Compliance
Summary Of Miscreants In The Global Wealth Management Industry

Almost every day now, firms are punished or threatened with action over issues such as benchmark-rigging and anti-money laundering lapses. Here is a summary of the latest cases.
The “naughty corner” for miscreant banks and other wealth
management institutions is getting crowded and also highlights
why compliance is such a major spending and recruitment issue for
firms these days. Charges of interbank rate fixing, lax
anti-money laundering controls and questionable pricing policies
have been levelled - and in some cases punished heavily.
Some of the failings that have been punished go back several
years and as of the time of writing, firms have moved, or say
they have done so, to clean up their act. Some firms making the
headlines are aware of the work they must embark upon to improve
their reputation. These firms must engage as openly as they can
with clients (and for that matter, constructive critics such as
this publication). Other banks have added to risk management
teams in recent months, and no doubt will continue to do so.
By way of a guide to some of the problems that have hit these
firms, here is a summary of the main institutions. Not all of the
cases mentioned are complete and could be subject to further
action. The summary here is in no way a comment by this
publication as to the specific responsibility of the firms
concerned.
We also invite readers who want to comment on what is being done
to improve compliance to share their thoughts with us at this
publication, and they can email the editor at
tom.burroughes@wealthbriefing.com
We urge readers to view Compliance Matters, a publication from
the publisher of this website that was launched just under a year
ago. To register, click here.
A report by Kinetic Partners, a consultancy advising financial
firms about compliance and regulation issues, reported today that
the UK's financial regulator, the Financial Conduct Authority,
handed out a total of £506.94 million ($840.3 million) in
penalties to UK firms in 2013. Individuals were punished by a
total of £5.42 million last year.
Standard Chartered
The bank reached a $300 million settlement with US authorities
over defective anti-money laundering controls. It also faces
tighter controls on certain Hong Kong and United Arab Emirates
clients. The UK-listed bank said it had reached a final
settlement with the New York State Department of Financial
Services regarding deficiencies in the anti-money laundering
transaction surveillance system at its New York branch.
The bank must suspend dollar clearing through its New York branch
for high-risk retail business clients at its SCB Hong Kong
subsidiary; exit high-risk client relationships within certain
business lines at its branches in the United Arab Emirates; it
must not accept new dollar-clearing clients or accounts across
its operations without prior approval from DFS.
The firm was fined $25 million for improperly altering a report on anti-money laundering and sanctions compliance by Bank of Tokyo Mitsubishi. The New York State Department of Financial Services has also banned PwC from accepting consulting work at financial institutions regulated by the organisation for two years.
Lloyds Banking Group
It has been fined $370 million by UK and US authorities for the
manipulation of LIBOR and other benchmark failings. The fine
includes $105 million by the Commodity Futures Trading
Commission, approximately $178 million by the Financial Conduct
Authority and $86 million from the US Justice Department. The
manipulation of submissions covered by the settlements took place
between May 2006 and 2009. Lloyds said in a statement that the
individuals involved have either left the group, been suspended
or are subject to disciplinary proceedings.
BNP Paribas
France's largest bank was fined $8.97 billion and temporarily
lost the ability to handle dollar-denominated business in the US
(clients will need to use a third-party bank) during 2015. The
bank pleaded guilty to violations of US sanctions against Sudan,
Cuba and Iran. The issue has raised concerns that US authorities
are treating such cases as "shakedown" operations to fill
government coffers (as argued by The Economist magazine
this week.) The fines have soured US-French relations.
Credit Suisse
The bank pleaded guilty to conspiracy to help US citizens evade
taxes and agreed to pay a $2.815 billion settlement with US
authorities, a move that the Swiss bank said will not affect its
licences or business and operational capabilities.
Invesco Perpetual
The Financial Conduct Authority in the UK fined Invesco Perpetual
£18.6 million ($31.3 million) for exposing investors to greater
levels of risk than they had been led to expect. Between May 2008
and November 2012, Invesco Perpetual did not comply with
investment limits designed to protect consumers by minimising
their exposure to risk. The FCA said that the rules designed to
limit the risks to investors were broken on 33 occasions across
15 funds, resulting in losses of £5 million.
Standard Chartered
The Monetary Authority of Singapore took "appropriate supervisory
actions" against the bank following it was found that bank
statements of some private banking clients had been stolen. The
issue pertained to a report by Standard Chartered in December
2013 that around 560 of its private banking clients' February
bank statements had been stolen at its third-party service
provider, Fuji Xerox Singapore. Fuji Xerox had been the
designated printer of the bank's statements for private banking
customers. The police alerted Standard Chartered of the
theft.
Standard Bank
The Financial Conduct Authority fined the UK subsidiary of South
Africa's Standard Bank Group £7.6 million ($12.6 million) for
failings relating to its anti-money laundering policies and
procedures over corporate customers connected to politically
exposed persons. The FCA said Standard Bank had failed to take
reasonable care to ensure that all aspects of its anti-money
laundering policies were applied appropriately and consistently
to its corporate customers connected to PEPs between 15 December
2007 and 20 July 2011.
Royal Bank of Scotland
The US Department of the Treasury’s Office of Foreign Assets
Control announced a $33 million agreement - as part of a combined
$100 million settlement - with the Royal Bank of Scotland to
settle the UK-listed firm’s potential liability for violations of
US sanctions regulations. The settlement resolved OFAC’s
investigation into apparent violations by RBS of US sanctions
programs relating to Iran, Sudan, Burma and Cuba. From 2005 to
2009, RBS engaged in payment practices that interfered with the
implementation of US economic sanctions by financial institutions
in the UK.
Lloyds Banking Group
The UK bank was fined a record £28 million ($45.8 million) by the
Financial Conduct Authority for "serious failings" relating to
its sales incentives, which resulted in a culture of mis-selling
among advisors. The FCA said it was the largest ever fine imposed
by it or its predecessor the Financial Services Authority for
retail conduct failings.
SAC Capital
The $15 billion hedge fund run by Steve Cohen, one of the biggest
names in the global hedge fund business, will forfeit its
investment advisory business and pay a total fine of $1.8 billion
after pleading guilty to insider trading charges, the US
Department of Justice has announced. The settlement brings to an
end a seven-year-long investigation by US prosecutors and fuels
months of speculation as regards whether Cohen might turn the
remainder of his business into a family office-type
structure.
Rabobank
Rabobank, the Netherlands bank, agreed to pay more than $1
billion in criminal and civil penalties to settle investigations
by US, UK and other regulatory authorities into its role in
manipulating global benchmark interest rates. Rabobank’s chief
executive, Piet Moerland, stepped down immediately after the
announcement.
The settlement with Rabobank is the second largest agreement
after the $1.5 billion penalty imposed on UBS related to the
manipulation of benchmark rates, which help determine the
borrowing costs for trillions of dollars of mortgages, business
loans, credit cards and other financial products. As part of the
settlement, Rabobank will avoid criminal charges as long as it
continues to cooperate with investigators. The firm will pay a
$325 million criminal penalty to the US Justice Department and
$475 million to the Commodity Futures Trading Commission, as well
as $170 million to the UK’s Financial Conduct Authority and about
$96 million to the Dutch authorities.
HSBC
A unit of the bank was ordered to pay $2.46 billion after a US
court ruled that one of the bank’s subsidiary companies along
with three of its senior executives had made false statements
that inflated the company’s share price. The ruling was against
credit card and mortgage lender Household International, acquired
by London-based HSBC in March 2003. Household - now known as HSBC
Finance Corp - is believed to have made misleading statements
that inflated the company’s share price. When contacted by this
publication, HSBC stated that the matter had been noted in its
filing for some time and that this was the next legal step in “an
11-year case.”
JP Morgan
UK and US regulators have fined JP Morgan a total of $920 million
for “serious failings” relating to trades carried out by the
firm’s chief investment office and disclosed last year.
The bank has agreed to settle actions brought by the US
Securities and Exchange Commission, who imposed a financial
penalty of $200 million and required the firm to admit
wrongdoing; the Office of the Comptroller of the Currency, who
imposed a financial penalty of $300 million, and the Federal
Reserve, who imposed a financial penalty of $200 million.
In addition, the Financial Conduct Authority fined the bank $220
million.
Several months earlier, the Financial Conduct Authority fined JP
Morgan International Bank a total of £3.08 million (around $4.6
million) for systems and controls failings at its wealth
management business. The failings persisted for two years and
were not corrected until the FCA brought them to the firm’s
attention in the course of its thematic review into wealth
management firms and the suitability of their advice. The FCA
identified a number of issues with JPMIB’s processes and an
inability to demonstrate client suitability from its client
files.
Among the issues identified by the FCA were: client files which
were not kept up to date or that did not retain important client
suitability information, a computer-based record system that did
not allow sufficient information to be retained, suitability
reports that failed adequately to contain a statement of the
client’s demands and needs, and the fact that communications to
confirm client suitability profiles were not always sent to the
client (as required by JPMIB’s own policy).
Aberdeen Asset Management
The Financial Conduct Authority fined Aberdeen Asset Managers and
Aberdeen Fund Management £7,192,500 ($11,200,328) for failing to
protect client money.
The FCA said in a statement that the firm had failed to
adequately protect client money placed in money market deposits
with third party banks between September 2008 and August
2011.
Guaranty Trust Bank
The Financial Conduct Authority fined Guaranty Trust Bank
£525,000 ($814,196) for failing to have sufficient anti-money
laundering controls for high risk customers between May 2008 and
June 2010, at the height of the financial crisis. The regulator
said the failings are “particularly serious” because they
affected customers based in countries associated with a higher
risk of money laundering, bribery or corruption, including
accounts held by politically exposed persons.
GT Bank, a subsidiary of Nigerian Guaranty Trust Bank, opened an
office in London in May 2008 offering retail and wholesale
banking products and services to private, corporate and
institutional clients. Its controls were reviewed in 2010 when
the FCA’s predecessor, the Financial Services Authority,
conducted a review into banks’ management of money-laundering
risks.
Sesame Bankhall
The UK’s Financial Conduct Authority fined Sesame Bankhall
£6,031,200 ($9.28 million) for two sets of failings: failing to
ensure that investment advice given to its customers was
suitable, and failings in the systems and controls that governed
the oversight of its appointed representatives. The penalty is
made up of a £245,000 fine for Sesame’s advice failings in
relation to keydata life settlement products, and a £5,786,200
fine for systems and controls weaknesses across its investment
advice business. All of the failings relate to Sesame’s oversight
of its ARs, which are individuals or firms that draw their
authorisation from a principal - in this case, Sesame - with the
principal ultimately accountable to the regulator for poor
practice.
UBS
The Zurich-headquartered bank agreed to pay around SFr1.4 billion
(around $1.53 billion) in fines and related payments to the US,
Swiss and UK authorities to settle investigations that
Switzerland’s largest bank manipulated interbank interest rates.
The UK's Financial Services Authority said that UBS' offences
were widespread and "do not make for pretty reading". The FSA
said it had found at least 2,000 requests for inappropriate
interest rate submissions, as well as a number of emails and
other communications about the issue. As part of the proposed
agreement with the US Department of Justice, UBS Securities Japan
Co has agreed to enter a plea to one count of wire fraud relating
to the manipulation of certain benchmark interest rates,
including Yen LIBOR. Statements from other regulators were due at
the time of this update going to press.
In a separate case announced a few days ago - 11 August 2013 -
the bank agreed to pay SFr110.5 million ($119.9 million) to
settle complaints of investors who had sued the bank in a
mis-selling case of Lehman Brothers structured products. Lehman
Brothers, a prominent producer of structured products, went
bankrupt in September 2008. The face value of these products
collapsed. "UBS is pleased to have resolved this legacy
litigation matter arising out of the 2008 financial crisis. UBS
agreed to the settlement to avoid the cost and uncertainty of
continued litigation. The full cost of the settlement is covered
by litigation provisions established by UBS in 2012 and in prior
periods," UBS said.
Societe Generale
Japan’s Financial Services Agency in October ordered the
suspension of Societe Generale's Japanese private banking
business, after discovering “serious violations of laws and
regulations”, during an inspection.
The FSA took administrative action against the French lender,
after “serious problems that may impede sound and appropriate
business operations were recognised, regarding the governance
system, the compliance system, and the customer protection
management system”.
SocGen had to suspend most of its private banking division, which
meant not accepting new money and soliciting for new money,
between 23 October 2012 to 22 November 2012. SocGen had also to
suspend most of its trust business in the corporate division
between 23 October 2012 to 22 January 2013, which the bank said
is a non-core asset.
The French banking giant has also been reprimanded by Hong Kong's
Securities and Futures Commission for lack of internal controls
of its wealth management activities in its Hong Kong branch,
leading it to reimburse customers more than $11 million (amounts
are in US dollars unless otherwise stated). The SFC raised
concerns that, in over 3,000 transactions undertaken between
April 2003 and January 2006, customers of the bank's Hong
Kong-based wealth management activities paid or received a
different price for over-the-counter products, from the actual
price transacted for them by SocGen, with the difference, or
margin, being retained by the bank as a fee.
Barclays
UK-listed Barclays has incurred penalties from US and UK
authorities totalling £290 million (around $455 million) for
misconduct relating to the inter-bank interest rate market. Chief
executive Bob Diamond, a high-profile character renowned for his
large bonuses and hard-charging style in running the bank, has
resigned. Lord (Adair) Turner, chairman of the Financial Services
Authority, the UK regulator, branded the LIBOR-rigging as a huge
blow to London’s reputation as a financial capital. The FSA is
probing other banks; a letter sent to the New York Federal
Reserve, and recently published, mentioned Lloyds Banking Group
as a firm that is possibly implicated. The US Justice Department
is carrying out a criminal investigation into the rate-rigging
affair. Lloyds has declined to comment on the claims that it was
involved.
HSBC
HSBC agreed to make a total payment of $1.92 billion to settle a
US criminal investigation over breaches of anti-money laundering
and sanctions laws, said to be the biggest penalty ever paid by a
bank for such transgressions.
The UK/Hong Kong-listed HSBC created dramatic headlines earlier
in the year when its global compliance boss, David Bagley,
resigned in front of a US Senate Committee that was grilling HSBC
executives and other persons about a report claiming widespread
shortcomings in how HSBC operated anti-money laundering controls.
It was said that money laundering failings facilitated monies for
drug gangs, rogue states such as Iran, and terrorists.
Coutts
The UK-based private bank was fined £8.75 million (around $13.8
million) by the FSA, the sixth-largest fine ever handed out by
the regulator, for failing to take reasonable care to establish
and maintain effective anti-money laundering systems and controls
relating to high-risk customers, including “politically exposed
persons”.
Merrill Lynch
The Bank of America-owned firm was fined $2.8 million for
supervisory failures that led to it overcharging clients $32
million in unwarranted fees. The US Financial Industry Regulatory
Authority also imposed the fine on the US securities firm for
failing to provide certain required trade notices. Merrill Lynch
repaid the nearly 100,000 affected clients with interest.
UBS
The Irish Central Bank fined UBS' international life insurance
division in relation to various breaches of a new act introduced
to protect the financial system from money laundering and
terrorist financing. The Central Bank of Ireland and UBS agreed
on 19 June that the latter will pay a financial penalty of
€65,000 (around $81,700) for failing to comply with specific
requirements of the Criminal Justice Act 2010.
The life insurer, part of the Swiss wealth management and banking
group, was not accused of terrorist financing or money laundering
as such. Among the breaches were failing to instruct staff and
directors about the new directives promptly after the Act had
come into force in July 2010. The firm had also failed to adopt
adequate written policies and procedures in relation to the
identification and reporting of suspicious transactions, the
central bank said in a statement. The central bank's anti-money
laundering and counter terrorist financing supervisory unit
identified these breaches during an inspection of the firm
carried out in December 2010.
Standard Chartered
Standard Chartered agreed with authorities in New York to pay a
civil penalty of $340 million to settle charges over transactions
linked to Iran. "The New York State Department of Financial
Services and Standard Chartered Bank have reached an agreement to
settle the matters raised in the DFS Order dated 6 August 2012.
The parties have agreed that the conduct at issue involved
transactions of at least $250 billion,” according to a statement
issued by Benjamin Lawsky, New York Superintendent of Financial
Services.
In December 2012, the bank agreed a $327 million settlement with
US authorities for rules violations relating to a period between
2001 and 2007.
“The settlements are the product of an extensive internal
investigation that led the bank voluntarily to report its
findings concerning past sanctions compliance to these US
authorities, and nearly three years of intensive cooperation with
regulators and prosecutors,” it said. “Under the terms of the
OFAC Settlement Agreement, the Deferred Prosecution Agreements
with the Department of Justice and the District Attorney’s
Office, and the Cease & Desist Order and Order of Assessment of a
Civil Money Penalty with the Federal Reserve, no further action
will be taken against Standard Chartered by these authorities if
it meets the conditions set out in the agreements,” it said.
Wells Fargo
The Securities and Exchange Commission has charged the firm's
brokerage firm and a former vice president for selling products
tied to mortgage-backed securities without fully understanding
their complexity or disclosing the risks to investors. Wells
Fargo agreed to pay $6.5 million to settle after the SEC found it
relied excessively on rating agencies when selling products. The
money will be placed into a fund for the benefit of harmed
investors. The products were sold by Minneapolis-based Wells
Fargo Brokerage Services (now Wells Fargo Securities), between
January 2007 and August 2007.
BlackRock
The Financial Services Authority fined BlackRock Investment
Management (UK) £9.5 million ($15.3 million) for failing to
protect client money adequately.
Nikolai Battoo
The US Securities and Exchange Commission froze the US-based
assets of an asset manager and two of his companies for
fraudulently proclaiming to investors a track record of
“exceptional risk-adjusted returns”, when in fact “particularly
heavy losses” were incurred in 2008. According to the SEC,
Nikolai Battoo claimed to manage $1.5 billion on behalf of
investors globally, $100 million of which was on behalf of
US-based investors. The losses he suffered in 2008 were due to
his investments in the Bernard Madoff Ponzi scheme - in which
several Battoo-managed hedge funds were heavily invested - and a
failed derivative investment