Compliance

Updated Summary Of Miscreants In Private Banking, Wealth Management

Tom Burroughes Group Editor London 12 December 2013

Updated Summary Of Miscreants In Private Banking, Wealth Management

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.

Updated for Royal Bank of Scotland, Lloyds 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, such as Barclays’ misbehaviour over the interbank interest rate rigging affair, 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 recently, most obviously HSBC (anti-money laundering) and Barclays (LIBOR rigging) 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). In the case of Barclays, for example, it has recruited top talent such as former UK Financial Services Authority chief executive Hector Sants to head up its efforts to improve compliance. 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

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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 U.

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 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 eleven 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 UK Financial Conduct Authority fined the bank $220 million.

Several months earlier, the UK's 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 has 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 programme.

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