathtaking in its scale, scope, and resistance to remedy. Traders colluded to rig the foreign exchange (FX) market, where daily transactions exceed $5 trillion, and to manipulate LIBOR, the world’s leading interest rate benchmark (see Chapter 13, Applying the Concept: Reforming LIBOR). Firms have facilitated tax evasion and money laundering. And Bernie Madoff engineered what was arguably the largest Ponzi.
What the Research Tells Us: The SEC, CFTC, FINRADuff & Phelps
It was a record year at the SEC, with 868 enforcement cases, up from 807 in 2015 and 755 the year before that: a reflection of former chair Mary Jo White’s ‘broken windows’ policy, pursuing even minor infractions. Nevertheless, the Trump Presidency’s focus on national security should mean that AML continues to be a priority, and SEC’s examination priorities suggests a number of other areas will see increased activity.
The convergence of non-traditional rivals and heightened global regulation are creating new digital opportunities for banks. To seize the high ground, banks need to think like disruptors and apply modern digital tools, techniques and partnership strategies.
Linguists and psychologists have developed techniques to identify deceptive language and behavior. Why don’t shareholders use these same techniques to evaluate the truthfulness of management and detect financial manipulation?
Discus the development of the fraud examinerforensic accounting pro.pdfMALASADHNANI
Discus the development of the fraud examiner/forensic accounting profession since the 2001
Enron fraud. Discuss applicable standards and the core foundation of the profession.
Solution
Forensic accounting has been pivotal in the corporate agenda after the financial reporting
problems which took place in some companies around the world like Enron. These scandals
resulted in the loss of public trust and huge amounts of money. In order to avoid fraud and theft,
and to restore the badly needed public confidence, several companies took the step to improve
the infrastructure of their internal control and accounting systems drastically. It was this
development which increased the importance of accountants who have chosen to specialize in
forensic accounting and who are consequently referred as “forensic accountants.”
Forensic accounting relies on the fraud triangle to identify weak points in the business systems
and find possible suspects in cases of fraud. It consists of three core concepts which together
create a situation ripe for fraud: incentive, opportunity, and rationalization. People must have the
incentive and opportunity to commit financial fraud, as well as the ability to justify it. Recent
analysis has suggested adding a fourth concept to make a diamond—capability. Just because
someone has the opportunity or incentive to steal does not necessarily mean that they have the
capability to do so. For example, if someone does not understand how to make journal or ledger
entries in the books of accounts, they would not know how to manipulate numbers no matter
what the incentive or opportunity is.
The accounting scandals involving Enron, WorldCom, Global Crossing, and other companies
have put accountants in the public spotlight as never before in their history. After these
accounting scandals, public confidence in the accounting profession has been seriously
undermined. However, the scandals have created business for forensic accountants and
developed opportunities for forensic and investigative accounting. Forensic accountants have
been conducting these activities for quite some time in a quiet professional manner. New laws
and regulations resulting from these scandals will make the role of forensic accountants more
important than ever before in the business world.
Forensic accountants, also referred to as forensic auditors or investigative auditors, often have to
give expert evidence at the eventual trial. All of the larger accounting firms as well as many
medium-sized and boutique firms have specialist forensic accounting departments. Forensic
accountants utilize an understanding of business information and financial reporting systems,
accounting and auditing standards and procedures, evidence gathering and investigative
techniques, and litigation processes and procedures to perform their work. Forensic accountants
are also increasingly playing more proactive risk reduction roles by designing and performing
extended procedures as part of stat.
E-book: How to manage Anti-Money Laundering and Counter Financing of Terroris...Jitske de Bruijne
Financial Institutions continue to face heightened fines and regulatory scrutiny over their AML/CFT Programs. This e-book helps you to manage AML/CFT Programs.
Our endeavour upheld group has more than 50 years of experience working with systematic investment management, and software development. By utilizing machine learning, data science and automation, we enable advisors to manage portfolio risk in near real-time.
CAMS (Certified Anti-money Laundering Specialist)Zabeel Institute
Enhance your knowledge skills & expertise of AML/CFT, along with financial crime detection and prevention professionals. Professionals who earn the Anti-Money Laundering designation position themselves to be leaders in the industry and experience Professional growth. Certified Anti money Laundering Specialist is the Global Gold Standard which is recognized worldwide by employers in both private industry and government. The CAMS certification is recognized and accredited by the US body ACAMS (Association of Certified Anti-money Laundering Specialist). Cams certification Training offered by Zabeel Institute stands out from other Trainings in the Market .
Financial Ethics
Learning Objectives
After completing this chapter, you should be able to:
• Describe the common dilemmas that accountants and financial officers face.
• Consider how commercial conflicts of interest may arise in preparing accounts and financial reports, and
examine whether such conflicts are best dealt with by the government or the marketplace.
• Understand some of the ways companies cheat on financial reports.
• Assess the advantages and disadvantages of insider dealing.
• Explain the problem of rogue trading.
• Describe the various regulations concerning financial practice.
Associated Press/Peter Morgan
7
fie66722_07_c07_165-186.indd 165 3/2/12 9:43 AM
CHAPTER 7Section 7.1 Introduction
Contents
7.1 Introduction
7.2 The Ethics of Accounting
Impartiality
Berle and Means Versus Henry Manne: Two Views of Corporate Corruption
Cooking the Books
Transfer Pricing and Costing
The Ethics of Deception
U.S. Accounting and Reporting History
7.3 Commercial Conflicts of Interest
The Buyer-Beware Principle
Complex Products
Should Customers Do Their Homework?
7.4 Insider Trading
Insider Trading Defined
Examples of Insider Trading
The Free Market Perspective
An Issue of Fairness
Legal Theory of Misappropriation
7.5 Rogue Trading
Example of Rogue Trading: Nick Leeson
What Can Be Done?
7.6 Conclusion
7.1 Introduction
Recently, a steady stream of major financial scandals have rocked the business world. At one
point, Enron (in the United States) was one of the world’s largest utility companies. Within a year,
a massive accounting fraud was uncovered, leading to its bankruptcy. The U.S. communications
company WorldCom was found to have been covering a $3.8 billion fraud, inflating its asset values
to make it look financially healthier than it really was. More recently, the American businessman
Bernard Madoff defrauded some 4,800 clients—including many charities—of $65 billion.
Accountants are trained professionals who are accredited and licensed to provide professional
services concerning the accounts, audits, and reporting of corporations’ finances. Many are mem-
bers of professional organizations, such as the American Institute of Certified Public Accountants,
that have ethical principles or codes of professional conduct that members pledge to adhere
to. Like medical professionals, they are expected to live up to a professional reputation that has
developed over many decades. But innovation in the business world, as well as globalization, has
166
fie66722_07_c07_165-186.indd 166 3/2/12 9:43 AM
CHAPTER 7Section 7.2 The Ethics of Accounting
put increasing pressures on accountants, auditors, and CEOs that can affect their professional
judgment and lead to accounting fraud. Such fraud is costly—in fact, it is estimated to cost the U.S.
economy over $300 billion annually.
In the wake of notable fraud cases such as the ones mentioned earlier, the financial profes-
sion has been under int ...
Car Accident Injury Do I Have a Case....Knowyourright
Every year, thousands of Minnesotans are injured in car accidents. These injuries can be severe – even life-changing. Under Minnesota law, you can pursue compensation through a personal injury lawsuit.
NATURE, ORIGIN AND DEVELOPMENT OF INTERNATIONAL LAW.pptxanvithaav
These slides helps the student of international law to understand what is the nature of international law? and how international law was originated and developed?.
The slides was well structured along with the highlighted points for better understanding .
WINDING UP of COMPANY, Modes of DissolutionKHURRAMWALI
Winding up, also known as liquidation, refers to the legal and financial process of dissolving a company. It involves ceasing operations, selling assets, settling debts, and ultimately removing the company from the official business registry.
Here's a breakdown of the key aspects of winding up:
Reasons for Winding Up:
Insolvency: This is the most common reason, where the company cannot pay its debts. Creditors may initiate a compulsory winding up to recover their dues.
Voluntary Closure: The owners may decide to close the company due to reasons like reaching business goals, facing losses, or merging with another company.
Deadlock: If shareholders or directors cannot agree on how to run the company, a court may order a winding up.
Types of Winding Up:
Voluntary Winding Up: This is initiated by the company's shareholders through a resolution passed by a majority vote. There are two main types:
Members' Voluntary Winding Up: The company is solvent (has enough assets to pay off its debts) and shareholders will receive any remaining assets after debts are settled.
Creditors' Voluntary Winding Up: The company is insolvent and creditors will be prioritized in receiving payment from the sale of assets.
Compulsory Winding Up: This is initiated by a court order, typically at the request of creditors, government agencies, or even by the company itself if it's insolvent.
Process of Winding Up:
Appointment of Liquidator: A qualified professional is appointed to oversee the winding-up process. They are responsible for selling assets, paying off debts, and distributing any remaining funds.
Cease Trading: The company stops its regular business operations.
Notification of Creditors: Creditors are informed about the winding up and invited to submit their claims.
Sale of Assets: The company's assets are sold to generate cash to pay off creditors.
Payment of Debts: Creditors are paid according to a set order of priority, with secured creditors receiving payment before unsecured creditors.
Distribution to Shareholders: If there are any remaining funds after all debts are settled, they are distributed to shareholders according to their ownership stake.
Dissolution: Once all claims are settled and distributions made, the company is officially dissolved and removed from the business register.
Impact of Winding Up:
Employees: Employees will likely lose their jobs during the winding-up process.
Creditors: Creditors may not recover their debts in full, especially if the company is insolvent.
Shareholders: Shareholders may not receive any payout if the company's debts exceed its assets.
Winding up is a complex legal and financial process that can have significant consequences for all parties involved. It's important to seek professional legal and financial advice when considering winding up a company.
DNA Testing in Civil and Criminal Matters.pptxpatrons legal
Get insights into DNA testing and its application in civil and criminal matters. Find out how it contributes to fair and accurate legal proceedings. For more information: https://www.patronslegal.com/criminal-litigation.html
How to Obtain Permanent Residency in the NetherlandsBridgeWest.eu
You can rely on our assistance if you are ready to apply for permanent residency. Find out more at: https://immigration-netherlands.com/obtain-a-permanent-residence-permit-in-the-netherlands/.
PRECEDENT AS A SOURCE OF LAW (SAIF JAVED).pptxOmGod1
Precedent, or stare decisis, is a cornerstone of common law systems where past judicial decisions guide future cases, ensuring consistency and predictability in the legal system. Binding precedents from higher courts must be followed by lower courts, while persuasive precedents may influence but are not obligatory. This principle promotes fairness and efficiency, allowing for the evolution of the law as higher courts can overrule outdated decisions. Despite criticisms of rigidity and complexity, precedent ensures similar cases are treated alike, balancing stability with flexibility in judicial decision-making.
RIGHTS OF VICTIM EDITED PRESENTATION(SAIF JAVED).pptxOmGod1
Victims of crime have a range of rights designed to ensure their protection, support, and participation in the justice system. These rights include the right to be treated with dignity and respect, the right to be informed about the progress of their case, and the right to be heard during legal proceedings. Victims are entitled to protection from intimidation and harm, access to support services such as counseling and medical care, and the right to restitution from the offender. Additionally, many jurisdictions provide victims with the right to participate in parole hearings and the right to privacy to protect their personal information from public disclosure. These rights aim to acknowledge the impact of crime on victims and to provide them with the necessary resources and involvement in the judicial process.
ALL EYES ON RAFAH BUT WHY Explain more.pdf46adnanshahzad
All eyes on Rafah: But why?. The Rafah border crossing, a crucial point between Egypt and the Gaza Strip, often finds itself at the center of global attention. As we explore the significance of Rafah, we’ll uncover why all eyes are on Rafah and the complexities surrounding this pivotal region.
INTRODUCTION
What makes Rafah so significant that it captures global attention? The phrase ‘All eyes are on Rafah’ resonates not just with those in the region but with people worldwide who recognize its strategic, humanitarian, and political importance. In this guide, we will delve into the factors that make Rafah a focal point for international interest, examining its historical context, humanitarian challenges, and political dimensions.
Military Commissions details LtCol Thomas Jasper as Detailed Defense CounselThomas (Tom) Jasper
Military Commissions Trial Judiciary, Guantanamo Bay, Cuba. Notice of the Chief Defense Counsel's detailing of LtCol Thomas F. Jasper, Jr. USMC, as Detailed Defense Counsel for Abd Al Hadi Al-Iraqi on 6 August 2014 in the case of United States v. Hadi al Iraqi (10026)
In 2020, the Ministry of Home Affairs established a committee led by Prof. (Dr.) Ranbir Singh, former Vice Chancellor of National Law University (NLU), Delhi. This committee was tasked with reviewing the three codes of criminal law. The primary objective of the committee was to propose comprehensive reforms to the country’s criminal laws in a manner that is both principled and effective.
The committee’s focus was on ensuring the safety and security of individuals, communities, and the nation as a whole. Throughout its deliberations, the committee aimed to uphold constitutional values such as justice, dignity, and the intrinsic value of each individual. Their goal was to recommend amendments to the criminal laws that align with these values and priorities.
Subsequently, in February, the committee successfully submitted its recommendations regarding amendments to the criminal law. These recommendations are intended to serve as a foundation for enhancing the current legal framework, promoting safety and security, and upholding the constitutional principles of justice, dignity, and the inherent worth of every individual.
1. 1
Foreword
The 2017 Regulatory and Examination Priorities Letter1, published by FINRA on January 4th, is a fitting
reminder of the resolve of Regulators to better execute their mission of investor protection and market
integrity. Although the Libor and FX scandals might seem like distant memories, Regulators have
continued on the war path. We would like to share some thoughts based on work we have been involved
in last year. The idea is to help lawyers and banks have a grown-up discussion and be prepared if, or
rather more likely, when, the Regulator knocks at the door.
Libor and FX regulatory investigations
When one speaks about regulatory investigation, news’ headlines come to mind and two major scandals
stand out in the fixed-income space namely the Libor scandal first and secondly, the Forex scandal.
The Libor scandal: in the course of 2012 the SFO (Serious Fraud Office) opened criminal investigations into
manipulation of interest rates. Since then the regulators of 10 different countries on 3 different continents
are investigating and around 20 major banks have been named in investigation and court cases. Also there
were class action lawsuits filed by U.S. municipalities (April 2012) and U.S. homeowners (October 2012) to
follow. As a result there have been fines from CFTC (Commodity Futures trading commission), DoJ
(Department of Justice), FCA (Financial conduct authority)… with a record fine - for interest related cases
- of USD 2.5 Bln towards Deutsche Bank in April 2015 and criminal matters against 2 individuals
The forex scandal: it involves front running client orders and rigging the FX benchmark WM/Reuters
rates. At least 15 banks disclosed investigations by regulators and about 40 employees have been
suspended, on leave, fired. As a result 5 banks were fined USD 1.7 Bln on12th November 2014 - for failure
in risk management around client confidentiality, conflict of interest between 2008 & 2013 - by the FCA
and USD 1.4 Bln by the CFTC on the same day for attempted manipulation. Also the DoJ issued felony
charges and fines consequently in 2015. Last but not least there were criminal proceedings with the one
and only known arrest in relation to the scandal
After these well publisiced scandals, the expectation was that other asset classes and markets would
follow. It is surprising, in some ways, that other markets did not come under scrutiny sooner. On the other
hand, the timeline and reaction function of regulators is different and understandably slower than that of
markets. Last year, we have been involved in a regulatory competition investigation and are aware of a
market manipulation investigation in emerging markets involving a US Regulator. Given the new powers
of the FCA, in competition matters, we believe this should be rightly on the radar screen of banks in the
UK.
1 http://www.finra.org/industry/2017-regulatory-and-examination-priorities-letter
Regulatory competition investigations
FinGuard Advisory LLP 16/01/2017 Number 4
2. 2
The dilemma faced by banks under investigation
Given the practices and culture that were pervasive in the financial markets pre the global financial crisis,
it was only a matter of time before other markets / asset classes / business areas come under the spot light
and attract the attention of Regulators. Given the arcane nature of markets and the wrath and success of
Regulators, it is at times banks themselves who blow the whistle. Banks understand very well the notion
of first mover advantage. It is no surprise that once banks come across any malpractices during the course
of internal investigations, they are keen to come clean and spill the beans. The challenge is then for the
other banks who had the misfortune to have been embroiled in these cabals. For such banks, the dilemma
is two-fold. The Regulator most likely knows more about the misdemeanors of their staff than they do at
this early stage. Trying to refute it and plead ignorance – an understandable and instinctive reaction from
senior management – is both futile and a non-starter. More importantly, the challenge is to ensure that
whatever findings they come up with, as a result of their investigation, is deemed as “adding value” to the
Regulator and hence hopefully help their plea for leniency.
Regulator’s approach
The Regulator’s approach is characterised by two interesting positions:
i) The behaviour and actions of the bankers under scrutiny will be judged / assessed on the basis
of current norms and standards instead of those prevailing at the time of the alleged offenses.
Moreover, the fact that everybody else was behaving in that way at that time does not make it
acceptable.
ii) Intent to do harm is sufficient. Evidence of successful attempts or profit from such actions is
irrelevant and does not matter. In other words, as long as it can be demonstrated that there was
intent to manipulate a market, that is sufficient. It does not matter whether the parties involved
were successful or actually benefited from such actions; neither is the quantum relevant.
Banks’ approach
From the banks’ point of view, although it might be tempting to shift the blame to the individuals
concerned and try to distance the senior management and the bank from such malpractices, there is a limit
to pleading ignorance. Beyond a certain point, it becomes senior management’s incompetence and failure
to exercise due control and oversight. It is almost “damn” if they do and “damn” if they don’t.
Understandably, the bank and the senior management would like to dissociate themselves from the
individuals involved in the wrong doing. They would like to demonstrate that such actions were not
institutional and not a product of the bank’s culture and business practices. The section below describes
some of the infrastructure that can help the bank achieve this objective.
3. 3
Get out of jail card: Prevention approach
The senior management would like to demonstrate that they could not have known of the improper
activities and behaviour of the staff in question. In reality what they need is to demonstrate that they had
put in place the proper process and procedures, risk, compliance and governance structures. These should
be in line with at least the regulatory requirements and ideally industry best practices. We provide below
a broad overview of the required architecture.
i) Record keeping and management information
Banks are notorious for having systems which “do not talk to each other”. Information is often
stored in silos and do not provide an overarching picture. The information should also be
retrievable so that when asked, they can access and produce the required information to show
that the information was being monitored.
ii) Compliance
Despite the significant increase in Compliance staff, it remains a regulatory tick box exercise. It
needs to evolve to serve the business and improve business efficiency and protect against
reputational risk.
iii) Risk
Risk reporting suffers from an overload of data and a lack of meaningful interpretation to give
senior management the necessary comfort that the business is being run securely.
iv) Governance
The fish rots from the head goes the saying. When senior hires do not perform as expected,
what are the escalation procedures and remedial process? Most market manipulations and
misdemeanors happen as a consequence of a “digging a hole mentality”.
Undoubtedly, the components of this architecture are already in place. However, they were not designed
to cater for the challenges of a potential competition investigation. The FX scandal has led to the use of
snoop analytics to monitor real time trade and communications in the FX markets. Such practices will
become increasing mainstream to satisfy compliance and market surveillance requirements. The overlay
to ensure the necessary quality assurance is a clever combination of existing technology and markets
intelligence. One of FinGuard’s senior associate is currently involved in such a market conduct
surveillance role. As the technology is still in its infancy, it tends to give too many false positives; hence
the need for the expertise and judgement of market practitioners.
UK FCA’s new competition powers & Senior Managers Regime
Talking to some lawyers, we gather that banks are waking up to the new powers of the FCA in
competition matters. What does a regulator do when he gets a new big stick?
Banks who can demonstrate that they have the adequate infrastructure in place should see it as a first
mover advantage. We would be happy to assist in approaching jointly banks for a preliminary discussion
to conduct such a review. In fact we are hearing through the grapevine that some banks are talking about
4. 4
This newsletter has been prepared by FinGuard advisors, all rights
reserved. The information contained is being provided freely and is
purely informational. It does not contain definitive advice
Please contact Guillaume CHEMIN for any follow-up
guillaume.chemin@finguard.co.uk
closing down some profitable business units, especially in the algo space, because the senior manager is
refusing to sign on the dotted line.
Talk of such a prevention approach, for when the regulator knocks at the door, is now less likely to fall on
deaf ears. No senior manager would want to play whack-a-mole or rather “whack-a-banker” when the
Regulator has a new big stick.
Update on a case we worked on in 2014:
We worked on a litigation involving a Structured note linked to inflation in
Argentina and the role of the Calculation Agent. In February 2015 Justice
Burton2 returned a judgement in favour of the Defendant. The Claimant
appealed. The Appeal Court3, in December 2016, dismissed the appeal
(three / nil). Jaya Patten was mentioned in the conclusion of Lord Justice
Hamblen.
2 www.bailii.org/cgi-bin/markup.cgi?doc=/ew/cases/EWHC/Comm/2015/463.html&query=metlife&method=boolean
3 http://www.bailii.org/ew/cases/EWCA/Civ/2016/1248.html