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Probes Reveal Central, US-Based, International Banks All Have Sticky Fingers (#GotBitcoin?)

The news marks the second time this year that a son of a former African president has been named in an investigation involving defrauding his country’s central bank. In March, Angolan prosecutors said José Filomeno dos Santos, a son of the country’s long-term leader José Eduardo dos Santos, was a suspect in an illegal transfer of $500 million from the central bank to the U.K. The funds were eventually frozen by U.K. authorities and returned to Angola. Mr. Filomeno dos Santos has said he is cooperating with the investigation. Probes Reveal Central, US-Based, International Banks All Have Sticky Fingers

The son of the former president, the former central bank governor and 15 officials are under investigation

Update: 10-4-2081

Officials in Angola have charged four men in connection with an alleged plot that would have been one of the biggest of its kind.

An accountant walked up to a teller at a suburban London branch of HSBC Holdings PLC and asked to transfer $2 million to Japan. The teller pulled up the account and stared at her screen. There was $500 million in the account.

After asking the accountant some questions, she told him she couldn’t make the transfer. Then she filed a report to her superiors.

HSBC quickly found out where the money had come from. Three weeks earlier, in mid-August of 2017, officials at the central bank of Angola had sent $500 million of the country’s reserves to a company registered to the accountant’s modest storefront office between a cafe and barber shop in a gritty London neighborhood.

Authorities in Angola now allege the $500 million transfer was illegal, part of a convoluted plot to defraud the southern African country in the final weeks of President José Eduardo dos Santos’s 38-year rule. If Angolan prosecutors are right, the HSBC teller had helped thwart one of the biggest attempted bank heists ever.

Investigators unraveling the transaction for Angola have identified a cache of forged bank documents and an “Ocean’s Eleven”-style cast of characters, including a smooth-talking Brazilian based in Tokyo and a Dutch agricultural engineer. Their alleged plan, said Angolan government officials in court documents and interviews with The Wall Street Journal, was to siphon fees and cash from the central bank while pretending to set up a $35 billion investment fund.

The group convened in glamorous spots in London, a coastal resort in Portugal and Angola’s capital, Luanda, with at least one meeting attended by President dos Santos. The money trail they left led investigators to international banks, shell companies and a Japanese firm whose mission is described on its website as “assets liberation.”

“One looks at this and thinks, ‘Wow, what’s going on here?’” says José Massano, Angola’s new central-bank governor, who is trying to piece together how his bank almost lost a chunk of its foreign-exchange reserves. “It is the kind of thing that shouldn’t really happen.”

Last month, prosecutors in Angola announced a variety of criminal charges against a son of Mr. dos Santos, the former central-bank governor and two others in relation to the alleged fraud. In the U.K., Angola has sued four men, including the Brazilian and the Dutch engineer, to recover €25 million the central bank paid to set up the multibillion-dollar fund, which never materialized.

The defendants in the U.K. civil case deny wrongdoing and say they did legitimate work on an investment fund, under contract, for which they received fees. After being named a suspect by Angola prosecutors in March, Mr. dos Santos’s son said he is cooperating with the investigation, and the former central-bank governor couldn’t be reached for comment. One of the other two men charged denied wrongdoing; the other couldn’t be reached for comment.

Angola’s lawyers say the country may have fallen victim to a decades-old type of get-rich-quick scheme, typically used to defraud individuals or companies, not sovereign states. Investors are told they can make huge returns through a private market in “bank guarantees.” There is no such market, and the U.S. Treasury Department and Securities and Exchange Commission have warned that such offers are always fraudulent.

This account of the case is based on interviews with Angolan officials, bankers, people involved in the legal cases and documents related to the U.K. lawsuit, including sworn statements and a judicial ruling.

In June of last year, a letter marked “confidential” arrived at Angola’s finance ministry for then-President dos Santos, 76 years old, who was preparing to step down after elections that August. Angola was reeling from double-digit inflation, and its currency had plunged since the 2014 oil bust.

The letter, bearing a BNP Paribas SA logo and the signature of the French bank’s chairman, made a compelling proposal. BNP Paribas and other European banks would help Angola create a $35 billion fund, refinance debt and get hard currencies for imports.

The letter named two deal coordinators: Hugo Onderwater, a Dutch agricultural engineer living in Portugal, and Jorge Pontes Sebastião, a childhood friend and business partner of President dos Santos’s son. Mr. Pontes, 40, a slim man whose bodyguard carries his briefcase to meetings, was until recently president of an Angolan bank; Mr. Onderwater, 55, tall and sandy-haired, has a business converting waste to energy, according to U.K. court filings by the two men. The two had met in 2016 to discuss financing for an Angolan government food-quality agency, then broadened the idea into an Angola investment fund, according to a court statement by Mr. Pontes.

Days after the letter arrived, Angola’s finance minister and central-bank governor flew to a meeting in Cascais, near Lisbon. The president’s son, José Filomeno dos Santos, then in charge of Angola’s sovereign-wealth fund, came with them to represent the state, according to a U.K. court filing. His father had approved looking into the project, according to Mr. Pontes’s statement.

In a seaside hotel, Mr. Onderwater, the Dutch engineer, and Mr. Pontes presented slides for a new fund to help diversify Angola’s economy, to be managed by a “qualified trust company” in London, according to excerpts from the presentation in U.K. court documents. A slide listed banks said to be supporting the project, including the European Central Bank.

The ECB says it was never involved in the project, and BNP Paribas says the letter with its logo and chairman’s signature was forged.

Mr. Onderwater later told the U.K. court the banks mentioned were merely examples of possible participants, and that he only saw the BNP Paribas letter during court proceedings.

Angola’s finance minister, Archer Mangueira, was skeptical of the plan. His department questioned the experience of the two deal coordinators and wondered about the project’s “true developers.”

Nevertheless, in July of last year, the central-bank governor, Valter Filipe da Silva, signed an agreement with Mr. Pontes to set up the fund.

That same month, the central bank started transferring €24.85 million ($28.9 million) from its Commerzbank AG account in Frankfurt to an account of Mr. Pontes at Banco Comercial Português SA in Lisbon, for fees due under the agreement, U.K. court documents show.

Mr. Onderwater received €5 million of that money, using some to buy property in Lisbon and rural Devon, England, investigators for the Angolan finance ministry found.

Another €2.4 million went to a Tokyo company called Bar Trading, headed by another alleged participant in the plan, 51-year-old Brazilian Samuel Barbosa da Cunha. His role was to act as “trustee” of Angola’s $500 million seed money for the new fund, in charge of obtaining the “bank guarantees” and financial instruments that were supposed to transform the country’s money into $35 billion, according to Mr. Pontes’s testimony and other U.K. court filings.

Mr. Pontes told the U.K. court Mr. Barbosa was brought into the deal by Mr. Onderwater, a claim Mr. Onderwater denies. Lawyers for Mr. Onderwater said recently in a written statement that the bank guarantee was “solely an internal Angolan matter.”

Bald and hulking, Mr. Barbosa described himself as an expert in buying and selling such guarantees on his company website and in correspondence with clients reviewed by the Journal. His LinkedIn biography says he has 30 years of financial experience and an economics doctorate from Boston University. The school’s library has no record of a dissertation, and a spokeswoman for the school couldn’t confirm his attendance or a degree after searches by his name, hometown and birthdate.

At the end of July 2017, Mr. Barbosa headed for London. First, he touched down in Riga, Latvia, where he boasted to a friend that he was working on a big deal with Angola’s central bank, the friend says.

Mr. Barbosa and the friend had teamed up before, persuading retirees in Florida and Canada and an Australian company to invest in bank guarantees promising up to 550% monthly returns, according to people who gave them money and documents they provided to those people, which were reviewed by the Journal. A representative of the Australian company filed complaints about the friend and Mr. Barbosa to U.K. authorities, alleging fraud, according to the documents.

U.K. regulators declined to comment. Mr. Barbosa didn’t respond to requests for comment, and the friend denied working with Mr. Barbosa or any involvement in the alleged fraud.

One day in August of last year, Messrs. Onderwater and Pontes sent instructions to the central-bank governor to transfer $500 million to the trustee, Mr. Barbosa, according to evidence cited by the U.K. court. They provided the details of an HSBC account of a company called Perfectbit Ltd., registered to the London accountant’s storefront office and listed on Bar Trading’s website as an overseas subsidiary.

Two days later, central-bank officials entered Perfectbit’s account details into the Swift network, a bank-owned consortium that handles millions of daily payment instructions. The money moved from the central bank’s Standard Chartered PLC account in London to Perfectbit’s HSBC account. The transaction didn’t prompt any extra checks by either bank, people familiar with the matter say.

“There is a hole in the international finance system that allows for transfers to be made with minimal information,” says Shane Shook, a cybersecurity consultant.

The central bank’s Swift message code indicated—inaccurately—that the money was for intrabank business with HSBC rather than headed to an HSBC customer, according to bank documents reviewed by the Journal. HSBC noticed the discrepancy later, when it started probing the transfer.

Once the $500 million was in Perfectbit’s account, the accountant made Mr. Barbosa and an associate owners of the company. The accountant, Bhishamdayal Dindyal, kept signing power on the HSBC account.

Over the next few weeks, the accountant and an associate of Mr. Barbosa’s each visited HSBC branches trying to access the cash, unsuccessfully, according to Angola’s U.K. court claim. The associate said in a later court statement that $26,999.99 from the HSBC account was paid as a fee for Perfectbit’s work on the fund.

After the alert teller in the suburban London branch filed a report about the enormous balance, HSBC suspended the account for review.

In Angola, a power shift was under way. President João Lourenço, inaugurated in September 2017, launched an anticorruption drive, and his finance minister, Mr. Mangueira, still suspicious of the central bank’s new investment fund, started an investigation.

Seeking answers, Mr. Mangueira took the central-bank governor, Mr. da Silva, to London again to meet with the three organizers of the deal—Messrs. Onderwater, Pontes and Barbosa. The former president’s son, Mr. Filomeno dos Santos, came along, too, this time in support of the deal organizers, U.K. court filings show.

In an hourslong meeting at the elegant Cavalry & Guards Club, Mr. Barbosa batted away questions about his and his colleagues’ qualifications. He said a European bank had guaranteed Angola’s $500 million, according to a U.K. court filing. That day, a letter was sent to President Lourenço saying Angola’s $500 million was guaranteed by Switzerland’s Credit Suisse AG , and had swelled to $2.5 billion from transactions by the trustee.

Credit Suisse says it didn’t guarantee the money and documents in its name were forged.

As he listened to Mr. Barbosa, Mr. Mangueira recalled in an interview, he became convinced the Brazilian was the mastermind of a fraud. He had the air of a “vendedor da banha da cobra,” Mr. Mangueira said—Portuguese for a snake-oil salesman.

Back in Angola, President Lourenço gave Mr. da Silva, the central-bank governor, 24 hours to get the $500 million back, according to U.K. court filings. That didn’t happen, and he resigned without any public explanation.

With the deal collapsing, Perfectbit wrote to HSBC last Nov. 9 asking the bank to return the nearly $500 million in its account to the central bank, according to a U.K. court statement from Mr. Barbosa. He said Perfectbit was asked to make the request by the company owned by Messrs. Pontes and Onderwater that had hired Perfectbit to act as trustee.

Eight days later, Angola’s finance ministry filed the U.K. lawsuit against the three organizers of the deal—Messrs. Pontes, Onderwater and Barbosa—and Mr. Barbosa’s associate. A judge froze the $499,972,438 remaining in the HSBC account. The U.K.’s National Crime Agency, an entity akin to the Federal Bureau of Investigation, opened a criminal investigation.

A few days later, Mr. Barbosa’s associate was arrested by police at Heathrow Airport and released under investigation. He denies wrongdoing.

The accountant, Mr. Dindyal, who isn’t a defendant in the lawsuit, was arrested at home in December and also released under investigation. He declined to comment.

Messrs. Pontes, Onderwater and Barbosa all say their companies operated under contracts with the central bank or each other and deny wrongdoing.

A judge in the U.K. civil case said in a written April ruling that Mr. Pontes and his company “appear to contend (in effect) that they are victims of a fraud perpetrated by Mr. Onderwater. Mr. Onderwater appears to contend (in effect) that he is a victim of the fraud of Dr. Barbosa and Dr. Pontes.”

U.K. authorities returned the $500 million to the Angolan central bank, but prosecutors in Angola are proceeding with their criminal fraud case.

They charged Mr. Filomeno dos Santos, the former president’s son, and Mr. Pontes with money laundering, criminal association, falsification of documents, influence peddling and stealing through fraud.

Mr. da Silva, the former central-bank governor, was charged with criminal association, embezzlement and money laundering. The fourth man, a central-bank employee, was charged with criminal association and embezzlement.

Mr. Filomeno dos Santos was dismissed from the sovereign-wealth fund this year. He hasn’t commented since the charges were announced. In a previous statement to Angola state television, he said he was cooperating with the investigation.

Mr. Pontes denies the criminal charges. In an email statement through his lawyers, he said Angola’s €24.85 million was voluntarily returned in June as part of negotiations to settle the U.K. civil case, and that he will “continue to act in good faith in his commercial dealings.”

The former central-bank governor, Mr. da Silva, hasn’t commented publicly and couldn’t be reached for comment.

Messrs. Onderwater and Barbosa likely will keep their payments unless Mr. Pontes takes his own legal action against them, according to people familiar with the U.K. civil case, which remains open.

In June, several photos appeared on Mr. Barbosa’s Facebook page. One shows him puffing on a cigar, another grinning from a business-class cabin.

Update: 9-27-2018

The son of Angola’s former president, who served as chief of the country’s sovereign-wealth fund, was arrested on allegations he misappropriated billions of those funds. It could mark the fall of the dos Santos family in the country.

JOHANNESBURG — In a continuing shake-up of Angola’s old order, the once-untouchable son of the nation’s longtime dictator has been arrested on corruption charges, state news media announced on Tuesday.

The Angolan government said that José Filomeno dos Santos, the former head of the oil-rich African nation’s $5 billion sovereign wealth fund, had been detained. He had been charged earlier with the fraudulent transfer of $500 million from the fund to an account in Britain.

Mr. dos Santos is the highest-profile figure from the government of his father, José Eduardo dos Santos, who led Angola for 38 years, to face prosecution. During his father’s long rule, which was marked by a nearly decade-long oil boom, the presidential family and close allies amassed great fortunes through their grip on oil, diamonds and other resources.

In the twilight of his presidency, Mr. dos Santos installed two of his children to key economic posts. In addition to his son’s role at the sovereign wealth fund, his daughter, Isabel, already known as the richest woman in Africa, was named to lead Angola’s state oil company, Sonangol.

In what had appeared to be a carefully scripted transfer of power, Mr. dos Santos, who has suffered from health problems in recent years, gave up the presidency last September to a trusted aide, João Lourenço. The transfer was completed this month when Mr. dos Santos gave up leadership of the People’s Movement for the Liberation of Angola, the party that has controlled Angola since liberation from Portugal in 1975.

But in his first year in power, Mr. Lourenço turned quickly on the former first family, forcing his predecessor’s children from their top posts. In Angola’s small ruling class, the dos Santos family had attracted increasing anger for failing to share the spoils of the nation’s government-controlled economy with a wider circle of people.

Corruption has continued to undermine Angola’s economy while the new government has taken only tentative steps to open up an authoritarian political climate, experts said. It is far from clear whether Mr. Lourenço’s government has gone after his predecessor’s children to clean up the economy or simply to grab their assets.

“Whether the new president will wage a fair, deep and prolonged fight against corruption remains to be seen,” said Fernando Macedo, a political scientist who has taught at Lusíada University in Luanda, the Angolan capital.

So far, Mr. Macedo said, the new government has carried out easy changes, including liberalizing the state news media and allowing political demonstrations.

The National Assembly has created laws to open up sectors of the economy, but the effects have still to be felt on the ground, said Francisco Miguel Paulo, an economist at the Center for Studies and Scientific Research at Catholic University of Angola.

The arrest of the younger Mr. dos Santos, who was charged in March with fraud involving the $500 million transfer, was aimed at pressing the former first family and its allies to return some of their assets to Angola, Mr. Paulo said.

“If they can arrest the son of the former president, it means there will not be impunity for anyone,” Mr. Paulo said.

Meanwhile,

Authorities in Liberia said they were investigating the disappearance of $104 million in newly printed bank notes intended for the central bank, in a possible fraud equal to 5% of gross domestic product.

The justice ministry on Wednesday confirmed that 15 officials, including the son of former president and Nobel Prize winner Ellen Johnson Sirleaf and the former central bank governor, were under investigation and had been banned from leaving the country.

Liberian officials said the bank notes—more than 16 billion Liberian dollars—were ordered by the central bank from overseas printers but disappeared between November and August. The money, packaged in canvas bags and 20-foot-high sealed containers, was cleared through Liberian customs between November and August but never made it to the central bank’s headquarters in the capital, Monrovia, the officials said.

The government said the matter was being taken extremely seriously because it had national-security implications.

The disappearance is a blow for Liberia’s crisis-addled economy as it recovers from the commodity-price crash and devastating Ebola epidemic that has claimed more citizen’s lives than in any other nation.

Liberia, a Virginia-sized nation founded in 1847 by freed slaves, is rich in diamonds, oil and timber but remains one of the world’s poorest nations with a gross domestic product per capita of $729, according to the International Monetary Fund.

Some analysts said news of the missing funds threatened to poison the political atmosphere just nine months after the government’s first peaceful transition in seven decades.

“Expectations are high after last year’s elections,” said Musa Ziamo, a Monrovia-based independent analyst, “Masses are very anxious and many are facing economic hardship.”

Ms. Johnson Sirleaf, Africa’s first elected female head of state, won the Nobel Prize in 2011. She was widely credited for restoring order to a country devastated by recurrent civil wars that ended in 2003. But Ms. Johnson Sirleaf, known to Liberians as Ma Ellen, was also criticized for nepotism—following the elevation of two of her sons to senior government positions—and failing to fight corruption.

Justice Minister Frank Musa Dean said the money had been ordered during the administration of Ms. Johnson Sirleaf, who was succeeded by former football star George Weah in January. A spokesman said the central bank is cooperating with the investigations, but declined to comment further.

Former central bank governor Frank Weeks, who left his position in March, said he was “not aware of any money that went missing” during his tenure. Ms. Johnson Sirleaf’s son Charles couldn’t be reached for comment.

On Thursday, investigators pored through central bank records to determine whether they had established the full impact of the missing funds. Liberia doesn’t have its own mint and the central bank is the only body with the power to order new currency.

Authorities discovered the disappearance from customs records that showed the shipments had arrived and been cleared but were never placed in the custody of the central bank. Several senior police officers in charge of security at the ports are among those under investigation.

Bank of America to Pay $30 Million in Benchmark-Manipulation Settlement

The bank was accused of trying to help its own derivatives positions.

Bank of America Corp. will pay $30 million as part of a settlement with the Commodity Futures Trading Commission related to charges that the bank tried to manipulate a benchmark for interest-rate products over a span of six years.

The CFTC said Wednesday that Bank of America tried to manipulate the U.S. Dollar International Swaps and Derivatives Association Fix, or ISDAfix, to help its own derivatives positions. It also accused the bank of false reporting.

Bank of America traders, according to the futures regulator, attempted to manipulate rates to benefit specific trading positions and influence reference rates and spreads ahead of the time the final rates were published.

CFTC Director of Enforcement James McDonald said in prepared remarks that the regulator’s settlement with the bank is its ninth enforcement action tied to manipulation with this benchmark. On Tuesday, the CFTC announced that Intercapital Markets LLC would pay $50 million as part of a settlement with the regulator.

“We have significantly enhanced our procedures to detect any inappropriate behavior,” a Bank of America spokesman said.

International Bank Agrees To Pay US $70 Million To Resolve CFTC Charges That It Attempted To Manipulate ISDAFIX Benchmark

Deutsche Bank Securities Inc. agreed to pay a fine of US $70 million to resolve charges brought by the Commodity Futures Trading Commission alleging that, from at least January 2007 through May 2012, it attempted to manipulate the US Dollar International Swaps and Derivatives Association Fix benchmark. The CFTC claimed that DBSI engaged in such violation through the acts of some of its traders who caused the firm to make false submissions in order to impact the Fix in a direction to help benefit the firm’s trading book.

American Express Gave Small Businesses One Rate, Then Secretly Raised It

For more than a decade, American Express Co.’s foreign-exchange unit recruited business clients with offers of low currency-conversion rates before quietly raising their prices, according to people familiar with the matter.

AmEx’s foreign-exchange international payments department routinely increased conversion rates without notifying customers in a bid to boost revenue and employee commissions, the people said. The practice, widespread within the forex department, was occurring until early this year and dates back to at least 2004, the people said.

The practice targeted mostly small and midsize businesses, the people said, a group of customers that accounts for about a quarter of the company’s credit-card revenue. AmEx, one of the largest small-business card issuers in the U.S., earlier this year said it hoped to become the leading payments and working-capital provider for small and middle-market companies.

AmEx said it doesn’t have contractual pricing arrangements with most of its foreign-exchange customers. “We have training, control and compliance oversight and believe that our transactions are completed and reported in a fair and transparent manner at the rates which the client has authorized,” said spokeswoman Marina Norville.

On Monday afternoon, Ms. Norville said the company takes “allegations like these very seriously” and will conduct a review with an external party to determine if its standards are being met. “If we find that we fell short of the mark, we will fix the problems and take appropriate actions to make sure it doesn’t recur,” she said.

Although the forex business is small—accounting for less than half of a percentage point of AmEx’s total revenue—it is among a suite of services the company offers to its small-business customers. Small business is a key growth area for AmEx, which has long sought to distinguish itself from rivals JPMorgan Chase & Co. and Citigroup Inc. by offering generous card-related benefits and tailored services to its consumer and business clients.

Current and former employees say the division’s commissions-driven culture fueled the practice.

Here’s how it worked, according to current and former employees: Salespeople would often tell potential clients that AmEx would beat the price they were paying banks or other financial institutions to convert currency and send money abroad. The salespeople didn’t inform customers that the margin, a markup that AmEx tacks on to the base currency exchange rate, was subject to increase without notice, they said. Prospective clients with certain AmEx cards also were accurately told they could earn points for the transactions, they added.

Some time later, salespeople would increase the margin without informing the customers, the current and former employees said. To spot the change, customers generally would have to log in to their accounts and compare the rate AmEx was offering to the market exchange rate at the time of the transaction. As recently as this year, they said, some customers had margins increased anywhere from 0.05 to 0.25 of a percentage point. In earlier years, margins rose by as much as 3 percentage points, according to former employees.

When clients did notice a change and inquired, AmEx salespeople sometimes would blame a glitch or other technicality and lower the margin, according to current and former employees and emails.

Current and former employees say the division targeted smaller businesses in part because they’re less likely than large corporations to have employees who closely track forex transactions.

Managers directed salespeople to keep the details of the payment arrangements hazy when speaking with potential customers and to avoid putting pricing terms in emails, current and former employees said.

Managers in the division tapped the brakes on the practice in recent months, according to current and former employees, following an article published late last year alleging similar practices at Wells Fargo & Co. An AmEx manager told salespeople they would need his approval before offering prospective clients a margin of less than 0.70 of a percentage point.

Current and former employees said the price changes were common knowledge within the forex business. Paul Hargreaves, who ran AmEx’s global foreign-exchange services division for many years, was aware of the tactic, former employees said. Following a long career with AmEx, he left the company earlier this year, Ms. Norville said.

Mr. Hargreaves couldn’t be reached for comment.

Current and former employees describe an environment focused on bringing in as many new clients as possible and squeezing revenue out of them before they depart. Employees were told that the average forex customer did business with AmEx for around three years, they said.

“Who cares if they come or go? Let’s make money while we have them,” one current employee said, referring to the attitude within the division.

“We constantly reinforce the importance of acting in the best interest of our customers,” said AmEx spokeswoman Ms. Norville.

Commissions are tied to monthly revenue targets, which are heavily influenced by margins and transaction volume, current and former employees said.

Salespeople who hit their targets earn a commission of 15% of the monthly revenue new customers generate, according to current and former employees. Commissions rise to around 25% after an annual revenue target of as much as around $285,000 is exceeded, they said. Sales reports distributed by managers list how much revenue salespeople generate, they added.

At AmEx, rate increases often would occur after managers told salespeople to review their accounts and adjust pricing, the current and former employees said.

Some salespeople said they were encouraged to employ the tactic at the division’s training program for new employees. One former employee said he was told during training to sign up as many accounts as he could in his early days and to go back later and adjust the rates upward to hit revenue targets.

CFTC Names Four Banking Organization Companies, A Trading Software Design Company And Six Individuals In Spoofing-Related Cases;

The Same Six Individuals Criminally Charged Plus Two More: On January 29, the Commodity Futures Trading Commission and the Department of Justice coordinated announcements regarding the filing of civil enforcement actions by the CFTC, naming five corporations and six individuals, and criminal actions by the DOJ against eight individuals – including six of the same persons named in the CFTC actions – for engaging in spoofing activities in connection with the trading of futures contracts on United States markets.

Four of The Corporations – part of global banking organizations – simultaneously resolved their CFTC-brought civil actions. These four corporations were Deutsche Bank AG and its wholly owned subsidiary Deutsche Bank Securities Inc., UBS AG and HSBC Securities (USA), Inc. DB and DBSI settled their CFTC enforcement actions by agreeing to jointly and severally pay a fine of US $30 million; UBS settled by consenting to a sanction of US $15 million; and HSBC settled by agreeing to a fine of US $1.5 million. The companies additionally agreed to continue to maintain surveillance systems to detect spoofing; ensure personnel “promptly” review reports generated by such systems and follow‑up as necessary if potential spoofing conduct is identified; and maintain training programs regarding spoofing, manipulation and attempted manipulation.

Generally, DB, UBS and HSBC were charged for the spoofing activities of their employees on the Commodity Exchange, Inc. in gold and other precious metal futures contracts. Typically, alleged the CFTC, the employees placed a small lot order on one side of a market and larger lot orders on the other side of the same market for the purpose of artificially moving the market to effectuate the execution of the smaller lot order. As soon as the small lot order was executed, the larger lot orders were cancelled.

DB was also charged with manipulation and attempted manipulation, and UBS was additionally charged with attempted manipulation. The CFTC claimed that one DB and one UBS employee placed orders to try to trigger customers’ stop loss orders to benefit proprietary trading.

DBSI – a registered futures commission merchant – was charged with failure to supervise. According to the CFTC, DBSI maintained a surveillance system that detected many instances of potential spoofing by DB traders, whose accounts it carried. However, said the CFTC, DBSI failed to follow up on “the majority” of potential flagged issues.

The CFTC acknowledged each firm’s cooperation during its investigation. The Commission additionally noted that UBS self‑reported its own misconduct in response to a firm-initiated internal investigation. The CFTC said that it was previously not aware of the misconduct.

Additionally, the CFTC charged Jitesh Thakkar and Edge Financial Technologies, Inc. – a company Mr. Thakkar founded and for which he served as president – with spoofing and engaging in a manipulative and deceptive scheme for designing software that was used by an unnamed trader to engage in spoofing activities. This enforcement action was filed in a federal court in Chicago, Illinois.

According to the CFTC, Mr. Thakkar and Edge Financial aided and abetted the unnamed trader’s spoofing by designing a custom “Back-of-Book” function. This function automatically and continuously modified the trader’s spoofing orders by one lot to move them to the back of relevant order queues (to minimize their chance of being executed) and cancelled all spoofing orders at one price level as soon as any portion of an order was executed. The CFTC said that the unnamed trader admitted using the Back-of-Book function to engage in spoofing activities involving E-mini S&P futures contracts traded on the Chicago Mercantile Exchange from January 30 through October 30, 2013.

It appears from language in a parallel criminal complaint also filed against Mr. Thakkar in a federal court in Chicago, Il., that the trader he is alleged to have assisted was likely Navinder Sarao. In November 2016, Mr. Sarao pleaded guilty to criminal charges for allegedly engaging in manipulative conduct through spoofing-type activity involving E-mini S&P futures contracts traded on the CME between April 2010 and April 2015, including illicit trading that contributed to the May 6, 2010 “Flash Crash.” He also settled a CFTC enforcement action related to the same conduct. (Click here for background regarding Mr. Sarao’s settlement and initial charges in the article “Alleged Flash Crash Spoofer Pleads Guilty to Criminal Charges and Agrees to Resolve CFTC Civil Complaint by Paying Over $38.6 Million in Penalties,” in the November 13, 2016 edition of Bridging the Week.)

Previously, Mr. Thakkar has served as a member of the High Frequency Trading Subcommittee of the CFTC’s Technology Advisory Committee.

The CFTC also filed civil complaints against Cedric Chanu, Andre Flotron, Krishna Mohan, James Vorley and Jiongsheng Zhao, alleging spoofing and engaging in a manipulative and deceptive scheme. The DOJ announced that criminal complaints were filed against the same persons, as well as Edward Bases and John Pacilio. The criminal case against Mr. Flotron was filed in September 2017. (Click here for details in the article “Spoofing Case Filed in Connecticut Against Overseas-Based Precious Metals Trader,” in the September 17, 2017 edition of Bridging the Week.) Both the civil and criminal actions were filed in federal courts in Connecticut, Illinois and Texas.

CME brought and settled a disciplinary action against Mr. Zhao, alleging disruptive trading in November 2017 (click here for details). To resolve the CME action, Mr. Zhao agreed to pay a fine of US $35,000 and be barred from access to all CME Group exchanges for ten business days.

Prior to the filing of the eight criminal actions by the DOJ, only three persons had previously been criminally prosecuted for spoofing. (Click here for background in the article “Former Newbie Bank Trader Pleads Guilty to Criminal Charges and Settles CFTC Civil Charges for No Fine for Spoofing, Attempted Manipulation and Manipulation of Gold and Silver Futures,” in the June 4, 2017 edition of Bridging the Week.)

My View: The settlement against DB for spoofing and DBSI for failure to supervise was resolved by an agreement by the firms to jointly and severally pay a fine of US $30 million.

In settlements, the rationale for any provision – including the precise amount of a fine – is correctly not part of the public record. As a result, it would be disingenuous to speculate why any one provision might have been agreed.

Hopefully, however, through this settlement, the CFTC is not signaling that it equates the acts of a principal spoofer with the failure of a carrying FCM to follow up on its surveillance system’s detection of possible misconduct by a customer. If this was the CFTC’s intent, it raises the supervisory obligation of FCMs to a new and highly unfair level. Certainly, the commission of an illegal act, or even the affirmative aiding and abetting of such act, must be regarded as far more serious than the failure of a carrying broker to act after it detects such potential misconduct through its ordinary surveillance system.

This matter is the second recent settlement entered into by the CFTC in recent months that seems to impose an extraordinarily high standard of oversight responsibility on FCMs.

Just a few months ago, Merrill Lynch, Pierce, Fenner & Smith Incorporated agreed to pay a fine of US $2.5 million to resolve charges brought by the CFTC that it failed to diligently supervise responses to a CME Group Market Regulation investigation related to block trades executed by its affiliate, Bank of America, N.A. on the CME and the Chicago Board of Trade. The CFTC said that the responses provided by BANA were not accurate. However, there was no indication that Merrill Lynch was aware or had reason to believe that its affiliate’s responses were inaccurate. (Click here for further details in the article “FCM Agrees to Pay US $2.5 Million CFTC Fine for Relying on Affiliate’s Purportedly Misleading Analysis of Block Trades for a CME Group Investigation,” in the September 24, 2017 edition of Bridging the Week.)

Earlier, in 2016, Advantage Futures LLC, Joseph Guinan (its majority owner and chief executive officer), and William Steele (who until May 2016 was Advantage’s chief risk officer), settled charges brought by the CFTC related to the firm’s handling of the trading account of one customer in response to three exchanges’ warnings and for the firm’s alleged failure to follow its own risk management policies. The CFTC claimed that, after three exchanges alerted Advantage to concerns they had regarding the trading of one unspecified customer’s account which they considered might constitute disorderly trading, spoofing and manipulative behavior, the firm initially failed “to adequately respond to the Exchange inquiries and did not conduct a meaningful inquiry into the suspicious trading.” (Click here for background and analysis in the article “FCM, CEO and CRO Sued by CFTC for Failure to Supervise and Risk-Related Offenses,” in the September 25, 2016 edition of Bridging the Week.)

FCM supervisory systems may, on occasion, fail to live up to regulator expectations. When that happens, a FCM may be fairly subject to penalties and other sanctions. However, in this settlement, the CFTC seems to equate the magnitude of the principal offense of spoofing with a failure to act after the detection of such potential offense by a customer – albeit an affiliated entity. If this is the intended message, the potential cost of engaging in the FCM business, or other businesses requiring CFTC registration, has just increased dramatically and unfairly.

Legal Weeds: Late last year, James McDonald, the CFTC’s Director of its Division of Enforcement, indicated during multiple public speeches that potential wrongdoers who voluntarily self-report their violations, fully cooperate in any subsequent CFTC investigation, and fix the cause of their wrongdoing to prevent a re-occurrence will receive “substantial benefits” in the form of significantly lesser sanctions in any enforcement proceeding and “in truly extraordinary circumstances,” no prosecution at all. The Division also released a formal Updated Advisory on Self Reporting and Full Cooperation, which memorialized and expanded the elements of Mr. McDonald’s presentations (click here to access).

The current settlements by DB, DBSI and UBS may provide some insight into what self-reporting might concretely be worth.

Factually, the allegations against DB and UBS were materially similar. In both actions, traders at each firm engaged in alleged spoofing activity that constituted attempted manipulation for a significant period of time – in DB’s circumstance, from February 2008 through at least September 2014, and in UBS’s situation, from January 2008 through at least December 2013. Some facts varied in each enforcement action, but the agreed fine was US $30 million combined for DB and DBSI and $15 million for UBS. Although the CFTC acknowledged both firms’ cooperation in its investigations, the CFTC noted that, in connection with UBS, “[d]uring the course of an internal investigation, [the firm] discovered potential misconduct, of which the Division was previously unaware” and promptly self-reported the misconduct. The CFTC said that both firms’ fines were “substantially reduced” because of their cooperation, but UBS’s fine was one-half that of the DB entities’ combined fine.

Under the Division of Enforcement’s new math – come forward + come clean + remediate = substantial settlement benefits – it appears that, at least in these two matters, coming forward was worth a 50% saving off an already reduced settlement attributable to coming clean!

(Click here for details on the CFTC’s new approach to settlements in the article, “New Math: Come Forward + Come Clean + Remediate = Substantial Settlement Benefits Says CFTC Enforcement Chief” in the October 1, 2017 edition of Bridging the Week.)

Compliance Weeds: The Thakkar and Edge Financial Technologies CFTC enforcement and criminal actions must be taken as a significant warning to programmers and technology firms that developing software to assist a trader in violating the law could result in a charge against such persons for such violation as if they ultimately committed the violation themselves. As a result, developers and their employers requested to customize software should raise any concerns about the purpose for such customization if the purpose seems contrary to law. They should not just accept all instructions and program! However, this may impose a heightened burden on programmers and could stifle the development of legitimate new technology.

JPMorgan Chase Settles Allegations It Violated U.S. Sanctions

The bank says it has since improved its compliance systems.

JPMorgan Chase Bank NA agreed to pay $5.3 million to settle allegations it violated various U.S. sanctions programs.

The bank was hit with two penalties, one monetary and the other a finding of violation. Both, the U.S. Treasury Department said, were connected to failures in its screening processes.

JPMorgan Chase voluntarily disclosed the issues more than six years ago, according to company spokesman Brian Marchiony.

“We have since upgraded our systems and made substantial enhancements to our sanctions compliance program,” he said.

The settlement relates to 87 net-settlement transactions between January 2008 and February 2012 totaling more than $1 billion.

Each of the 87 transactions involved a U.S.-based JPMorgan Chase client and a foreign entity with connections to eight airlines that were, at various times, subject to U.S. sanctions, the Treasury said. The Treasury didn’t identify the U.S. client or the foreign entity.

Before January 2012, JPMorgan didn’t appear to have had a process to independently evaluate members of the foreign entity despite receiving red-flag notifications on at least three occasions, the Treasury said.

“The bank failed to screen…for purposes of [sanctions] compliance, despite being in possession of the necessary information to enable screening,” the Treasury said in its penalty notice.

But since then, the Treasury said, the bank screened all net-settlement participants until it terminated its relationship with the American client. It also increased its compliance staff, implemented new sanctions-screening software and enhanced employee compliance training.

No managers or supervisors were aware of the transactions that led to the sanctions violations, the Treasury said.

U.S. Sues UBS Over Mortgage Securities

The Swiss banking giant says it will contest the allegations.

The Justice Department on Thursday (11-11-2018) filed a civil suit against UBS Group AG over “catastrophic” losses incurred by investors from mortgage-linked securities sold in the run-up to the financial crisis in 2006 and 2007.

The lawsuit, which UBS has vowed to fight, will likely leave a legal cloud hanging over Switzerland’s largest bank for many months. It also serves as a reminder that, more a decade after the collapse of Lehman Brothers, some of the issues at the heart of the financial crisis have yet to be fully resolved.

“Investors who bought [residential mortgage-backed securities] from UBS suffered catastrophic losses, which not only caused direct harm to those investors, but also contributed to the financial crisis of 2008,” said U.S. Attorney Richard P. Donoghue.

In the complaint, the U.S. alleges that UBS misled investors about the quality of billions of dollars in subprime and other mortgage loans that were used to back 40 deals. UBS securitized more than $41 billion in mortgage loans through these deals, according to the complaint.

The government didn’t specify the damages that it was seeking, though it pegged the losses by investors as being “many billions of dollars.”

Earlier Thursday, prior to the announcement from U.S. authorities, UBS said it expected the lawsuit and would contest it.

The bank said that it wasn’t a major originator for these types of mortgages and that the bank itself suffered “massive losses” due to investments in U.S. mortgage-backed securities when the housing market collapsed. “This fact alone negates any inference that UBS engaged in an intentional fraud,” it said.

“The DOJ’s claims aren’t supported by the facts or the law. UBS will contest any such complaint vigorously in the interest of its shareholders. UBS is confident in its legal position and has been fully prepared for some time to defend itself in court,” UBS said.

The trade-off for the world’s biggest wealth manager is that even if it is on strong legal ground—and is able to win in court or at least settle for a small sum—its decision to fight prolongs the legal uncertainty. Shares of UBS have languished in recent years, though they have risen since the bank reported solid third-quarter earnings last month.

Other big banks, including German lender Deutsche Bank AG and UBS’s Swiss rival Credit Suisse Group AG , have paid billions of dollars to the U.S. to settle crisis-era claims.

An exception that analysts drew parallels to was Barclays AG , which was sued by the Justice Department in late 2016—around the same time that Deutsche Bank and Credit Suisse settled—over its sale of mortgage-backed securities. This March, Barclays agreed to pay $2 billion to resolve the claims.

The U.S. initially sought around $5 billion from Barclays.

Updated 11-20-2018

Société Générale to Pay $1.3 Billion to Resolve U.S. Sanctions, Money-Laundering Violations

Fines and penalties relate to U.S. allegations that the bank processed transactions connected to Iran, Sudan, Cuba and Libya.

French bank Société Générale SA agreed to pay $1.34 billion in penalties to settle allegations by U.S. and New York state authorities that the bank had processed and concealed billions of dollars in transactions related to countries under sanctions.

New York regulators said Société Générale conducted transactions involving parties in Iran, Cuba, and Sudan between 2003 and 2013. Federal prosecutors, meanwhile, said the bank engaged in more than 2,500 transactions valued at about $13 billion from 2004 to 2010. The transactions violated U.S. sanctions laws, authorities said.

The majority of the transactions and much of the total value involved a dollar credit facility designed to finance oil transactions between a Dutch commodities trading firm and a Cuban company with a state monopoly on the production and refining of Cuban crude, federal prosecutors said.

Société Générale avoided detection, in part, by making inaccurate or incomplete notations on payment messages that accompanied the transactions, prosecutors alleged. The department that managed them “engaged in a deliberate practice of concealing the Cuban nexus of U.S. dollar payments,” prosecutors said.

The total penalty amount is the second-largest imposed on a financial institution for violations of U.S. sanctions, federal prosecutors said. “Other banks should take heed: Enforcement of U.S. sanctions laws is, and will continue to be, a top priority of this office and our partner agencies,” said U.S. Attorney Geoffrey Berman, in a statement.

Frédéric Oudéa, Société Générale’s chief executive, said in a statement that the bank regrets the shortcomings identified in the settlements.

The bank cooperated with authorities and has taken a number of steps in recent years to enhance its sanctions and anti-money-laundering compliance programs, Mr. Oudéa said.

He also referenced the bank’s settlement in June with U.S. and French authorities concerning its alleged manipulation of Libor rates and transactions involving Libyan counterparts.

“These resolutions, following on the heels of the resolution of other investigations earlier this year, allow the bank to close a chapter on our most important historical disputes,” Mr. Oudéa said in the statement.

The penalty is fully covered by a provision for disputes in its books, the bank said, noting that it won’t have any additional effect on the bank’s results for the year. The bank in September forecast an expected $1.3 billion penalty over the sanctions violations, saying at the time it had entered into a phase of active discussions with U.S. authorities over the matter.

Société Générale struck a deferred-prosecution agreement with the U.S. Justice Department, and agreed to forfeit $717.2 million in a civil forfeiture, prosecutors said. The bank also agreed to pay $325 million to DFS, $162.8 million to the Manhattan district attorney’s office, $81.3 million to the Federal Reserve and $53.9 million to the U.S. Treasury Department’s sanctions office. It also agreed to continue to cooperate with U.S. authorities in the future.

A second consent order with New York’s DFS requires the bank to pay an additional $95 million relating to anti-money-laundering and compliance deficiencies, and it mandates the New York branch to continue a series of enhancements to its compliance program. Under the terms of the consent order, an independent consultant will assess the branch’s progress after 18 months.

The Société Générale settlements follows a pattern frequently seen during the Obama administration, in which a bank would reach simultaneous agreements with multiple U.S. state and federal authorities regarding sanctions violations. The pace of these settlements, however, had slowed in recent years.

The largest involved BNP Paribas SA, another French bank, which agreed in 2014 to pay nearly $9 billion. Others include HSBC Holdings PLC, which agreed to pay $1.92 billion in 2012, Switzerland’s Credit Suisse AG , which paid $536 million in 2009 and the Netherlands’ ING NV, which agreed to pay $619 million in 2012.

Updated 11-20-2019

Deutsche Bank Handled $150 Billion of Potentially Suspicious Flows Tied to Danske

German lender’s shares drop on investor concerns about the scandal’s impact on its profitability.

Preliminary findings of an internal review by Deutsche Bank AG of its role in a massive money-laundering scandal at Danske Bank suggest the German lender handled about $150 billion of the total amount of potentially suspicious transactions tied to Danske, according to a person familiar with the matter.

Deutsche Bank’s findings aren’t final and haven’t been made public. It has been trying to assess its exposure to allegations of money laundering involving flows from Russia and elsewhere through Denmark’s largest bank. U.S. law enforcement agencies are probing transactions at Danske’s tiny Estonian branch over several years through 2015 where $230 billion flowed through accounts of non-Estonian account holders at the branch.

On Monday, a British former trader at Danske’s Estonian branch, Howard Wilkinson, testified publicly at a Danish parliamentary hearing about the scope of the alleged activity he witnessed at the small outpost.

Investor concerns about the impact of the Danske scandal have contributed to a drop in Deutsche Bank shares which are down more than 48% this year and hit new lows of near €8 ($9) Tuesday.

he shares had partially recovered by midday Tuesday in Germany, trading near €8.30, representing a 3% decline for the day. The Stoxx Europe 600 Banks index was down 1.8%.

The Danske concerns come as Deutsche Bank’s shares have fallen on broader doubts about its profitability.

“Deutsche Bank acted as correspondent bank for Danske Bank in Estonia,” a Deutsche Bank spokesman said. “Our role was to process payments for Danske Bank. We terminated this relationship in 2015 after identifying suspicious activity by its clients.”

Deutsche Bank has received requests for information from U.S. officials about Danske-related transactions, according to people familiar with the matter.

Mr. Wilkinson, who worked at Danske’s Estonian branch until 2014, pointed fingers at the three U.S. correspondent banks that cleared U.S. dollars for Danske Estonia for not catching suspicious flows of money. He singled out Deutsche Bank, referring to it only as the U.S. subsidiary of a European bank that served Danske throughout the period under investigation, between 2007 and 2015.

“This was the major correspondent bank for U.S. dollars, so when we are talking about this $230 billion number of suspicious funds, I would guess that $150 billion went through this particular bank in the U.S.,” he said.

His estimate roughly matches Deutsche Bank’s own preliminary findings, according to the person familiar with that review.

Correspondent banks serve as intermediaries in international transactions, handling transfers for other banks doing business in countries where they have limited operations.

Deutsche Bank handles $450 billion to $500 billion in U.S. dollar transactions, on average, each day, according to a person close to the business.

JPMorgan Chase & Co. served as correspondent bank for Danske Estonia until 2013, when it was replaced by Bank of America Corp. , which cut ties with the Estonia branch over money laundering concerns in 2015. Those banks have declined to comment.

In September, Danske Bank said in reporting findings from a law firm it hired that around $230 billion washed through its Estonian branch via thousands of accounts. A large part was deemed suspicious. The bank’s CEO resigned with the release of the report.

Deutsche Bank is a major correspondent bank for U.S. dollar transactions. Banks are responsible for policing such money flows and flagging transactions they deem suspicious. Suspicions can be based on origin of funds or concerns about who’s sending or receiving money.

Deutsche Bank has come under fire repeatedly from U.S. and European watchdogs for weaknesses in its policing of financial crime. The unit responsible for money-laundering has suffered high-level turnover. In recent months, its global and U.S. heads of financial crime-fighting have both left for jobs at other banks. The global head, Philippe Vollot, joined Danske Bank as chief compliance officer and an executive board member.

Updated 11-29-2018

Deutsche Bank Offices Raided in Money-Laundering Probe

Investigation focuses on employees suspected of helping clients create offshore entities in tax havens.

German authorities raided Deutsche Bank AG DB -4.85% offices Thursday as part of an investigation into whether the firm helped clients launder money through tax havens. One of the employees suspected of involvement works in the division responsible for fighting financial crime, according to people familiar with the matter.

Around 170 police officers and other officials seized documents during searches through six different properties Thursday, including one employee’s home, according to authorities.

The raid was a visible sign of mounting legal problems for the German lender, which has faced a string of allegations and costly legal settlements tied to failures to prevent money laundering and other banking violations.

Thursday morning, police vehicles lined up outside Deutsche Bank’s central Frankfurt headquarters, and German federal police and other officers crowded into the lobby of the highrise towers. Officers soon filtered upstairs onto other floors of the bank to search records, a person inside the bank said.

Not long after, Randal Quarles, the Fed’s vice chairman for supervision, arrived for a prescheduled lunchtime meeting with Deutsche Bank’s chief executive Christian Sewing and regulatory chief Sylvie Matherat, people familiar with the matter said.

The meeting was arranged well before Thursday, the people said. A Fed spokesman had no immediate comment. Mr. Sewing became CEO in April and before Thursday had spoken with Mr. Quarles by telephone, people close to the bank say.

Ms. Matherat oversees the division responsible for detecting and preventing financial crime by clients of the bank. She has come under pressure amid discussions of a potential management shakeup, The Wall Street Journal reported this week, citing people close to the bank.

The German authorities are expected to return to Deutsche Bank Friday, according to people close to the bank. Areas they searched Thursday included management-board offices, one of the people said.

The probe includes two unidentified Deutsche Bank employees aged 50 and 46 and other unidentified employees suspected of helping clients create offshore entities in tax havens, the prosecutor’s office said in a statement. The person who works in the financial crime-fighting division remained an employee Thursday, the people familiar with the matter said.

Deutsche Bank confirmed the investigation. Both the bank and prosecutors said it is related to the Panama Papers, a trove of records revealed by a consortium of journalists in 2016 tied to a Panamanian law firm that specialized in offshore holding companies.

“As far as we are concerned, we have already provided the authorities with all the relevant information regarding Panama Papers,” Deutsche Bank said. It said that the bank would cooperate closely in this latest probe “as it is in our interest as well to clarify the facts.”

The investigation focuses on transactions spanning 2013 to 2018, prosecutors said.

People close to the bank said its lawyers and executives aren’t certain of the full scope of the investigation, including whether it is solely focused on the Panama Papers case, or could extend more broadly.

Reports stemming from the Panama Papers linked government and other public figures and company executives around the world to overseas assets in tax havens ranging from the British Virgin Islands to Panama. The records showed hundreds of millions of dollars in assets allegedly tied to hundreds of individuals.

Officials suspect that funds from criminal activities were transferred to Deutsche Bank entities or accounts without the bank raising flags as required, the prosecutor’s office said. The German prosecutors said Friday they were working based on information from Panama Papers documents and investigations.

Updated: 12-21-2018

UBS To Pay $68 million To Settle State Libor-Manipulation Claims

Bank says it is pleased to have resolved the legacy matter.

UBS UBS Group AG agreed to pay $68 million to end state investigations into alleged manipulation of a key lending benchmark that was considered one of the most important barometers of the world’s financial health.

A bank spokesman said the bank was pleased to have resolved the legacy matter and said the settlement “was achieved with the best interests of our shareholders in mind.”

UBS is the fourth U.S. dollar-LIBOR-setting panel bank that reached settlements with attorneys general to resolve accusations that they made billions of dollars by rigging the lending benchmark.

A series of Wall Street Journal articles in 2008 raised questions about whether global banks were manipulating the interest-rate-setting process by lowballing a key interest rate to avoid looking desperate for cash amid the financial crisis.

The London interbank offered rate, or Libor, is used globally to help set the price of many types of financial contracts, from home mortgages to commercial borrowing.

Libor, which is being phased out, is calculated every working day by polling major banks on their estimated borrowing costs.

Under the agreement with the attorneys general, which ties into a previous federal case that ultimately led to the Swiss bank pleading guilty to wire fraud, UBS admitted that management at times directed employees to “err on the low side” or stay in the “middle of the pack” when submitting U.S. Libor rates and that it submitted false Yen Libor rates to benefit its trading positions.

“It is highly advisable to err on the low side with fixings for the time being to protect our franchise in these sensitive markets,” the then head of the bank’s asset and liability management wrote in an email, according to Friday’s settlement agreement. “Fixing risk and [profit and loss] thereof is secondary priority for now.” 

As part of the settlement agreement with the states and District of Columbia, UBS agreed to cooperate with the state investigations and said it has “substantially complied” with required business changes under a 2012 settlement agreement with the U.S. Commodity Futures Trading Commission.

UBS said it wouldn’t object to the CFTC providing any reports about UBS’s compliance to the attorneys general.

 
Updated: 12-20-2018

Barclays Fined $15 Million by New York Over CEO’s Anti-Whistleblower Push

Regulator faults bank’s corporate culture after executive apologized for effort to unmask critic.

Barclays PLC was fined $15 million on Tuesday by New York state regulators after a probe into Chief Executive Jes Staley’s efforts to unmask a whistleblower.

The New York Department of Financial Services said shortcomings in governance, controls and corporate culture relating to the bank’s whistleblowing function allowed a sequence of events that could have hurt its whistleblower program. Several members of management failed to follow or apply whistleblowing policies in a manner that protected the CEO or the bank itself, DFS said.

In the summer of 2016, Mr. Staley personally directed the head of group security at Barclays to attempt to identify the author of two whistleblowing letters, DFS alleged. The letters had criticized a new hire, whom The Wall Street Journal has previously identified as Tim Main, a former colleague of Mr. Staley at JP Morgan Chase & Co. Mr. Main was brought in as the head of the financial institutions group at Barclays, the Journal has reported.

Mr. Staley was advised several times, including by the group chief compliance officer and the general counsel, not to try to identify the author of the letters, DFS said. His motive to learn the identity was to protect the new hire from a personal attack, but he had a conflict of interest because the letters criticized Mr. Staley’s role, and that of management, in recruiting and employing him, DFS said.

Mr. Staley has previously acknowledged his personal involvement and apologized. He was fined £642,430 ($868,501) by U.K. regulators in May for what they called a “serious error in judgement” in trying to identify the author of whistleblowing letters. The bank also docked £500,000 in pay from his 2016 bonus over the matter.

The board was told in early 2017 of Mr. Staley’s attempts to identify the whistleblower and it began its own investigation, and told regulators. Barclays said Tuesday that all regulatory investigations into the matter are now closed.

In addition to the $15 million fine, Barclays entered into a consent order with DFS requiring the bank to submit a detailed written plan to ensure the implementation of a whistleblower program, and a plan to improve the board’s oversight of that program.

It also has to provide by March 31 a report detailing, among other things, all instances since Jan. 1, 2017, in which an employee attempted to learn the identity of a whistleblower and any allegations of whistleblower retaliation.

Updated 1-15-2019

U.S. Casts Global Dragnet in Mozambique Corruption Probe

Recent arrests are part of a Justice Department effort to capture alleged conspirators in a $2 billion corruption scheme

Mozambique’s former Finance Minister Manuel Chang boarded a plane two weeks ago, planning to celebrate New Year’s Eve with his girlfriend in Dubai. Instead, he was arrested during a layover in South Africa and spent the holiday in a crowded Pretoria holding cell, awaiting potential extradition to the U.S.

A few days later, Lebanese shipbuilding executive Jean Boustani flew to the Dominican Republic for a beach vacation with his wife. Dominican authorities arrested him at the airport and expelled him to New York, where he is being held in a Brooklyn detention center.

The men were detained as part of a global effort by the U.S. Justice Department to capture alleged conspirators in a $2 billion corruption scheme in Mozambique, one of the poorest countries in the world. Mr. Chang and Mr. Boustani deny the charges against them, which include fraud.

Authorities in London last week arrested three former Credit Suisse Group AG bankers who allegedly helped plan and finance the fraud, and other suspects have yet to be apprehended, according to court documents. The former bankers, Andrew Pearse, Surjan Singh and Detelina Subeva, have been released on bail. A lawyer for Ms. Subeva declined to comment. Lawyers for Messrs. Pearse and Singh couldn’t be reached for comment.

The arrests on three continents—planned weeks ahead to occur in countries that have extradition treaties with the U.S.—are part of a widening effort by U.S. authorities to police what bond investors say is a growing intersection of high finance and corruption in emerging markets.

The Justice Department is investigating Goldman Sachs Group Inc.’s role in a multibillion-dollar scandal involving a Malaysian sovereign-wealth fund known as 1MDB. Goldman has denied wrongdoing.

Pursuing foreign executives and government officials—Mr. Chang is now a member of Mozambique’s parliament—is part of a new Justice Department strategy to curb corruption by going after individuals, according to lawyers specializing in international corruption cases who aren’t involved in the case.

An indictment filed in the case by the Justice Department in a New York federal court also refers to an unnamed, unindicted co-conspirator matching the description of Iskandar Safa, a wealthy Lebanese defense contractor who owns the company Mr. Boustani works for, according to a person familiar with the matter.

The Justice Department started investigating the situation in 2016, after reported irregularities in $2 billion of debt deals Credit Suisse and Russian bank VTB Group arranged for Mozambique to make purchases from Mr. Safa’s shipbuilding company, Privinvest Group.

According to the recent indictment, Mr. Boustani conspired with Mr. Chang and other Mozambican officials to create government maritime projects as fronts to borrow the money, which was used to pay at least $200 million in bribes and kickbacks.

The conspirators identified Mr. Chang by the code name “pantero,” or panther, in emails and in some cases tried to disguise their scheme by describing bribe payments as chicken deliveries, according to the indictment.

Mr. Pearse and his former colleagues arranged the debt deals by concealing their true nature from Credit Suisse’s compliance department, which had flagged the Privinvest executive said to match Mr. Safa’s description as a “master of kickbacks” in early due diligence, according to the indictment.

Credit Suisse received about $107 million in fees from the deals, according to Kroll Inc., which donors to Mozambique retained to conduct a forensic audit of the transactions. The bank has said it has cooperated with the Justice Department and hasn’t been indicted.

Credit Suisse has increased employees in its global compliance department by 42% since October 2015, hiring over 800 additional compliance specialists, a person close to the firm said.

“Neither VTB nor any of its employees are involved in the current proceedings,” a spokeswoman for VTB said. The Russian bank collected approximately $89 million in fees from the deals, according to the Kroll audit.

The U.S. alleges that the bribes included at least $12 million to Mr. Chang, about $15 million to Mr. Boustani and about $50 million to the three former Credit Suisse bankers.

Privinvest received about $1.8 billion of the debt proceeds and delivered some naval boats and surveillance equipment but overbilled Mozambique by at least $713 million, according to the Kroll audit. “We do not accept the partly constructed evaluation,” Privinvest said about Kroll’s analysis in a 2017 press release.

Neither U.K. nor Swiss authorities have charged anyone in relation to the alleged fraud. Mozambican authorities have also been slow to react, partly, analysts say, to avoid further scandal tainting the ruling party in an election year.

“Our domestic prosecutors were complacent,” said Adriano Nuvunga, head of ADS, a civil-society think tank in Mozambique. “We always hoped that since they used the U.S. financial system in the wrongdoing, the Americans would come for them.”

After the arrests, Mozambique’s national prosecution authority said in a press release that it had identified 18 suspects in its own investigation. U.S. authorities haven’t shared information with Mozambique’s government, according to the statement.

The U.S. Justice Department said it has jurisdiction because the defendants allegedly used correspondent banks in New York to transfer bribes and because the debt was sold to investors in the U.S. The indictment charges the alleged conspirators with wire fraud, securities fraud and money laundering and with violating the Foreign Corrupt Practices Act.

The Justice Department has asked U.S. and South African courts to deny bail requests by Mr. Chang and Mr. Boustani because it considers them to be flight risks, which lawyers for the men deny.

Mr. Chang was transferred to a Johannesburg cell he shared with 20 other detainees, where he paid a gang leader to ensure his protection, according to Willie Vermeulen, one of his lawyers. On Wednesday, Mr. Chang was moved into solitary confinement at his lawyers’ request.

Mr. Boustani has been in Brooklyn’s Metropolitan Detention Center with limited access to visitors or telephone calls because of a power outage and a reduction of inmate services caused by the partial U.S. government shutdown, his lawyer said in a court filing last week.

Related Articles:

U.S. Market-Manipulation Cases Reach Record (#GotBitcoin?)

Wall Street Fines Rose in 2018, Boosted By Foreign Bribery Cases (#GotBitcoin?)

Your questions and comments are greatly appreciated.

Monty H. & Carolyn A.

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