Ultimate Resource For Money Laundering, Spoofing, Market-Rigging, Etc. In Banking Industry (#GotBitcoin)

Bank of America To Pay $30 Million In Benchmark-Manipulation Settlement. Ultimate Resource For Money Laundering, Spoofing, Market-Rigging, Etc. In Banking Industry (#GotBitcoin)

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.

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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.

Updated: 1-13-2021

Christine Lagarde Convicted: IMF Head Found Guilty Of Criminal Charges Over Massive Government Payout

But former French finance minister, who faced potentially one year in jail, will not face any punishment.

International Monetary Fund chief Christine Lagarde has been convicted over her role in a controversial €400m (£355m) payment to a businessman.

French judges found Ms Lagarde guilty of negligence for failing to challenge the state arbitration payout to the friend of former French President Nicolas Sarkozy.

The 60-year-old, following a week-long trial in Paris, was not given any sentence and will not be punished.

The Court of Justice of the Republic, a special tribunal for ministers, could have given Ms Lagarde up to one-year in prison and a €13,000 fine.

Updated: 1-10-2021

Federal Investigators Probing AmEx Card Sales Practices

OCC and inspectors general offices of Treasury, FDIC and Federal Reserve probe company’s business-card sales practices.

Federal investigators are probing business-card sales practices at American Express Co., according to people familiar with the matter.

The inspectors general offices of the Treasury Department, Federal Deposit Insurance Corp. and Federal Reserve are investigating whether AmEx AXP 0.10% used aggressive and misleading sales tactics to sell cards to business owners and whether customers were harmed, the people said.

They are also examining whether specific employees contributed to the alleged behavior and if higher-level employees supported it, some of the people said.

The Office of the Comptroller of the Currency is also investigating business-card sales practices at AmEx, according to people familiar with the matter.

More than a dozen current and former AmEx employees previously told The Wall Street Journal that some salespeople strong-armed or misled small-business owners into signing up for cards to boost sales numbers.

Some salespeople misrepresented card rewards and fees, or issued cards that customers hadn’t sought, they said.

An AmEx spokesman said at the time that the company had found only a very small number of problems, which were resolved “promptly and appropriately,” including through disciplinary action.

“We have robust compliance policies and controls in place, and do not tolerate misconduct,” an AmEx spokeswoman said this week.

The civil investigation by the inspectors general offices is in early stages, according to some people familiar with the matter. The federal authorities have been staffing up investigation teams and have spoken with current and former employees, they said.

They are also reviewing whether the company’s compensation plans encouraged salespeople to cut corners, they said.

Spokespeople for the inspectors general offices at the Treasury, FDIC and Fed declined to comment.

The AmEx spokeswoman said that since last spring, “we have been cooperating with a regulatory review of small business card sales between 2015 and 2016.”

“We have conducted a detailed, independent review of these sales from this time period, and found no evidence of a pattern of misleading sales practices,” the spokeswoman said. “We take these matters seriously, and will continue to cooperate with our regulators.”

The previous Journal article focused on sales practices within the team that places calls to sell cards to small businesses. The spokeswoman said this group’s sales “represented approximately 0.25 percent of the 65 million total new cards American Express acquired world-wide between 2014 and 2019.”

The OCC’s investigation involves cards issued to business owners to replace their co-branded AmEx- Costco cards, according to people familiar with the matter. Costco Wholesale Corp. decided in 2015 to end its long-running partnership with AmEx, and AmEx launched an aggressive campaign to keep those customers.

The OCC, an independent branch of the Treasury, has been examining whether the problematic sales practices continued, according to some of the people familiar with the matter.

An OCC spokesman declined to comment.

After Wells Fargo & Co. disclosed a fake-accounts scandal in 2016, the OCC asked AmEx and other banks to review their sales practices. AmEx conducted a review and told the OCC it found few cases of inappropriate sales tactics, the Journal previously reported.

A whistleblower complaint filed with the OCC early last year said AmEx understated the number of problematic sales calls it reported to the OCC. According to the complaint, the company excluded some of the calls where AmEx employees tried to retain business-card holders who had been using AmEx-Costco business cards.

The complaint, which was reviewed by the Journal, also alleged a conflict of interest in how AmEx’s internal review was conducted. It said AmEx recruited a small number of employees in the sales division to help with the OCC-requested review. Those employees were told that the future of the sales division depended on the outcome of the review, the complaint said.

The investigation by the inspectors general offices is probing, among other issues, whether employees made sales calls that weren’t recorded, some of the people said. The investigators are also looking into how salespeople used customers’ personal information to make sales, these people said.

Current and former employees previously told the Journal that some salespeople in the Phoenix office placed calls from personal cellphones, and that senior managers sometimes closed sales on their unrecorded desk lines. Current and former employees also previously told the Journal that some salespeople pulled Social Security numbers and addresses from customer databases to submit card applications on behalf of business owners who didn’t always want them.

Updated: 2-14-2021

American Express Acknowledges DOJ Review of Card Sales

Company adds that it received a civil investigative demand from Consumer Financial Protection Bureau.

American Express Co. acknowledged Friday that government agencies, including the Department of Justice, have reviewed the company’s sales practices regarding small-business cards.

The company said in a regulatory filing that in May it began responding to a regulatory review led by the Office of the Comptroller of the Currency and the DOJ’s civil division. AmEx said the review was connected to “historical sales practices relating to certain small business card sales.”

The Wall Street Journal reported last month that federal investigators including the inspectors general offices of the Treasury Department, Federal Deposit Insurance Corp. and Federal Reserve were investigating AmEx card sales. The investigators were looking into whether the company used aggressive and misleading sales tactics to sell cards to business owners and whether customers were harmed, the Journal reported.

The Justice Department is working with those offices, according to people familiar with the matter.

The Journal also reported last month that the OCC was investigating the company’s business-card sales practices.

More than a dozen current and former AmEx employees previously told the Journal that some salespeople strong-armed or misled small-business owners into signing up for cards to boost sales numbers. Some salespeople misrepresented card rewards and fees, or issued cards that customers hadn’t sought, they said.

AmEx has previously said it found only a very small number of problems that were resolved “promptly and appropriately,” including through disciplinary action.

AmEx said Friday that it had “conducted an internal review of certain sales from 2015 and 2016” and had “taken appropriate disciplinary and remedial actions, including voluntarily providing remediation to certain current and former customers.”

AmEx also said in its Friday regulatory filing that it received a grand-jury subpoena last month from the U.S. attorney’s office for the Eastern District of New York regarding small-business card sales. It also said it had received a civil investigative demand from the Consumer Financial Protection Bureau “seeking information on sales practices related to consumers.”

The Company Said In The Filing: “We are cooperating with all of these inquiries and have continued to enhance our controls related to our sales practices. We do not believe this matter will have a material adverse impact on our business or results of operations.”

Deutsche Bank To Pay $130 Million To Settle Federal Criminal And Civil Investigations

German bank agreed to settle allegations that it violated laws against bribery by using middlemen and hiding payments.

Deutsche Bank agreed Friday to pay $130 million largely to settle allegations that it violated laws against bribery by using middlemen and hiding its payments to them as part of a global effort to win business.

The German bank admitted the wrongdoing in its agreement with prosecutors and reached a deal with the U.S. government over a commodity-trading scheme as it settles two longstanding cases before the change of administrations in Washington.

The bribery settlement exposed a wide-ranging effort by the bank to use consultants or middlemen to help it get deals in Saudi Arabia, Abu Dhabi, China and Italy. Regulators frown on the use of these consultants because they are often seen as a backdoor way to funnel cash to government or corporate officials.

The bank reached a so-called deferred-prosecution agreement with federal prosecutors in Brooklyn, meaning it won’t face criminal charges if it abides by certain requirements for three years.

The bank agreed to pay about $87 million to settle the criminal allegations. Deutsche Bank will pay $43 million to resolve a parallel investigation by the U.S. Securities and Exchange Commission, the SEC announced Friday.

A Deutsche Bank spokesman said the bank couldn’t comment on the specifics of the resolutions but that it had taken significant remedial actions. “Our thorough internal investigations, and full cooperation with the DOJ and SEC investigations of these matters, reflect our transparency and determination to put these matters firmly in the past,” the spokesman said.

In court documents unsealed Friday, federal prosecutors accused Deutsche Bank of two separate schemes. In one, prosecutors accused the bank of falsifying records related to payments to third-party intermediaries, known as business development consultants.

These included concealing bribes to a client’s decision maker in Saudi Arabia and hiding millions of dollars in payments to an intermediary in Abu Dhabi, prosecutors said. They said that in Italy, Deutsche Bank falsely recorded payments to a regional tax judge who it employed to help attract clients.

In China, the bank hired a consultant who was a close friend of an official involved with setting up an investment fund with Deutsche Bank. It paid the consultant at least $1.6 million without fully documenting his services or reviewing invoices the consultant submitted for gifts and entertainment for government officials, the SEC said.

In the separate scheme that involved derivatives trading, Deutsche Bank agreed to pay $1.9 million to resolve allegations that former precious metals traders manipulated prices for gold and silver futures contracts. The bank was also assessed a $5.6 million fine, but the DOJ waived the amount because of earlier regulatory penalties paid by Deutsche Bank.

The traders were convicted in Chicago federal court in September of wire fraud. James Vorley and Cedric Chanu traded for the bank from its offices in London and Singapore. A jury found they manipulated prices for gold and silver futures contracts traded on exchanges operated by Chicago-based CME Group Inc.

The traders asked a judge in November to overturn the jury’s verdict or grant them a new trial. A third former trader, David Liew, pleaded guilty in 2017.

The settlement is part of an effort by Deutsche Bank Chief Executive Officer Christian Sewing to restore the lender’s tarnished reputation with regulators. The bank paid large fines in the U.S. and U.K. over weaknesses in its anti-money-laundering procedures and has been rebuked by Federal Reserve regulators over risk controls in its U.S. operations.

Deutsche Bank had previously said it was being investigated by the Justice Department for its hiring practices and use of consultants in foreign countries.

In 2019, the bank paid $16 million to settle charges by the Securities and Exchange Commission that it violated U.S. foreign bribery law by hiring relatives of foreign government officials in China and Russia. Deutsche Bank settled those Foreign Corrupt Practices Act charges without admitting to or denying the SEC’s findings.

In November, The Wall Street Journal reported that the bank was under pressure to exit Russia by outside monitors tracking its money-laundering controls. The monitors were appointed by New York state’s Department of Financial Services as part of a 2017 settlement related to “mirror trades,” in which the bank moved $10 billion of Russian client money out of the country.

Deutsche Bank has said it has committed significant resources to improve its money-laundering controls and has fully cooperated in investigations.

Updated: 5-30-2021

Fed Admonishes Deutsche Bank For Ongoing Compliance Failures

The Federal Reserve has privately told Deutsche Bank AG that its compliance programs aren’t up to snuff, signaling that the scandal-plagued bank is failing to adhere to a number of past accords with U.S. regulators, according to people familiar with the matter.

The Fed’s recent warning came in an annual regulatory assessment that said Deutsche Bank hadn’t improved its risk management practices despite being under confidential agreements with the central bank to fix the issues, the people said. The assessment letter has the German bank’s leaders bracing for potential sanctions, including the possibility of a large fine, said one person briefed on the matter.

The Fed’s latest admonishment is a setback for Chief Executive Officer Christian Sewing, who has been working diligently to repair Deutsche Bank’s relations with banking supervisors following a tumultuous period in which the lender stumbled from one crisis to the next. He now has a new hurdle to overcome — and it’s likely a big one.

Deutsche Bank spokesman Dylan Riddle said the firm doesn’t comment on any communications it has with regulators. A Fed spokesman also declined to comment.

Deutsche Bank has had multiple dust-ups with U.S. regulators — including foreign-exchange violations and ties to money-laundering cases. The lender has also been the subject of numerous Fed orders on how the company manages risks, and the firm’s efforts to overhaul its controls haven’t convinced the agency that the bank’s problems are behind it, the people said.

In a move that showed the firm is focusing on compliance issues, Deutsche Bank last week elevated Joe Salama, who had been general counsel for the Americas, to be global head of anti-financial crime and group money laundering officer. He succeeded Stephan Wilken, who had been in the post since October 2018.

While discussions with the Fed over Deutsche Bank’s ongoing missteps are in their early stages, the bank has faced similar rifts with the agency in recent years and been fined for them. The punishments include a $137 million settlement over allegations that traders rigged currency benchmarks and a $41 million penalty for money-laundering vulnerabilities.

Despite the Fed scrutiny, there are signs that Deutsche Bank has improved its risk management, at least in some areas. The firm emerged from the March collapse of Archegos Capital Management unscathed, while other banks that did business with Bill Hwang’s family office lost more than $10 billion combined.

The turn of fortune after years of gloom has lifted Deutsche Bank’s share price to outperform rivals as Sewing’s revamp has taken hold, and are up 38% this year.

Still, more trouble remains a possibility, as the Fed taking aim at the bank’s compliance systems shows. The stock is still trading at one of the steepest discounts to book value among European lenders with shares still far below their peak, and the bank has lost money in five of the past six years.

Updated: 12-17-2020

Credit Suisse Criminally Charged In Longstanding Money-Laundering Case

Swiss prosecutors allege the lender didn’t comply with provisions against money laundering, allowing a Bulgarian criminal organization to launder money through the bank between 2004 and 2008.

Credit Suisse Group AG CS +0.39% was charged by Swiss prosecutors Thursday for allegedly failing to prevent money laundering through the bank by clients and an employee, in a case stretching back more than a decade.

The Swiss attorney general’s office said Credit Suisse CS 0.39% in Zurich didn’t comply with provisions against money laundering or the bank’s own internal rules between 2004 and 2008 in opening and monitoring customer accounts.

It alleged that those and other flaws in the lender’s controls allowed a Bulgarian criminal organization to launder money through the bank during those years with the help of a bank executive. The organization allegedly recruited a Bulgarian wrestler and others in his orbit for operations transporting drugs and laundering money.

The former Credit Suisse executive, who wasn’t named, was charged with aggravated money laundering for allegedly assisting the Bulgarian organization and concealing the criminal origin of assets in transactions at Credit Suisse. Two more unnamed individuals, who prosecutors said were members of the Bulgarian organization, also were charged. Switzerland had started criminal proceedings in 2008.

Credit Suisse said it was astonished to be charged and refuted the allegations, including about “supposed organizational deficiencies.” It said it is convinced that the former employee, who left the bank in 2007, is innocent.

It said outside lawyers and consultants had reviewed its systems against money laundering during the yearslong probe and found its organizational setup was “correct and appropriate” throughout the period probed by prosecutors. It said those experts found prosecutors were alleging deficiencies based on rules and principles that didn’t apply at the time.

The charges come as Credit Suisse tries to untangle itself from a raft of mishaps this year that included fallout from a corporate-spying scandal. Like most global banks, it is involved in multiple criminal and civil probes and lawsuits over past alleged misconduct or governance or systems failures.

In 2014, it pleaded guilty to helping Americans evade taxes by hiding their wealth, as part of a settlement with the U.S. Justice Department. Rival UBS Group AG is currently fighting a $5 billion fine from a French court that ruled it illegally helped French clients hold undeclared Swiss accounts

The Swiss Federal Criminal Court could order the disgorgement of profits and impose fines up to 5 million francs, equivalent to about $5.7 million, Credit Suisse said. It said prosecutors would have to prove the former employee is guilty of crimes and that the bank’s purported organizational deficiencies enabled the employee and violated rules at the time.

The bank said its anti-money-laundering framework has been significantly expanded and strengthened since the probe started in 2008. It said meeting legal and regulatory requirements “has been and remains an absolute priority for Credit Suisse.”

Hundreds of compliance staff were hired in recent years to improve the bank’s systems, Credit Suisse executives have said previously. In 2018, its main regulator, Finma, said it found deficiencies in Credit Suisse’s anti-money-laundering processes in relation to dealings with clients linked to two oil companies and to FIFA, soccer’s governing body.

Credit Suisse Pays $600 Million To Settle U.S. Mortgage Case

Credit Suisse Group AG agreed to pay $600 million to settle a lawsuit over mortgage securities that collapsed in the 2008 financial crisis, an accord that locks in an expected hit to its profit.

The plaintiff, MBIA Insurance Corp., said late Thursday that it had reached an agreement, after a post-trial court decision that ordered the Swiss bank to pay about $604 million in damages. The settlement means there will be no appeal trial.

Credit Suisse is expecting to post a fourth-quarter loss when it reports earnings on Feb. 18, after setting aside $850 million for U.S. legal cases including MBIA and booking a $450 million impairment on a hedge fund investment.

“We are pleased to have resolved this legacy matter, which dates back to 2007. The settlement amount of $600 million is substantially less than our earlier guidance of up to approximately $680 million and has been fully provisioned for in our fourth quarter 2020 results,” Andreas Kern, a spokesman for Credit Suisse, said in an email.

MBIA’s shares rallied after the news, up almost 10% in pre-market trading.

Last month, the New York state judge presiding over the case ruled against Credit Suisse in the 2009 suit brought by the bond insurer over alleged misrepresentations of the quality of loans underlying residential mortgage-backed securities it guaranteed in 2007. MBIA had been seeking $686.7 million plus interest while Credit Suisse had estimated damages of $597.7 million.

Credit Suisse is among lenders including UBS Group AG, Morgan Stanley and Nomura Holdings Inc. that are still defending themselves against claims over the sale of the securities that plummeted in value during the 2008 crisis. Credit Suisse probably has the most exposure in repurchase litigation, as it faces suits seeking more than $3 billion, according to Bloomberg Intelligence’s Elliott Stein.

The case is MBIA Insurance Corp. V. Credit Suisse Securities LLC, 603751/2009, New York State Supreme Court, New York County.

Updated: 12-15-2020

FBI Is Investigating SEB, Swedbank, Danske Bank; Shares Tank

Shares in SEB AB, Swedbank AB and Danske Bank A/S plunged on Tuesday after one of Sweden’s biggest newspapers said the Federal Bureau of Investigation was probing allegations of money laundering and fraud.

Swedbank fell as much as 9.6%, SEB lost 7.6% and Danske dropped 4.2%, driving the three to the bottom of the Bloomberg index of European financial stocks.

The selloff followed a report in the Dagens Industri newspaper, which alleged that the banks are being investigated by three federal authorities in the U.S., namely the Justice Department, the FBI and a federal prosecutor’s office in New York. The newspaper didn’t say where it got the information.

Swedbank, SEB and Danske said the report contained no new information, amid ongoing investigations into allegations of money laundering. Danske, Denmark’s biggest bank, admitted more than two years ago that its Estonian unit was at the heart of one of Europe’s biggest dirty money scandals.

Frida Bratt, a savings economist at broker Nordnet, said that while the allegations against the banks are well known to most investors, the sudden selloff shows how vulnerable their shares are to bad news.

“This reflects the fear that the worst is not yet over in the money laundering issue,” she said.

Nicklas Andersson, a savings economist at another broker in Stockholm, Avanza, said, “Investors play it safe and reduce risk when information like this appears, before they know how to interpret that information.”

* Unni Jerndal, a spokeswoman for Swedbank, said the information contained in the Dagens Industri report is “old news.” The lender is in ongoing talks with U.S. authorities in connection with existing probes into allegations of money laundering, she said by phone. For legal reasons the bank can’t identify which authorities.

* Frank Hojem, a spokesman for SEB, also called the information “old” and said the bank has been in touch with U.S. authorities, but that it’s unaware of “any accusations” against it.

* Stefan Singh Kailay, a spokesman for Danske, said “it is known that we are being investigated by authorities in Denmark, the U.S., Estonia and France, and we continue to be in close dialogue with them all.” He said Danske is “unable to estimate any potential outcome of these dialogues,” which he said includes the “timing.”

The Probes

“The FBI’s involvement doesn’t strike me as a surprise,” said Elliott Stein, a senior litigation analyst for Bloomberg Intelligence in New York. “We’ve known for some time that the U.S. Justice Department was investigating potential money laundering violations in at least some Nordic banks. DOJ’s investigative work is often done by the FBI in conjunction with prosecutors.”

Danske has previously said it’s being investigated in the U.S. and Europe after admitting that a large part of about 200 billion euros ($243 billion) in non-resident flows through an Estonian unit were suspicious.

Swedbank has also said it’s being probed in the U.S., after its Baltic unit was allegedly used for transferring suspicious transactions. It was fined in Sweden earlier this year for its anti-money laundering breaches.

SEB has also been targeted in an investigation by Sweden’s regulator regarding allegations against the bank that it handled suspicious transactions via its Baltic operations. The lender has previously said it had been contacted by U.S. authorities, without elaborating.

According to Dagens Industri, the Swedish Ministry of Justice received a formal request for legal aid from the U.S. Department of Justice this summer due to the money laundering investigation in that country.

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.

Updated: 3-1-2020

AmEx Staff Misled Small-Business Owners to Boost Card Sign-Ups

Questionable sales tactics cropped up in push to retain cardholders after Costco partnership ended.

The American Express Co. saleswoman had finally convinced Bryan Daughtry to apply for a card. There was just one thing: She had to run a credit check.

Mr. Daughtry, who owns a disaster-cleanup company in Ohio, balked. He was trying to get a mortgage and didn’t want the inquiry to dent his credit score. She refused to stop the process, he said, checked his credit, and his application was approved.

“That left a bad taste in my mouth,” said Mr. Daughtry.

Some AmEx salespeople strong-armed business owners like Mr. Daughtry to increase card sign-ups, according to more than a dozen current and former AmEx sales, customer-service and compliance employees. The salespeople have misrepresented card rewards and fees, checked credit reports without consent and, in some cases, issued cards that weren’t sought, the current and former employees said.

An AmEx spokesman said the company found a very small number of cases “inconsistent with our sales policies.” “All of those instances were promptly and appropriately addressed with our customers, as necessary, and with our employees, including through disciplinary action,” he said.

“We have rigorous, multilayered monitoring and independent risk-management processes in place, which we continuously review and enhance to ensure that all sales activities conform with our values, internal policies and regulatory requirements,” he said. “We carefully examine any issues raised through our various internal and external feedback channels and audits, and we do not tolerate any misconduct.”

Current and former employees said the dodgy sales tactics date to at least 2015, when AmEx was scrambling to retain Costco Wholesale Corp. small-business customers after the warehouse club ended their long-running partnership.

The deal’s demise was a huge blow to AmEx. For 16 years, the warehouse club didn’t accept credit cards in its stores from any company but AmEx. AmEx also issued credit cards branded with the Costco logo that offered special perks.

Small businesses were a particularly valuable slice of the Costco cohort. The warehouse club sells a lot of things they need—two-liter jugs of olive oil, bulk cleaning supplies, big-screen TVs, tires for their delivery vans. AmEx was about to lose the stream of fees on all of those card purchases.

Customers were also free to use their Costco-branded cards elsewhere, and they did. Kenneth Chenault, then AmEx’s chief executive, said that about 70% of spending on the Costco cards were non-Costco purchases. Those fees would go away, too.

The potential revenue hit from the loss of the Costco customers was enormous, so AmEx launched an aggressive campaign to keep them. The push ushered in an era of escalating sales goals and hefty commissions that persists today.

Mr. Daughtry said he didn’t seek out the AmEx card. The saleswoman called his office numerous times over several weeks last spring before she finally got him on the line. Although he said he never consented to the card, he got a $250 bill for its annual fee in the mail.

He called to complain. “I told them I wouldn’t stand for it, and I would take some type of action,” Mr. Daughtry said. AmEx agreed to drop the charge.

Known for courting well-heeled consumers, AmEx also relies heavily on its business customers. It derives about 30% of its revenue from the services it sells to a range of companies—from mom-and-pop shops to multinational corporations.

AmEx is the largest business-card issuer in the U.S., according to the Nilson Report. Small businesses are an especially important constituency; AmEx has said its small-business card portfolio is larger than that of its nearest five competitors combined.

The task of retaining Costco customers initially fell to about a hundred AmEx salespeople in Phoenix. The “top client acquisitions” group employees were told that the Costco retention program—Project Lincoln—was a once-in-a-lifetime opportunity to make big money. Their task: dial up Costco business-card holders and convince as many as possible to sign up for AmEx business cards.

The dial-for-dollars strategy worked. AmEx managed to hang onto a big chunk of the Costco customers. Within six months of the push, some salespeople had earned commissions of $50,000 to $100,000, according to current and former employees. BMWs and other high-end cars began appearing in the office parking lot.

Some salespeople took shortcuts to get there, current and former employees said.

Salespeople are required to call customers on their recorded desk lines, but some placed calls from personal cellphones, often while standing in a breezeway between two buildings on AmEx’s Phoenix campus, according to current and former employees. Senior managers sometimes closed sales on their unrecorded desk lines.

There were red flags. Some 40% to 45% of cards that were being mailed out as part of Project Lincoln were being activated, according to a 2015 presentation by a senior employee in the division—well below the typical rate of at least 60%. Phoenix salespeople were earning the highest commissions, but the accounts they had opened had the lowest usage rates of any other group, said people familiar with the presentation.

An executive at the company’s headquarters in New York flagged the low activation rates to senior sales employees in Phoenix, according to people familiar with the matter. Commissions were scaled back, and some salespeople suspected of dicey behavior were fired, the people said.

The Costco retention campaign ended in 2016, but the problematic sales practices didn’t, current and former employees said. Salespeople who had grown accustomed to the big commissions from the retention program were back to mostly relying on cold calls to meet their now-higher monthly sales targets.

Salespeople sometimes told hesitant business owners they would send informational “welcome kits” in the mail. Instead, they used Social Security numbers and addresses gleaned from customer databases to submit applications on the business owners’ behalf. The “welcome kits” were simply the cards and their associated paperwork.

It didn’t take long for senior sales employees to begin spotting the same practice at another AmEx office in Florida focusing on business-card sales, they said.

Some employees tried to warn higher-ups about the questionable tactics. In early 2017, a saleswoman contacted Susan Sobbott, at the time president of global commercial services. She connected the saleswoman with employees in human resources and risk management so they could investigate the allegations.

When human-resources staff reached out to the employee’s manager, he denied the saleswoman’s allegations and said she was underperforming. The employee later left the company. The manager was later promoted. Ms. Sobbott has since left AmEx.

“The senior leader appropriately referred the matter to independent groups outside the business, who then investigated the allegations and found them to be unsubstantiated,” the AmEx spokesman said.

Around this time, AmEx was conducting a broad review of its sales tactics. After Wells Fargo & Co. disclosed in September 2016 that branch employees had opened fake accounts without customer consent, the Office of the Comptroller of the Currency asked AmEx and other banks it oversees to make sure their employees weren’t doing the same thing.

AmEx reviewed calls from desk phone lines of sales staff between 2014 and 2017 and found evidence of misleading behavior, according to people familiar with the matter. Some customers were told their cards were being upgraded when they were being given new cards; others received more cards than they sought. Salespeople skipped over required disclosures and, in some cases, falsely told customers their credit wouldn’t be checked, the people said. Cards also had been issued without customer consent, they said.

AmEx told the OCC it found few cases of inappropriate sales tactics, the people said. The company reprimanded or fired a small number of employees and asked credit-reporting firms to remove inquiries from the credit reports of customers who didn’t consent to the checks, they said. AmEx asked customers who received cards they didn’t authorize if they wanted to keep them, the people said.

The review didn’t capture calls made from employees’ cellphones, nor did it catch those made by senior sales staff on unrecorded lines, according to people familiar with the matter.

An AmEx spokesman said the company “found no evidence of a pattern of misleading sales practices.”

Last year, the OCC listened to some AmEx sales calls and found evidence of misconduct, according to people familiar with the matter.

AmEx said the business-card sales teams were responsible for around 0.25% of 65 million new cards issued by the company world-wide between 2014 and 2019, or about 162,500 cards. “Less than 0.25% of the group’s sales activities have been identified by us as inconsistent with our sales policies,” a spokesman said.

As recently as last year, AmEx’s customer-service department fielded complaints from business owners who said they had received cards they didn’t sign up for, according to people familiar with the matter. Some of those calls made their way to the company’s executive escalations department, some of the people said. Angry customers were often offered extra rewards points to drop their complaints, they said.

Customers also complained that salespeople misled them about card fees and rewards, current and former employees said.

Abdelnasser Abdeen said a salesperson told him he wouldn’t be charged an annual fee if he didn’t activate his AmEx card. Soon after the card came in the mail last year, he got a bill for $295. When he called to complain, Mr. Abdeen said he was told the card rewards would more than cover the fee.

“They were pushing to sell me that card,” said Mr. Abdeen, who owns a used-car dealership in northern Virginia. “I didn’t like that.” He canceled the card and signed up for a different type of AmEx card. He said he isn’t getting the rewards points he was told he would get.

In the fall, an AmEx salesman convinced Glen Vitale to take out six business cards with an unusually generous offer of four rewards points per dollar on certain spending categories for the first $150,000 spent. He said he was led to believe he would pay a single annual fee of $295 for all the cards.

Mr. Vitale, an executive at an auto-parts manufacturer in Pompano Beach, Fla., began using one of the cards right away. The salesperson emailed to ask whether he would make a small purchase with the others to test their security chips.

Soon after, Mr. Vitale said he got six separate bills for $295 each. The salesperson told him the rewards would more than cover the cost.

“I said, ‘I hope you’re right,’ and I went on with my business,” he said. AmEx recently fired the salesman.

Updated: 2-27-2020

Wells Fargo To Pay $35 Million To Settle ETF Probe

SEC says sales controls weren’t sufficient over products called too risky for some investors.

Wells Fargo & Co. agreed to pay $35 million to settle regulatory claims that its financial advisers recommended exchange-traded funds that were too risky for some clients.

The Securities and Exchange Commission’s investigation targeted Wells Fargo’s sale of inverse ETFs, a type of fund that moves in the opposite direction of an index it tracks. Inverse ETFs can be used to hedge other positions or bet on a falling market, but the products are complex enough that regulators have warned for years they are unsuitable for many individual investors.

The sanction follows on an earlier blemish for similar conduct in 2012, when Wells Fargo paid $2.7 million to the brokerage industry’s self-regulator for selling inverse and leveraged ETFs without reasonable supervision. The SEC’s settlement order said Wells Fargo updated its policies for selling the products in 2012, but the controls still weren’t sufficient.

The deal comes one week after Wells Fargo resolved a bigger regulatory cloud, a multiyear investigation into how low-level employees who were stressed by high sales goals opened fake and unauthorized bank accounts. Wells Fargo paid $3 billion to settle those allegations.

Brokers and investment advisers have struggled for years with how to sell inverse and leveraged ETFs. Leveraged ETFs employ derivatives to deliver two or three times the daily price moves of benchmarks. The SEC approved the products over a decade ago and has been reining in their use by individual investors ever since.

Wells Fargo said Thursday that its advisory business “no longer sells these products in the full-service brokerage.”

The products are popular with some traders and are intended for daily, tactical trading. But many brokers have recommended the products to investors who held the funds for longer periods, which can lead to surprises.

For example, an inverse fund that should rise in value when the market declines can actually lose value during periods of sustained volatility. That outcome stems from the effects of daily compounding, which over longer periods produces returns that can vary from a leveraged or inverse ETF’s objectives.

The SEC’s settlement order said Wells Fargo’s employees advised clients from 2012 to 2019 to hold the funds “in many cases for months or years” in accounts, including those investors saving for retirement.

The SEC said the $35 million penalty would be used to compensate clients who had losses and held the funds for more than 30 days.

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.

Updated: 8-14-2020

An AmEx Manager Says She Spoke Up About Sales Problems, Then Got Pushed To The Side

Sophia Lewis Said Amex Created A Culture Where Employees Can Get Rewarded For Breaking Rules.

Sophia Lewis’s career was on the rise. Then she began telling her bosses about questionable sales practices. ‘Things started going downhill.’

Sophia Lewis thought she would build a long career at American Express Co. A few years in, though, she was telling her bosses that something was wrong.

Ms. Lewis said she saw some AmEx employees routinely submit corporate card applications without verifying the companies’ financial information, pocketing commissions each time. Beginning in 2018, Ms. Lewis said, she alerted higher-ups about those complaints. But AmEx, she said, had created a culture where employees can get rewarded for breaking rules.

“It was when I started raising red flags,” she said, “that things started going downhill.” The company suspended her in February for reasons it said are unrelated to her complaints. Other current and former employees said they saw the same behavior that Ms. Lewis described.

An AmEx spokesman said the company, based in New York, is committed to fostering a culture of respect and integrity, and provides multiple channels for employees to raise concerns. “We encourage our colleagues to speak up when they believe our policies, values or standards are not being upheld, and we strictly prohibit retaliation,” he said.

In the race for customers, AmEx has relied heavily on commissions to motivate salespeople. More than a dozen current and former AmEx employees in sales, customer service and compliance previously told The Wall Street Journal that salespeople strong-armed small-business owners to increase those card sign-ups, sometimes misrepresenting card rewards or issuing cards that weren’t sought. An AmEx spokesman said at the time that the company had found only a very small number of problems, which were resolved “promptly and appropriately,” including through disciplinary action.

Banking regulators have kept a close eye on sales incentives since the Wells Fargo & Co. fake-accounts scandal exploded in 2016. According to an internal 2018 AmEx document, the Office of the Comptroller of the Currency told AmEx to change how it paid employees who sold small-business and corporate cards—the division where Ms. Lewis works. The regulator said AmEx’s commission structure could increase the risk of misconduct.

An OCC spokesman declined to comment. An AmEx spokesman said the matter was raised by the OCC in 2017 and that the company addressed it.

In response to Ms. Lewis’s allegations, the AmEx spokesman said that her higher-ups had properly referred her concerns to “our independent investigatory teams.” He said the claims “were thoroughly reviewed and appropriately addressed” and that “no instances of customer harm were identified.”

Ms. Lewis, now 50 years old, joined AmEx’s Phoenix office in 2014 to sell small-business cards. She had worked for years selling mortgages.

By 2017, she was promoted to oversee a group of about 10 employees selling small-business and corporate cards.

In 2018, Ms. Lewis said, some of her employees told her about what they believed to be problems with certain salespeople on another team.

For a business to be eligible for a corporate card, it typically needed at least $4 million in annual revenue, according to current and former employees and company documents.

Ms. Lewis and other current and former employees said some salespeople were submitting applications without verifying their numbers. Many of the businesses fell far short of the $4 million threshold, they said.

Ms. Lewis told a sales director about what she and her employees were seeing, and AmEx launched an investigation.

The AmEx spokesman said that the company may make exceptions to the $4 million threshold, and that it is only one factor used to determine whether a business qualifies for a corporate card. “All applicants undergo a thorough risk assessment to determine their creditworthiness,” he said.

The spokesman also said that AmEx “found no violations of policies or procedures” when it reviewed Ms. Lewis’s claims.

The questionable applications typically wouldn’t get approved if underwriting employees reviewed them. But some did, and salespeople pocketed commissions either way, often about $475 to $650 per application, Ms. Lewis and former employees said.

Soon, in Ms. Lewis’s unit, AmEx changed commissions for corporate cards to pay them after the cards were approved and used. The AmEx spokesman said the company regularly reviews and modifies sales incentives, in part to reduce circumstances that could lead to inappropriate sales practices. He said the 2018 change was made “to better align with business objectives.”

After the AmEx investigation into Ms. Lewis’s claims about sales practices, she applied for several positions and didn’t get them.

In July 2019, she filed a complaint with the Equal Employment Opportunity Commission alleging racial and gender discrimination. Ms. Lewis, who is Black, said she was also frustrated about not getting promoted.

The EEOC forwarded her complaint to the Arizona attorney general’s office, which closed her case last month, citing insufficient evidence. Ms. Lewis is appealing.

The AmEx spokesman said the company had “found no basis for” Ms. Lewis’s allegations of discrimination. “We are deeply committed to fostering a diverse and inclusive workplace,” he said.

Spokespeople for the EEOC and the Arizona attorney general declined to comment.

Around mid-2019, Ms. Lewis said, her salespeople told her that some employees in Arizona and Florida were again engaging in the questionable tactics she had previously flagged, including not verifying companies’ financial information. By then, AmEx had returned to paying commissions for applications—though now it could claw back the money if underwriters rejected them.

Ms. Lewis again alerted her bosses. In October, for example, she emailed several sales leaders, citing about a dozen examples of what she saw as problematic sales, according to a copy of the email reviewed by the Journal. In one case, a salesperson had submitted a corporate card application for a Greenbelt, Md., financial-services firm without including verifying documents and while using a corporate ID number related to Apple Inc. The financial-services firm isn’t related to the technology giant.

When asked about the exchanges that Ms. Lewis described, the AmEx spokesman said: “When the employee raised concerns of potential sales practice violations, they were properly referred by her leaders to our independent investigatory teams outside of her business unit, thoroughly reviewed and appropriately addressed.”

A few days later, Ms. Lewis was told by email that two of those sales leaders had met with “internal audit,” which was looking into the matter.

A week later, Ms. Lewis said, she was called into a sales leader’s office, where she was told to consider how she was affecting her “brand” and whether she wanted to remain at AmEx, Ms. Lewis said. He followed up with an email saying she wasn’t supposed to conduct her own investigations, according to a copy of the email reviewed by the Journal.

Ms. Lewis replied that she thought she was doing the right thing by bringing problems to leadership, according to a copy of the email reviewed by the Journal.

Ms. Lewis said she struggled over what to do next. Her husband encouraged her to press on. So did her mother.

In December, Ms. Lewis filed a Labor Department complaint. A Labor Department spokeswoman didn’t comment on Ms. Lewis’s case.

In February, Ms. Lewis was placed on a three-day paid suspension. The AmEx spokesman said she broke information-security policies by sending confidential company information to her personal email address.

Ms. Lewis said she did nothing wrong. She said she had sent an email to her personal account with information about a problematic sales call. She said she had also forwarded an email that she had written about sales problems to her personal account.

Ms. Lewis didn’t want to go back to the office. Exhausted and unnerved, she said, she filed for stress-related paid sick leave. AmEx granted it.

A couple of weeks later, Ms. Lewis learned that her performance rating for 2019 had plummeted. She doesn’t know why. During the first three quarters of 2019, Ms. Lewis was a top performer among small-business and corporate card sales managers, according to a company document.

Ms. Lewis said she tried to negotiate with AmEx through the Labor Department. She wanted to return, but only if her performance rating is revised. AmEx, she said, has declined.

Updated: 3-12-2020

JPMorgan Chase Settles In Suit Over Credit Card Crypto Purchases

The sixth-largest bank worldwide, JPMorgan Chase Bank, has settled a lawsuit over unannounced changes made to the fee structure applied to cryptocurrency purchases made using its credit cards in 2018. The details of the settlement have not been disclosed.

Plaintiffs Brady Tucker, Ryan Hilton, and Stanton Smith accused Chase Bank of violating its cardholder terms of service during January 2018.

The trio asserts that Chase applied the fee structure for cash advances to cryptocurrency purchases made with Chase’s credit cards for 10 days without providing any warning as to the change.

Chase Changes Fee Structure For Crypto Purchases Without Warning

During a previous hearing, Chase sought to argue that cryptocurrency purchases comprise “cash-like transactions” as per its terms of service, and as such, it did not breach its contract with cardholders.

However, in August, Judge Failla ruled that the trio had demonstrated a credible interpretation of “cash-like” as exclusively referring to financial instruments tied to fiat currency — such as traveler’s check and money orders, and cash.

Chase also claimed that the adjusted fee schedule was the result of crypto exchange Coinbase changing its merchant category code from “purchases” to “cash advances.”

Plaintiffs Sought $1 Million In Statutory Damages

Tucker originally filed the suit during April 2018. After the bank sought dismissal of the case in July 2018, Tucker filed an amended complaint alongside Smith and Hilton.

Claiming to represent a class of up potentially thousands of Chase Bank cardholders impacted by the unannounced changes, the plaintiffs sought full refunds of all charges wrongfully incurred in addition to $1 million in statutory damages.

All parties now have 75 days to submit their stipulations of settlement, otherwise, the plaintiffs can apply for the action to be restored.

JPMorgan Chase Targets Burgeoning Stablecoin Sector

Last month, JPMorgan Chase published a 74-page report examining the development and state of the blockchain industry.

While acknowledging that distributed ledger technologies had seen significant adoption for niche financial applications such as stock exchanges, the report concluded that mainstream blockchain adoption is still many years away.

Despite its predictions, America’s largest bank has moved quickly to capitalize on the recent boom in stablecoin interest.

During February 2019, JPMorgan Chase became the first U.S. bank to successfully test a stablecoin representing fiat currency after trialing its ‘JPM Coin’.

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: 6-18-2020

Deutsche Bank Settles Swap Reporting Outage, Spoofing Violations

The bank has agreed to pay more than $10 million to settle two separate cases by a derivatives market regulator.

Deutsche Bank will pay $9 million to settle claims stemming from an outage in 2016 of its swaps reporting platform, the U.S.’s derivatives market regulator said Thursday.

The fine by the Commodity Futures Trading Commission appears to close the book on longstanding issues related to information the bank is required to provide regulators about its swaps reporting business.

Deutsche Bank on Thursday also agreed to pay a civil penalty of $1.25 million to settle separate claims related to a type of market manipulation known as spoofing by two Tokyo-based traders.

“As reflected in both the settlement orders, we have taken meaningful steps to enhance our controls and are pleased to put these matters behind us,” Dan Hunter, a Deutsche Bank spokesman, said in a statement Thursday.

The larger settlement traces back to what the CFTC called an unprecedented outage in Deutsche Bank’s swaps reporting platform in 2016. For five days in April that year, Deutsche Bank was unable to report any swaps data, according to the CFTC.

The outage violated a prior consent order in 2015 related to the bank’s swaps reporting practices, and led to the imposition of a court-appointed monitor. Over the course of more than two years, Deutsche Bank had implemented numerous recommendations from the monitor to improve its reporting, the CFTC said.

The smaller penalty imposed on Deutsche Bank stemmed from alleged misconduct by two unnamed Tokyo-based traders. One had spoofed the Treasury futures market, while the other spoofed the Treasury and Eurodollar futures markets, according to the CFTC.

Spoofing is a type of market manipulation that typically involves sending large orders to futures exchanges which traders intend to cancel, in order to create a false sense of changing supply and demand and benefit the trader’s other, smaller orders.

In both cases, the CFTC said the penalties imposed had been reduced because of the bank’s cooperation.

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.”

 
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.

Updated: 10-22-2019

Investment Bankers Charged in Global Insider Trading Scheme

Federal prosecutors say alleged scheme resulted in tens of millions of dollars in illegal profits.

Federal prosecutors in Manhattan have charged six bankers, including a Goldman Sachs Group Inc. GS +0.60% executive, with a wide-ranging insider-trading scheme spanning Europe and in the U.S. that yielded tens of millions of dollars in allegedly illegal profits.

Four separate indictments unsealed in recent days laid out several interconnected alleged conspiracies that the Manhattan U.S. attorney’s office said represented a “global insider trading ring.” Insiders at multiple banks obtained nonpublic information about publicly traded companies and provided that information to securities traders, who profited from the illicit scheme, according to indictments in Manhattan federal court.

Prosecutors charged Benjamin Taylor and Darina Windsor, who worked in the London offices of two unnamed global investment banks, in a “large-scale international insider trading ring.” According to a 40-count indictment unsealed Monday, the pair leaked nonpublic information about companies and deals to traders.

One of the traders, in turn, leaked that information to journalists, with the aim of having them publish news articles that could influence stock prices, the indictment alleges. The trader reaped more than $1.2 million through trades pegged to articles based on information he leaked, the indictment alleges.

Even after Mr. Taylor left his bank in 2015, he continued to receive nonpublic information from insiders from at least one investment bank, prosecutors alleged. Mr. Taylor and Ms. Windsor were compensated by co-conspirators with over $1 million in cash and luxury goods.

Lawyers for Mr. Taylor and Ms. Windsor couldn’t immediately be reached for comment.

Updated: 2-16-2021

Ex-Goldman Sachs Analyst And Brother Charged In U.K. Insider Trading Case

Charges from U.K. authorities relate to trades in companies advised by Goldman, including chip giant ARM Holdings.

A former Goldman Sachs GS 1.84% Group Inc. analyst and his lawyer brother were criminally charged by the U.K. financial regulator Tuesday with fraud and insider trading after allegedly profiting from information about deals Goldman worked on.

Mohammed Zina, 32 years old, was an analyst in the conflicts resolution group at Goldman Sachs when he allegedly used confidential information at the bank to make the equivalent of almost $200,000, or £142,000, with his brother on stock trades. He pleaded not guilty on Tuesday to the charges brought by the Financial Conduct Authority.

His brother, Suhail Zina, 33 years old and a former lawyer at Clifford Chance LLP, didn’t enter a plea and his lawyer declined to comment. Both were released on bail.

A Goldman Sachs spokesman said protecting client information is of paramount importance and that the bank isn’t part of the proceedings. He said Goldman has been assisting the FCA. A Clifford Chance spokesman said Suhail Zina left in 2018, and said the global law firm isn’t part of the proceedings.

The FCA said the charges involve stock trades in six U.K. companies including chip designer ARM Holdings PLC and business lender Shawbrook PLC, between July 15, 2016, and Dec. 4, 2017.

Some of the companies named by the FCA in its proceedings against the brothers were advised by Goldman on takeovers during that period, according to filings. For example, on July 18, 2016, ARM Holdings PLC agreed to be taken over for $31 billion by SoftBank Group Corp., with Goldman acting as ARM’s financial adviser. In June 2017, Shawbrook accepted a buyout offer, with Goldman providing advice to Shawbrook’s independent directors on the deal.

The case also related to three personal loans taken out for around $130,000 that funded the alleged insider trading, while purporting to be for home improvements. The FCA didn’t give further details on how the alleged fraud was carried out, or the alleged roles of each brother.

The younger brother worked at Goldman Sachs from 2014 to 2018, and had been an intern at the bank while at business school.

The conflicts resolution group sits within Goldman’s executive office that helps set corporate strategy and fosters the bank’s culture. The group Mr. Zina worked for evaluates perceived or actual conflicts of interest in Goldman’s financing, advisory work and other activities for clients.

Tuesday’s charges come amid criticism of the FCA’s handling of other recent financial scandals. U.K lawmakers are probing potential failings in the FCA’s supervision of London Capital & Finance PLC, an investment company that went bust with more than $300 million in investors’ money. The scandal has ensnared Bank of England Governor Andrew Bailey, a former head of the FCA.

The regulator’s insider trading cases have also been criticized at times for focusing on small fry. Earlier this week, it brought insider dealing charges against two other men in a case unrelated to Tuesday’s, for allegedly trading on information one received through work. Those alleged profits were around $190,000.

Last year, in another unrelated case, a former Goldman Sachs banker pleaded guilty in Manhattan federal court to a charge related to his role in an alleged international insider trading ring, admitting that he conspired to give nonpublic information about Goldman clients to a securities trader in Switzerland in exchange for cash and other perks.

Updated: 10-25-2019

Chicago Fed Board Chief Can Continue After Exit From Private Sector Firm Under Investigation

Anne Pramaggiore resigned as CEO of Exelon Corp. after it received second subpoena from prosecutors.

The chairwoman of the board of directors of the Federal Reserve Bank of Chicago can continue in that role while her former employer is the subject of a federal probe, the regional Fed bank said.

Anne Pramaggiore abruptly retired Oct. 15 from her job as chief executive of the utilities unit of Exelon Corp. , the largest operator of nuclear plants in the U.S., less than a week after Exelon Corp. said it had received a second grand-jury subpoena from federal prosecutors looking into its lobbying activities in Illinois.

Ms. Pramaggiore has served as chair of the Chicago Fed’s board since 2014. Each of the Federal Reserve’s 12 regional banks is overseen by boards comprising community and business leaders, as well as bankers. The regional Fed boards aren’t involved in monetary policy decisions, but they do choose their banks’ presidents, who do participate in the policy-making process.

Ms. Pramaggiore, whose term is set to end this year, is a so-called Class C director at the Chicago Fed. These directors are appointed by the Washington-based Fed board of governors to represent the community, and they are supposed to show “proven leadership credentials,” according to the central bank. The Fed also says Class C directors need to be experienced with the banking and financial services.

A spokesman from the Chicago Fed said that Ms. Pramaggiore’s retirement from Exelon “does not affect her eligibility to serve out the remainder of her term or continue as chair of the board.” Neither the Fed board nor Ms. Pramaggiore immediately responded to requests for comment.

While the Fed board is part of the federal government, the 12 regional banks operate in a hybrid public/private structure. Local private banks own shares of their respective regional Fed banks, even though those private banks have no direct control over their respective Fed bank’s activities, while the Fed in Washington keeps close oversight over the regional Fed banks.

Connie Razza, who serves as chief of campaigns and policy with the Center for Popular Democracy, a left-leaning advocacy group, questioned whether it is appropriate for Ms. Pramaggiore to retain her Fed role with “an ethical shadow hanging over her.”

Updated: 11-20-2019

Bank Accused of Breaching Money Laundering Laws—23 Million Times

Westpac, Australia’s second-largest bank, failed to carry out due diligence on 12 customers with known child-exploitation risks, Austrac said.

Australia’s second-largest bank has been accused of the biggest breach of the country’s money laundering and terrorism financing laws in history, including failing to detect transfers that may have been used to facilitate child exploitation in Asia.

Westpac Banking Corp. allegedly breached money laundering laws more than 23 million times, including failing to report in a timely way about $7.5 billion in international transfers, Australia’s financial-intelligence agency said in a court filing Wednesday.

Each individual breach could attract a fine of up to $21 million Australian dollars (US$15.7 million).

Australia’s banks once held a reputation for being among the world’s safest and most profitable for investors, but a series of scandals in recent years has rocked the country’s top financial institutions. The country’s biggest lender, Commonwealth Bank of Australia, last year settled a case involving more than 53,800 money laundering contraventions for A$700 million plus legal costs, the largest corporate civil penalty ever paid in Australia. It could have faced penalties of more than A$1 trillion.

“We know we have to do better,” said Westpac Chief Executive Brian Hartzer, telling reporters that the bank agreed with the statement of claim filed by the Australian Transaction Reports and Analysis Centre, or Austrac.

The bank had self reported to the agency what it said was a failure to report a large number of international fund transfers, and Mr. Hartzer said Westpac should have identified and rectified the failings sooner. He added that he accepted there was a need for accountability within the bank, but declined to say whether he would step down.

The alleged infractions, which occurred between 2013 and 2019, were “the result of systemic failures in its control environment, indifference by senior management and inadequate oversight by the board,” Austrac said in court documents. “They have occurred because Westpac adopted an ad-hoc approach to money laundering and terrorism financing risk management and compliance.”

That led to a failure to properly assess and monitor the risks in moving money in and out of the country and to carry out appropriate due diligence on customers—who were known for child-exploitation risks—sending money to the Philippines and elsewhere in Southeast Asia.

The regulator is alleging Westpac failed to carry out due diligence on 12 of its customers to manage known child-exploitation risks. In one case, when a customer who had served jail time for child exploitation opened a number of Westpac accounts, only one was promptly identified as indicative of child exploitation.

The customer continued to send frequent low-value payments to the Philippines through accounts that weren’t being monitored appropriately, Austrac said.

Australia’s Prime Minister Scott Morrison said he was “absolutely appalled” by the allegations, calling on the country’s banks to “lift their game.”

Westpac shares fell 3.3% to A$25.67 on Wednesday, underperforming the broader market and the other major banks. The lender this month reported its first decline in annual profit in four years, dented by a sharp rise in provisions for customer refunds and lawsuits.

Mr. Hartzer, who has been Westpac’s CEO since early 2015, said the bank had invested heavily to improve the management of financial crime risks, including enhancing automatic detection systems. He pledged to personally get to the bottom of the claims, including those that emerged in the financial agency’s investigation of links with child exploitation.

New Zealand’s central bank said Wednesday it was looking closely at the Australian financial-intelligence agency’s claims to see if they were relevant to Westpac’s subsidiary in New Zealand.

Recent scandals have rocked Australia’s big lenders, leading to a number of executive departures and a judicial probe last year that revealed a string of issues including inappropriate lending, collecting fees from dead customers for financial advice and lying to regulators.

Updated: 12-1-2019

A Credit Suisse Banker Helped Fuel $2 Billion Debt Fraud

Andrew Pearse used the millions he was paid to travel with his mistress, start a business and recruit a professional rugby player to coach his son’s team.

Andrew Pearse said he negotiated his first bribe while sipping vodka at a hotel in Maputo, the capital of Mozambique, in February 2013.

His employer, Credit Suisse Group AG CS -1.50% , was financing a $370 million coastal security contract between Mozambique and Privinvest Group, a shipbuilder owned by Lebanese billionaire Iskandar Safa.

Poolside after deal meetings, Mr. Pearse said he and a Safa lieutenant struck an agreement for Mr. Pearse to receive millions in cash. In exchange, Privinvest would pay a lower fee on Credit Suisse’s loan for the Mozambique security contract.

Mr. Pearse, 50 years old, needed the money. He was having an affair with a colleague and wanted to leave Credit Suisse and start a financial boutique with her.

Soon, according to Mr. Pearse, Privinvest was backing his boutique firm and paying him to get Credit Suisse to lend even more to the Mozambique projects, which expanded beyond maritime security surveillance systems to include fishing boats and a shipyard. His life became a whirl of clandestine meetings, secret bank accounts and exotic travel.

It all came to an end in January with Mr. Pearse’s arrest in London. In July, Mr. Pearse pleaded guilty in Brooklyn federal court to wire fraud, saying he conspired to defraud investors in the Mozambique deals. His former lover, Detelina Subeva, and another former Credit Suisse colleague, Surjan Singh, both pleaded guilty to laundering illicit funds.

Mr. Pearse told the court this fall that ambition and love drove him to take $45 million from Mr. Safa’s Abu Dhabi-based company. In October, Mr. Pearse was the star government witness in the trial of a Safa lieutenant, Jean Boustani, whom the U.S. Justice Department has accused of fraud and money laundering in $2 billion of debt deals in Mozambique. A verdict in Mr. Boustani’s trial could come as soon as Monday.

Mr. Boustani has denied paying bribes and disputed Mr. Pearse’s account of the payments. He said Privinvest backed Mr. Pearse’s boutique investment firm and paid him a share of revenue.

A Privinvest spokesman said that no bribes were paid and Privinvest is proud of its work in Mozambique.

Lawyers for Mr. Pearse, Ms. Subeva and Mr. Boustani declined to comment, and a lawyer for Mr. Singh didn’t respond to requests for comment.

The trial came at a sensitive time for Credit Suisse, which drew fire in September for hiring investigators to spy on a banker who left for a competitor. That episode and the Mozambique deals added to questions about the bank’s oversight following client tax-evasion scandals and regulatory failings in recent years. The Swiss bank arranged financing for two of the three Privinvest projects that ultimately defaulted on their debts.

Mr. Pearse, in his testimony, said he was able to manipulate the bank’s controls and claimed other senior bankers had side deals with clients.

Credit Suisse says it is a victim of rogue employees in the Mozambique deals and is cooperating with authorities. Chief Executive Tidjane Thiam has sought to repair the bank’s reputation by starting an ethical investing division and a campaign to ensure all debts are disclosed when countries borrow.

New Zealand-born Mr. Pearse joined Credit Suisse in 2000. The bank was pouring money into emerging markets, and Mr. Pearse rode the wave to head a group making loans to foreign companies and governments.

His team included Ms. Subeva, a Princeton graduate from Bulgaria, and Mr. Singh, a longtime friend.

By 2012, Mr. Pearse was looking to leave investment banking and spend more time with Ms. Subeva, who, like him, was married with a young family. Mr. Pearse’s search for funding grew more urgent after colleagues spotted the two canoodling in a restaurant, according to his court testimony and a person familiar with the matter.

By that September, Mr. Pearse glimpsed a route out. He worked with Mr. Boustani on the $370 million loan for Privinvest’s security contract, and he said they bonded.

Early the next year, Mr. Pearse pitched a boutique that would help Privinvest finance similar projects. In Maputo, he said he told Mr. Boustani that the $49 million financing fee that Privinvest was paying could be lowered. His aim was to “curry favor” with Messrs. Boustani and Safa so they would invest in his new company, Mr. Pearse later told the court.

Over a bottle of vodka at the Radisson Blu hotel, Messrs. Boustani and Pearse agreed Privinvest would pay Mr. Pearse $5.5 million in exchange for an $11 million reduction in the fee, Mr. Pearse recounted in court. “I remember it very clearly because it was a significant point in my life where it was the first time I’d been offered a kickback,” Mr. Pearse said.

Mr. Boustani in testimony said Privinvest made payments to Mr. Pearse to start his new business.

A few weeks later, at Mr. Safa’s compound in the south of France, Mr. Safa agreed to back Mr. Pearse’s startup and pay it fees for additional loans, according to Mr. Pearse’s testimony.

Mr. Pearse left Credit Suisse, but told Mr. Singh, who remained, that he could earn a few million dollars by pushing Credit Suisse to make more loans, according to testimony from both men. Mr. Singh told the court he was “ashamed to say” he criminally received $5.7 million.

Messrs. Pearse and Singh set up bank accounts to receive the payments in Abu Dhabi, where Mr. Boustani helped obtain residency documents. Mr. Pearse posed as a tube welder. Mr. Singh posed as an archives clerk, stripping off his jacket and tie in a visa-processing center filled with laborers so he would “fit in more,” he told the court.

Mr. Boustani said in court testimony the visas the two men received were to work at the investment boutique, and the job titles came from Privinvest visa quotas.

Mr. Pearse’s new firm thrived, and he and Ms. Subeva traveled together for work and pleasure, including to Bali, the Seychelles and Montego Bay in Jamaica. He started an energy business buying oil rights, and hired a former professional rugby player from New Zealand to coach his son’s high school team in southeast England.

By 2015, the Mozambique projects were failing amid an oil rout and were at risk of defaulting on their debts, which Credit Suisse and other banks had sold to investors around the world.

When Credit Suisse decided to stop lending, Mr. Boustani threatened to write to Mr. Singh on his bank email to demand the return of $3.7 million Privinvest had paid him, Mr. Singh said in court. He said he refused. Mr. Pearse took him on a trip to Paris to create a cover story for payments Privinvest and Mr. Pearse had made to him, Mr. Singh testified.

On the Eurostar train, they tapped out a document describing fees for fictitious investments that Mr. Boustani was supposed to have made for Mr. Singh.

Mr. Boustani testified in court that the actual Privinvest payment was to recruit Mr. Singh to Mr. Pearse’s boutique. Mr. Pearse said he paid Mr. Singh $2 million for getting Credit Suisse to continue the financing.

In 2016, Mozambique restructured some debts and The Wall Street Journal reported on irregularities in the deal, prompting international donors to halt aid and triggering an economic contraction in the impoverished country.

U.S. firms holding the debt began selling out as prices fell. Mutual-fund manager AllianceBernstein took a loss of about $22 million, according to court testimony.

U.S. and U.K. authorities investigated. They got a breakthrough when Credit Suisse found personal email addresses of some alleged conspirators in deal correspondence. The DOJ issued warrants to get the messages from email providers at the end of 2017, and over the next year developed a case alleging that $200 million out of Mozambique’s $2 billion in borrowings went to bankers and Mozambican officials.

Mr. Pearse and Ms. Subeva’s on-and-off affair cooled, but they kept working together. On Dec. 31, 2018, they texted New Year’s greetings.

A few days later, they were arrested in London. Both face up to 20 years in prison.

Updated: 2-16-2021

Credit Suisse To Pay $600 Million To Settle Securities Case

Bank executives have vowed to clean up legacy legal cases at the Swiss lender that have cost it billions of dollars.

Credit Suisse Group AG said it would pay $600 million to settle a long-running case with credit insurer MBIA Inc. over toxic securities, as its executives seek to clear a roster of legal and regulatory cases that have dragged on the bank’s profits for a decade.

The payment is to settle an MBIA lawsuit claiming the Swiss bank misrepresented the quality of loans in residential mortgage-backed securities that MBIA insured in 2007, closing the door to any appeal of a November court ruling against Credit Suisse.

A New York state judge in January said Credit Suisse should pay $604 million damages in the case. The bank had said it would appeal. Credit Suisse provisioned around $680 million for the case, around the amount MBIA sought in court.

MBIA announced the settlement late Thursday and Credit Suisse on Friday said it was pleased to have resolved the case.

In January, Credit Suisse said it would take an $850 million legal charge for old RMBS cases, including the MBIA one, adding to an earlier, $300 million provision specific to the MBIA case.

The agreement comes as Credit Suisse Chief Executive Thomas Gottsein tries to clean the slate on misconduct and other problems at the bank. He told investors in December that the bank was tackling its legacy litigation and would try to avoid new lawsuits by being more disciplined. Mr. Gottstein has been in the job for a year and a new chairman, current Lloyds Banking Group PLC CEO António Horta-Osório, is set to be voted in by shareholders in April.

MBIA sued Credit Suisse in New York state court in 2009, alleging the bank misrepresented the quality of loans in securities MBIA had insured in 2007. MBIA sued for breach of contract and the state court ruled in its favor last year. MBIA said it had relied on Credit Suisse to vet the quality of the loans, and had to pay out hundreds of millions of dollars in claims on the securities.

By October 2009, about half of the 15,615 loans in the pool had defaulted, MBIA said in its 2009 complaint. It alleged Credit Suisse was aware of problems in its underwriting and due-diligence processes.

Later that month, Switzerland’s federal prosecutor charged the bank with failing to prevent money laundering through the bank by a Bulgarian criminal organization and an employee more than a decade ago. It is also under enforcement proceedings with the Swiss regulator over the handling of employee surveillance following a spying scandal. Last week, The Wall Street Journal reported the bank knew for years about misconduct by a banker who went to jail in 2018 for stealing from clients.

“This management team has no appetite for creating new problems either for ourselves or future management teams,” Mr. Gottstein said at an investor day. Credit Suisse denies the allegations in the federal criminal charges and said it was cooperating with the Swiss regulator in the spying enforcement proceedings. It was previously rebuked by the regulator over the banker’s misconduct and said it has improved its systems.

In all, legal penalties and settlements have cost the bank more than $9 billion since 2009, according to Credit Suisse disclosures.

Updated: 12-2-2019

Shipbuilding Executive Found Not Guilty in Mozambique Debt Fraud Trial

Justice Department had accused Jean Boustani of wire fraud, securities fraud and money laundering.

A federal jury in Brooklyn found a Lebanese shipbuilding executive not guilty of fraud and money-laundering charges related to $2 billion of debt deals in Mozambique, a spokesman for the U.S. Attorney’s Office said.

Jean Boustani, a salesman for shipbuilder Privinvest Group, was found not guilty on charges of wire fraud, securities fraud and conspiracy to commit money laundering related to the debt raised to pay for contracts between Privinvest and Mozambique.

The verdict could hinder the Justice Department’s efforts to police alleged corruption in emerging-markets finance. It also delivered a victory for Privinvest and its owner, Lebanese businessman Iskandar Safa.

The Justice Department indicted Mr. Boustani, three Credit Suisse AG bankers, another Privinvest employee and three Mozambican officials in December, charging them with conspiring to use millions of dollars from the debt deals to pay bribes and kickbacks. The case is part of a new strategy by the U.S. to curb corruption by pursuing individual executives and officials.

Mr. Boustani was arrested in January in Brooklyn after being sent there by authorities in the Dominican Republic who detained him during a holiday with his wife.

“The jury’s verdict completely exonerates Mr. Boustani and confirms what Privinvest has said for the past four years—there was absolutely no wrongdoing with respect to the Mozambique maritime projects,” a spokesman for Privinvest said in a statement. “We deeply regret that an innocent man had to endure nearly a year in jail due to the U.S. government’s overreach.”

The spokesman for the U.S. Attorney’s Office declined to comment on the verdict. A spokesman for Credit Suisse declined to comment.

The country defaulted in 2017 on $2 billion of debt meant to build coastal security, fishing and shipbuilding projects after much of the borrowed money went missing.

The three bankers pleaded guilty to some charges and cooperated with the Justice Department in its case. One of the Mozambican officials, former Finance Minister Manuel Chang, has been detained for almost a year in South Africa, awaiting a ruling on whether he will be extradited to the U.S. or to Mozambique, where he also faces fraud charges.

Updated: 12-26-2019

Traders Got Advance Feed of Bank of England News Conferences

The central bank shut down an audio feed after it was used to offer traders a competitive advantage.

The Bank of England shut down an audio feed of market-sensitive information after it was used to offer some traders a competitive time advantage.

The feed supplies investors and central-bank watchers with audio from the news conferences by Gov. Mark Carney in the minutes after interest-rate decisions are published. Small changes in language from bank officials on the future path of interest rates can often move the pound or U.K. government bonds.

The audio feed, meant to be a backup to the main audio and video feed provided by Bloomberg LP, has been “misused by a third-party supplier to the Bank since earlier this year to supply services to other external clients,” the central bank said in a statement, without identifying the supplier.

Traders have long sought to gain access to market-sensitive information as quickly as possible, and the rise of electronic and algorithmic trading has made such information even more valuable.

The bank, which also didn’t identify the clients who received the information from the backup-audio supplier, said it was in the dark about the alleged misuse. “This wholly unacceptable use of the audio feed was without the Bank’s knowledge or consent,” the central bank said.

Statisma News and Data Ltd., an audio-delivery technology company, says on its website that it has covered public events in the U.K. since 2010 including Bank of England news conferences. It said in a statement published on its website Thursday, “We DO NOT carry embargoed information and we DO NOT release information without it first being made available to the public.” A Statisma spokesman couldn’t be reached for further comment.

On April 29, a tweet from an account linked to Statisma’s website enticed customers to watch government news conferences through its feed. “Hear the news first…up to 10 seconds faster than watching them live on TV,” the tweet said. The tweet appears to have been taken down Thursday.

Another tweet, posted Nov. 7, the same day that Mr. Carney was set to speak, said, “Sign up for a free trial at statisma.com to hear him first.”

A YouTube account that purported to be from Statisma News posted videos of Bank of England press conferences along with links to charts showing how the pound moved when Mr. Carney was speaking. This included a news conference on August 2, 2018, the day the bank raised interest rates for only the second time in a decade.

Statisma’s website said it is a unit of Encoded Media Ltd. Encoded Media describes itself as a media streaming company, founded in 2003, with the original aim of serving the finance industry. The companies share common directors according to U.K. corporate filings. Encoded executives couldn’t be reached for comment.

The Bank of England declined to comment on Statisma’s statement or on the social media posts from the @StatismaComms Twitter account. The monetary authority said Thursday it had referred the case to the Financial Conduct Authority, the U.K.’s market watchdog. Any misuse of the feed would likely fall foul of market abuse regulations, a person familiar with the FCA’s oversight role said.

The European Central Bank appears to have run into a similar issue. In September it started providing a low-latency or ultrafast audio feed of its press conferences, after the bank discovered that some companies were trying to sell access to a faster feed than the official video webcast, which has a delay of about 30 seconds. Audio-only feeds tend to be faster than video.

The new ECB audio feed has a delay of about three seconds, to help ensure a level playing field for listeners, an ECB spokesman said.

The Bank of England holds its news conferences at its fortresslike headquarters in the City of London. Reporters given access to rate decisions ahead of time are held in a “lock in” in the basement without internet access. After the decision is released, reporters move upstairs to an auditorium where the press conference takes place.

The press briefings often offer more detail and nuance than the official statements published on the central bank’s website. There are also question-and-answer sessions where the responses from policy makers at the BOE, including Mr. Carney, offer more spontaneous responses which have the potential to move markets.

“Having information a few seconds early—where fractions of a second make a difference—could be hugely advantageous,” said Ben Watford, partner and head of hedge funds at global law firm Eversheds Sutherland.

In 2017, the U.K. government restricted how it distributed economic data to markets after The Wall Street Journal documented how the information was leaking to traders before publication.

Central banks, including the U.S. Federal Reserve, have also come under criticism in recent years for giving preferential access to big investors, who can glean future policy decisions from the meetings.

The Fed said Thursday that it “aims to make its press conferences available as widely as possible by streaming them live directly to the public and through accredited news organizations, “ according to a spokesman. “We only use systems that are open for broad distribution.”

The Fed has a pool arrangement with three news organizations. One of them at a time is allowed to attend a press conference and broadcast live, sharing the footage with the others for distribution.

The Fed doesn’t have a separate audio-only feed.

Information leaks at central banks don’t occur often but are potentially consequential when they do.

Several years ago, the Federal Reserve mistakenly emailed market-sensitive minutes of a monetary-policy meeting to a group of people, including investors, a full day before the document was scheduled to be released to the public.

In 2017, Federal Reserve Bank of Richmond President Jeffrey Lacker resigned after revealing his involvement in a 2012 leak of confidential information about Fed policy deliberations.

The alleged breach comes at a sensitive time for the Bank of England. Mr. Carney is set to step down at the end of January after serving in the job since 2013. While generally respected for his handling of monetary policy, he has also drawn sharp criticism from investors and politicians for what some say have been overly pessimistic predictions about the effects of Brexit on the economy.

Boris Johnson’s incoming government, fresh off last week’s election victory, has yet to name a successor.

Central Banks In Africa

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: 10-4-2018

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.

Updated: 6-27-2020

Swedish Regulator Fines SEB $107 Million, Citing Lax Anti-Money-Laundering Efforts

Investigation finds bank lacked sufficient anti-money-laundering governance, controls and resources at Baltic branches.

Sweden’s financial supervisory authority fined Skandinaviska Enskilda Banken AB 1 billion Swedish kronor ($107.3 million) following a delayed review of the bank’s efforts to prevent money laundering at Baltic branches.

The regulator, known as the Finansinspektionen, was investigating the bank’s anti-money-laundering governance and controls in Estonia, Latvia and Lithuania. In a decision released Thursday, the regulator said SEB didn’t comply with rules on monitoring business relationships and transactions.

The investigation found that SEB lacked sufficient anti-money-laundering governance, controls and resources at its Baltic subsidiary banks. The authority said that those deficiencies “may result in risks for SEB AB at both group level and institution level and that the bank must manage such risks.”

SEB said it would analyze the regulator’s decision. “We always strive to adhere to current regulations and our high internal standards, and we continuously develop the bank’s abilities to prevent, detect and report suspected money laundering and other types of financial crime,” SEB President and Chief Executive Johan Torgeby said in a statement. “That work is of highest priority and will never end, not least since crime constantly finds new ways.”

A large portion of business in SEB’s Baltic operations came from nonresident customers, including many whom the subsidiary banks themselves had classified as high risk, the regulator said.

“Parts of the operations in SEB AB’s subsidiary banks have been exposed to an elevated risk of money laundering,” it said, “not only due to the general increase in the risk level from their geographical location but also due to the composition of the subsidiary banks’ customer relationships.”

The regulator gave SEB a year to improve its transaction-monitoring system to better identify risky customers.

The investigation was conducted in cooperation with the financial supervisory authorities in Estonia, Latvia and Lithuania, the regulator said in December. The conclusion of the investigation, initially expected in April, was delayed until this month because of the coronavirus pandemic.

The bank said Thursday that the Swedish and Baltic supervisory authorities have concluded their reviews.

SEB and another Swedish bank, Swedbank AB, came under investigation by the regulator after reports by a Swedish TV network alleged large-scale money laundering throughout the banks’ branches in the Baltics.

The regulator in March found that Swedbank’s Baltic operations had serious anti-money-laundering deficiencies, and fined the bank 4 billion kronor.

Updated: 8-11-2020

Interactive Brokers to Pay $38 Million Over Anti-Money Laundering Claims

Three regulators fined the brokerage over alleged compliance lapses, including failure to report suspicious trades.

Interactive Brokers LLC has agreed to pay a total of $38 million to settle claims by U.S. regulators that it failed for more than five years to maintain an adequate anti-money-laundering program.

The U.S. broker-dealer hadn’t monitored hundreds of millions of dollars of customers’ wire transfers for money laundering concerns and failed to report potential manipulation of microcap securities in customer accounts, regulators said.

The total fine stemmed from coordinated settlements with the U.S. Securities and Exchange Commission, the U.S. Commodity Futures Trading Commission and the Financial Industry Regulatory Authority, a Wall Street self-regulatory group.

Interactive Brokers consented to the settlements without admitting to or denying the regulators’ findings. A spokesperson for the broker-dealer said it had cooperated fully with the regulators and that steps it had taken to enhance its anti-money-laundering safeguards were taken into account in the settlements.

Finra’s action focused on a period from January 2013 through September 2018 during which Interactive Brokers grew to become one of the largest electronic broker-dealers in the U.S. based on shares traded, with more transactions cleared for foreign financial institutions than any other dealer, according to the regulator.

Interactive Brokers failed to strengthen its anti-money-laundering program in tandem with that growth, Finra said.

Even after a compliance manager warned his supervisor that “we are chronically understaffed” and “struggling to review reports in a timely manner,” it took years for the broker-dealer to materially increase staffing or enhance its safeguards, Finra said.

The SEC’s action focused on a one-year period ending in the middle of 2017. According to the SEC, Interactive Brokers during that period failed to file more than 150 suspicious activity reports flagging potential manipulation of microcap securities.

Some of the trading accounted for a significant portion of the daily volume in certain of the U.S. microcap issuers, the SEC said.

The CFTC’s action focused on a period from June 2014 to November 2018. During that time, Interactive Brokers didn’t maintain an adequate anti-money-laundering program and failed to ensure its employees followed established policies with respect to supervision of customer accounts, the agency said.

That included supervising accounts for a New York trader who was sentenced to three years in prison in 2017 after pleading guilty to defrauding investors of more than $23 million. The CFTC in 2018 won a court order requiring the trader, Haena Park, and her companies to pay restitution to the defrauded investors.

Interactive Brokers had been the futures commission merchant for Ms. Park and her companies and had failed to monitor her account activity, the CFTC said. A lawyer who represented Ms. Park in the case didn’t immediately respond to a request for comment.

Interactive Brokers failed to meet anti-money-laundering obligations under the Bank Secrecy Act and the financial record-keeping and reporting provisions of federal securities laws, the regulators said.

The CFTC said its action was the first to allege a violation of a regulation requiring its registrants to comply with the BSA. The agency said it was requiring Interactive Brokers to hire a third-party compliance consultant to review and report on the broker-dealer’s anti-money-laundering program.

Interactive Broker’s fines include two $11.5 million civil penalties by the SEC and CFTC, and a $15 million fine by Finra. The CFTC also required the company to pay more than $700,000 in disgorgement.

Updated: 8-24-2020

Scotiabank Fined $127 Million For Price Manipulation, False Statements

Settlement concerns manipulative orders for precious metals futures contracts and was compounded by compliance failures, Justice Department and CFTC say.

The Bank of Nova Scotia agreed to pay more than $127 million to settle civil and criminal allegations in connection with its role in what authorities described as a massive price-manipulation scheme.

The fine is the result of multiple agreements reached Wednesday with the U.S. Justice Department and the U.S. Commodity Futures Trading Commission. The settlements stem in part from thousands of manipulative orders for precious metals futures contracts placed on U.S. exchanges over an eight-year period by four traders at the bank, known as Scotiabank, the agencies said.

The settlements also resolve claims by the CFTC that Scotiabank made false statements and incomplete disclosures about alleged price manipulation by its traders in connection with a prior investigation by the derivatives market regulator. Scotiabank also agreed to resolve further claims by the CFTC related to its conduct as a swap dealer. Under the agreements with both agencies, the bank will be required to retain an independent compliance monitor for three years.

The steep fine and imposition of a monitor reflected the seriousness of Scotiabank’s offense and the state of its compliance program, Robert Zink, chief of the Justice Department’s criminal fraud section, said in a statement.

Scotiabank said Wednesday that it had set aside money for the fines in earlier quarters.

“We understand that in order to maintain the trust of our stakeholders, we must adhere to trading-related regulatory requirements and compliance policies,” the bank said. “We are committed to adhering to these standards.”

The price-manipulation scheme was compounded by several compliance failures, federal prosecutors said. In one case, in 2013, one of the traders involved in the unlawful trading contacted a compliance officer to seek clarification on the CFTC’s guidance on disruptive trading practices, they said.

The trader’s email detailed how the trader was engaging in problematic activity by placing groups of one-contract orders on one side of the market to facilitate execution on the other, prosecutors said. The compliance officer forwarded the note to a colleague but made no effort to investigate the trader’s practices, they said.

The manipulation caused other market participants to lose about $6.6 million, according to the Justice Department.

The department on Wednesday filed its agreement, which defers criminal charges of wire fraud and attempted price manipulation, in federal court in New Jersey.

The agreement requires Scotiabank to pay more than $60.4 million in criminal penalties, disgorgement and victim compensation. Prosecutors said half of the criminal penalty would be credited against fines by the CFTC.

The CFTC agreement settled two separate enforcement actions against Scotiabank, the regulator said—one related to the price-manipulation scheme, known as spoofing, and another related to the bank’s conduct as a swaps dealer, the regulator said. Spoofing is designed to trick other investors into buying and selling at artificially high or low prices.

In both actions, as well as in the agreement with the Justice Department, Scotiabank was accused of misleading regulators at the CFTC, and making incomplete disclosures, at times due to inconsistent record-keeping.

Scotiabank was fined $800,000 by the CFTC in 2018 for spoofing in the gold and silver futures markets. Statements the company made to the regulator during the course of the investigation that led to the earlier settlement had later proved to be false, the CFTC said.

With regards to its swap dealer business, Scotiabank had failed to meet certain disclosure, supervision and compliance requirements, the CFTC said. It also made false or misleading statements to CFTC staff about audio recordings used to supervise its swaps business, the regulator said.

In the order settling the CFTC’s claims, Scotiabank neither admitted nor denied the regulator’s findings.

Corey Flaum, one of the Scotiabank traders described in the settlement, pleaded guilty to attempted price manipulation in 2019. The former Scotiabank trader is scheduled to be sentenced early next year, according to the Justice Department.

Updated: 9-12-2020

Former Deutsche Bank Traders To Stand Trial In Test Of Spoofing Crackdown

Criminal case turns on whether trading tactic to manipulate prices is fraud.

A government crackdown on traders accused of price manipulation faces one of its biggest tests next week, as a pair of former Deutsche Bank traders face trial on charges related to rigging precious-metals prices using a strategy known as spoofing.

Traders at Citadel Securities and Quantlab Financial, high-speed trading firms that use models to automate their buying and selling, are among the witnesses scheduled to testify against the ex-traders, James Vorley and Cedric Chanu. The criminal trial will take place in Chicago with protocols aimed at reducing the risk of coronavirus spread, including the use of masks and a requirement to maintain social distancing.

The Justice Department has lost two of three prior trials over spoofing, a type of price manipulation that involves bluffing other traders into thinking supply or demand has changed.

Prosecutors have faced hurdles on their way to the latest trial, with the judge in the case expressing skepticism in recent weeks about whether evidence supports the claims of fraud.

“There is probably some additional pressure to win this one,” said Aitan Goelman, a partner at Zuckerman Spaeder LLP who is a former senior regulator and federal prosecutor. “I don’t think that means if they lose, they will never bring another spoofing case. But they have not had a particularly successful run so far in prosecuting spoofing.”

One concern is persuading a jury that bluffing is actually fraud. The traders argue they made no false statements—usually a precondition for fraud—by sending orders they wound up canceling. The electronic orders didn’t convey any intent or promises, the traders say, likening it to a poker player who bluffs by upping the ante but doesn’t talk about what cards he holds.

Nonetheless, prosecutors have obtained eight guilty pleas from other traders accused of spoofing, including one who is scheduled to testify against the former Deutsche Bank duo. A Justice Department spokesman declined to comment.

In one episode from 2009, Mr. Chanu exchanged chat messages with another Deutsche Bank trader about spoofing, according to court filings. The other trader placed and canceled within seconds a flurry of orders to buy gold futures, helping Mr. Chanu sell gold at a higher price. The other trader wrote: “Got that up 2 bucks…that does show you how easy it is to manipulate sometimes.”

“Basically you tricked alkll [all] the algorythm,” Mr. Chanu replied in a message cited by prosecutors.

Spoofing involves sending orders that a trader doesn’t intend to have filled, essentially a feint designed to trick other traders into posting prices the spoofer wants. Once spoofers accomplish the trade they wanted, they cancel the orders that caused the market to move in their favor.

Messrs. Vorley and Chanu, who worked in London, were charged in 2018 with wire fraud and conspiracy, but not spoofing.

Much of the trading at issue dates from 2009 through 2011, when spoofing could have been considered illegal but wasn’t yet defined in federal law. Congress explicitly outlawed spoofing in the 2010 Dodd-Frank financial overhaul law.

Attorneys for Messrs. Vorley and Chanu declined to comment.

“In some ways it feels like the department is trying to fit a square peg into a round hole” by charging fraud and not spoofing, Mr. Goelman said. “But I do think the government can make a case there is an element of deception there. Just the fact that spoofing is now illegal means it might be easier to prove a fraud case.”

The Justice Department’s fraud section has carved out a niche prosecuting the cases, charging nearly 20 defendants since 2015.

Some critics have questioned whether spoofing should be prosecuted as a crime, instead of a civil regulatory violation handled by the Commodity Futures Trading Commission.

Deutsche Bank paid $30 million in 2018 to settle CFTC claims tied to the traders’ spoofing. Other experts say the Justice Department’s attention is warranted because manipulation affects commodity prices as well as correlated assets, such as stocks.

“It is basically lying to people about their willingness to trade and lying about the liquidity in the market,” said James Angel, a finance professor and regulatory expert at Georgetown University’s McDonough School of Business.

Repeated many times over, spoofing can be profitable, although traders fighting the Justice Department say the losses they are accused of causing are limited. In a separate case that could go to trial next year, the alleged spoofing by two former Bank of America traders caused losses for other traders of about $300,000 over seven years, according to court filings.

In a filing made early this month, prosecutors outlined the role of another former Deutsche Bank trader who plans to testify about his colleagues’ conduct. That trader, David Liew, pleaded guilty in 2017 and will testify that he learned to spoof by watching Messrs. Vorley and Chanu, according to court filings. An attorney for Mr. Liew and a Deutsche Bank spokesman declined to comment.

Traders at Citadel Securities and Quantlab are expected to testify that bluffing is fraud because traders assume orders are genuine, and not a feint designed to achieve something else. A spokeswoman for Citadel Securities declined to comment, as did a spokesman for Quantlab.

The mechanics of the trial have been modified in light of concerns about the spread of Covid-19. Federal courts around the country—most of which shut down or severely limited operations in March—have taken various precautions to address the pandemic, with some even postponing jury trials until next year. The Administrative Office of the U.S. Courts published a guide in June to help judges navigate through the thicket of public-health concerns.

The case was filed in Chicago because CME Group Inc., which operates the exchanges used by Messrs. Vorley and Chanu, is based there. Potential jurors for the trial won’t approach the judge’s bench during the jury-selection process and will instead wear headsets to answer questions from the judge and attorneys.

Those who are picked will be spread across half of the courtroom in order to force social distancing, and will deliberate in a separate courtroom instead of meeting in a smaller jury room.

Updated: 9-19-2020

Citadel Securities, Quantlab Loom Over Trial Probing Spoofing Charges

Two ex-Deutsche Bank traders fighting charges they defrauded market by spoofing.

Citadel Securities’ headquarters stands across the street from this city’s federal courthouse. The high-speed trading powerhouse had an even closer view when one of its traders began testifying Friday in a criminal trial over market manipulation known as spoofing.

Citadel Securities and Quantlab Financial LLC, another electronic trading firm that uses computer models to automate buying and selling, have loomed over this week’s trial. The firms were allegedly victimized by the spoofing of two former Deutsche Bank precious-metals traders, who are fighting fraud charges against them.

Attorneys for the two former traders, James Vorley and Cedric Chanu, deny the charges and have attacked a basis for the case—that the men defrauded “supercomputers” by flooding the market with phony orders that gave a misleading picture of supply and demand, also known as spoofing.

The orders were in fact genuine because any participant, defense attorneys countered, could trade with them before they were canceled.

Some critics of the Justice Department’s spoofing crackdown say prosecutors have turned routine behavior into a crime on a par with insider trading, while the alleged victims are often computerized trading firms that update or cancel orders in milliseconds. Many investors say the enforcement is justified because rampant spoofing undermines the integrity of prices.

Since Congress outlawed the practice in 2010, the Justice Department has charged 20 traders with spoofing-related crimes and eight have pleaded guilty.

The traders’ attorneys have aggressively questioned a former junior trader at Deutsche Bank, David Liew, who pleaded guilty to spoofing and testified against Messrs. Vorley and Chanu. Defense attorneys sought to debunk Mr. Liew’s statements that the trading could fool high-speed traders such as Citadel Securities, saying the defendants were manual traders who canceled orders for legitimate reasons and could never move as fast as computer algorithms that trade in fractions of a second.

“Unlike a computer that has an algorithm that is so fast it cannot be hit, you guys could easily be hit, right?” asked Matthew Mazur of Dechert LLP, an attorney for Mr. Vorley. “Yes,” Mr. Liew replied.

“So at all times the orders you placed in the market, that you claimed were trick orders, were at risk, right?” Mr. Mazur asked. “Yeah, at risk,” Mr. Liew replied.

A trader for Citadel Securities, Anand Twells, began his testimony Friday and is scheduled to continue on Monday, while a Quantlab employee is likely to testify after him. In a conference this week outside the jury’s presence, prosecutors and defense attorneys sparred over what the defense could ask Mr. Twells and Travis Varner, an employee for Houston-based Quantlab.

A Citadel Securities spokeswoman and a Quantlab spokesman declined to comment.

U.S. District Judge John J. Tharp said he would allow questions about the firms’ trading, but warned against asking about their revenue or how many engineers are required to write a trading algorithm, saying it could prejudice jurors against the victims.

Messrs. Vorley and Chanu were charged in 2018 with wire fraud and conspiracy, based on conduct alleged to have occurred as much as 10 years ago. Deutsche Bank paid $30 million in 2018 to resolve regulatory claims that Messrs. Vorley, Chanu, Liew and others spoofed precious-metals futures.

Spoofing, as explained by prosecutors, involves sending and quickly canceling large orders. A spoofer posts, for instance, a sell order he genuinely wants to trade, while using larger, “spoofed” buy orders to signal demand is growing and the prevailing market price should rise.

If other participants react, they will adjust prices and trade with the spoofer’s sell order at a higher price. The spoofer’s next move is to quickly cancel the large buy contracts, which indicates that demand has fallen. The price then dips, back to where it had been, before the misleading orders confused the market. The episode happens in just a few seconds.

Mr. Twells was shown a chart Friday that showed Citadel Securities made nine trades in silver futures with Mr. Chanu on March 30, 2010. Mr. Chanu posted and quickly canceled about eight large orders before Citadel Securities’s algorithm traded with part of a buy order that Mr. Chanu had entered. The prevailing market price fell slightly during that time.

Messrs. Vorley and Chanu say they didn’t spoof and that prosecutors’ fraud theory is wrong because every order is at risk to trade, particularly in fast-moving futures markets.

Prosecutors have used traders’ chat messages to argue the men sent and canceled orders that were intended to fool the market. Mr. Liew, who left banking in 2012 and now teaches computer programming, bragged about misconduct in chats with friends, including other traders at UBS Group AG and Barclays PLC.

“As a manual trader I can use fake bids/offers amd [and] make the algo buy/sell into my real bid/offer,” he wrote in one chat from June 2011.

Attorneys for Messrs. Vorley and Chanu questioned whether it was so easy to fool automated trading firms that invest millions of dollars to improve trading speed by “nanoseconds.” Mr. Liew acknowledged that Deutsche Bank traders could have many reasons to cancel orders, such as price moves in correlated assets.

Mr. Liew, who worked in Singapore for Deutsche Bank, pleaded guilty in 2017 to conspiracy and spoofing. In testimony, he acknowledged other misconduct that didn’t involve Messrs. Vorley and Chanu, who worked in London.

Mr. Liew said he shared confidential information with a Singapore-based friend who worked at UBS, and worked with that trader to manipulate gold and silver markets. In a 2011 chat with another friend at Barclays, he also complained he didn’t have a “team” at Deutsche Bank.

Updated: 9-21-2020

Global Banks Hit By New 2 Trillion Dollar Corruption Allegations. Why Authorities Are Unlikely To Act This Time

Shares of European banks fell sharply on Monday, after the release by BuzzFeed and the International Consortium of Investigative Journalists of thousands of documents seemingly showing that some $2,000 billion worth of illicit funds were moved and laundered through the U.S. financial system over two decades.

– The papers show that five global banks — JPMorgan,  HSBC, Standard Chartered Bank, Deutsche Bank, and Bank of New York Mellon — kept doing business with “oligarchs, criminals and terrorists” even after being fined by U.S. authorities for earlier failures to clamp down on dirty money. The banks themselves said they could not comment on specific transactions due to bank secrecy laws. Their statements can be found here.

Updated: 9-21-2020

FinCEN Leak Suggests New AML Measures May Not Go Far Enough… For Banks

The leaked documents show many banks ‘enabling’ money laundering.

Leaked documents from the U.S. Financial Crimes Enforcement Network (FinCEN) imply that the agency’s revamped efforts to identify illicit transactions and money laundering may not be sufficient. But on this occasion, the institutions described as being at fault are not crypto exchanges, but some of the world’s best-known banks.

BuzzFeed News reported on Sept. 20 that it received thousands of documents detailing “suspicious activity reports,” or SARs, from banks to FinCEN between 2000 and 2017. According to the news outlet, the reports “offer an unprecedented view of global financial corruption, the banks enabling it, and the government agencies that watch as it flourishes.”

Some of the more contentious information in the SARs implies that FinCEN took little or no action to stop banks from enabling money laundering from suspicious individuals and institutions on some occasions.

“Laws that were meant to stop financial crime have instead allowed it to flourish,” BuzzFeed News stated. “So long as a bank files a notice that it may be facilitating criminal activity, it all but immunizes itself and its executives from criminal prosecution. The suspicious activity alert effectively gives them a free pass to keep moving the money and collecting the fees.”

New AML Laws For Financial Institutions

News of the leak comes just one week after the financial regulator announced that it would be making sweeping changes to its anti-money laundering (AML) rules designed to identify and combat illicit financial activity through robust record-keeping and risk assessment requirements.

Regulations are one thing; enforcement is another. BuzzFeed News stated that although the financial watchdog received millions of SARs in a 17-year period from many financial institutions, it was not always able to force banks to effectively prevent money laundering.

The SARs reveal that money laundering issues have penetrated deep into financial institutions, with BuzzFeed reporting many banks including JPMorgan Chase, HSBC, Standard Chartered, Deutsche Bank, and Bank of New York Mellon enabling “a shadow financial system” through which illicit funds can travel freely.

According to experts, “Some banks treat SARs as a kind of get-out-of-jail-free card, filing alerts about a huge array of transactions without actually moving to halt them,” the news outlet reported. “In some cases, banks filed numerous reports on the same clients, detailing their suspected crimes over the course of years while continuing to welcome their business.”

“The networks through which dirty money traverse the world have become vital arteries of the global economy. They enable a shadow financial system so wide-ranging and so unchecked that it has become inextricable from the so-called legitimate economy. Banks with household names have helped to make it so.”

The Mt. Gox Connection

According to TrustNodes, the institution which had the most suspicious activity reports with FinCEN in the latest leak was Mayzus Financial Services (MFS), allegedly a fiat intermediary of Bitcoin exchange BTC-e. The exchange was allegedly involved in moving funds from the infamous Mt. Gox hack, in which thieves stole 850,000 Bitcoin (BTC) in 2014. The stolen crypto would be worth roughly $9.3 billion today.

MFS and its subsidiaries, including MoneyPolo, have issued various statements on the nature of the relationship, although the company is on record as saying that BTC-e “has never had any direct link to our company, neither structurally, nor personally”.

There are reportedly more than 2,000 documents in the latest leaked FinCEN files.

FinCEN Files: BNY Mellon Processed $137M for Entities Linked To OneCoin

One of America’s oldest banks wired over a hundred million dollars in funds linked to the crypto Ponzi scheme OneCoin, according to a trove of documents leaked from the U.S.’ financial crimes watchdog.

In February 2017, the Bank of New York Mellon (BNY Mellon) flagged a number of transactions with the Financial Crimes Enforcement Network (FinCEN) it deemed suspicious as they appeared to be “layered” – a money-laundering technique that hides the source of funds through sending multiple transactions.

Worth a combined $137 million, the bank said these transactions came from entities linked to OneCoin – a crypto scheme the U.S. government accused of being a Ponzi. It’s estimated OneCoin raised a total of $4 billion from investors, making it one of the most successful schemes of its kind ever.

Buzzfeed received thousands of leaked suspicious activity reports (SARs) from 2011 and 2017 that show instances when a bank’s compliance team flagged a transaction they consider out of the ordinary and possibly suspect with FinCEN.

Dubbed the “FinCEN files,” the trove of 2,657 documents gives an indication of how much dirty money may be passing through some of the world’s biggest banks. As SARs are just the concerns of compliance officers, they are not necessarily evidence of wrongdoing by themselves.

The files show Deutsche Bank flagged a total of $1.3 trillion, JPMorgan approximately $500 billion and Bank of America another $384 billion. BNY Mellon underlined a total of $64 billion in 325 separate SARs filed with FinCEN, making it the second-most-frequent filer in the leaked documents.

Buzzfeed shared the FinCEN files with the International Consortium of Investigative Journalists (ICIJ), which showed one particular transaction in 2016 where Fenero Equity Investments, a British Virgin Islands-based company, wired approximately $30 million from its account at DMS Bank & Trust, a Cayman-based bank, to BNY Mellon.

Fenero described the payment as a “loan for CryptoReal” – an investment trust set up by OneCoin founder Ruja Ignatova, who has not been seen since late 2017.

In a SAR filed at the time, BNY Mellon’s compliance team said Fenero often received wires from shell entities linked to OneCoin. It sent the money on to Hong Kong’s DBS Bank, where it was credited to a local company called Barta Holdings.

Emails seized by U.S. authorities last year shows Mark Scott, the New York attorney convicted last year of laundering $400 million for OneCoin, arranged the $30 million loan from Fenero to allegedly purchase an oilfield from Barta Holdings.

But the seized emails show that the loan was never repaid and that $10 million of the amount sent to Barta Holdings was actually spent by one of the OneCoin co-founders.

“I believe that the €30 million purported “loan” from Fenero to Barta was arranged by Scott to launder OneCoin Ltd. proceeds to CC-2 [OneCoin’s co-founder],” said testimony from special agent Kurt Hafer, attached to the New York Attorney’s office.

A BNY Mellon spokesperson told ICIJ that the bank fully complied with existing financial regulation and took its role in protecting the integrity of the global financial system seriously. By law, they said the bank was unable to comment on specific SARs.

Likewise, DMS Bank said it took its legal responsibilities for helping to combat fraud and money laundering “extremely seriously.”

OneCoin, Ruja Ignatova, and DBS Bank didn’t respond to ICIJ’s requests from comment.

Updated: 9-23-2020

JPMorgan Nears Deal To Pay About $1 Billion To Settle Spoofing Probes

Authorities target illicit practice of submitting misleading orders to exchanges.

JPMorgan Chase & Co. is nearing an agreement with federal prosecutors and regulators to pay a fine to settle civil and criminal charges that its traders rigged futures and securities markets, people familiar with the matter said.

The bank would pay about $1 billion to wrap up several investigations into whether its trading desks manipulated prices for metals and Treasury securities, one of the people said.

The Justice Department’s Fraud Section and regulators at the Commodity Futures Trading Commission and Securities and Exchange Commission were involved in the probes.

The proposed agreement wouldn’t put any restrictions on the bank’s operations, the person said

Bloomberg News reported on the potential settlement Wednesday.

The Justice Department and CFTC have been on a campaign against an illicit practice known as spoofing, which has mainly focused on wily trading in derivatives.

Spoofing involves submitting misleading orders to exchanges that traders use as a ruse, according to regulators.

The problematic orders are typically sent in large volume on one side of the market and quickly canceled but create the appearance of changing supply or demand.

The feint can briefly shock the market and trick others into trading at prices the spoofer wants.

A year ago, three men who had worked for the bank’s metals unit were arrested and charged in the probe.

The indictment charged all three with crimes including racketeering, a claim that is more typically found in cases against organized-crime entities.

Prosecutors later charged a fourth JPMorgan employee who worked with the bank’s hedge-fund clients.

Authorities said it was the first time that defendants accused of spoofing were charged with racketeering.

In regulatory filings, JPMorgan has said it was cooperating with the investigations.

Updated: 9-27-2020

Nexo Founder Feels Vindicated By The FinCen Leak, Talks Of Double-Standards

Had it been Coinbase or Nexo, he agreed with speculation that law enforcement would have been knocking on the door the next day.

Nexo co-founder Antoni Trenchev told Cointelegraph that he believes the information revealed during the recent FinCen leak vindicates the crypto industry. According to the leak, the world’s leading financial institutions cleared over $2 trillion “suspicious” transactions — and Deutsche Bank alone cleared over $1.3 trillion of that amount. Trenchev said:

“The first thing I’m feeling is vindication because like everyone has been saying for years, all that Bitcoin and money laundering in the same breath. We’ve been hearing that from regulators, from politicians, from bankers, from just about anyone. And it turns out that the number one choice for money launderers still is the U.S. dollar and still is the incumbent legacy financial system.”

Had such a level of activity come from Coinbase or Nexo, he agreed that law enforcement would have paid them a visit the very next day, saying “Yeah, it’s a terrible double standard.”

Trenchev also emphasized the fact that the only company that was mentioned in the Leak with any cryptocurrency ties was OneCoin, and even that was a stretch, in his opinion:

“Her [Ruja Ignatova, OneCoin founder] project had very little to do with crypto, they didn’t even have a blockchain. This is a classic multilevel marketing Ponzi scheme.”

When it comes to bankers, Trenchev believes that there is little motivation to curtail money laundering and other illicit activities, as the punishment seems to be rather forgiving. In fact, such activities can be highly lucrative:

“It’s called ‘willful blindness’, like where you know there’s something wrong, but you choose to ignore it. <…> And then, second of all, the sanctions are not that bad. When you look at what happened, hardly anyone from the bankers has been prosecuted criminally for money laundering. And the caveat here is also that once you file a suspicious transaction report, this almost gives you immunity from the rule of law,”

Nexo also files “various suspicious activity reports” with relevant regulators around the world. Trenchev said that approximately 4% of Nexo’s transactions get flagged. The company is also forced to comply with the U.S. sanctions and blacklist countries like Iran, Venezuela, and North Korea,

Though it is unclear if the publicity generated by the Leak will lead to investigations and prosecutions, many of the implicated banks were punished by the market.

Updated: 9-28-2020

Deutsche Bank Tops List Of Suspicious Transactions Among Leaked U.S. Government Files

Germany’s largest lender, Deutsche Bank, appears to have facilitated more than half of the $2 trillion of suspicious transactions that were flagged to the U.S. government over nearly two decades, German broadcaster Deutsche Welle reported.

The documents showed that between 1999 and 2017, $1.3 trillion of $2 trillion in leaked transactions that were flagged as suspicious passed through Deutsche Bank, according to DW. It said BuzzFeed News obtained the files and shared them with the International Consortium of Investigative Journalists.

The leaked documents contained suspicious activity reports that banks and other financial institutions filed with the U.S. Department of Treasury’s Financial Crimes Enforcement Network, or FinCEN. Financial firms are required by law to alert regulators when they detect activities that may be suspicious, such as money laundering or sanctions violations. Such reports are not necessarily evidence of any criminal conduct.

In a statement posted on its website, the German bank said the incidents in the leaked documents “have already been investigated and led to regulatory resolutions in which the bank’s cooperation and remediation was publicly recognized. Where necessary and appropriate, consequence management was applied.”

It also said that it has “devoted significant resources to strengthening our controls” and “are very focused on meeting our responsibilities and obligations.”

Deutsche Bank has previously been found to facilitate financial transactions that violate U.S. sanctions. In 2015, Deutsche Bank agreed to pay fines worth $258 million for doing business with U.S.-sanctioned countries including Iran, Syria, Libya, Sudan and Myanmar, according to DW. But the leaked FinCEN documents suggested that the bank had continued to move suspicious funds after that 2015 settlement, the report said.

Updated: 9-29-2020

JPMorgan Paying $920 Million To Resolve Market Manipulation Probes

Settlement resolves investigations by DOJ, CFTC and SEC tied to manipulation of precious-metals and Treasury markets.

JPMorgan Chase & Co. agreed to pay $920 million and admit misconduct tied to manipulation of precious-metals and Treasury markets, regulators said Tuesday.

The settlement resolves investigations by the Justice Department, Commodity Futures Trading Commission and the Securities and Exchange Commission, according to a CFTC statement. The fine is the largest the CFTC has ever imposed for spoofing, a type of market manipulation, the agency said.

The agencies’ announcements confirm news of the fine that was first reported last week. The claims include allegations that JPMorgan traders manipulated Treasury securities from 2015 to 2016, the SEC said in a settlement order.

The Justice Department said JPMorgan agreed to a deferred prosecution agreement through which the bank admitted wrongdoing on its precious-metals and Treasuries trading desks. The deal suspends a prosecution of the bank on two counts of wire fraud and requires JPMorgan to cooperate with related investigations and continue improving its compliance and oversight programs.

The SEC’s investigation involved spoofing of Treasury bonds and notes. Spoofers enter and quickly cancel large orders in an effort to deceive others about supply and demand. The tactic can move prices in a direction the spoofer favors.

The SEC said the conduct ended in January 2016, after “certain personnel changes” were made on the desk that traded Treasury securities.

“The conduct of the individuals referenced in today’s resolutions is unacceptable and they are no longer with the firm,” said Daniel Pinto, co-President of JPMorgan Chase and CEO of the Corporate & Investment Bank. “We appreciate that the considerable resources we’ve dedicated to internal controls was recognized by the DOJ, including enhancements to compliance policies, surveillance systems and training programs.”

The spoofing spanned at least eight years and involved hundreds of thousands of misleading orders in precious metals and U.S. Treasury futures contracts, the CFTC said. The total fine includes a penalty of $437 million, restitution of $311 million and disgorgement of $172 million, the CFTC said. Disgorgement is the requirement to pay back profits that were illegally earned.

“Spoofing is illegal—pure and simple,” CFTC Chairman Heath Tarbert said. “This record-setting enforcement action demonstrates the CFTC’s commitment to being tough on those who intentionally break our rules, no matter who they are.”

Four former JPMorgan traders were charged last year with crimes tied to spoofing, including racketeering, an offense more typically found in cases against organized crime entities. The traders have pleaded not guilty and are fighting the charges. Two other ex-JPMorgan traders pleaded guilty in 2018 and 2019 to crimes tied to spoofing of precious metals futures.

In total, the Justice Department has charged 20 people with spoofing-related crimes since 2015. Banks and other financial institutions have collectively paid over $1 billion in fines tied to civil and criminal spoofing probes.

Two traders who formerly worked at Deutsche Bank AG were convicted last week in Chicago federal court of wire fraud tied to spoofing allegations. The traders were acquitted on one count of conspiracy.

Updated: 10-8-2020

Regulators Fine Citigroup $400 Million Over ‘Serious Ongoing Deficiencies’

Fed, OCC order the nation’s third-largest bank to fix its risk-management systems.

Federal banking regulators on Wednesday fined Citigroup Inc. $400 million and ordered the nation’s third-largest bank to fix its risk-management systems, citing “significant ongoing deficiencies.”

In a consent order agreed to by the New York bank’s board, the Federal Reserve faulted Citigroup for falling short in “various areas of risk management and internal controls” including data management, regulatory reporting and capital planning.

The Office of the Comptroller of the Currency, in a separate consent order, said the fine was punishment for the bank’s “longstanding failure” to remedy problems in its risk and data systems.

The Wall Street Journal earlier reported that the Fed and the OCC were planning to reprimand Citigroup for failing to improve its risk-management systems—an expansive set of technology and procedures designed to detect problematic transactions, risky trades and anything else that could harm the bank.

“We are disappointed that we have fallen short of our regulators’ expectations, and we are fully committed to thoroughly addressing the issues identified in the Consent Orders,” the bank said. “Citi has significant remediation projects under way to strengthen our controls, infrastructure and governance.”

The public rebuke marks a major escalation of regulators’ efforts to get Citigroup to fix its risk systems. For years, the Fed and the OCC have privately pushed Citigroup Chief Executive Michael Corbat to give priority to an overhaul of the systems. Their decision to issue consent orders requiring the changes indicates the pressure they were exerting behind the scenes wasn’t enough.

The reprimand, in the works for several months, accelerated planning for Mr. Corbat’s retirement. Mr. Corbat, who said last month that he would step down in February, felt the expensive, multiyear overhaul was best left in the hands of his successor, Jane Fraser, the Journal previously reported.

The punishment, while substantial, is gentler than the rebuke Wells Fargo & Co. got for weaknesses in its risk-management systems brought to light by its 2016 fake-account scandal. The OCC in early 2018 fined the bank more than $1 billion, and the Fed imposed an unprecedented growth cap on the bank.

At issue at Citigroup is the infrastructure underpinning its systems meant to identify risk and protect customer data.

Many of Citigroup’s various businesses, for example, run on their own independent systems that have their own methods for tracking customers and transactions. There are hundreds of identification systems inside the bank. A customer doing business with multiple parts of the bank could have different identification codes for each one.

Regulators have long fretted that the hodgepodge of systems, a legacy of a string of deals in the 1990s that turned Citigroup into a financial powerhouse, could make the bank vulnerable to costly and potentially damaging missteps. A recent high-profile error—Citigroup’s accidental $900 million payment to creditors of cosmetics company Revlon Inc. —gave credence to their concerns.

The consent orders from the OCC and Fed leave Citigroup with a lengthy to-do list. The regulators ordered the bank to form a new board committee to oversee the risk overhaul and to develop plans for holding management accountable.

The OCC order requires Citigroup to seek approval for any acquisition and gives the regulator power to order the bank to replace managers or directors. The Fed and the OCC already broadly exercise veto power over big purchases.

In its order, the OCC called out Citigroup’s procedures for reporting problems within the bank to the board of directors and its leaders’ lack of “clearly defined roles and responsibilities.” It said the bank failed to comply with “multiple laws and regulations,” including the Fair Housing Act.

The risk-management overhaul is expected to be an expensive undertaking. Chief Financial Officer Mark Mason has said the bank would spend $1 billion on the work this year alone.

Analysts have said that a pricey overhaul and enhanced regulatory scrutiny would weigh on the bank’s profitability, which already lags behind that of its peers. They also said a regulatory reprimand could raise fresh concerns that the bank remains too big to manage, spurring a breakup.

The task of satisfying regulators’ demands largely will fall to the bank’s incoming CEO. Ms. Fraser, currently Citigroup’s president and the head of its consumer bank, has been tapped numerous times to tackle the bank’s thorniest problems.

Updated: 5-13-2021

Judge Says Revlon Lenders Can Access Citi’s Mistaken Loan Payment

Revlon lenders that received roughly $500 million in an erroneous transaction from Citigroup can use the money while the bank’s appeal is pending.

Lenders to Revlon Inc. that received roughly $500 million from Citigroup Inc. last year due to a back-office blunder are allowed to use the money as they see fit, a federal judge ruled Wednesday, unfreezing the funds.

Judge Jesse Furman of the U.S. District Court in Manhattan on Wednesday denied Citi’s request to continue to freeze the funds while the bank tries to persuade an appellate court it deserves the money back. The judge had frozen the funds in August while he considered the case.

Citi wanted the freeze to be maintained, saying it feared that even if it won on appeal, it might have difficulty recovering the money once the asset managers distributed it to their clients.

The dispute stems from a mistake in August in which Citi paid off—with its own money—a nearly $900 million loan balance owed by Revlon, when only an interest payment was due. When Citi asked for the money back, some of the recipients obliged, returning roughly $385 million.

Others—including Brigade Capital Management LLC, Symphony Asset Management LLC and HPS Investment Partners LLC—declined to return more than $500 million, touching off a legal dispute with the bank.

Citi is appealing the judge’s February ruling that the lenders could keep the funds they were wired by the bank, the loan agent in charge of collecting and distributing interest payments from Revlon. As the appeal continues, the bank had sought to prohibit the lenders from using the money as they wished.

The lenders “are entitled to use the money without interference” from Citi, the judge said Wednesday.

A Citi spokesman said the bank disagrees with the decision and plans to file a motion with the Second Circuit Court of Appeals to try to ensure that the funds are preserved.

At an April court hearing, Citi lawyer Neal Katyal argued that a continued pause would cause minimal harm to the lenders. He said the early loan repayment was tantamount to a “windfall,” partly because the debt didn’t come due until 2023 but also because it had been trading at less than 30 cents on the dollar when Citi erroneously repaid it in full.

Judge Furman said Wednesday that Citi “faces an uphill battle on appeal.”

Robert Loigman, a lawyer for the lenders, said he was pleased with the decision and that he agrees Citi is unlikely to win its appeal.

Updated: 10-10-2020

Spoofing Settlements Highlight the Foibles of Trader-Surveillance Tools

Banks have struggled to find tools that flag suspicious trading without generating scads of false positives, compliance professionals say.

Recent settlements with JPMorgan Chase & Co. and others underscore the need for investment banks to ensure the surveillance tools they use to detect misconduct by traders are effective.

JPMorgan last week agreed to pay a cumulative $920 million in a series of settlements with U.S. authorities over spoofing, a type of market manipulation. The settlement follows similar deals earlier this year with The Bank of Nova Scotia and Deutsche Bank.

The spate of corporate resolutions are the result of long-running investigations by the U.S. Commodity Futures Trading Commission, the U.S. Justice Department and other agencies into spoofing of the precious-metals and Treasury markets.

Spoofing involves sending large orders to exchanges which traders intend to cancel, creating a false sense of supply and demand that benefits the trader’s other, smaller orders.

The recent settlements require the banks to strengthen their anti-spoofing compliance programs. Pushing companies to become increasingly sophisticated about compliance has been a growing emphasis of the Justice Department and regulators.

When it comes to spoofing, one compliance commitment required by the settlements—effective surveillance programs—stands out, professionals say.

“If you are trying to capture culture…that’s where two types of surveillance come into play,” said Eric Young, a professor at Fordham University School of Law and a former compliance officer for BNP Paribas SA .

Trade-surveillance software, which looks for trends and patterns in trading and flags suspicious activity for follow-up by a compliance officer, is one, he said. Another type of surveillance software scans electronic communications and flags suspicious emails or texts between traders.

Scotiabank’s spoofing settlement in August stemmed from illegal trading by four traders in the precious-metals futures markets between 2008 and 2016, according to U.S. authorities. During that time, the bank’s compliance failed to detect the misconduct, according to court documents. Prosecutors in particular pinpointed the lack of an effective trade-surveillance program.

Scotiabank didn’t respond to a request for comment.

Staying ahead of illegal conduct by traders requires continued refinement by compliance officers, says Stacie Hartman, co-chair of Steptoe & Johnson LLP’s financial services group. “There’s always a challenge with surveillance systems in keeping up with the current trends.”

JPMorgan—along with several of the other banks that have been targeted by prosecutors and regulators for spoofing—pleaded guilty in 2015 to conspiring to manipulate the price of U.S. dollars and euros in the foreign currency market. The bank’s spoofing misconduct mostly took place before that settlement—from March 2008 to August 2016—prosecutors said last week.

One reason JPMorgan avoided more severe penalties, including the imposition of a monitor, was because it took steps after the 2015 settlement to overhaul its compliance program, hiring hundreds of new compliance officers and spending over $335 million on personnel and other compliance-related costs, officials have said.

“The company really engaged in a significant compliance uplift,” Brian Rabbitt, the acting assistant attorney general in charge of the department’s criminal division, said Thursday at the WSJ Risk & Compliance Forum. That was “part of the calculus for us in terms of not requiring an independent compliance monitor,” he said.

A JPMorgan spokesman declined to comment on the settlement and its compliance requirements.

JPMorgan’s trade and electronic communications surveillance programs were also strengthened following the 2015 settlement. They now monitor trades on over 80 equities exchanges and over 40 futures and options exchanges, according to its deferred prosecution agreement with the Justice Department.

And the bank refined its spoofing surveillance by modifying the parameters of the program in response to lessons learned from the case, as well as from related interactions with exchanges and regulators, prosecutors said.

Still, banks have struggled to find software that identifies improper trading maneuvers without generating so many false positives as to make it useless, Ms. Hartman says.

“You want a surveillance system to catch any potential issues,” she said. “You don’t want it to spit out thousands or tens of thousands [of alerts] that no compliance officer or even a phalanx of compliance officers is going to have time to review.”

Improvements in technology and artificial intelligence have started to counteract the problem, Mr. Young said. But the steps banks take to reduce false positives should be justified and well-documented, he said.

“Are you changing your rules so you can manage them with less staff, or are you doing it to make the program more accurate?” Mr. Young said.

Updated: 11-1-2020

Westpac Profit Plunges On Bad Debts, Record Laundering Fine

Westpac Banking Corp.’s full-year profit plunged after the lender was hit with a record fine for breaching anti-money laundering laws, and the coronavirus-induced recession swelled bad-debt charges.

Cash earnings fell 62% to A$2.61 billion ($1.8 billion) in the 12 months ended Sept. 30, the Sydney-based bank said in a statement Monday. The results include a previously disclosed A$1.2 billion charge for the laundering fine and the mounting cost of compensating wrongly treated customers. Bad-debt provisions increased A$3.2 billion as the recession smashes consumers and businesses.

Updated: 11-25-2020

JPMorgan Chase Unit To Pay $250 Million Penalty Over Poor Internal Controls

Regulator cites bank’s weak risk-management practices and an insufficient framework for avoiding conflicts of interest.

A top banking regulator fined a JPMorgan Chase & Co. unit $250 million over deficiencies in internal controls and internal audit practices.

JPMorgan Chase Bank N.A. entered into a resolution with the Office of the Comptroller of the Currency to pay the civil penalty, the company said in a regulatory filing Tuesday.

For several years, the bank “maintained a weak management and control framework for its fiduciary activities and had an insufficient audit program for, and inadequate internal controls over, those activities,” the OCC said in its order. “Among other things, the bank had deficient risk management practices and an insufficient framework for avoiding conflicts of interest.”

The regulator said the bank has since remedied these deficiencies. JPMorgan, as part of the order, didn’t admit or deny the OCC’s findings. The company disclosed earlier this month that a resolution was in the works.

“We are committed to delivering best-in-class controls across our business, and we have invested significantly in and enhanced our controls platform over the last several years to address the issues identified,” said Darin Oduyoye, a JP Morgan spokesman.

The penalty comes almost two months after a separate $920 million settlement between JPMorgan and the Justice Department, Commodity Futures Trading Commission and the Securities and Exchange Commission. The settlement resolved allegations of misconduct tied to manipulation of precious metals and Treasury markets.

The OCC in recent years has paid close attention to internal controls at banks, reprimanding some for taking too long to fix weaknesses.

The OCC and the Federal Reserve last month fined Citigroup Inc. $400 million and ordered the bank to fix its risk-management systems. In the OCC order, the regulator said the fine was punishment for the bank’s “longstanding failure” to correct problems in its risk and data systems. The bank said it was working to address issues identified by the regulators.

The OCC also fined USAA Federal Savings Bank $85 million last month for allegedly failing to maintain effective compliance-risk management and information-technology risk-governance programs. USAA has said it is working with the regulator to address the issues.

Updated: 12-17-2020

U.K. Watchdog Fines Barclays Units $34.7 Million Over Mis-Treatment of Customers In Arrears

Barclays said it has since implemented changes to its systems, processes and training and sought to redress customers.

A top U.K. regulator has levied a £26 million ($34.7 million) fine on Barclays PLC-related units over the treatment of customers that fell into arrears or went through a difficult financial situation.

The Financial Conduct Authority said Tuesday that between April 2014 and December 2018, Barclays and some affiliates failed to help some customers understand the reason behind missed payments and provided solutions that were unaffordable or unsustainable.

The FCA requires consumer credit firms to take measures to understand customers’ financial difficulties and to show forbearance to customers who have missed payments or are struggling financially.

The regulator cited Barclays Bank UK PLC, Barclays Bank PLC and Clydesdale Financial Services Ltd., a wholly owned subsidiary of Barclays Bank, for the violations.

“Consumers should feel reassured that their lender will work with them to help resolve any financial difficulties, whereas Barclays’s poor treatment of its customers risked making these difficulties worse,” Mark Steward, the FCA’s director of enforcement and market oversight, said in a statement. Barclays didn’t dispute the FCA’s findings, according to the regulator.

Barclays said that it has since implemented changes to its systems, processes and training. The bank also has repaid more than £273 million to at least 1.53 million customer accounts since 2017, the FCA said.

“Since the issue was first identified, we have implemented a number of changes to our customer journeys, systems, processes and colleague training to correct it, and the vast majority of customers who were impacted have already been contacted,” a Barclays representative said in a statement.

The FCA said Barclays identified some of the problems in 2014 but didn’t immediately rectify the issues due to systems and controls failures.

The regulator reduced Barclay’s fine by 30% because the bank agreed to settle the case and didn’t dispute the regulator’s findings. The bank would have faced a £37.2 million penalty if the FCA hadn’t taken into account its redress program.

“While this case predates the pandemic, this message is especially important as the impact of coronavirus continues to affect household incomes and budgets,” the FCA said.

Updated: 12-22-2020

U.K. Regulator Fines Charles Schwab Unit $12.1 Million Over Client Assets

The Financial Conduct Authority said the company carried out a regulated activity without the proper permission.

The U.K.’s Financial Conduct Authority said Monday that it has fined Charles Schwab UK Ltd. £8.96 million ($12.1 million) over failing to protect client assets.

The watchdog said the U.K. unit of the financial-services company carried out a regulated activity without the correct permission and sent the FCA a statement that included inaccurate information.

“The firm did not at all times have permission to safeguard and administer custody assets, and failed to notify the FCA of the breach when applying for the correct permission,” the regulator said.

Charles Schwab UK said it cooperated with the FCA’s investigation and has addressed the issues identified. “Charles Schwab UK client money and assets were protected at all times in accordance with U.S. rules,” a company spokeswoman said in a statement. She added that “no clients or assets were negatively impacted.”

The breaches took place between August 2017 and April 2019, when the company changed its business model, and the money of its clients swept across from CSUK to its affiliate Charles Schwab & Co., based in the U.S., according to the regulator.

The client assets, which had to abide by U.K. rules, were held in CS&C’s general pool, which contained both firm and client money and was held for both U.K. and non-U.K. clients, the FCA said.

However, Charles Schwab failed to protect its clients’ assets under U.K. rules and didn’t put in place the necessary safeguards to ensure, if required, that there could be an orderly return of client assets, the regulator said.

“The firm took remedial action at various points after discovering the breaches. There was no actual loss of client assets and CSUK stopped holding client assets from Jan. 1, 2020,” the FCA said.

If CSUK hadn’t agreed to settle the case, it wouldn’t have received a 30% discount to the fine. CSUK would then have been fined £12.8 million, the regulator added.

The customers that suffered the consequences of the breaches were all retail customers, the FCA said.

Updated: 12-22-2020

Danske Bank Cleared of U.S. Sanctions Liability For Estonia Scandal

The U.S. Treasury Department’s sanctions watchdog has closed an investigation into the Danish lender.

The U.S. Treasury Department’s sanctions watchdog has closed an investigation into a money-laundering scandal at Danske Bank A/S’s Estonia branch, the Danish lender said.

The closure of the probe by the Treasury’s Office of Foreign Assets Control, which is responsible for civil enforcement of U.S. sanctions, doesn’t signal an end to legal woes stemming from the Estonia scandal.

Danske came under investigation for money laundering after admitting that it failed to appropriately vet about $230 billion in transfers by non-Estonians through its branch in Tallinn, Estonia, primarily by Russians, between 2007 and 2015.

Danske remains under investigation by the U.S. Justice Department, U.S. Securities and Exchange Commission and by criminal law enforcement and regulatory agencies in Denmark and France, the bank said in a statement issued Saturday.

An OFAC spokesman declined to comment.

News of the sanctions probe’s closure came in the form of a letter from OFAC, Danske said. The decision doesn’t preclude the watchdog from taking future action if new information comes to light, the bank said.

Updated: 1-28-2021

Lebanese Judge Charges Central Bank Governor Over FX Misuse

A Lebanese prosecutor charged central bank Governor Riad Salameh with dereliction of duty and breach of trust over the alleged misuse millions of dollars provided by the regulator last year.

Judge Ghada Aoun has been investigating claims that dollars provided by the central bank via an electronic trading platform to help people pay for essential needs and expenses were sold on the black market, where they’d fetch a higher price.

Between $5 million to $7 million were squandered from June through December, Aoun told Bloomberg. Thirty-seven financial institutions including money exchange bureaus profited from such transactions, she said.

Salameh did not immediately respond to an emailed request for comment.

Aoun referred the case to an investigative judge to pursue it. Salameh, who’s headed the Banque du Liban since 1993, is also entangled in a separate Swiss investigation into possible embezzlement from the Lebanese central bank. The Swiss didn’t identify the target of their money-laundering probe, but Lebanon’s Al Akhbar newspaper reported an alleged transfer of some $400 million linked to Salameh.

The governor has denied wrongdoing in the Swiss case.

The head of the central bank enjoys immunity from legal prosecution under Lebanese law. A judge needs the approval of the government before pursuing a case as actions against the governor risk monetary stability.

Faced with its worst financial crisis in decades, Lebanon’s currency has come undone, reaching around 8,800 pounds per dollar on the black market. The central bank continues to subsidize fuel and wheat at the official exchange rate of 1,500 per dollar. The subsidized rate that applied to the electronic platform was 3,900.

Updated: 3-1-2021

Bringing New Money-Laundering Law Into Force Falls To Tiny Treasury Unit

Among other things, FinCEN will have to create a registry of owners of anonymous shell companies, a task that will require a revamp of its creaky technology.

Over the next year, a small, relatively obscure bureau of the U.S. Treasury Department will take a lead role in plugging what many experts consider the biggest hole in the U.S.’s anti-money-laundering protections.

It won’t be easy for the Financial Crimes Enforcement Network, say experts and almost a dozen former Treasury officials and veterans of the bureau.

Sweeping anti-money-laundering legislation, approved this year, requires the agency to build a state-of-the-art corporate ownership registry meant to help authorities unmask the beneficial owners of anonymous shell companies and track the flow of illicit money.

FinCEN—whose roughly 300 employees account for less than 1% of those working in the Treasury Department—will need to muster the technological expertise to build a system that can store and analyze the ownership information of possibly tens of millions of businesses.

The agency will also have to write a host of potentially controversial regulations surrounding the law, which is intended to protect national security and foster the innovation needed to catch the next wave of terrorists and financial criminals.

FinCEN will need to start a whistleblowers reward program, and establish national priorities that financial institutions can use to create risk-based compliance programs.

“A pretty big mandate for a small institution,” summed up James Freis, a former FinCEN director.

FinCEN is one of more than 160 financial intelligence units operating in countries around the world. Its mandate is to collect information on suspicious financial activity from banks and other financial institutions to fight money-laundering, terrorism financing and other crimes.

The unit’s mission has grown since its formation in 1990. Today FinCEN juggles a list of competing priorities—from intelligence collection and database management, to policy-making, enforcement and investigations. The anti-money-laundering act only adds to that load.

The agency has a year to promulgate regulations under the new anti-money-laundering law and another two to put them into effect.

But the magnitude of the project could stretch the rollout beyond the bill’s Congressional deadlines. While Treasury Secretary Janet Yellen has called the law a priority, the Biden administration has faced delays in filling key positions.

President Biden has yet to nominate a Treasury undersecretary for terrorism and financial intelligence, a role that also oversees FinCEN.

The agency declined to make any of its officials available for an interview, including the current director, Kenneth Blanco. But a FinCEN spokeswoman said in an email that it is working to meet the congressional mandates laid out in the new law. Several provisions relate to initiatives already in progress, she said.

Putting new regulations into effect is likely to be a thorny process. The agency will have to navigate the interests of major banks and their regulators, law enforcement agencies, financial transparency advocates and business associations.

The fine print of the regulations is expected to most immediately touch owners of small businesses and entities such as limited liability companies, many of which will be required to submit information to the federal government unless they fall under one of more than 20 exemptions.

Financial transparency groups say exemptions should be kept narrow to increase the overall effectiveness of the law. Business groups—in particular the National Federation of Independent Business, a small business association—say they will fight to minimize the costs to their members of complying with the legislation.

“It’s a very significant piece of legislation and, for so much of it, the devil’s in the details,” said Eric Lorber, a former Treasury official and now a managing director of the compliance services firm K2 Integrity Holdings Inc. “The 800-pound gorilla is the creation of the beneficial ownership database.”

How FinCEN approaches the technological aspects of the registry will also be critical, experts say, since the underlying systems could determine how effectively banks and FinCEN’s law-enforcement partners use the new ownership records to prevent and investigate crime.

A Congressional Budget Office report on a 2019 version of the corporate registry bill estimated that it would generate approximately 25 million to 30 million filings a year. But the enacted bill doesn’t require covered entities to file annually.

At present, FinCEN receives about 3 million suspicious activity reports a year, which are housed in a system that holds more than 300 million reports, according to the agency.

That system is already somewhat outdated, according to people familiar with it, and for years FinCEN has faced concerns over whether the data it manages is being used to the fullest extent possible.

Worries over data security, meanwhile, were underscored by a leak of FinCEN data made public last year, which appeared to show banks continuing to do business with clients whose transactions they had flagged as suspicious, even as law enforcement took no immediate action.

They are woefully behind the curve in technology.
— Tom Cardamone, Global Financial Integrity

“They are woefully behind the curve in technology,” said Tom Cardamone, the president of Global Financial Integrity, a Washington-based advocacy group that recently convened a group of 19 anti-money-laundering experts, including veterans of FinCEN, to explore ways to strengthen the agency.

J.R. Helmig, an innovation lead for Cary, N.C.-based analytics software company SAS Institute Inc. and a former senior adviser to FinCEN who has participated in GFI roundtables, said the agency should be looking to incorporate advanced technologies like machine-learning and artificial intelligence into the registry.

The new registry presents an opportunity to build such a system from the ground up, but the cost of doing so could far exceed the agency’s already stretched budget. The CBO in 2019 estimated the one-time cost of updating FinCEN’s IT systems would be about $40 million.

For the fiscal year ending in September, the agency has requested a budget of nearly $130 million, with allocations for 346 full-time employees.

The anti-money-laundering bill authorizes $10 million in additional funds for FinCEN’s budget, and gives the agency special hiring ability, allowing it to offer more competitive salaries for the experts it needs to modernize its systems.

FinCEN’s immediate focus is on hiring and getting the funds it needs to bring the law into force, according to the agency’s spokeswoman.

“They need to plus-up on data analytics, data scientists,” Mr. Cardamone said of FinCEN. “The agency should be more of a tech agency that does financial intelligence rather than the other way around.”

Updated: 3-3-2021

Anti-Money-Laundering Unit Must Staff Up To Fulfill Reform Mandate, Official Says

FinCEN director expresses confidence in agency’s ability to implement a new anti-money-laundering law and launch a corporate ownership database.

The U.S. Treasury Department’s financial crimes unit is focused on acquiring the resources it needs to implement sweeping new anti-money-laundering reforms—in a way that doesn’t unnecessarily burden the financial industry, its director said.

Putting into practice the anti-money-laundering legislation, which was passed in January as part of an annual defense-policy bill, is a priority of the Financial Crimes Enforcement Network, FinCEN Director Kenneth Blanco said Tuesday at a virtual conference hosted by International Institute of Bankers.

“The priority is to make sure that we do everything that we can to implement the [law], everything that we can to get FinCEN in a position where it can accomplish that,” Mr. Blanco said.

That means making sure FinCEN is “fully staffed” and “fully resourced,” and conducts outreach needed to carefully write regulations surrounding the law, he said.

The anti-money-laundering bill requires FinCEN to build a sophisticated corporate ownership registry that can help law-enforcement officials pierce anonymous shell companies and track illicit money.

Financial crimes experts say creation of the database is likely to be a big lift for FinCEN, whose workforce accounts for less than 1% of the Treasury Department’s entire full-time staff.

The agency last year requested a budget about nearly $130 million, with allocations for 346 full-time employees. A Congressional Budget Office report from 2019 that reviewed an earlier version of the beneficial-ownership bill estimated the one-time cost of updating FinCEN’s IT systems to build the registry would be about $40 million.

Mr. Blanco said his agency was up to the task of implementing the law. “We think we can do it,” he told financial industry representatives. But he said FinCEN would tread carefully in writing the rules implementing the legislation.

“We’ve waited so long for this kind of legislation,” Mr. Blanco said. “We need to make sure we’re very thoughtful in implementing it.”

To create the corporate registry, FinCEN will need to propose regulations that lay out exactly who will be required to file ownership information with the agency, and how often. It will have to decide who can access it, and how.

It will also need to write rules for many other provisions of the bill. The law requires FinCEN to start handing out financial awards to whistleblowers, and to roll out a pilot program allowing banks in the U.S. to share information about suspicious activity with their international operations.

The unit has a year to write the regulations, and another two to put them into practice, according to the law.

Pressed on how FinCEN might implement certain parts of the legislation, Mr. Blanco largely declined to give concrete details. But he said the law’s purpose was to protect national security by making anti-money-laundering rules more efficient. The agency wasn’t looking to shoulder banks with additional compliance burdens, he said. “People shouldn’t be looking at this as, ‘Oh, my God, more regulation,’ ” Mr. Blanco said.

The rule-making process could be a politically fraught one for FinCEN, which will have to navigate the sometimes competing interests of financial institutions, regulators, law-enforcement officials and advocacy groups.

Mr. Blanco encouraged financial institutions to be vocal in comments about the regulations, while saying they should try to offer solutions to any perceived pitfalls because the reforms are necessary to protect the financial system and the country’s national security interests.

“We’re going to take a look at it,” referring to any potential comments financial institutions and other affected entities submit on the regulations. “[But] at the end of the day… We’re going to do what we think is the best thing to protect this country and our national security.”

Updated: 3-25-2021

NatWest’s Ulster Bank Takes Record Fine For Mortgage Scandal

The Irish central bank hit NatWest Group Plc’s Ulster Bank with a record fine and reprimanded it for “serious failings” over its role in a mortgage overcharging scandal that has engulfed the country’s lenders.

Ulster Bank was fined 37.7 million euros ($44.5 million), the central bank said in an emailed statement Thursday. The bank admitted 49 breaches, with some customers suffering “significant overcharging,” it added. The lender’s actions affected 5,940 accounts and as many as 43 customers lost their properties.

The lender has previously paid 128 million euros in redress, compensation and account balance adjustments in relation to the industrywide tracker scandal. These loans were closely tied to the European Central Bank’s key interest rate and were popular in Ireland before the financial crisis hit in 2008.

When bank funding costs soared and then interest rates plunged during the crisis, the loans began to lose money. Many customers were later placed on an incorrect rate.

“I am deeply sorry for the impact that our handling of the tracker mortgage issue has had on our customers and their families,” Ulster Bank Chief Executive Officer Jane Howard said in an emailed statement. “Today’s announcement does not draw all tracker issues to a close and we will continue to work on those cases which are under appeal or are with the Financial Services and Pensions Ombudsman to bring them to a conclusion,” Howard said.

Ulster Bank was aware its mortgage documentation was unclear from 2009 onwards yet failed to bring this to the attention of the regulator and devised a “deliberate strategy” to only correct customers’ rates when they complained, the central bank said.

The firm also “failed to meet the Central Bank’s expectations of adequate co-operation” in the investigation.

The central bank ordered lenders that offered tracker mortgages to review their loan books in 2015. The regulator has fined Permanent TSB Group Holdings Plc and KBC Group NV’s Irish unit already, and is investigating all the country’s main retail banks, which have paid out at least 683 million euros in compensation and redress to customers so far.

The fine comes a month after NatWest said it would exit its Ulster Bank business in Ireland.

Updated: 4-19-2021

Anti-Money-Laundering Prosecution Deals Setbacks To European Banks

ABN Amro agreed to pay around $575 million to settle a criminal case accusing it of violating money-laundering and terrorism financing rules.

Failures to police money laundering procedures hit two major banks in Europe, dealing a further setback to a region that has struggled to stop financial institutions from serving as conduits for illicit transactions.

ABN Amro Group said Monday that it had agreed to pay around $575 million to settle a criminal case accusing the Dutch lender of violating money-laundering and terrorism financing regulations repeatedly for several years.

Also Monday, the head of Denmark’s largest bank, Danske Bank, resigned after he was named as a suspect in the ABN Amro case. Chris Vogelzang was an ABN Amro board member before Danske hired him in 2019. He held various positions at ABN Amro from 2000 to 2017, including as head of global retail and private banking.

In stepping down from Danske Bank, Mr. Vogelzang said he didn’t want speculation about his role at ABN Amro to get in the way of the Danish bank’s cleanup. Danske hired him following a massive money-laundering scandal of its own, disclosing in 2018 that its tiny Estonian branch had moved more than $230 billion from Russia and other former Soviet states over several years, undetected.

“I left ABN Amro more than four years ago and am comfortable with the fact that I managed my management responsibilities with integrity and dedication,” Mr. Vogelzang said.

In Monday’s settlement, Dutch prosecutors listed a series of problems it found between 2014 and 2020 at ABN Amro, which is more than 50% owned by the Dutch government. The prosecutors said three former managers were under investigation in its probe, but didn’t disclose their names.

Prosecutors said the bank failed to conduct proper diligence of clients and the origin of their money and that documents and data on customers were missing and incomplete. It also said the bank paid little attention to cash transactions, which tend to have higher risk of money laundering.

In one instance, ABN Amro allowed a person to open a bank account in 2014—and gave the account a low-risk rating—even though it knew the customer had been involved in fraud since 1995.

Prosecutors said movements on the account didn’t fit the clients’ alleged business activities, and there were cash deposits using €500 notes, which were a risk factor for money laundering. Police suspect the client worked for criminal groups.

“ABN Amro must have missed many signs of money laundering and other forms of financial and economic crime over a number of years,” a prosecutor said.

In a statement, ABN Amro said it was taking measures to improve its controls, including by increasing the number of employees working to detect risk. The bank said it “deeply regrets the situation and recognizes the seriousness of the matter.”

Europe’s overlapping jurisdictions have made it prone to money laundering mishaps. It has often fallen to U.S. prosecutors and regulators to enforce changes. The U.S. used its purview over dollar transactions globally to effectively shut down Latvian bank ABLV in 2018 after it became a haven for dirty money.

European authorities have tried to boost the continent’s power to fight money laundering, which is currently mostly dealt with on a domestic level. Discussions, however, have taken a back seat because of the pandemic.

Dutch authorities have been particularly tough regarding anti-money-laundering enforcement. In 2018, prosecutors fined ING Groep NV over $900 million for its money-laundering failings. That case is still hanging over the new chief at UBS Group AG , Ralph Hamers, after a Dutch court ordered a probe into his role in the scandal. Mr. Hamers was ING’s CEO before moving to UBS in November.

Amsterdam-listed shares of ABN Amro were up over 1% Monday on the settlement. Danske shares listed in Copenhagen were down close to 1%. The Danish bank said it had appointed its chief risk officer, Carsten Egeriis, as chief executive, replacing Mr. Vogelzang.

Updated: 5-6-2021

JPMorgan Memo Warned $875 Million Payment Was Graft Risk

JPMorgan Chase & Co. was warned by its compliance team over the “great risk” of corruption just days before it made the last of three transfers that totaled $875 million to a former Nigerian oil minister.

The internal memo is set to be scrutinized in a London lawsuit brought by the West African nation. The U.S. bank is accused of ignoring red flags when it transferred funds between 2011 to 2013 from government accounts to Dan Etete, who had been convicted of money laundering.

The current government says a contract awarded by one of its predecessors to explore the deep waters off the Gulf of Guinea was corrupt.

European and Nigerian courts have been raking over the purchase by Eni SpA and Royal Dutch Shell Plc of the oil license in Africa’s largest crude producer a decade ago. While the energy giants were recently acquitted of corruption charges in Milan in a decision prosecutors could appeal, Nigeria’s government is continuing to seek compensation from JPMorgan.

The memo disclosed at a London court hearing this week shows what JPMorgan managers knew about the oil contract and when, lawyers for the Nigerian government said in court documents. A spokesperson for the investment bank declined to comment.

The government claims Etete distributed a portion of the funds received via the bank from the oil majors to corrupt former and serving senior public officials.

The bank has denied any wrongdoing and says it’s being held responsible for not protecting the Nigerian people from their own government.

The government says that by 2013 JPMorgan’s internal concerns over payments to Malabu Oil and Gas Ltd. — a firm controlled by Etete — were escalating to more senior members of the bank.

“In light of Malabu’s reported connection to the alleged Nigerian corruption scheme, there would be great risk presented if JPMC continues to process wires involving Malabu,” a compliance officer based in the U.S. wrote in a memo dated Aug. 23, 2013.

Just six days later, JPMorgan made a payment of $75.2 million to the Malabu account.

Lawyers for the Nigerian government said in court Wednesday it wants to know how the memo was compiled and asked a judge for more emails and documents from the compliance team.

It’s seeking details on how compliance monitored and placed controls over questionable payments including a so-called “interdiction list” — a tool to prevent transfers from being automatically cleared. Malabu was placed on the list in November 2013.

Updated: 5-7-2021

JPMorgan Memo Warned $875 Million Payment Was Graft Risk

JPMorgan Chase & Co. was warned by its compliance team over the “great risk” of corruption just days before it made the last of three transfers that totaled $875 million to a former Nigerian oil minister.

The internal memo is set to be scrutinized in a London lawsuit brought by the West African nation. The U.S. bank is accused of ignoring red flags when it transferred funds between 2011 to 2013 from government accounts to Dan Etete, who had been convicted of money laundering.

The current government says a contract awarded by one of its predecessors to explore the deep waters off the Gulf of Guinea was corrupt.

European and Nigerian courts have been raking over the purchase by Eni SpA and Royal Dutch Shell Plc of the oil license in Africa’s largest crude producer a decade ago. While the energy giants were recently acquitted of corruption charges in Milan in a decision prosecutors could appeal, Nigeria’s government is continuing to seek compensation from JPMorgan.

The memo disclosed at a London court hearing this week shows what JPMorgan managers knew about the oil contract and when, lawyers for the Nigerian government said in court documents. A spokesperson for the investment bank declined to comment.

The government claims Etete distributed a portion of the funds received via the bank from the oil majors to corrupt former and serving senior public officials.

The bank has denied any wrongdoing and says it’s being held responsible for not protecting the Nigerian people from their own government.

The government says that by 2013 JPMorgan’s internal concerns over payments to Malabu Oil and Gas Ltd. — a firm controlled by Etete — were escalating to more senior members of the bank.

“In light of Malabu’s reported connection to the alleged Nigerian corruption scheme, there would be great risk presented if JPMC continues to process wires involving Malabu,” a compliance officer based in the U.S. wrote in a memo dated Aug. 23, 2013.

Just six days later, JPMorgan made a payment of $75.2 million to the Malabu account.

Lawyers for the Nigerian government said in court Wednesday it wants to know how the memo was compiled and asked a judge for more emails and documents from the compliance team.

It’s seeking details on how compliance monitored and placed controls over questionable payments including a so-called “interdiction list” — a tool to prevent transfers from being automatically cleared. Malabu was placed on the list in November 2013.

Updated: 5-27-2021

Dirty Money Flows Continuing Over New Channels, Latvia Says

Flows of illicit money are continuing through new channels after Latvia shut banks and instituted a crackdown, the head of the nation’s anti-money laundering watchdog said.

Authorities imposed strict measures on the financial industry, which at one point handled as much as 1% of U.S. dollar flows. Scrutiny increased when the U.S. Treasury accused a local lender of money laundering and handling money for North Korean shell companies in 2018.

In the ensuing cleanup, Latvia replaced its bank regulator, anti-money laundering watchdog and central bank governor; froze suspect cash, expelled suspicious shell companies and opened a raft of criminal probes. The tougher restrictions have pushed the flows of dirty money into new countries and over different channels.

“Where are those flows now? They are definitely continuing to circulate in Europe and of course the world,” Ilze Znotina, director of the financial intelligence unit, said in an interview. “We unfortunately have to start to think a lot more about different financial services, for example payment companies, e-money companies” and virtual money providers that have taken on handling the flows, she said.

Latvian authorities, who’ve been working to restore the reputation of the Baltic nation’s financial sector, froze a record 429 million euros ($525 million) in suspect cash last year.

The next step is taking the cases to court for rulings on whether the money can be seized and transfered to the state budget. The coronavirus has slowed the process, but this year a new court dedicated to economic crimes began work.

The crackdown on illicit finance is winning some praise. The European Commission in its review of EU nations cited only one field where Latvia had shown substantial progress, in the fight against money laundering. Moody’s Investors Service also lauded the euro-sharing Baltic country when it affirmed its rating at A3, the sixth-highest investment grade rating, this month.

Updated: 6-13-2021

Judge Dismisses Anti-Money-Laundering Charges Against MoneyGram

The order concludes a settlement agreement the company entered into in 2012 for failing to prevent mass-marketing and consumer-fraud phishing schemes.

Anti-money-laundering charges against MoneyGram International Inc. were dismissed after prosecutors said the money-transfer company had complied with the terms of a long-running settlement agreement.

The order by Judge Christopher Conner of the U.S. District Court in Harrisburg, Pa., on Thursday brought to a close MoneyGram’s more than eight-year effort to win the U.S. Justice Department’s approval for its compliance program.

Prosecutors last month asked Judge Conner to dismiss a court filing from 2012 that charged the Dallas-based company with aiding and abetting wire fraud and violating the Bank Secrecy Act.

The dismissal comes after an independent monitor in April certified that MoneyGram’s compliance program was reasonably designed and implemented. The monitor, the company’s second, was John Carey, a senior managing director with the consulting group Treliant, according to a Justice Department spokesman.

Mr. Carey, who took up oversight of MoneyGram’s compliance overhaul from another monitor in 2018, previously declined to comment on the certification, saying he is bound by a confidentiality agreement.

MoneyGram had struggled to get past the settlement, which arose from a series of mass-marketing and consumer-fraud phishing schemes that prosecutors said were perpetrated in part by corrupt company agents and defrauded tens of thousands of victims.

The company’s deferred-prosecution agreement, which was meant to last five years, was extended seven times. In 2018, the Justice Department determined that MoneyGram had breached the agreement and that its compliance program still had significant weaknesses, which led to a 30-month extension of the settlement and more penalties. MoneyGram ultimately forfeited a total of $225 million over the course of the settlement.

Prosecutors last month also confirmed that the company had paid the entirety of the fines imposed on it as part of the settlement. The funds were made available to victims of the fraud who had transmitted money through MoneyGram between 2004 and 2009, and between 2013 and 2017, prosecutors said in a court filing on Wednesday.

A MoneyGram spokesman said the company was pleased to have concluded the deferred-prosecution agreement and monitorship.

“MoneyGram has implemented the highest consumer-data collection capabilities in the industry and its customer ID verification standards, technology platforms and data-driven controls have helped to bring consumer fraud rates to all-time lows,” the spokesman said.

The company has made a number of improvements to its compliance program in recent years, according to past remarks by its chief compliance officer, Andy Villareal.

MoneyGram now has new point-of-sale identification requirements and technology that helps it stay ahead of evolving schemes by fraudsters, he said. Since 2018, it has required senders and receivers of any transaction exceeding $1 to verify their identities.

Updated: 7-19-2021

Government’s Futures Cop Departs After Leading Market-Manipulation Crackdown

Latest trial over spoofing tactic, against former Bank of America traders, is set to start Monday.

The former prosecutor who conceived and oversaw the Justice Department’s effort to crack down on market manipulation in commodities and derivatives has resigned and joined the litigation firm Quinn Emanuel Urquhart & Sullivan LLP.

Robert Zink, who left the department July 2, will now represent companies and individuals facing government investigations.

He was the architect of a campaign to criminally charge traders accused of using a manipulative tactic known as spoofing. Prosecutors have charged 20 traders with spoofing misconduct and settled criminal cases over spoofing with JPMorgan Chase & Co., Deutsche Bank AG and Bank of America Corp.

Another trial is set to begin Monday in Chicago federal court against two former Bank of America traders, Edward Bases and John Pacilio. The two are accused of spoofing precious-metals futures on exchanges operated by CME Group Inc.

The trial, which could last three weeks, will involve debates over trading charts that purport to show the spoofing, as well as testimony from traders and expert witnesses interpreting whether the conduct was manipulative. Messrs. Bases and Pacilio have denied the government’s allegations.

Mr. Zink and the Justice Department fraud section doubled down on the campaign after losing their first spoofing trial in 2018 against a former UBS Group AG trader. The department prevailed at trial last year against two former Deutsche Bank precious-metals traders accused of spoofing. The defendants were sentenced last month to a year in prison.

Regulators and prosecutors say spoofing involves sending and canceling a flurry of orders intended to mislead traders into thinking supply and demand have changed. The mirage, which some defense attorneys argue is lawful bluffing, can cause counterparties to lose money by trading at artificially low or high prices.

Some defense lawyers and business groups say some Justice Department spoofing cases amount to prosecutorial overreach. In at least one case, some of the conduct predated a federal law that defined and outlawed spoofing. The department alleged the spoofing violated an antifraud law that had a longer statute of limitations. Prosecutors prevailed in the case.

Mr. Zink said it didn’t matter whether spoofing or fraud laws were cited because sending orders intended to dupe the market—and make money from the ruse—was always illegal. “Market manipulation has been a crime for decades, and the advent of the spoofing statute just made charging and proving these cases a little easier,” he said.

The Commodity Futures Trading Commission, a regulatory agency that polices derivatives markets, also has investigated spoofing. But traders say criminal cases that might result in prison time are more likely to deter wrongdoing.

“There has been serial under-enforcement in the commodities and derivatives space,” Mr. Zink told the Futures Industry Association, a trade group, in April. “Our objective here is not to point at the scoreboard and rack up numbers. Our objective is to help the regulator, the CFTC, police the markets.”

Prosecutors have recently broadened their enforcement campaign through cases that allege manipulation of commodity prices, not just futures. A former trader at Glencore PLC pleaded guilty in March to conspiring to manipulate fuel-oil prices and agreed to cooperate with the government’s continuing investigation. Those efforts are now led by Avi Perry, a prosecutor Mr. Zink recruited to join the fraud section.

Many spoofing cases involved a detailed analysis of CME trading data. Mr. Zink said he came up with the data-mining approach after prosecuting healthcare fraud earlier in his career. The Justice Department uses Medicare billing data to hunt for physicians bilking government-funded insurance programs.

Mr. Zink, 43 years old, joined the Justice Department in 2010 as a trial attorney. After serving as fraud-section chief, he became the criminal division’s acting deputy assistant attorney general, a role he held until early July.

His move to Quinn Emanuel, a firm whose partners include prominent Washington attorney William Burck, reflects a pattern of former prosecutors and regulators leaving their posts to become higher-paid defense attorneys.

The “revolving door” worries some advocates who say it dilutes the government’s willingness to bring challenging cases. Others say it helps federal agencies recruit more seasoned attorneys.

Nathan Muyskens, a lawyer at Greenberg Traurig LLP, said Mr. Zink was an aggressive but principled prosecutor whose investigations unsettled Wall Street. Mr. Muyskens represented the former UBS trader who was acquitted in 2018. “I don’t think the banks were sending him bouquets of flowers on his last day,” Mr. Muyskens said.

Updated: 7-22-2021

Ex-Merrill Trader Says He Learned To Spoof From Pacilio, Bases

A former trader at Bank of America Corp.’s Merrill Lynch unit told a federal jury in Chicago that he learned how to manipulate the price of precious metals from two more senior traders in the bank’s New York office, John Pacilio and Edward Bases.

Harnaik Lakhan said he used Merrill’s internal computer system to watch Pacilio and Bases, who are on trial for alleged spoofing, issue buy and sell orders they didn’t intend to be filled, pushing prices up or down to make it profitable for orders they wanted to execute. Lakhan, who agreed to cooperate with the government to avoid prosecution, said he began using the same techniques from his office in London.

“I wanted to push the market price to my true, intended trade,” Lakhan, who worked at Merrill’s London office from 2007 to 2013, testified on Thursday.

“I knew it was wrong to do, but it helped us make money and get trades done,” he said. “You’ve got to make money. If you don’t make money, you’re out of there.”

Bases and Pacilio face about 20 charges related to alleged spoofing trades in precious-metals markets from 2008 to 2014.

Lakhan was a desk assistant for Pacilio and other traders before becoming a trader himself. When Bases joined Merrill in 2010, Lakhan traveled to New York to help set up his desk right next to Pacilio.

Lakhan said he “frequently” saw Bases and Pacilio spoofing because he was watching their trading activity “all the time.” While Pacilio typically used a single large order to push the market, Bases favored using many smaller orders, Lakhan said.

During Thursday’s testimony, prosecutor Scott Armstrong displayed a copy of a portion of an exchange on an instant messaging group chat used by Merrill traders, including Lakhan. The chat log showed Pacilio messaged the group that he had in an order “to spoof the gold” in November 2009.

Lakhan said he’s had a variety of jobs since he left as a metals trader at Morgan Stanley in 2015. He’s tutored students in math and English, been a support worker for adults with autism and now works at an Amazon fulfillment center packing boxes.

Defense attorneys for Bases and Pacilio have not yet begun cross-examining Lakhan.

Updated: 9-21-2021

Leaked Treasury Documents Prompt Fresh Calls For Updated Anti-Money-Laundering Regulations

Reports on the documents follow the announcement of a new rule and potential new rules aimed at modernizing the U.S.’s anti-money-laundering regulatory regime.

A leak of U.S. Treasury Department records on red-flagged financial transactions underscores a message that national security officials, banks and regulators have been sending for more than a decade: Anti-money-laundering rules need to be updated to better disrupt illicit cash flows.

Government and industry officials, concerned that existing laws fail to address the evolution of the financial system, have been gaining political traction for an overhaul of regulations meant to fight terror finance and money-laundering used by drug traffickers, arms proliferators and a host of other bad actors.

Thousands of leaked suspicious activity reports, or SARs, filed by banks to the Treasury Department’s Financial Crimes Enforcement Network highlighted long-known ways that criminals use the financial system to move money.

BuzzFeed News, the International Consortium of Investigative Journalists, and other media organizations published reports over the weekend citing the leaked documents.

Those SARs were designed to provide financial intelligence to help disrupt those flows. But banks, regulators and watchdog groups say that while the SARs do help, the overarching rules they are a part of are antiquated.

“The FinCEN files illustrate the alarming truth that an enormous amount of illicit money is sloshing around our financial system, and that U.S. banks play host and facilitator to rogues and criminals that represent some of America’s most insidious national security threats,” said Elizabeth Rosenberg, a former Treasury sanctions official.

“But the devastating problem is not that bad people move dirty money—a feature of every system of currency and exchange in history,” she said.

The problem is that the U.S. doesn’t have strong enough transparency laws that ban anonymous companies and require the true owners of firms to be identified, said Ms. Rosenberg, now at the Center for New American Security.

Many former top Treasury officials have joined banks in saying that existing regulations don’t give them the tools they need to better surveil the trillions of currency transactions they handle every day.

Rather, they report so much data—many with unnecessary red-flagged transactions—that the information flow often obscures illicit activities.

Banks, under existing rules, file what many former regulators say is an overwhelming amount of SARs to satisfy bank supervisors, sometimes appearing to give priority to quantity over quality.

“That formula is not the ideal way to protect America from security threats and crime,” Ms. Rosenberg, who served in the Obama administration, said.

That’s why watchdog groups like the Financial Accountability and Corporate Transparency Coalition have praised U.S. Treasury efforts to push Congress to pass banking and corporate-transparency legislation that lawmakers have failed to approve despite broad industry backing.

“It’s time to overhaul our anti-money-laundering system and prioritize the fight against illicit finance,” said Clark Gascoigne, interim executive director at the FACT Coalition. “That begins by enacting bipartisan legislation to end the incorporation of anonymous shell companies in the National Defense Authorization Act,” he said.

FACT also is calling for an increase in staff and resources devoted to FinCEN, overhauling safeguards in the correspondent banking system, and other changes.

The U.S. Treasury Department has been rolling out several long-planned initiatives in recent months, including expanding regulations for banks to the cryptocurrency industry, bolstering real-estate reporting requirements, plugging a gap in U.S. anti-money-laundering regulations and officially kicking off a regulatory restructuring with a public comment period for new rule-making.

An advance notice of proposed rule-making published last week in the Federal Register seeks public comment on the requirement that financial institutions must maintain an “effective and reasonably designed” anti-money-laundering program.

Any amendments to the Treasury’s current rules would clarify that such AML programs should be informed by a particular institution’s own risk assessment, and that they should result in the sector providing useful information to authorities, the notice said.

The proposed rule-making is part of a larger effort to modernize the U.S.’s AML regime, according to FinCEN.

The agency has suggested making clarifications about the requirements of the U.S.’s primary AML legislation, the Bank Secrecy Act, that would empower banks to allocate their resources more effectively.

“It shows an awareness that the industry is really trying to comply here, but there is a lot of difficulty in doing so,” said Seetha Ramachandran, a partner at law firm Proskauer Rose LLP. “The regulations are complex and onerous in certain ways that don’t make sense.”

The SARs leaks “once again emphasize the need to pursue intelligence-led changes for financial crime risk management—driven by meaningful improvements to public-private sector cooperation and cross-border information sharing,” said Tim Adams, head of the Institute for International Finance, which represents the world’s largest banks, funds and other financial institutions.

“I hope these findings spur urgent action from policy makers to enact needed reforms.”

FinCEN said its new rules could include clarifying requirements related to risk assessments and customer due diligence. They also could revise guidance on so-called politically exposed persons. FinCEN is seeking comments on the possible overhauls through Nov. 16.

FinCEN said earlier this month that it was aware of the forthcoming reports on the leaked SARs, adding in a statement that “the unauthorized disclosure of SARs is a crime that can impact the national security of the United States, compromise law enforcement investigations, and threaten the safety and security of the institutions and individuals who file such reports.”

FinCEN said it had referred the matter to the U.S. Department of Justice and the Treasury’s inspector general.

FinCEN also completed a rule last week that imposes new AML requirements on certain financial institutions that have traditionally operated without a federal regulator.

The rule extends customer identification and beneficial ownership requirements and applies to institutions such as private banks, non-federally insured credit unions, and certain trust companies, FinCEN said.

Financial institutions without a federal regulator must begin complying with the rule by March 15, the agency said.

Updated: 10-7-2021

NatWest Pleads Guilty To Anti-Money-Laundering Charges

The guilty plea is the first criminal prosecution under money-laundering regulations that went into effect in 2007, according to a U.K.’s financial regulator.

A subsidiary of NatWest Group PLC pleaded guilty in the U.K. on Thursday to charges that it violated regulations requiring financial institutions to maintain adequate anti-money-laundering systems and controls.

The guilty plea is the first criminal prosecution under money-laundering regulations that went into effect in 2007, the U.K.’s Financial Conduct Authority said.

The criminal charges, brought by the FCA, stemmed from operational weaknesses in the U.K. bank’s anti-money-laundering protections between 2012 and 2016 that caused it to fail to adequately monitor the accounts of an unnamed U.K. incorporated customer, NatWest said.

The case has been sent to the Southwark Crown Court in London for sentencing, the FCA said Thursday.

NatWest said the sentencing was expected to be in four to eight weeks, and that it would make a provision in the company’s third-quarter financial statements in anticipation of a potential fine being imposed. The statements are due to be published on Oct. 29.

NatWest said it had cooperated fully with the FCA since the beginning of the investigation.

“We deeply regret that NatWest failed to adequately monitor and therefore prevent money laundering by one of our customers between 2012 and 2016. NatWest has a vital part to play in detecting and preventing financial crime and we take extremely seriously our responsibility to prevent money laundering by third parties,” NatWest Chief Executive Alison Rose said.

The FCA on Thursday said that no individuals would be charged as part of the proceedings against the bank.

Based on statements made at court, NatWest is likely to be fined between £174 million and £348 million (a range of about $237 million to $474 million in U.S. dollars), according to S&P Global Ratings. The credit rating firm said it expected NatWest’s franchise and daily business activities wouldn’t be materially affected by the fine.

The case demonstrates the challenges faced by large banks in implementing robust prevention and detection processes, and verifying that these controls are deployed effectively across the institution, S&P added.

NatWest has spent nearly £700 million to strengthen its financial crime control systems over the last five years, and plans to invest another £1 billion in the next five years, according to the bank.

Updated: 12-8-2021

Justice Department Told Deutsche Bank Lender May Have Violated Criminal Settlement

The possible violation is related to an internal complaint in its asset-management arm’s sustainable investing business.

The Justice Department has informed Deutsche Bank AG that the German lender may have violated a criminal settlement when it failed to tell prosecutors about an internal complaint in its asset-management arm’s sustainable investing business, according to people familiar with the matter.

The complaint alleged that the asset manager, DWS Group, overstated how much it used environmental, social and governance criteria, known by the industry acronym ESG, to manage its assets.

U.S. authorities learned of the issue in an August Wall Street Journal article, rather than from the bank, which had ongoing disclosure and compliance obligations under the earlier criminal settlement, according to people familiar with the matter.

That earlier criminal settlement was struck in January and related to Deutsche Bank’s involvement in overseas corruption and market-manipulation.

Deutsche Bank agreed to pay $130 million and entered into a deferred-prosecution agreement, which allows companies to avoid being indicted in exchange for staying out of trouble for a period of several years and flagging any potential problems as soon as the bank finds out about them.

If U.S. authorities pursue Deutsche Bank for a breach of the agreement, the bank could lose its earlier deal and, in the worst case, face indictment and prosecution, according to the agreement.

Authorities also could decide against taking the bank to court, and instead ask it to pay an additional fine and make other changes, such as hiring an outside monitor to dig into the bank’s business and review its compliance efforts.

A final decision has yet to be made, the people familiar with the matter said.

According to the January settlement, prosecutors are supposed to give written notice before launching a prosecution, and the bank is allowed to provide its own feedback on how it dealt with the alleged violation.

A Deutsche Bank spokesman declined to comment. A Justice Department spokesman also declined to comment.

Justice officials have said in recent months that they plan to call out companies for breaches of deferred-prosecution agreements, which allow companies to avoid a guilty plea but require them to admit wrongdoing.

Some critics argue the leniency deals are used too often, particularly when the government doesn’t bring charges against employees who committed the misdeeds.

“You are going to see, in the days and weeks to come, a desire and a focus on making sure companies are living up to those commitments, and when they don’t, there will be consequences,” Deputy Attorney General Lisa Monaco said at the Journal’s CEO Council event this week, without naming individual companies.

Any Justice Department move would be a costly setback for a bank that has been trying to improve its relationship with U.S. regulators and show investors it is a reformed institution following years of legal troubles.

For years Deutsche Bank was considered one of the world’s most troubled banks. In the U.S. it paid hefty fines over money-laundering and mortgage-securities scandals. Also hanging over Deutsche Bank was its longtime role as lender to former President Donald Trump, which put the bank in the middle of political fights and congressional investigations.

Last year, the New York Department of Financial Services fined Deutsche Bank $150 million over its dealings with convicted sex offender Jeffrey Epstein and other lapses. Deutsche Bank said at the time it had learned from its mistakes in the case.

The problems in its asset-management arm emerged earlier this year. DWS’s former head of sustainability, Desiree Fixler, sent an email outlining her concerns about the company’s ESG claims to two executives of Deutsche Bank in March, according to a copy of the email seen by the Journal.

While DWS is a separately listed company in Germany with its own management, Deutsche Bank owns most of it, consolidates DWS’s figures in its results and calls it a core business for the bank. DWS’s chairman, Karl von Rohr, sits on the management board of Deutsche Bank.

Ms. Fixler’s email, reviewed by the Journal, went to Mr. von Rohr and Jörg Eigendorf, Deutsche Bank’s global head of communications and sustainability.

She wrote at the time that she believed she was being fired by DWS for raising concerns about several issues she had found at the firm, including that DWS overstated its sustainable-investing efforts.

A Deutsche Bank spokesman said Messrs. von Rohr and Eigendorf declined to comment.

ESG investments are a booming business for asset managers like DWS. Trying to meet demand from investors, some firms have rushed to classify investment strategies as ESG-friendly. U.S. regulators have warned money managers against pitching misleading ESG products.

In August, the Journal reported that DWS overstated how much it used sustainable investing criteria to manage its assets, according to Ms. Fixler and documents. DWS has denied it overstated its ESG capabilities, saying its process is transparent to investors.

Later in August, the Journal reported prosecutors and the Securities and Exchange Commission were investigating DWS’s claims related to its ESG business, citing people familiar with the matter.

The Justice Department earlier this year informed two companies—Swedish telecom-equipment manufacturer Ericsson AB and British bank NatWest Group PLC—that they had breached the terms of earlier deferred and nonprosecution agreements, respectively.

Ericsson said it would continue to cooperate with the department. NatWest said that it was engaged in discussions with the U.S. authorities and that it believed it shouldn’t be prosecuted over its earlier conduct.

Updated: 12-10-2021

JPMorgan Set To Pay $200 Million Fine Over Lax Staff Monitoring

JPMorgan Chase & Co. is preparing to pay roughly $200 million to resolve U.S. regulatory investigations into lapses over monitoring employee communications.

A settlement with the Securities and Exchange Commission and Commodity Futures Trading Commission could be reached before year-end, according to people familiar with the matter, although the figure is preliminary and could change. SEC commissioners have yet to vote on resolving the matter, one of the people said.

The unusually stiff sanctions for lax surveillance serve as a warning for the financial industry under the new regulatory regime.

Spokespeople for JPMorgan and the CFTC declined to comment, and the SEC didn’t immediately reply to a request for comment.

Wall Street firms are required to scrupulously monitor communications involving their business. That system, already challenged by the proliferation of mobile-messaging apps, was strained all the more as firms sent workers home shortly after the start of the Covid-19 outbreak.

Investigators have been looking into JPMorgan’s compliance leading up to and during the pandemic.

Earlier this year, JPMorgan ordered traders, bankers, financial advisers and even some branch employees to dig through years of messages on personal devices and set aside any related to work, Bloomberg reported in June.

One of the internal notices directed recipients to root through their messages since the start of 2018 and save those related to work until the company’s legal department instructed them otherwise.

JPMorgan, the biggest U.S. bank, disclosed in an August filing that it had been responding to requests for information “concerning its compliance with records preservation requirements in connection with business communications sent over electronic messaging channels that have not been approved by the firm.”

The bank said at the time that it was engaged in “certain resolution discussions” with regulators. In a subsequent filing last month, it characterized those talks as “advanced resolution discussions.”

In both instances, the New York-based firm said there was no guarantee that a settlement would be reached.

Updated: 12-13-2021

UBS Penalties Slashed By Around $3 Billion In French Tax Case

Court upholds Swiss bank’s conviction in tax evasion case but cuts penalty.

A French appeals court ordered UBS Group AG to pay around $2 billion for helping wealthy clients in France evade taxes, reducing the size of an earlier penalty of around $5 billion.

The court upheld the guilty verdict against the Swiss banking giant, in a case tried under French criminal law.
However, it slashed an earlier fine of 3.7 billion euros, equivalent to around $4.2 billion, to 3.75 million euros, all but eliminating the largest chunk of penalties. It ruled that UBS must still pay 800 million euros in damages and interest, and ordered the confiscation of 1 billion euros.

The bank’s shares jumped around 2% Monday on the news.

“We’re not happy about the guilty verdict. We still believe that we didn’t commit any wrongdoing, and that the law is in our favor,” said Denis Chemla, a lawyer from the firm Allen & Overy who represented UBS. He said it was too early to say whether the bank would appeal the case in France’s highest court.

The case has hung for years over UBS, one of the world’s biggest wealth managers. The original 2019 verdict was large enough to threaten its financial health and reputation as an institution entrusted with helping rich people care for their wealth.

The legal battle stemmed from visits more than a decade ago by Switzerland-based UBS bankers to France where prosecutors said they were unauthorized to do business.

Bankers wooed clients on hunting trips, at the opera and at sporting events such as the French Open tennis tournament to open accounts in Switzerland and avoid paying tax, prosecutors alleged at the initial trial. Judges hearing the case in Paris were told the bankers used James Bond-like tactics to travel surreptitiously to France.

The judges found UBS guilty in 2019 of illegally recruiting clients in France and helping them to launder money that wasn’t declared to French authorities.

UBS has denied wrongdoing and said the initial conviction wasn’t supported by any concrete evidence. It has said some Switzerland-based bankers met with clients in France at social events, but it disputes that the contact established there was unlawful solicitation for business.

The bank took a 450 million euro provision against the matter in 2018 and cut its bonus pool in 2019.

An appeals court heard the case in March, rescheduled from June 2020 because of the pandemic. Prosecutors said they wanted at least a 2 billion euro fine, while the French government asked for 1 billion euros in damages and interest.

The prosecutors lowered their earlier request to reflect penalties calculated on tax not withheld rather than the total amount of client funds involved, a point UBS had contested in the 2019 case.

French authorities began investigating cross-border activities of some UBS staff in 2011, drawing on whistleblowing allegations by four former or current employees.

The case emerged at a time when authorities on both sides of the Atlantic were cracking down on tax evasion, especially by financial institutions who used Switzerland’s banking secrecy laws to hide wealth.

UBS in 2009 admitted wrongdoing in helping Americans evade taxes, reaching a settlement to pay $780 million and turn over the names of thousands U.S. taxpayers with secret accounts, to avoid criminal charges.

The French investigation was later broadened to include all UBS Swiss accounts held by French clients who allegedly committed tax fraud. In a 2017 trial order, the bank was charged with unlawful solicitation of clients, laundering the proceeds of tax fraud, and aiding and abetting both those activities.

NatWest Fined £265 Million After Money Laundering Guilty Plea

NatWest Group Plc was fined 265 million pounds ($351 million) at a sentencing hearing after pleading guilty to failing to prevent money laundering in a case that heard details of hundreds of thousands of pounds being couriered in black garbage bags and branch vaults overflowing with bank notes.

The bank admitted to three criminal charges in October, accepting that it failed to prevent money laundering at an English gold dealer. NatWest took in some 365 million pounds in deposits, more than two-thirds of which was in cash, across some 50 branches.

The deposits piled up despite the gold dealer forecasting an annual revenue of just 15 million pounds per year.

The case was prosecuted by the U.K.’s financial watchdog, the Financial Conduct Authority, which laid out a series of lapses at local branches as well as repeated failures of overall reporting and oversight.

One manager at a cash processing center warned a financial crime investigator that the volume of deposits was the most suspicious that he had encountered in his entire career. NatWest kept taking in money until police finally took over the account in 2016.

“Without the bank — and without the bank’s failures — the money could not be effectively laundered,” Judge Sara Cockerill said. She imposed a fine that was 15% higher than the 340 million pounds initially sought by the FCA — partly as a deterrent effect — although she reduced the total by a third because of the bank’s guilty plea.

“Despite the bank’s commitment to improvement and regret it is incumbent on the court to pass a sentence which is of sufficient size that it will be felt by management and shareholders of the bank,” she said.

NatWest said in a statement that the cost of the fine will be met from existing provisions, with a small additional provision to be taken in NatWest’s fourth quarter.

“We deeply regret that we failed to adequately monitor one of our customers between 2012 and 2016 for the purpose of preventing money laundering,” Chief Executive Officer Alison Rose said in the statement. Rose and Chairman Howard Davies sent a letter to the judge apologizing for the bank’s actions.

The gold dealer was shut down after a police investigation in 2016 into what was alleged to be “an extremely sophisticated” money laundering operation.

The bank had agreed it wouldn’t handle any cash deposits when it opened the account. But at the height of the activity, the dealer was depositing up to 1.8 million pounds per day with the local branch, Clare Montgomery, a lawyer for the FCA, said.

“NatWest is responsible for a catalog of failures in the way it monitored and scrutinized transactions that were self-evidently suspicious,” Mark Steward, executive director of Enforcement and Market Oversight at the FCA, said. “Combined with serious systems failures, like the treatment of cash deposits as checks, these failures created an open door for money laundering.”

Black Binliners

The account was the single most “lucrative” for the corporate banking office in the Bradford area in northern England, Montgomery told the judge. At one branch, she said, around 700,000 pounds in cash was loaded into black binliners and walked through a shopping center. The notes were so heavy that the bags almost split, she said.

The vaults were so full that some bags of cash had to be stored outside, she said.

John Kelsey-Fry, a lawyer for NatWest, said that bank staff didn’t miss the suspicious activity.

“It did not go under the radar. It was identified and subjected to scrutiny,” Kelsey-Fry said. “The quality and adequacy of that scrutiny is another matter.”

On another occasion, bank staff at a cash processing center noted a heavy volume of Scottish bank notes, that the police suspected may have come from drug trafficking. NatWest refused to provide further information in response to the police request.

The case is the FCA’s first criminal prosecution under 2007 money laundering rules and the first prosecution against a bank, part of a concerted effort by the regulator to act more forcefully.

“Whatever else may happen, the bank must bear the stigma of that,” Kelsey-Fry said.

Updated: 12-17-2021

Biden’s Baby Steps On Dirty Money

The administration is moving in the right direction, but the U.S. is still a haven for ill-gotten gains.

President Joe Biden’s administration has a message for the world: After many years of inaction, the U.S. is finally ready to do its part in the global fight against tax evasion, money laundering and terrorist financing.

The sentiment is welcome, but a lot more action is needed.

Once upon a time, the U.S. spearheaded an international crackdown on the financial secrecy that helps the corrupt and the dangerous hide their assets. Since then, much has been achieved. Many advanced nations have established beneficial-ownership registers — often publicly accessible — to reveal the people behind shell companies.

They have started to require real-estate professionals, including attorneys and notaries, to report questionable transactions. More than 100 jurisdictions have joined the Common Reporting Standard, which entails automatic sharing of information on the foreign bank accounts of each other’s taxpayers.

Yet in a spectacular display of hypocrisy, the U.S. has avoided the transparency that it has demanded from the rest of the world.

As the Pandora Papers investigation demonstrated, opaque trusts offered by states such as Nevada and South Dakota have attracted hundreds of billions of dollars from people seeking extreme financial privacy, outcompeting the likes of Switzerland and the Cayman Islands.

Lax controls have made penthouses in Miami and mansions in Beverly Hills into ideal vehicles for laundering criminal proceeds, including from Iranian sanctions-busting and Malaysian embezzlement.

The U.S. remains the only major nation that hasn’t joined the CRS, undermining other governments’ efforts to make people pay the taxes they owe.

It’s thus encouraging that Biden wants to set things straight. As part of a broader anti-corruption campaign surrounding the State Department’s Summit for Democracy, his administration has announced some important steps in the right direction.

The Treasury Department is moving quickly to set up a beneficial-ownership register, as mandated in the Corporate Transparency Act that Congress passed late last year. And it may require a potentially wide range of real-estate professionals to flag suspicious activity and conduct due diligence on their clients.

Unfortunately, even if the U.S. follows through on these measures, many dark corners will remain. The ownership database won’t cover those South Dakota trusts, lacks a verification mechanism, and limits access to certain categories of financial institutions (subject to the client’s consent), barring even a modicum of public scrutiny.

Key anti-money-laundering rules still probably won’t apply to known facilitators such as trust service providers and investment-fund managers.

And the Treasury still won’t have the authority to provide other governments with the same bank-account information on their taxpayers that it regularly receives from other countries.

As a result, the U.S. risks adding to its regulatory burden without deriving much benefit: As before, a corrupt Russian or Chinese official will be able to park assets legally, without the relevant authorities in his home country or the U.S. knowing about it.

To some extent, rectifying these shortcomings will require further acts of Congress — for example, to shed light on trusts and allow intergovernmental information sharing.

In other areas, such as expanding anti-money-laundering reporting to more types of financial professionals, Treasury has the authority to act on its own. In any case, the U.S. needs to do better. Without its full participation, the global fight against dirty money cannot succeed.

Updated: 12-28-2021

Money Laundering Watchdog Turns Focus To Digital Tools, Extremism

Marcus Pleyer, the president of the Financial Action Task Force, says certain money laundering patterns have increased during the pandemic.

The coronavirus halted a wide range of economic activities, but it hasn’t stopped criminals from using the global financial system to commit fraud and engage in other types of illicit behavior.

Yet the pandemic has forced some countries to divert resources away from fighting money laundering and made it harder for compliance officers in the private sector to detect it, according to the Financial Action Task Force.

The organization, which sets international standards and assesses countries’ anti-money-laundering and counterterrorism-financing policies, has been closely monitoring the impact of the pandemic on its global network, says Marcus Pleyer, FATF’s president.

Mr. Pleyer began a two-year term as FATF’s head in July, about two months after the organization released its first report on the AML and CTF risks posed by the pandemic. In an interview with Risk & Compliance Journal, Mr. Pleyer discussed FATF’s priorities under his presidency. Edited excerpts follow.

WSJ: Has the coronavirus pandemic increased the risk of money laundering?

MR. PLEYER: We see an increase in certain crimes and money laundering patterns. For example, fraud connected with government aid. We see fundraising for fake charities. We see counterfeiting of medical goods. Also, cybercrime.

On the other hand, cash intensive crimes where you need to take cash over the border is certainly something that is decreasing.

What worries me a little bit also is that…there has been an impact on [anti-money-laundering] work in the public sector. We see that in some countries resources are diverted to other areas of government.

We also see this in the private sector. When customers are onboarded, the customer due diligence processes are sometimes not driven at the same level as usual because people are working from home or they have different security measures.

WSJ: There seems to be a growing consensus that the traditional anti-money-laundering and counterterrorism-financing regime isn’t working. How might FATF’s standards evolve to address some of those issues?

MR. PLEYER: There is something that really could change the game, and that is not necessarily a revision of the standards. I think the standards are right. Countries need to implement them fully and effectively, and to make this possible countries should look into—and we at FATF will look into—the digital tools that are out there to promote effective implementation of the standards.

That is why under my presidency we issued a priority on digitization, and we will look into what digital solutions exist and how they can be used for AML-CFT. We will look into possible structural legal technical obstacles and how you can address them.

There is some tension between effectively fighting money laundering on the one side and adhering to data protection. I’m pretty sure if we bring together—and that is what I plan to do—people from the AML area, people from data protection and the technical experts, we will find ways to reconcile these two objectives.

WSJ: Is technology the primary solution to the problem?

MR. PLEYER: You cannot make AML more effective by using digital tools only—you need trained people. So it’s also about human resources, in all the parts of the chain of AML. You need them in compliance, you need them with the supervisors, you need them with the financial Intelligence units, you need them with law enforcement.

This is why I encouraged leaders at the G-20 summit to leave AML-CFT very high on the agenda—to invest in law enforcement and provide them with the necessary human resources. But again, [to provide them] also with the digital resources. It’s always the right mixture between human resources, skills and digital tools.

WSJ: A recent report detailing the contents of leaked U.S. suspicious activity reports appeared to show that banks are identifying a lot of suspicious transactions and suspicious actors, but in many cases they’re continuing to do business with them. What does this mean for the continued fight against money laundering and counterterrorism finance?

MR. PLEYER: This has shone light on the problems we have with money laundering and terrorist financing. A high-level comment on this is that in our mutual evaluations, we also see that there is still a lot of room for improvement for all countries.

I want, especially the G-20, to march ahead and be a model for other countries. All countries need to improve, and all parts in the chain need to improve. We are quite good on this planet with technical compliance, with introducing the standards into the legal framework. But everyone needs to step up their effectiveness.

WSJ: What are your other priorities as FATF president?

MR. PLEYER: One is potentially the fastest growing security and terrorist threat globally, and that is the extreme right-wing terrorism. We have seen a 320% rise in attacks over the past five years. [The number of attacks by such groups in the U.S. from 2010 to 2017] has surpassed the number of attacks perpetrated by terrorist groups such as ISIS and Al-Qaeda. We want to understand the financing behind this, to help us detect and prevent those terrorist attacks.

The other issue I want to stress, because it impresses by magnitude, is environmental crime and its link to money laundering. Up to $258 billion in profit are generated by environmental crimes, and we expect an increase by 5% to 7% annually. By going after these profits, our organization can contribute to several global challenges [including] the protection of our precious ecosphere.

And with this Covid-19 pandemic, we have seen that fighting environmental crime, especially illegal wildlife trade, has a connection to health. We need to preserve biodiversity as a buffer between the world of animals and human mankind.

Updated: 12-29-2021

Deutsche Bank Fined For Weak Controls On Rate Data

Germany’s financial regulator BaFin said the bank didn’t do enough to tighten controls after $3.5 billion in earlier fines related to rate rigging.

Deutsche Bank AG was fined nearly $10 million by Germany’s financial regulator on Wednesday for not having strong enough controls around data submissions that help set a European interest-rate benchmark.

Deutsche Bank “at times did not have in place effective preventive systems, controls and policies to ensure the integrity and reliability of all contributions of input data to the administrator,” the regulator, BaFin, said.

The weaknesses found by BaFin related to Euribor submissions in a 2019-2020 time period, according to a person familiar with the matter.

Deutsche Bank said there is no indication it actually submitted any incorrect data, and that it is taking measures to improve the controls. The bank said it wouldn’t contest the fine, which was €8.66 million, equivalent to nearly $10 million.

“It remains a top priority for us to identify and address potential weaknesses in our control processes,” a Deutsche Bank spokesman said.

The penalty revives one of the darkest chapters for Germany’s biggest bank by assets. Last decade, Deutsche Bank paid around $3.5 billion to settle allegations by U.S., U.K. and European authorities that its traders for years manipulated Euribor and other global interest-rate benchmarks.

It was the most heavily fined bank over the rate rigging, and has since sought to improve its culture and systems to prevent any repeats.

The Wall Street Journal previously reported that a whistleblower who helped U.S. and U.K. regulators investigate rate manipulation at Deutsche Bank received nearly $200 million for assisting that probe.

A series of 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.

Regulators investigated, and found traders at banks and brokers for years conspired to manipulate benchmark rates. The rates are set based on oral submissions by banks and not on actual transactions.

Like other banks, Deutsche Bank was accused of letting employees nudge rates up or down slightly to benefit their trading positions. The practice was harmful, authorities say, because the rate benchmarks are used to determine interest paid on everything from mortgages to corporate loans to complex financial derivatives. The most widely used rate, Libor, is in the process of being replaced.

Updated: 1-3-2022

Danske Bank Rebuilds Compliance Program After Money-Laundering Scandal

Galvanized by the 2018 scandal at a tiny branch in Estonia, the Copenhagen-based bank is about half-way through a revamp of its financial crimes controls, according to its new chief compliance officer.

Danske Bank A/S in 2018 became the face of a money-laundering scandal that grew to engulf the entire Nordic region. Now, the Danish lender is looking to rebuild its reputation, including by creating a world-class compliance program.

The Copenhagen-based bank is about halfway through a revamp of its financial crimes controls, according Satnam Lehal, its new chief compliance officer.

That process began in early 2019, after Danske Bank acknowledged that more than $230 billion had flowed, largely unchecked, from Russia and other former Soviet states through a tiny branch of the bank in Estonia.

The scandal prompted broader scrutiny of the region’s banking sector. Despite its reputation as a squeaky-clean bastion of social democracy, the revelations about Danske Bank’s Estonia unit came to reveal deep flaws in the compliance systems of some of the region’s other leading banks.

Soon after Danske Bank, Swedbank AB and Skandinaviska Enskilda Banken AB in Sweden also came under investigation for lax anti-money-laundering controls at their Baltic operations.

Mr. Lehal, who joined Danske Bank in July 2019 as its head of financial crime compliance, spoke with WSJ’s Risk & Compliance Journal about his outlook on the region, lessons learned from Danske Bank’s remediation process, and the diverse skill set that is increasingly necessary to work in the compliance field. Edited excerpts follow.

WSJ: What has Danske Bank done to strengthen its compliance program after what happened in Estonia?

Mr. Lehal: After the Estonian matter, there was a recognition that the financial crimes controls we had, and the framework we had, over the course of time just had not stayed abreast with the evolving risks and regulators’ expectations.

We’re sort of halfway through with our remediation process. Some of the big flagship things we’ve done are around screening our customers against U.S. and other relevant sanctions lists.

Another big thing we did early on was to say, “We’ve got all these customers, they were on-boarded historically to a different standard. Let’s refresh all of our due diligence on all of those customers to a more modern, higher standard.”

We’ve also done a lot of work on transaction-monitoring.

WSJ: What have you learned from this process that might be applicable to other companies facing similar challenges?

Mr. Lehal: Sometimes, I think where banks get remediation wrong is they are trying to do everything simultaneously. You have competing regulatory pressures. Or it can just be the urgency and panic within the organization, if you have gone through a big—let’s face it—trauma.

There’s also the execution risk. A financial crimes transformation is probably one of the most significant changes an organization can go through. It’s large-scale, it involves large parts of the organization.

That is just a big exercise to get done. It requires some really advanced execution and project management skills. It is very rarely lack of intent, or lack of financial or board support, that derails banks.

WSJ: What’s your view on where the Nordic region is regarding financial crime prevention?

Mr. Lehal: You read the press, you see what’s happening at some of our peers or competitors in the Nordics. We had a very big crystallized failure. We recognize that. But I don’t think this was a Danske Bank-specific issue.

What you see across the Nordic regions are financial institutions upgrading their financial-crimes frameworks and controls. I think there’s been a massive upskilling and knowledge acquisition in both the private sector and the public sector in the last three years.

One thing that we’re all now trying to do a bit more of is, amongst the private and public sectors, is knowledge-sharing, where it’s appropriate, so that we can quickly be learning from each other.

[Compliance] is an area where banks don’t really compete against each other. You need the entire system to have a basic minimum standard of control.

WSJ: What expertise is needed to be a chief compliance officer in the financial sector?

Mr. Lehal: The range of skills you need to be effective, I think, is greater than many other jobs.

You need to know about operations, you need to know about technology, you need to know about law, you need to know about all the bank’s products—not just some of them. You need to know the distribution channels, and you need to understand how people are compensated and about incentives.

When you’re looking at conduct, you have to understand human psychology and differences in cultures across all of the jurisdictions in which your business operates. You have to be a great people manager, you have to be a great trainer. You have to be good at explaining complex technical issues in a way that people can understand.

You have to do all of that with a smile on your face and an abundance of resilience. Because often the issues that compliance departments are dealing with are when there’s problems or near-misses, or it’s gray and there’s no obvious answer, and there are going to be trade-off decisions.

WSJ: What’s changing in the profession?

Mr. Lehal: As I look forward, the thing that I think is going to be an additional, significant component of a successful compliance officer is going to be technology and data.

Firstly, I think financial institutions are harnessing technology and data more and more in the design of their products and their suite of offerings. So if you want to be a compliance officer—identifying, mitigating, designing controls around those risks—you really need to understand it.

There’s a second component. As banks have more data, and as regtech has developed and proven itself more and more, we are harnessing increasingly more of these technologies ourselves. I now need to be someone who understands robotics, and things like surveillance tools.

At Danske Bank, we recently developed our compliance strategy, and a key component of that is technology. And to make sure that, in the coming years, our own staff have the requisite technology skills to be able to perform their roles effectively.

London’s Fintech Boom Opens The Door For Dirty Money

Among the more than 200 electronic money institutions licensed in the U.K. are ones with executives or shareholders tied to alleged financial wrongdoing.

A 10-minute walk from the Bank of England, on the eastern edge of the City of London, lies a gateway to a new shadow world of money.

Here on Dukes Place is the office of Moorwand Ltd., one of a fast-growing breed of upstarts that bill themselves as alternatives to old-fashioned banks when moving money around the world.

Each day in the U.K. alone, an estimated 1.4 billion pounds ($1.9 billion) courses through loosely regulated digital payments businesses like Moorwand. Though only a small fraction of Britain’s financial flows, it’s a system critics warn is opening a door for dirty money.

Moorwand is one of more than 200 electronic money institutions, or EMIs, approved by U.K. regulators since 2018. Trouble soon followed: A tiny lender in Denmark with which Moorwand had developed a close relationship flagged hundreds of suspicious transactions involving the payments firm, according to internal bank documents seen by Bloomberg News.

In 2018, Danish authorities seized the bank, Kobenhavns Andelskasse, citing violations of money-laundering laws and referred the matter to the police.

Moorwand, controlled by Moldova-based businessman Wael Sulaiman Almaree, hasn’t been accused of wrongdoing and is still authorized to move client funds. Neither Almaree nor Moorwand responded to repeated requests for comment.

Now questions are swirling around dozens of EMIs regulators licensed as part of a move to boost London’s reputation as a fintech center and promote banking competition.

Hundreds of regulatory, legal and corporate filings reviewed by Bloomberg sketch an unsettling picture of this new corner of the City. And they point to oversight weaknesses at the U.K.’s Financial Conduct Authority.

Among the companies approved by the FCA, Bloomberg’s review found, are ones with executives or shareholders tied to Baltic money-laundering scandals, alleged financial wrongdoing in Russia and Kyrgyzstan, health-care fraud in the U.S. and suspected wrongdoing in Luxembourg and Australia.

Dozens of firms are controlled by investors in jurisdictions far beyond the U.K., including the British Virgin Islands, Cyprus, Ukraine and the United Arab Emirates. Some openly boast of doing business with high-risk customers.

Transparency International U.K., the British arm of the global anti-corruption group, sounded an alarm in a report last month saying more than one-third of EMIs licensed by the FCA have red flags related to their activities, owners or directors.

“It’s a Wild West even without the added complication of those moving into the area with deliberate criminal intent,” said Graham Barrow, a financial-crime analyst who has worked for lenders including HSBC Holdings Plc, Nordea Bank Abp and Societe Generale SA. “What you have is a free-for-all, and the regulators are desperately fighting to catch up with it.”

FCA data show the agency has taken some action. It rejected 50 of the 89 applications received last year and recently conducted eight formal reviews of EMIs. The regulator previously imposed business restrictions on four firms.

“We are focused on tackling financial crime,” an FCA spokesperson said in an email, declining to comment about Moorwand or other companies. “We have done a substantial amount of work to raise anti-financial crime standards at payment and e-money firms, including placing business restrictions on some. We will continue to take assertive action where firms do not meet the standard we expect.”

EMIs emerged about a decade ago. They offer payments services such as processing transactions, prepaid cards, overseas remittances and digital wallets. But they often serve high-risk clients who traditional lenders would refuse to deal with, such as those trading cryptocurrencies, said Jon Wedge, a partner at London accounting firm Berg Kaprow Lewis LLP.

“These guys can’t get banking services,” said Wedge, who works with payments businesses. “What they [EMIs] do now is they fill a gap in the market that’s not filled by High Street banks or main acquiring banks.”

Money laundering already costs the U.K. more than 100 billion pounds a year, according to government estimates, and the proliferation of EMIs without tighter regulation could worsen London’s reputation as a dirty-money hub, Wedge and others say.

Concerns are even more pressing in the wake of the collapse of Wirecard AG in Germany last year. That company’s chief regulator, BaFin, missed signs that it was a sham before it imploded with $2.3 billion of funds missing from its accounts.

“If you’re sitting in the seat of someone in the FCA, you’d be worried,” said Alan Brener, a law professor at University College London who has studied the EMI industry. “Is there another Wirecard kicking around in my area of jurisdiction? You’d be doing a skeleton hunt to see if you can find one or more than one.”

Governments across Europe have been trying to shake up the payments business for years and wrest control from global banks to help reduce costs for customers, according to Brener. The European Union’s Payments Services Directive, introduced in 2007 and revised about a decade later, was designed to simplify transactions and encourage new market entrants.

E-money companies are typically subject to lighter regulation than banks. They are allowed to process payments and hold customer funds, but clients aren’t protected by national deposit insurance programs and firms cannot lend.

More established firms, including Revolut Ltd. and Checkout.com, and dozens of smaller ones are part of London’s growing fintech scene, one of the world’s biggest and prized by the U.K. government in the wake of Britain’s exit from the EU. Use of e-money accounts increased fourfold from 2017 to early 2020 to 4% of adults.

The Bank of England, which doesn’t regulate e-money firms, says customers have about 10 billion euros ($11.3 billion) parked at the companies.

Along with the growth is the potential for greater risk-taking. The number of Suspicious Activity Reports, or SARs, linked to the electronic-payments sector quadrupled in the year through March 2020.

A spokesman for the U.K.’s National Crime Agency said the surge in SARs—which firms and individuals are required to file when they’ve observed shady behavior—wasn’t unexpected given the expansion of the industry. The Bank of England has warned that the sector “could in the future present systemic risks.”

Few have embraced the business more than Moorwand’s former chief executive officer, Robert Courtneidge. Renowned for his payments expertise, Courtneidge, 57, has been a qualified solicitor since 1990.

By the mid-2010s, he was a consultant at U.S. law firm Locke Lord LLP, a colorful presence at fintech industry awards in London and beginning to take up EMI board roles.

He also did some cryptocurrency consulting for Ruja Ignatova, a Bulgarian known as the Cryptoqueen, who was then promoting the OneCoin digital currency. U.S. prosecutors accused her of overseeing a $4-billion fraud. She never appeared in court to face the charges.

In 2015, Courtneidge became a director of AF Payments Ltd., a London-based firm that received its EMI license several years later. The company’s founder and CEO is fintech entrepreneur Guy Raymond El Khoury, but its only listed shareholder is a British Virgin Islands entity, filings show.

El Khoury previously ran FBME Card Services Ltd., a related company of FBME Bank Ltd. That bank was barred from the U.S. financial system after accusations that it had laundered funds for criminal organizations and paramilitary groups including Hezbollah.

El Khoury said through his lawyer that he wasn’t responsible for wrongdoing at the card services company, which didn’t involve money laundering, but rather sought to end it. Neither El Khoury, AF Payments nor Courtneidge have been accused of any misconduct.

Courtneidge joined the board of CFS-ZIPP Ltd., another EMI, in 2016. He allegedly helped arrange a 1.5 million-pound loan from the company and its owner to a currency-trading firm promoted by a then-business partner, according to a U.K. legal action filed last year.

That venture, SwissPro Asset Management AG, collapsed in 2019 with losses of more than 50 million pounds. A Swiss regulator said in a letter to creditors that the business “appears a Ponzi scheme.”

Courtneidge, who left the CFS-ZIPP board that year, hasn’t been accused of wrongdoing.

He became a director at ePayments Systems Ltd. in 2018, two months after that firm was licensed by the FCA. Founded by Russia-based businessman Mikhail Rymanov and controlled by unidentified offshore shareholders, the company had amassed about 175 million pounds of client funds, U.K. filings show.

Yet in February 2020, it announced it had suspended all activities following an FCA probe of its anti-money-laundering controls. Courtneidge left the board several days later and hasn’t been accused of any wrongdoing.

EPayments said on its website last month that it was back in business. Masoud Zabeti, a lawyer at Greenberg Traurig representing the firm, said the company has “developed a robust and industry-leading approach to support the stamping out of fraud and prevention of money laundering.”

Courtneidge declined to comment about his work at ePayments or any other company, but in a statement to Bloomberg News, he said the EMI industry has been “transformed in recent years” in response to heightened scrutiny.

“There has been a marked improvement not only in the level of understanding and implementation of the relevant regulations in line with the FCA’s guidance,” he said, “but also a far better practical ability to put that guidance into practice.”

The FCA’s 290-page handbook on payment-services companies outlines a rigorous approval process. An applicant must be able to convince the regulator that its executives are “of good repute” and haven’t been convicted of a crime, investigated by other authorities or been the subject of an adverse finding in civil proceedings.

If a successful applicant then raises suspicions, the watchdog has broad enforcement powers, including conducting raids, probing their operations and suspending or revoking licenses.

But having power is one thing—using it is another. The Bank of England warned of possible gaps in oversight of payments companies in 2019 and called for a sweeping review of how the industry is being monitored.

And the FCA has come under criticism from lawmakers since the collapse early last year of mini-bond issuer London Capital & Finance Plc, which exposed retail investors to losses of more than $300 million.

That case didn’t involve electronic payments, but a subsequent probe found a sluggish investigative tendency under then-chief Andrew Bailey, now governor of the Bank of England. A spokeswoman for Bailey declined to comment.

A parliamentary committee concluded in June that the FCA must set key milestones to transform its culture. The agency has requested legislation to give it more powers to supervise EMI managers that would bring its authority in line with its oversight of banking executives.

Jane Jee, a compliance lawyer who works with payments companies, said the risks of an FCA audit are low, that the agency lacks staff to conduct investigations and that it is ineffective in fighting financial crime.

“The FCA is between a rock and a hard place,” Jee said. “It does not have enough resources, and it is also under pressure to open up the market.”

Some enforcement actions raise more questions. Take London-based Allied Wallet Ltd., which the FCA forced into liquidation in 2019, just 18 months after granting it an EMI license.

In May of that year, the U.S. Federal Trade Commission accused the company and its owner, Ahmad Khawaja, of processing payments for Ponzi schemers and later imposed a $110 million penalty as part of a settlement. In August 2021, Massachusetts prosecutors accused Khawaja and others of orchestrating a $150 million fraud.

Khawaja hardly had a clean record when FCA officials considered his application. He and a U.S. company of the same name paid $13 million in 2010 to resolve federal allegations that they had processed funds illegally for gambling outfits. Khawaja, a fugitive in a separate case, didn’t respond to requests for comment.

The FCA approved Moorwand’s application for a license in April 2018, around the time Almaree was taking control of the company.

Almaree, who’s reportedly married to the daughter of onetime Moldovan political heavyweight Dumitru Diacov, has been known to charm clients in the best restaurants in Chisinau, but others have been spooked by his armed entourage, people familiar with the matter say.

Courtneidge became CEO of Moorwand in early 2018 as the company was deepening its relationship with Kobenhavns Andelskasse. Almaree became a shareholder of the cooperative bank, and Courtneidge joined the board.

At the time, the bank was attracting clients from the Marshall Islands to Belize, according to a regulatory probe reviewed by Bloomberg.

The Danish financial regulator requested a police investigation in August of that year, noting that the lender’s payments-services business had attracted a “large number of customers who do not otherwise have a natural connection to the cooperative” and that “such transactions are associated with a high risk of money laundering and terrorist financing.”

Weeks later the bank was placed under the administration of Denmark’s financial authorities. Police have since seized accounts holding millions of dollars linked to Almaree and Moorwand, according to reports in Borsen, a Danish newspaper that has investigated the scandal.

Denmark’s serious fraud agency confirmed that a probe into Kobenhavns Andelskasse is ongoing but declined to comment further, as did the nation’s financial regulators.

Courtneidge, who left Moorwand in 2020, hasn’t been accused of wrongdoing. Nor have Almaree or Moorwand. Meanwhile, key roles at the firm, including risk and client-onboarding positions, have been moved to Moldova, according to a review of LinkedIn profiles.

Courtneidge remains active in the industry. He was a judge at the U.K.’s Emerging Payments Awards in October, where he mused in a red-carpet interview about the challenges facing electronic-payments companies. “We’ve got a lot more going on,” Courtneidge said. “The regulators are trying to get it right.”

Updated: 1-24-2022

Treasury Wants Banks To Loop In Foreign Affiliates On Suspicious Transactions

The pilot program from the department’s anti-money-laundering watchdog would allow participating banks to share so-called suspicious activity reports with branches abroad.

The U.S. Treasury Department’s Financial Crimes Enforcement Network has proposed a new rule that would allow banks to share so-called suspicious activity reports more readily with foreign affiliates.

The proposed rule, which FinCEN announced Monday, would create a pilot program to allow banks to share SARs with foreign branches and affiliates, a bid to improve financial institutions’ ability to counter money laundering.

The new program was mandated under the Anti-Money Laundering Act, which came into force in January 2021.

FinCEN will take public comments from banks over the next two months on its proposal.

The program, once in place, “will assist financial institutions in further combating illicit finance risks,” said FinCEN’s acting director, Himamauli Das.

SARs are a key tool for institutions and government agencies to counter money laundering, though they remain subject to a host of rules meant to ensure their confidentiality.

Under previous guidance, banks with U.S. operations were allowed to share SARs only with their foreign head offices, controlling companies or affiliates that also filed SARs—foreign bank branches weren’t included on that green list.

Financial institutions have wanted to be able to share SARs, said Satish Kini, chair of the banking group at law firm Debevoise & Plimpton LLP.

“Institutions have been seeking to do this as a means of better managing their anti-money-laundering risks globally,” Mr. Kini said. “It will facilitate more ready risk management because folks [abroad] will know that a SAR has been filed in the United States.”

The previous rules forced banks to develop workarounds to share information underlying a report, but a SAR can bring together dozens of information points, said Daniel Stipano, a partner at law firm Davis Polk & Wardwell LLP.

“Being able to effectively prevent and deter money laundering really depends heavily on being able to share information,” Mr. Stipano said. “If information is siloed…nobody has the full picture.”

FinCEN’s proposed pilot program would impose some restrictions. Banks wouldn’t be permitted to share information with branches in China, Russia or any country subject to U.S. sanctions or that the U.S. designates as a state sponsor of terrorism.

Additionally, the participating banks would have to complete an application and file quarterly reports, including on possible issues with their own anti-money-laundering programs, along with some other requirements.

FinCEN currently estimates that about 100 banks will participate in the program, which is scheduled to terminate in January 2024, three years after the enactment of the AML Act.

Given some of the burdensome requirements of the program, eligible banks will have to decide whether participating is worth it, Mr. Stipano said.

“Banks that apply to participate in it need to weigh the burdens against the benefits,” he said.

Updated: 1-26-2022

U.K. Government Accused of Leaking Market Sensitive Information (Again)

* Call For Probe After Minimum Wage Briefed Before Autumn Budget
* Treasury Committee Also Warns On Wage Growth, Inflation Risks

British lawmakers have accused the government of leaking market sensitive information to the media before the budget last October.

In a report published Thursday, the influential Treasury Committee called for a formal investigation after the national minimum wage rate was reported by ITV News two days before the budget.

A number of measures were trailed but the announcement of a 6.6% increase in the minimum wage for those aged 23 and over constituted “inside information as defined by market abuse regulations,” the cross-party panel said.

In the build-up to the Oct. 27 budget, Chancellor of the Exchequer Rishi Sunak was accused by lawmakers of treating Parliament with contempt by briefing so many measures to the press.

In a letter to the committee, Tom Scholar, the Treasury’s top civil servant, denied that the minimum wage rise was inside information as it was “an economy-wide measure.”

However, he did not deny that the announcement was market sensitive. The Department for Business, Energy and Industrial Strategy is in charge of minimum wage policy, which would be expected to lead any internal investigation.

“The unauthorized and premature disclosure was clearly unfortunate, and should not have happened,” Scholar said. The Treasury confirmed the announcement shortly after ITV News published it on Twitter.

The Treasury Committee said “it is not unreasonable to conclude that the announcement of the change to the National Living Wage might have been market sensitive,” since the Office for National Statistics deems retrospective wage data to be market sensitive.

It argued that the release constituted “inside information” because companies with large numbers of low wage staff would be disproportionately affected.

In a statement responding to the report, the Treasury said it followed principles set out in a review on pre-budget briefings and that it didn’t pre-release the heart of the statement.

“We share the committee’s concerns that the National Living rate was leaked prior to the budget, and the government will review the arrangements ahead of future announcements,” the Treasury said.

The Committee’s Criticism Was Contained In A Wide-Ranging Inquiry Into The Autumn Budget And The Treasury’s Review Of Departmental Spending. The Report Also Warns The Government That:

* Inflation could come along with a policy of promoting high wage growth unless productivity improves and “risks contributing to a wage-price spiral”

* Tax cuts before the next election will be difficult for Sunak to achieve, since his fiscal targets give him little room for maneuver on a key goal

* The Treasury would have to “identify areas of departmental spending where he can reduce spending in real terms even if this is in the face of increased demand”.

* Debt interest costs are likely to be higher than forecast because of a surge in inflation and rising interest rates, which together will force the Office for Budget Responsibility to make revisions.

* “The Treasury should keep these risks at the forefront of their thinking when designing policies at future fiscal events”

Updated: 2-2-2022

New Chainalysis Report Suggests NFT Crime Doesn’t (Always) Pay

More NFT wash traders lost money than made money in 2021, according to the blockchain research firm’s data.

The booming non-fungible token (NFT) market might look like an attractive place for crypto criminals looking to make a quick buck, but new research from Chainalysis suggests NFT crime is less lucrative – and more difficult – than other types of crypto crime.

In a report published Wednesday, the blockchain research firm examined two types of NFT-related crime – wash trading and money laundering – that occur in the Ethereum NFT ecosystem.

The NFT market exploded in popularity last year. In 2021, Chainalysis traced $44.2 billion worth of crypto sent to NFT-related smart contracts, up from just $106 million the year before.

And as the crypto market grows, so, too, does crypto-enabled crime such as ransomware attacks and scams. In 2021, crypto crime hit an all-time high of $14 billion, and criminals increasingly turned to new areas like decentralized finance (DeFi) platforms to make money. But criminals looking to NFTs to strike it rich might find it a tougher nut to crack than expected.

“It’s not a very good idea to get into crime in NFTs because it’s expensive,” said Kim Grauer, Chainalysis’ head of research. “It’s hard to guarantee you’ll be profitable if you wash trade, and if you want to use [NFTs] to launder money, we can trace it, and you will be able to see who’s in possession of the NFT. There’s things that make the NFT space unattractive for crime.”

Wash trading – the practice of buying and selling the same asset to create artificially high trading volume and manipulate the asset’s price – has become common on NFT marketplaces like LooksRare.

Chainalysis found 262 NFT traders who had sold an NFT to a self-financed address over 25 times, which is Chainalysis’ threshold for when NFT sales are more likely to be wash trading than not. The research firm found that more than half actually lost money, as gas fees racked up and their wash trading failed to generate interest from real buyers.

However, for successful wash traders, the NFT marketplace can be profitable: The 110 successful wash traders Chainalysis tracked made a collective $8.9 million last year.

Money laundering through NFT marketplaces also picked up steam in 2021, with a collective $2.4 million sent from wallet addresses connected to illicit activity by Chainalysis.

However, this was only a tiny fraction of the total $8.6 billion in crypto-based money laundering Chainalysis tracked last year.

Updated: 2-3-2022

Wells Fargo Gamed System In Investor Arbitration, Judge Says

A Georgia judge said the bank and its lawyer secretly manipulated a list of potential arbitrators.

A Georgia judge questioned the fairness of the financial industry’s dispute-resolution process in a ruling stemming from a Wells Fargo & Co. customer’s claim that the bank botched his investments.

Wells Fargo and its lawyer improperly manipulated a list of arbitrators who could decide on the customer’s claim—with the permission of the regulatory body that oversees the process, Superior Court Judge Belinda Edwards wrote in a Jan. 25 ruling.

Brian Leggett and Bryson Holdings LLC brought the case against Wells Fargo after losing some $1.2 million on a merger arbitrage investment strategy executed by a broker there in 2015 and 2016.

The arbitrators ultimately decided in Wells Fargo’s favor. Judge Edwards’s ruling vacated the arbitration award.

The case is another mess for Wells Fargo, which is still digging out from its long-running fake-accounts scandal. It also sheds an unflattering light on the arbitration process set up to handle many of the disputes between investors and financial institutions.

The process is overseen by the Financial Industry Regulatory Authority, Wall Street’s self-regulatory arm, and typically plays out behind closed doors.

Finra for years has used a computer system to randomly generate a neutral list of potential arbitrators from which the parties agree on three to decide the case.

But in this case, multiple names were removed from the list at the request of Wells Fargo’s lawyer and with the permission of Finra, according to the judge’s decision.

“Permitting one lawyer to secretly red line the neutral list makes the list anything but neutral, and calls into question the entire fairness of the arbitral forum,” Judge Edwards wrote.

A Finra spokeswoman said that none of the arbitrators in question were excluded or removed from the lists before they were sent to the parties, nor did Finra have any sort of agreement with Wells Fargo’s attorney regarding the appointment of arbitrators. “Any assertions to that effect are false,” she said.

Finra “has well-established rules for admitting arbitrators to its roster and the process is fair to all parties,” a Wells Fargo spokeswoman said. “Wells Fargo Advisors followed this process, and both parties had the opportunity to make arguments regarding each of these issues to the arbitrators and to Finra.”

Still, the verdict is sure to fuel concerns among critics that private arbitration leaves room for bias. Sen. Elizabeth Warren (D., Mass.) has previously criticized Finra arbitration.

Michael Edmiston, an attorney and president of the Public Investors Advocate Bar Association, said, “It highlights a suspicion that many of us perceive that sometimes the arbitrator names that appear on a list are not as random as we’d like them to be.”

His group has called for the Securities and Exchange Commission to investigate Finra’s operations and Congress to hold hearings.

Jill Gross, a professor at the Elisabeth Haub School of Law at Pace University who has studied arbitration, said that Finra has generally bent over backward to address complaints about unfairness in the process.

The Wells Fargo case “struck me as really out of the norm and greatly varying with my experience of the forum,” she said.

The judge said the rationale for vacating the decision also was based on the conduct of the bank and its lawyer after the arbitration began.

At one point, the arbitration stopped due to a medical emergency. When it resumed, the broker who had been testifying provided different answers than before the break, and the bank’s attorney misrepresented the prior testimony, according to the judge’s decision. “Wells Fargo and its counsel committed fraud,” she said.

The Wells Fargo spokeswoman said that the bank plans to appeal the decision. “We adamantly deny all of the allegations cited in this decision,” she said.

The attorney that represented Wells Fargo in the case, Terry Weiss, didn’t respond to an email requesting comment.

Updated: 2-4-2022

US Treasury Department Warns of NFT Risk In Art-Related Money Laundering

High-value art is particularly vulnerable to money laundering. The rapid growth of the NFT market presents new issues, according to a new study.

The U.S. Department of the Treasury warned that non-fungible tokens (NFT) may become a tool for money laundering in the high-value art market in a study published Friday.

The 40-page report, published in accordance with the Anti-Money Laundering Act of 2020, found there is some evidence to suggest high-value art is involved in money laundering, but likely not in any terrorist financing. However, the document did suggest NFTs could be used to facilitate more illicit transactions in the art market.

“The emerging digital art market, such as the use of non-fungible tokens (NFT), may present new risks, depending on the structure and market incentives,” a press release said.

Art is relatively easy to transport and the art market has a “long-standing culture of privacy” that can enable easily manipulated prices, making high-value art vulnerable to money laundering, the report said.

Different pieces of artwork have already been used to cover up the transfer or holding of funds acquired illicitly, the report said, pointing to the 1MDB scandal as one example.

NFTs and the broader, growing digital art sector can present new money laundering issues.

“Recent sales of high-profile pieces of physical and digital art involving NFTs, including NFT-authenticated works such as Beeple’s ‘Everydays: The First 5000 Days,’ which sold at a Christie’s auction for more than $69 million, indicate that this nascent art sector has reached similar valuations as traditional art mediums,” the document said.

The NFT market saw $1.5 billion in trading in the first quarter of 2021, compared to the $20 billion seen by the U.S. art market through all of 2020.

Still, the report noted that legitimate auction houses and art dealers “are increasingly offering NFTs,” and highlighted the growth of platforms such as Dapper Labs, OpenSea and SuperRare.

Updated: 2-16-2022

Crypto Heavyweights Coinbase, Fidelity And Robinhood Back US Anti-Money Laundering Group

The 18-member Travel Rule Universal Solution Technology (TRUST) initiative addresses AML data sharing requirements prescribed by FinCEN.

A group of well-established firms active in cryptocurrencies in the U.S., including Coinbase, Fidelity and Robinhood, have joined together to bring digital assets in step with global anti-money laundering (AML) rules.

In total, there are some 18 virtual asset service providers (VASPs) participating in the launch of the Travel Rule Universal Solution Technology (TRUST).

Announced Wednesday, the TRUST platform was created in response to AML data sharing requirements recommended by the Financial Action Task Force (FATF) and prescribed by the Financial Crimes Enforcement Network (FinCEN).

The current U.S. TRUST membership includes: Anchorage, Avanti, Bitgo, bitFlyer, Bittrex, BlockFi, Circle, Coinbase, Fidelity Digital Assets, Gemini, Kraken, Paxos, Robinhood, Standard Custody & Trust, Symbridge, Tradestation, Zero Hash and Zodia Custody.

There have been a number of proposed ways to accommodate “travel rule” requirements within the pseudonymous-by-design cryptocurrency space.

Prior to its official launch, TRUST was known among crypto AML specialists as the U.S. Travel Rule Working Group, where the lead engineering firepower was provided by Coinbase, alongside a founding member group that included Gemini, BitGo, Kraken, Circle and Fidelity.

How It Works

“There are two components to this solution,” said Gemini’s Chief Compliance Officer Elena Hughes in an interview. “There’s the ability to identify who’s on the other side of the transfer prior to initiating it. Secondly, there’s no centralized storage of personal data. So we don’t send it via a centralized repository; instead the information is exchanged on a bilateral basis.”

The plan, said Hughes, is to expand to other global jurisdictions, with building currently taking place in Canada, Singapore and Germany. The group’s goal is also to become an industry standard for complying with the travel rule. (Until now there has been only one standard agreed upon by the crypto industry, the Inter-VASP Messaging Standard, known as IVMS 101.)

Some jurisdictions, including Singapore, have chosen to go a step beyond the FATF travel rule recommendations for identifying beneficial owners of transactions between VASPs to include those with private or unhosted wallets – a point of contention among many in crypto.

With regard to the inclusion of unhosted wallets within the TRUST architecture, Hughes said: “We are working toward ensuring that we have a compliance solution in those other jurisdictions.

What it will ultimately look like is going to be a bit of a ‘time will tell.’”

‘A Tool In The Compliance Arsenal’

The TRUST solution’s compliance capabilities will be reinforced by a partnership with Exiger, a technology platform focused on regulation and financial crime, according to a press release.

The TRUST protocol could also bolster the world of blockchain analytics, those firms that follow the money in the case of nefarious actors transacting in crypto, according to Paxos Director of Compliance Christel Chan.

“I do see the TRUST travel solution as a tool in the compliance arsenal with regard to being able to give signals to VASPs as to, is this a wallet of concern?” said Chan in an interview. “And also as a complementary tool when it comes to blockchain monitoring firms’ capabilities.”

Interoperability between the range of solutions on offer (Fidelity Digital Assets is a member of both TRUST and the institution-focused Travel Rule Protocol, for example), as well as across different regions, is another hot topic in the crypto travel rule space.

“I think a year or two down the line, interoperability will be a core requirement,” Chan said. “I know the different solutions are thinking about this with regard to the various partnerships they’re discussing today.”

The concerted effort behind TRUST is an achievement in itself, given how directly competitive these firms are with one another. Robinhood Chief Operating Officer Christine Brown via an emailed statement called it “an innovative compliance solution, while also persevering the integrity of private customer data.”

“Just as it takes a community of crypto investors and enthusiasts to democratize finance, we believe it takes a community of crypto businesses and platforms to work together to find a solution to preserve customer privacy while meeting the legal requirements of the Travel Rule,” she said.

Updated: 2-18-2022

CLO Headaches Loom With EU Ban On Caymans Over Money Laundering

* EU To Effectively Blacklist Cayman With New Regulations
* U.S. CLOS Sold To EU Buyers May Switch To Jersey Or Bermuda

European regulators are creating trouble for managers of U.S. collateralized loan obligations that typically sell some of their bonds to investors in the region.

In the coming weeks, the European Union is likely to add the Cayman Islands to its list of jurisdictions that have “strategic deficiencies” in areas including anti-money laundering and counter-terrorist financing regimes, according to a January note from law firm Clifford Chance. That effectively blacklists them for European investors, the note said.

The Problem: most U.S. CLOs are issued using entities domiciled in the Cayman Islands. If the Cayman Islands are blacklisted, any U.S.

CLOs that are routinely offered to EU investors in addition to the typical American audience — nearly one-third of U.S. deals, by some estimates — will need to find an alternative home to for issuing. Otherwise, managers will have to limit their deals to U.S. investors.

The leading alternative jurisdictions to set up CLO special purpose vehicles are the island of Jersey, a self-governing dependency of the U.K. off the coast of France, or Bermuda. Deals are already in the works using these new locations as offshore SPVs, and will be issued soon, according to CLO lawyers.

“In the coming weeks, we’ll see the first deals priced with Jersey or Bermuda-based SPVs” from managers that want to sell their deals into Europe, Nick Robinson, a partner at Allen & Overy who is focused on CLO deals, said in an interview. “A number of deals are in the launch stage. Of course, deals not marketed to Europe can stay in the Cayman Islands.”

The Ministry of Financial Services & Commerce of the Cayman Islands said in a press statement in January that it was working with the EU to be removed from the list of jurisdictions viewed as being a high risk from the standpoint of money laundering activity.

Moving SPVs

On Jan. 7, the European Commission adopted a draft regulation adding the Cayman Islands to its list of countries with strategic deficiencies in their AML regimes, according to the law firm Cadwalader.

Article 4 of the EU Securitisation Regulation provides that securitization special purpose entities may not be established in any country on that list.

“The application of Article 4 of the EU Securitisation Regulation to EU investors is unclear, but the general consensus is that EU investors should not invest in Cayman-domiciled securitization vehicles while the Cayman Islands are on the list,” Cadwalader attorneys wrote in a Jan. 27 article.

In addition to new deals, refinanced CLOs that are to be sold to European investors also need to be re-domiciled, lawyers say, and the jurisdiction needs to be changed before the refinancing closes, which can lead to a time crunch.

“To the extent that those CLOs sold to EU investors are refinanced, they’ll need to be moved, which increases costs and time,” said Robert Villani, structured credit partner at Clifford Chance.

The British Virgin Islands, another perceived tax haven that is creditor friendly, was briefly considered as an alternative jurisdiction for CLOs, Robinson said, but was dismissed because there had been AML investigations in that country as well.

One other option that has been used, especially for a few middle-market CLO deals, is to register the SPV domestically as a Delaware LLC, Robinson said, although that means the transactions would need to have somewhat simpler structures.

CLOs have been one of the hottest sectors in the credit markets for several reasons, including the fact the securities are floating-rate and may protect against rising yields during a rate-hiking cycle. Investors have also become more comfortable because the product had stellar performance through the pandemic downturn.

The outsized demand brought new sales of U.S. CLOs to a post-financial crisis record in 2021, with numbers close to $184 billion, according to data compiled by Bloomberg.

Updated: 2-21-2022

Credit Suisse Data Leak Reveals Decades Of Shady Clients And Activity

Swiss bank secrecy laws have protected Credit Suisse from having to disclose whether it was banking criminal activity, which is a far cry from the transparency blockchain technology offers.

Leaked data shows that until recently, Swiss bank Credit Suisse held accounts valued at more than $100 billion for sanctioned individuals and heads of state reportedly accused of money laundering.

The New York Times reported on Sunday that the data leak included more than 18,000 bank accounts. The data goes back to accounts that were open from the 1940s until into the 2010s, but not current operations.

Among the account holders holding “millions of dollars in Credit Suisse” were King Abdullah II of Jordan and Venezuela’s former vice-minister of energy, Nervis Villalobos.

King Abdullah II has been accused of misappropriating financial aid for his own personal benefit, while Villalobos pleaded guilty to money laundering in 2018. Other sanctioned individuals also held accounts at Credit Suisse, as the New York Times wrote:

“Other account holders included sons of a Pakistani intelligence chief who helped funnel billions of dollars from the United States and other countries to the (Mujahideen) in Afghanistan in the 1980s.”

Banteg, the lead developer at Yearn.finance, leading decentralized finance yield farming platform, tweeted on Sunday, “Credit Suisse AML happily hosted human traffickers, murderers, and corrupt officials.” Commenters took note of HSBC, another huge international bank that has paid hefty fines for aiding serious international criminals.

Credit Suisse AML happily hosted human traffickers, murderers, and corrupt officials: https://t.co/5Fd0DGUnTS

— banteg (@bantg) February 20, 2022

Although there are laws in place that prohibit Swiss banks from accepting deposits from known criminals, the country’s famous bank secrecy laws make it easy to evade, if they are enforced at all. This has seemingly made Switzerland an inviting place for criminals to do their international banking. The New York Times wrote:

“The leak shows that Credit Suisse opened accounts for and continued to serve not only the ultrawealthy but also people whose problematic backgrounds would have been obvious to anyone who ran their names through a search engine.”

The irony of a major traditional financial institution aiding high criminals was not lost on the cryptocurrency community, which has battled against accusations of abetting criminals for years.

The $100 billion in deposits outlined by the data leak dwarfs the $25 billion estimated by Chainalysis to be held by criminal crypto whales as of 2021.

The bank has denied any wrongdoing, but the centralized clandestine way in which Credit Suisse has operated contrasts with fully transparent blockchain technology. Such transparency may also mean that investigators and law enforcement can keep tabs on individuals and governments that are trying to evade economic sanctions in real-time.

Seizure Of Bitfinex Funds Is A Reminder That Crypto Is No Good For Money Launderers

Law enforcement’s robust capacity to follow the money on the blockchain is good news for the crypto industry.

As public understanding of how digital assets work becomes more nuanced along with the mainstreaming of crypto, the language of Bitcoin’s (BTC) “anonymity” gradually becomes a thing of the past.

High-profile law enforcement operations such as the one that recently led to the U.S. government seizing some $3.6 billion worth of crypto are particularly instrumental in driving home the idea that assets whose transaction history is recorded on an open, distributed ledger are better described as “pseudonymous,” and that such a design is not particularly favorable for those wishing to get away with stolen funds.

No matter how hard criminals try to obscure the movement of ill-gotten digital money, at some point in the transaction chain they are likely to invoke addresses to which personal details have been tied.

Here is how it went down in the Bitfinex case, according to the documents made public by the U.S. government.

Too Comfortable Too Early

A fascinating statement by a special agent assigned to the Internal Revenue Service, Criminal Investigation (IRS-CI) details a process whereby the U.S. federal government’s operatives got a whiff of the couple suspected of laundering the money stolen in the 2016 Bitfinex hack.

The document describes a large-scale operation to conceal the traces of stolen Bitcoin that involved thousands of transactions passing through multiple transit hubs such as darknet marketplaces, self-hosted wallets and centralized cryptocurrency exchanges.

In the first step, the suspects ran the crypto earmarked as being looted in the Bitfinex heist through darknet market AlphaBay.

From there, a portion of funds traveled to six accounts on various crypto exchanges that were, as investigators later found, all registered using email accounts hosted by the same provider in India. The emails shared similar naming styles, while the accounts exhibited similar patterns of trading behavior.

The chain wore on, and the BTC that law enforcement followed was further funneled to a slew of self-hosted wallets and other exchange accounts, a few of them registered in the real name of one of the suspects.

Following along the investigators’ narrative, a reader eventually gets an impression that, at one point, Ilya Lichtenstein and Heather Morgan felt that they had done enough to cover up their tracks and that they could spend some of the money on themselves.

That was it: Gold bars and a Walmart gift card, purchased using the funds traceable back to the Bitfinex hack and delivered to Lichtenstein and Morgan’s home address. Everything was right there on the ledger. The resulting report reads as a compelling description of a crime that has been reverse-engineered using an immutable record of transactions.

Following The Money

The scale of the investigation was perhaps even more formidable than that of the laundering operation. Despite the suspects’ years-long efforts to obscure the movement of the funds, government agents were able to gradually unravel the paths by which the majority of stolen BTC traveled, and ultimately seize it.

This goes to show that the U.S. government’s capacity to follow the money on the blockchain is at least on par with the tactics that the people behind some of the major crypto heists are using to escape the law.

Speaking of the investigation, Marina Khaustova, chief executive officer at Crystal Blockchain Analytics, noted that the Bitfinex case is an especially hard one to crack due to the sheer amount of stolen funds and the perpetrators’ extensive efforts to conceal their operations. She commented to Cointelegraph:

“Any case of this size, which has been running for years, it will no doubt take a long time for financial investigators to examine and understand the data they have before using it as evidence.”

The U.S. government agents were well-resourced and had access to state-of-the-art blockchain analytics software as they tackled the case.

It is no secret that some of the leading players of the blockchain intelligence industry supply law enforcement in multiple countries, the United States included, with software solutions for digital asset tracing.

One possible explanation of why Lichtenstein and Morgan ultimately got busted is the seeming nonchalance with which they abandoned caution and began spending the allegedly laundered funds in their own name.

Were they simply not smart enough, or is it because law enforcement has gone unprecedentedly deep into the transaction chain, deeper than the suspects could reasonably expect?

Khaustova thinks that there was “a bit of carelessness to the methods employed” as the suspects let investigators obtain one of the key documents – which allowed them to link email addresses to exchanges, KYC records and personal accounts – from cloud storage.

Yet, it is also true that there is a point where any crypto launderer has to step out of the shadows and turn the stolen funds into goods and services they can use, at which point, they become vulnerable to deanonymization.

The Bitfinex investigation showed that, if law enforcement is bent on tracing the suspects to that point of “cashing out,” there is little that criminals can do to avoid getting caught.

A Case To Be Made

The big-picture takeaway here is that governments — the U.S. government in particular, but many others are not too far behind when it comes to bolstering their blockchain-tracing capacities — are already up to speed with the tactics and techniques that crypto launderers are using.

The blockchain’s perfect traceability could have been a theoretical argument some years ago, but now it is an empirically proven reality, as evidenced by enforcement practice.

There are two big reasons why this notion is good for the crypto industry. One is that there could be some degree of recourse for the victims of major crypto heists.

Granted, not every instance of crypto theft will attract the scarce attention of federal investigators, but the most high-profile and egregious ones certainly will.

Another powerful consequence of law enforcement’s newfound prowess with blockchain tracing is that it renders some regulators’ tired argument of “crypto as a perfect tool for money laundering” obsolete.

As real-life cases demonstrate, digital assets are, in fact, opposite to that. Hammering this point into policymakers’ minds will eventually moot one of the fundamental anti-crypto narratives.

Updated: 3-14-2022

Swedbank A ‘Suspect’ In Estonian Money-Laundering Probe

The bank “has been summoned as a suspect to an interrogation,” it disclosed.

Swedbank AB said its Estonian unit has been named a suspect in an Estonian money-laundering investigation.

A special white-collar crime investigator with Estonia’s Central Criminal Police notified the bank that Swedbank AS, its Estonian subsidiary, has been summoned as a “suspect to an interrogation,” Swedbank said in a statement released Monday.

Estonian investigators are probing whether the Stockholm-based financial institution was involved in money-laundering and other criminal violations.

The bank said it “cooperates with the authorities” and shares all information.

“The bank has no further information as to how this investigation will proceed or what the implications of it may be,” Swedbank said.

Swedbank has for several years faced law enforcement scrutiny over its operations in the Baltic countries, where the bank has a significant presence.

Sweden’s financial supervisory authority, known as Finansinspektionen, in 2020 imposed a 4 billion Swedish kronor (about $397 million at the time) fine on the bank after finding serious deficiencies in its anti-money-laundering measures following an investigation in cooperation with authorities in Estonia, Latvia and Lithuania.

The investigations came after a Swedish broadcaster reported in 2019 that billions of dollars in suspicious transactions, largely linked to Russia, may have passed through Swedbank’s Estonia operations.

Swedbank’s board fired Chief Executive Birgitte Bonnesen just over a month after that report aired, following a raid by Swedish police on the bank’s headquarters.

Swedbank earlier this year hired Britta Hjorth-Larsen to serve as its new chief compliance officer.

Updated: 3-17-2022

USAA Fined $140 Million For Failing To Fix ‘Rudimentary’ Anti-Money-Laundering Program

The violations resulted in the failure to file at least 3,873 suspicious activity reports, the U.S. Treasury’s financial crimes unit said.

USAA Federal Savings Bank has agreed to pay $140 million after admitting it failed to fix an anti-money-laundering program that authorities said was “rudimentary” and significantly understaffed.

The bank, which caters to military members and their families, willfully failed to implement and maintain an anti-money-laundering program that met the requirements of the Bank Secrecy Act, the U.S. Treasury Department said.

The fine included separate civil penalties imposed by the Treasury’s Financial Crimes Enforcement Network and the Office of the Comptroller of the Currency. The agencies said they coordinated on the settlement.

USAA’s anti-money-laundering failures occurred from at least January 2016 until April 2021, FinCEN said. USAA failed to file at least 3,873 reports about suspicious activity by its customers, including some who used their personal accounts for apparent criminal activity, the agency said.

“As its customer base and revenue grew in recent years, USAA FSB willfully failed to ensure that its compliance program kept pace, resulting in millions of dollars in suspicious transactions flowing through the U.S. financial system without appropriate reporting,” Himamauli Das, FinCEN’s acting director, said Thursday.

USAA said it was cooperating with regulators. “While the issues identified in these orders did not result in any individual member harm, we understand the importance of these requirements,” Chief Executive Wayne Peacock said. “Compliance is a top and urgent priority that is fundamental to providing our members with the highest level of service.”

The bank, which is based in San Antonio, provides retail deposit and consumer loan products for about 13 million customers.

Beginning in 2017, the OCC put USAA on notice that there were significant problems with its anti-money-laundering program, according to a consent order released Thursday.

The bank in 2018 made a commitment to overhaul its compliance program, including by developing adequate customer due diligence and risk identification processes, but has to date failed to meet deadlines to do so, according to FinCEN.

During the time when the violations occurred, USAA’s compliance department was significantly understaffed, and relied heavily on third-party contractors, the agency said.

The bank in 2018 conducted an assessment and found it needed 178 permanent full-time positions to staff its compliance function.

As of early 2021, the bank had 62 vacant positions, which included the head of its financial intelligence unit, FinCEN said. About 76% of the bank’s compliance staff needs were met by third-party contractors, the agency said.

USAA’s case alert and investigations system also was chronically deficient, according to the consent order. In 2021, the bank installed a new transaction-monitoring system, but failed to test it adequately before launch.

As a result, the new system failed to flag more than 1,300 cases the legacy system was able to catch, representing at least 160 suspicious activity reports that would have gone unfiled, FinCEN said.

The new system is now too sensitive and creates an unmanageable number of alerts and cases, the agency said. At the end of 2021, USAA had a backlog of around 90,000 alerts and 6,900 cases yet to be reviewed, the agency said.

FinCEN also pointed to a number of failings by USAA with respect to internal audits, training and customer due diligence policies.

Updated: 3-19-2022

Brother of Lebanon’s Central Bank Governor Denies Graft Charges

* Rajah Salameh Was Detained Last Week In Embezzlement Case
* Central Bank Governor Also Being Investigated Over Bond Claims

The brother of Lebanon’s central bank governor denies allegations that he embezzled public funds and should be given the opportunity to defend himself in court, his lawyer said.

Raja Salameh was detained last week and accused of embezzlement and money laundering. He attended a hearing on March 17 scheduled by Mount Lebanon Prosecutor Judge Ghada Aoun, who is also investigating the governor.

“In a period of three hours his status changed from witness, to accused to finally be arrested in total disregard of the most basic and fundamental rules,” Marwan Issa El-Khoury, the lawyer, said in a statement to Bloomberg.

He said his client was denied the chance to present evidence at the hearing. There was no immediate comment from the court.

Raja, Central Bank Governor Riad Salameh and a friend stand accused of money laundering and embezzling public funds from the central bank to companies belonging to the Salameh family.

The allegations, the lawyer said, were based on media reports. He denied that two companies linked to Raja Salameh received illegal funds and said the source of the money was fully traceable.

Swiss authorities are also looking into allegations that Riad Salameh indirectly benefited from the sale of Lebanese Eurobonds held in the central bank’s portfolio, Bloomberg reported in early 2021. Also of interest to authorities is the relationship between Salameh’s brother, Raja, and the brokerage firm Forry Associates Ltd, which charged commissions on the sale of Eurobonds to investors.

The central bank governor has repeatedly denied the allegations him.

Updated: 3-21-2022

Lebanon’s Central Bank Chief Charged With Money Laundering

* Riad Salameh Case Has Been Referred On For Further Probe
* Governor Has Been Head Of Lebanon’s Central Bank Since 1993

A Lebanese judge charged veteran Central Bank Governor Riad Salameh and his brother with illegal enrichment and money laundering, an official in the judiciary said Monday.

Mount Lebanon Prosecutor Ghada Aoun accused Salameh, his wife and his brother, Raja, of facilitating money laundering through companies they own, the official said, asking not to be named discussing the charges. Aoun referred the case to an investigative judge.

Raja Salameh was detained last week and accused of embezzlement and money laundering during a hearing with Judge Aoun. The Salameh brothers deny the allegations against them. The central bank governor didn’t attend a hearing scheduled for Monday.

The central bank didn’t respond to a request for comment. Raja Salameh’s lawyer, Marwan Issa El-Khoury, didn’t immediately answer calls to his phone.

The charges are part of a lawsuit filed last week by a group of lawyers. One of the group, Francoise Kamel, said the brothers were accused of money laundering and embezzling public funds at the central bank during Lebanon’s worst ever financial crisis in favor of companies belonging to the Salameh family.

Riad Salameh is also under investigation in France and Switzerland, raising pressure on the veteran banker who’s been at the helm of the central bank, also known as Banque du Liban, for 29 years.

Swiss authorities are looking into allegations that Riad Salameh indirectly benefited from the sale of Lebanese Eurobonds held in the central bank’s portfolio, Bloomberg reported in early 2021. Also of interest to authorities is the relationship between Raja Salameh and the brokerage firm Forry Associates Ltd., which charged commissions on the sale of Eurobonds to investors.

Riad Salameh has denied allegations in the Swiss investigation and has said that such cases, including those in Lebanon, are part of a media campaign to tarnish his image. He says he amassed his fortune during a previous career as a private banker at Merrill Lynch.

A household name on Wall Street and in foreign capitals, Salameh has been one of the few constants over the past three decades as Beirut wrestled with war, debilitating political standoffs and an economic meltdown.

That backdrop sparked mass protests in October 2019 against a political class accused of bleeding state coffers through decades of corruption and mismanagement. Demonstrators also blamed Salameh for ever-riskier policies to sustain a financial model that ultimately failed, wiping out the life savings of a generation of Lebanese.

Updated: 3-22-2022

Barclays To Book $591 Million Loss Due To Debt-Sale “Snafu”

British bank is buying back structured notes after selling too many of them.

Barclays PLC said it is buying back a slug of structured notes at a loss of about £450 million, or $591 million, after selling too many of them.

Structured notes are a type of debt instrument that is linked to an underlying reference such as the S&P 500 or oil. The British bank had registered with the U.S. Securities and Exchange Commission to sell up to $20.8 billion of these notes. It exceeded the limit by $15.2 billion, the company said.

Barclays said it is conducting a review of the matter. Regulators, too, are “conducting inquiries and making requests for information,” the bank said. As a result, the bank will delay the start of its £1 billion share-buyback program to the second quarter.

Barclays shares fell 2.3% in London on Monday. The firm’s American depositary receipts fell 11% in New York.

Expensive flubs are rare in the world of banking, which is built upon a web of technology, policies and procedures designed to nearly eliminate the risk of human error. But mistakes happen.

Citigroup Inc. in 2020 accidentally sent $900 million to creditors of cosmetics company Revlon Inc. Last year, the U.K. arm of Banco Santander SA mistakenly paid out £130 million into thousands of random accounts.

Barclays is known for its large fixed-income business, so the mistake is especially surprising. Analysts and investors struggled to make sense of the announcement.

“I’ve seen a lot of structured note issuance but I’ve never seen this kind of matter before,” said Joseph Dickerson, an equity research analyst at Jefferies.

“It looks like an operational or legal failure,” said Jerome Legras, managing partner at Axiom Alternative Investments, a fund that specializes in bank debt. “It’s hard to believe they would do such a stupid thing. This honestly is the first time I’ve heard of something like this.”

Barclays will have to buy the notes at the original purchase price. The estimated loss indicates that a substantial amount of the notes are currently trading below what investors paid for them.

In fact, Barclays is more underwater on the notes than it appears: The bank’s calculation includes tax breaks associated with the loss.

Barclays’s iPath Pure Beta Crude Oil ETNs maturing in 2041 and iPath Series B S&P 500 Vix Short-Term Futures ETNs due in 2048 are among the affected notes.

The bank stopped selling and issuing new notes a few weeks ago, saying it didn’t have the capacity to do so. They are still trading on the New York Stock Exchange.

Barclays breached the limits of what is known as a shelf registration, which is put in place so an issuer can parcel out the sale of a chunk of bonds without seeking regulatory approval each time.

The limit is typically outlined ahead of time in the bond prospectus and can be extended.

“In this case, it looks like they forgot to extend this limit,” Mr. Legras said.

Barclays said the loss will dent its common equity Tier 1 ratio, a key metric of financial health, but it is expected to remain within the bank’s target range of 13% to 14% on March 31.

Updated: 3-24-2022

Credit Suisse Warns of $500 Million Hit From Billionaire’s Lawsuit

Swiss bank had said a rogue banker was responsible for Georgian billionaire Bidzina Ivanishvili’s losses.

Credit Suisse CS 4.54%increase; green up pointing triangle

Group AG is expected to pay around $500 million after losing a lawsuit brought by a Georgian billionaire who claimed the bank mismanaged his money.

Credit Suisse has spent years fending off claims from Bidzina Ivanishvili, a former prime minister of Georgia. He sued the bank in Bermuda and Singapore for breach of trust, alleging he lost $800 million on forged trades made by his Geneva-based private banker, Patrice Lescaudron.

Mr. Ivanishvili sought $400 million damages in Bermuda’s Supreme Court, where a five-week trial ended in December.

In a statement Wednesday, Credit Suisse said a judgment against the bank was expected shortly in Bermuda for potentially more than $500 million. A person familiar with the matter said the judgment stems from Mr. Ivanishvili’s lawsuit.

Mr. Lescaudron was sentenced in Switzerland to five years in prison in 2018 for fraud and forgery. He admitted cutting and pasting client signatures to divert money and buy stocks without their knowledge, causing more than $150 million in losses, according to the Geneva criminal court.

At his trial, Mr. Lescaudron said his aim was always to make big returns for his clients, and some money for himself, too. He apologized to Credit Suisse, former colleagues and his clients for his actions.

Mr. Lescaudron served a two-year pretrial detention and was released in 2019. He killed himself in 2020.

Credit Suisse contested Mr. Ivanishvili’s claims, and has said it was also a victim of a rogue employee breaking the rules.

But evidence in the Bermuda trial included a report for Switzerland’s financial regulator in 2017 that found around a dozen executives or managers in Credit Suisse’s private bank knew Mr. Lescaudron was repeatedly breaking rules but turned a blind eye, proposed lenient punishment for his misconduct or otherwise glossed over the issues because he brought in around $25 million in revenue a year.

Credit Suisse tried to block the report, whose contents were first reported by The Wall Street Journal in February 2021, from being shared with Mr. Ivanishvili in the Bermuda proceedings.

The regulator, Finma, publicly censured Credit Suisse in 2018 for inadequately supervising and disciplining Mr. Lescaudron, and said he had repeatedly broken internal rules.

Credit Suisse has said it discovered Mr. Lescaudron’s fraud in September 2015, when a stock he bought for clients crashed.

The Finma-commissioned report found Mr. Lescaudron’s activities triggered hundreds of alerts in the bank that weren’t fully probed in the 2009-2015 period studied.

A business-risk manager who tried to escalate the issues told the report’s investigators he feared losing his job if he raised the alarm further, according to the report.

Credit Suisse said it had taken reserves previously, without saying for how much, and that it intends to pursue all available legal actions.

As recently as November, the bank declined to say whether it took any provisions for the billionaire’s cases. It didn’t disclose a provision specific to the cases in its annual report published earlier this month either.

Credit Suisse had litigation provisions of $1.65 billion at the end of 2021, and it estimated up to another $1.6 billion in potential charges not provisioned for. The bank said it will consider whether further reserves are needed in its first-quarter results due on April 27.

Updated: 3-29-2022

Credit Suisse Ignored Signs Banker Was Bilking Billionaire Client, Judge Says

Bermuda court orders the bank to pay $555 million in damages to former Georgia Prime Minister Bidzina Ivanishvili.

A Bermuda court said Credit Suisse Group AG must pay billionaire Bidzina Ivanishvili about $555 million for allowing a private banker to steal from the former Georgia prime minister and mismanage his money.

Mr. Ivanishvili sued the bank for breach of contract and fiduciary duty after his private banker, Patrice Lescaudron, admitted to cutting and pasting signatures to make unauthorized stock bets. Credit Suisse had said it too was a victim of Mr. Lescaudron and shouldn’t be held liable for his actions.

In a ruling Tuesday, Bermuda Supreme Court Chief Justice Narinder Hargun said a Credit Suisse subsidiary gave priority to Mr. Lescaudron’s revenue over the interests of Mr. Ivanishvili and other clients.

Credit Suisse knew or should have known that Mr. Lescaudron was fraudulently mismanaging Mr. Ivanishvili’s accounts since 2007, the court found. The fraud came to light in 2015 when one of Mr. Lescaudron’s stock picks plummeted in value.

Mr. Lescaudron was sentenced in Switzerland to five years in prison in 2018 for fraud and forgery. He served pretrial detention and part of the sentence, was released in 2019 and killed himself in 2020.

Credit Suisse last week flagged damages of more than $500 million from the verdict. The bank said it would appeal the judgment.

A spokesman for Mr. Ivanishvili said it is shocking that Credit Suisse is still refusing to offer compensation for the money it admits was stolen. A similar case against the bank by Mr. Ivanishvili in Singapore is continuing.

Final damages in the Bermuda case will be based on a calculation of what Mr. Ivanishvili would have made from his Bermuda accounts if his money had been invested in a medium-risk investment portfolio, through March 29. An initial calculation put that amount at roughly $555 million through July 2020.

Mr. Ivanishvili invested more than $1 billion with Credit Suisse over a 10-year period starting in 2005.

The Bermuda court drew heavily on a 2017 report commissioned by Switzerland’s financial regulator that found about a dozen Credit Suisse executives or managers knew Mr. Lescaudron was repeatedly breaking rules but turned a blind eye, proposed lenient punishment for his misconduct or otherwise glossed over the issues because he brought in about $25 million in revenue a year.

Credit Suisse tried to block the report, whose contents were first reported by The Wall Street Journal in February 2021, from being shared with Mr. Ivanishvili in the Bermuda proceedings.

Updated: 3-31-2022

Crypto Should Disrupt Current Anti-Money Laundering Practices, Not Adopt Them

Modern know-your-customer, anti-money laundering regulations are ineffective; crypto represents a better option to address this problem.

Until the early 20th century, highly respected doctors would routinely engage in bloodletting to cure ailments ranging from acne to tuberculosis. While we have left bloodletting behind, we are still engaging in putatively helpful, but veritably destructive practices.

Modern know-your-customer/anti-money laundering (KYC/AML) regulations are equivalent to financial bloodletting today: They do little good and may cause a lot of harm. Yet whether we like it or not, the KYC/AML nightmare is coming to crypto.

A few weeks ago, news broke that a consortium of U.S.-based crypto companies had formed TRUST, a travel rule compliance platform that expands financial surveillance.

Incorporated companies must abide by the law of their local jurisdiction. Yet crypto shouldn’t blindly follow legacy AML rules from the Financial Action Task Force (FATF), the global money-laundering and terrorist funding oversight group; it should disrupt them.

A Recent Phenomenon

The idea of money laundering is a relatively recent one. In 1970, Richard Nixon passed the euphemistically named Bank Secrecy Act, which required financial institutions to spy on their customers.

Keep in mind, Al Capone and other U.S. mobsters had already been successfully prosecuted for tax evasion 40 years before the Bank Secrecy Act was passed! Since then, the scope of surveillance has grown exponentially.

For example, banks in 1970 were required to report transactions in excess of $10,000. Today the limit remains $10,000, but $10,000 in 1970 is equivalent to $73,000 today!

Only after the 1990s did the rest of the world criminalize “money laundering,” mostly because of U.S. pressure after the 2001 terrorist attacks on the World Trade Center and Washington, D.C.

What Have The Results Been Of This Policy Experiment?

According to financial crime specialist Dr. Ron Pol, very little. Current AML rules don’t stop the vast majority of money laundering. The United Nations estimates that less than 1% of all criminal assets are seized globally, meaning that over 99% of criminal assets get laundered with impunity.

Why would criminals use the relatively small cryptocurrency market to launder funds on a public record, when they can easily launder billions through the conventional financial system without a trace?

AML regulations also come at a great financial cost. Worldwide spending on AML and sanctions compliance by financial institutions is estimated to exceed $180 billion a year, about 100 times more than the $1 billion to $2 billion in criminal assets that get seized annually.

Social costs are also high. The bureaucratic rules designed to keep criminals out disenfranchise millions of legitimate customers. More often than not, these are often marginalized groups.

If you live in a small or poor country, you might find it impossible to jump through the arbitrary hoops designed by a San Francisco product manager on the advice of a London lawyer.

The author has personally been locked out of accounts because a small EU government issued document was not accepted as valid proof of address. The company’s KYC service couldn’t comprehend that there are places where people do not use utility bills to prove residence.

AML departments in financial service companies are more about complying with AML legislation than actually stopping money laundering. A 2014 study found that identity verification “principles, guidance and practices resulted in processes that are largely bureaucratic and do not ensure that identity fraud is effectively prevented.”

In other words, fraud has been growing at astronomical rates worldwide and KYC laws have greatly contributed to this. People are now accustomed to share their personal identity documents with a wide range of actors ranging from banks to telecom providers to pornography websites. Is it surprising when their information gets compromised?

Crypto Is Well Suited

How can cryptocurrency disrupt AML regulations? Cryptography-based systems are uniquely well suited for proving identity and source of funds. Moreover, they can do so in a privacy preserving and transparent way.

For instance, you could open accounts at a centralized entity pseudonymously, using a public key verified by a trusted authority.

That way you have to trust only one entity with your details. A similar privacy-preserving method could be used in decentralized finance (DeFi) using zero-knowledge proofs. Indeed, there is evidence that crypto is starting to disrupt sanctions enforcement.

Coinbase announced it had limited access to its services in 25,000 wallets that may be related to sanctioned Russians. The non-custodial privacy-focused wallet Wasabi has announced it will be blocking sanctioned addresses from its CoinJoin pools, meaning that users can be confident they won’t be mixing funds with sanctioned individuals.

These measures, while countering the censorship-resistant ethos of cryptocurrency, generate much less collateral damage than the blanket bans and creeping surveillance of the current regime.

Although medical bloodletting was probably well intentioned, over centuries it caused a lot of unnecessary suffering, came at great societal cost and did nothing to treat disease.

The cryptocurrency industry was born from a realization that the modern financial system leaves individuals vulnerable to abuse by trusted third parties.

The current regulatory hodgepodge of FATF-driven KYC and AML regulations have birthed ineffective systems that do little to stop money laundering.

Instead, they enable political censorship, financial surveillance, fraud and inequality. The cryptocurrency industry should lead by example through the use of new innovative and effective anti-crime methods, instead of forcing old, ineffective ones.

Updated: 4-15-2022

IRS Investigating American Express Sales Pitches

Businesses were told they could deduct transaction fees while their owners earned tax-free cash rewards, WSJ previously reported.

The Internal Revenue Service is investigating American Express Co. over a questionable tax break that it pitched to clients, according to people familiar with the matter.

The civil investigation has been under way for a few months, these people said. The Wall Street Journal reported in November that AmEx salespeople touted a tax break based on a shaky interpretation of tax law.

The pitch was part of a strategy to persuade business owners to sign up for costly payment services.

AmEx previously acknowledged, in response to the November story, that some members of its U.S. sales organization “failed to uphold our values and had positioned certain products inappropriately, specifically with respect to tax benefits.”

An AmEx spokesman said this week that “we have already taken a number of actions to change products, policies and personnel and are continuing to cooperate with our regulators and government agencies.”

“As we said in November, we engaged an external law firm to conduct an investigation of our small business sales practices in the U.S.,” he added. AmEx “will take further steps as appropriate.”

AmEx previously said that it discontinued wire services associated with the pitch. These had been available to a wide range of companies, according to people familiar with the matter.

Last month, AmEx sales employees were told that the company was discontinuing a payments service for McDonald’s Corp. franchise owners associated with the tax pitch, according to people familiar with the matter.

Such IRS investigations can take years. In an investigation like this, AmEx could decide to give the IRS the names of clients who signed up for the payments services, according to tax attorneys. AmEx could have to turn over the profits it made from the sales strategy, they said.

It couldn’t be determined whether the IRS is examining any of the business owners’ tax returns.

An IRS spokesman said the agency is prohibited by law from commenting on specific taxpayers.

The sales pitch that the IRS is investigating was previously described to the Journal by current and former employees, and in training and sales documents reviewed by the Journal.

AmEx encouraged businesses, including eye doctors, McDonald’s franchisees and payroll companies, to use AmEx to pay vendors and employees through wire or card transactions.

Salespeople told the businesses that they could deduct the resulting fees as expenses, the Journal previously reported. Salespeople also told the businesses they could transfer the rewards points they’d earn to a certain AmEx card, and then the business owner could convert those points into untaxed cash, the Journal reported.

Rewards points generally aren’t considered income for individuals who generate them when they make personal purchases. It is less clear-cut when there is a separation between the entity earning the reward—the business—and the individual receiving the awards.

A whistleblower filed a report with the IRS last summer alleging that AmEx knowingly persuaded business owners to underreport their income and taxes, the Journal previously reported.

The IRS allows whistleblowers to get a share of taxes the government collects because of information they provide.

AmEx has in recent weeks terminated at least a handful of vice presidents who oversaw sales teams that pitched the strategy, according to people familiar with the matter.

Other federal agencies had already been probing AmEx over the way it sells cards.

The Journal reported in 2020 that AmEx employees, under pressure to hit aggressive sales goals, misrepresented the costs and benefits of AmEx business cards to business owners.

The Justice Department’s civil fraud and criminal divisions are investigating AmEx’s business-card sales practices, as are the Office of the Comptroller of the Currency and the inspectors general offices of the Treasury Department, Federal Deposit Insurance Corp. and Federal Reserve.

AmEx has said it is cooperating.

The IRS is working with at least some of those agencies, according to people familiar with the matter. It is examining allegations that AmEx salespeople used fake tax identification numbers when filling out card applications for small businesses, they said. Those numbers are also known as TINs or employer identification numbers.

Higher-ups told salespeople that many small-business owners don’t immediately know their TINs, and that using a dummy number like 123456789 could keep the application moving, according to the people familiar with the matter. The practice occurred from at least 2014 until 2018, they said.

An AmEx spokesman said the company no longer allows this practice. “Several years ago we allowed existing small business card members, who wanted additional American Express cards and did not have their business’ tax identification number readily available, to apply for a new card by populating the application with a temporary number,” he said.

Ex-BofA Treasury Note Trader Admits To Spoofing

Tyler Forbes admitted to entering illegal phony orders, prosecutors say.

A former Bank of America Corp. trader has pleaded guilty to spoofing, admitting to entering phony orders to try to influence the market for U.S. Treasurys.

Tyler Forbes, 27, on Thursday entered a plea to a single count of manipulating securities prices at a hearing in Brooklyn federal court, according to prosecutors.

Mr. Forbes, who traded in the secondary market for U.S. Treasury notes, entered large so-called spoof orders to move the market ahead of genuine orders he intended to fulfill, prosecutors said.

The spoof orders, which ultimately were canceled, were meant to move prices and create an appearance of market depth so that Mr. Forbes could execute his real orders more profitably, prosecutors said.

The spoofing spree ran from about January 2019 to June 2019, according to prosecutors.

In one example, Mr. Forbes attempted to sell $65 million in 10-year Treasury notes in May 2019 and placed a phony $250 million buy order, creating a false appearance of market interest, according to prosecutors.

Mr. Forbes, who began his career with Bank of America in 2016 after studying at Colgate University, was involved in 194 instances of spoofing, according to a disciplinary filing with the Financial Industry Regulatory Authority, Wall Street’s self-regulatory body.

Bank of America fired Mr. Forbes in August 2019, giving the reason for the termination as his failure to observe its trading policy, according to Finra records. Finra suspended Mr. Forbes in September of last year and fined him $75,000.

Bank of America declined to comment. A lawyer for Mr. Forbes didn’t immediately respond to a request for comment.

Updated: 4-19-2022

FATF To Evaluate Countries Anti-Money-Laundering Systems More Frequently

The organization, which sets anti-money-laundering law standards, said it would shorten its coming fifth round of mutual evaluations to a six-year cycle, from every 10 years currently.

The Financial Action Task Force said it would assess its member countries more frequently to assist them further in tackling money-laundering and combating terrorist financing.

FATF, a Paris-based organization that sets anti-money-laundering law standards, said it would shorten its coming fifth round of mutual evaluations to a six-year cycle, according to a report on the state of countries’ effectiveness and compliance published Tuesday. The current mutual evaluation is usually held around once every 10 years, according to a FATF spokesman.

FATF’s mutual evaluations consist of peer reviews in which members from different countries assess the effectiveness and implementation of one another’s anti-money-laundering measures.

FATF said the evaluations entail a description and an analysis of a country’s financial safeguards to prevent the illicit abuse of its financial system and recommendations to further strengthen it.

For the next round of mutual evaluations, FATF said it would also focus more on each countries’ highest risks and adopt a follow-up process that would emphasize the specific actions countries need to take.

FATF found that out of the 120 countries it has assessed so far, 76% of them have set up a broad set of AML rules and regulations that would enable them to “follow the money” in combating crimes and terrorism, compared with about 36% in 2012.

But FATF said that many countries continue to adopt laws and regulations in a “tick box” approach, which makes it difficult for countries to take effective measures to tackle the specific illicit finance risks they face.

FATF said countries would need to make significant improvements to their AML systems in the next round of peer reviews.

In addition, countries also need to focus on tangible results. FATF said many national authorities still face challenges in investigating and prosecuting complex, high-profile cross-border cases. Countries also still need to focus on the prevention of illicit use of anonymous shell companies and trusts, FATF said.

Rick McDonell, FATF executive secretary between 2007 and 2015, said a shorter evaluation cycle is a good thing and would help countries improve the effectiveness of their AML systems faster.

“More frequent testing of the country’s system, it focuses the mind and it focuses the government’s policies,” Mr. McDonell said.

The report, which is based on the fourth round of evaluations with a focus on the strengths and weaknesses of countries’ AML frameworks, is the first of its kind, according to FATF President Marcus Pleyer.

The public report is produced as part of FATF’s strategic review to make its mutual evaluation process timelier and more effective, he said.

The group also published on Tuesday the methodology and procedures it intends to adopt for the fifth round of mutual evaluations.

“We will put an even greater focus on ensuring that countries not only pass the relevant laws and regulations, but also effectively implement these laws,” Mr. Pleyer said in the report. “This will help prevent and prosecute money laundering, terrorist financing and financing of proliferation of weapons of mass destruction in a manner consistent with their risks.”

Updated: 4-29-2022

Once A Money-Laundering Risk, Latvia Looks To Rebuild Reputation In Face Of Russia Sanctions

In Latvia, some banks have stopped processing Russia-related transactions, only to see their clients attempt to reroute payments through other countries.

Latvia’s banking sector was once viewed by some as a hub for dirty money flowing out of Russia. Now, with the U.S. and Europe imposing an array of economic sanctions on Russia over its invasion of Ukraine, the former Soviet republic faces a new challenge: proving it can enforce the punishing measures.

The country is among a number of Baltic and Nordic nations on the front line in the economic war being waged against Russia. Many businesses in those countries have longstanding ties with their neighbor to the east, and the banks that service them have grappled with thorny questions in recent weeks about how to navigate an increasingly complex array of prohibited transactions.

“The first days were a shock for probably everyone,” said Ulvis Jankavs, deputy head of anti-money-laundering at Skandinaviska Enskilda Banken AB’s Latvian subsidiary, one of the largest financial institutions in the country.

The heavily regulated financial industry functions as a bulwark against financial crimes. Like their counterparts elsewhere, Baltic and Nordic banks are obliged to review transactions by their customers to ensure they don’t violate the sanctions on Russia and its regional ally Belarus.

In Latvia, banks have reason to be especially cautious when it comes to application of the sanctions. After the fall of the Soviet Union, the newly independent country set out to become a financial hub for the region, and quickly attracted money from sources such as wealthy Russians who saw Latvia as a transit point to the West.

The business led to a series of scandals that continue to loom large over Latvia’s banking sector. The country in recent years has taken steps to repair its reputation, and officials there say Latvia has reduced its exposure to Russia and Belarus.

In the region more generally, the scrutiny has forced banks to invest more resources in financial crime prevention.

Whether those steps have fully prepared Latvia and its neighbors for the latest crisis remains to be seen. Although Nordic and Baltic banks have dealt with sanctions on Russia since its annexation of Ukraine’s Crimea region in 2014, the latest measures imposed by the U.S. and Europe are far more severe, and present a nearly unprecedented compliance challenge for the region, experts say.

Complicating the situation in Latvia is the fact that Russia remains a significant trading partner across the entire Baltic region, despite some decline in relations since 2014. In Latvia, Russia supplies key goods used by local manufacturers such as fuels, metals and wood.

Russians and people of Russian origin, meanwhile, make up more than 25% of the country’s population, which numbers just under 2 million. Many local businesses have Russian owners, suppliers or customers, often with legitimate reasons to send money to or from Russia.

Efforts to adhere to the sanctions in recent weeks have placed an enormous burden on the compliance departments of Nordic and Baltic banks, according to senior executives and compliance officers from more than half a dozen of the region’s largest financial institutions. Compliance staff there have dealt with case backlogs, prompting delays and frustrating clients.

The risk for banks isn’t small. Within the first two weeks of enhanced monitoring of Russia-related payments, one Nordic bank’s compliance department found that at least two-thirds of the transactions it reviewed would have violated the sanctions placed on Russia if they hadn’t been stopped, according to one senior compliance executive.

Even one errant transaction is enough for banks to incur large fines from regulators.

“We are tracking all transactions in [Russian] rubles, it doesn’t matter which side of the transaction [they are on],” said Mr. Jankavs, who is based in Latvia. “We are stopping them, and checking those customers and their counterparties.”

Some banks, after assessing the costs of doing such enhanced monitoring, have simply decided to cease most Russia-related business, a process known as de-risking.

Swedbank AB, the largest bank in Latvia, in early April said that it would halt transactions to Russia and Belarus starting late April, and those originating in Russia starting in May.

Other banks have tried to take a more nuanced approach in an effort to continue providing services to companies with suppliers or customers in Russia or Belarus. Latvia-based Rietumu Banka has indicated it will continue processing payments, although it has warned customers they may need to provide the bank’s compliance department with additional documentation on their transactions.

The scrutiny of Latvia’s banking sector and its relationship with Russia extends back decades. In 2018, the U.S. Treasury Department declared ABLV Bank AS, then one of Latvia’s largest private banks, an “institutionalized money laundering” operation and cut its access to the U.S. dollar.

Officials said the bank was laundering money for corrupt clients in Russia, Azerbaijan and Ukraine, as well as for North Korea’s nuclear missile program.

In another scandal in 2019, several Nordic banks admitted that hundreds of billions of dollars had flowed unchecked from Russia and other former Soviet states through their operations in Estonia.

Latvia’s financial regulator has held regular roundtables with banks on the Russia sanctions and worked with the European Commission to resolve confusion around technical aspects of the prohibitions.

Latvia requires companies to also follow sanctions issued by the U.S., which can vary from European Union sanctions, creating ambiguities.

“Like a lot of the big Western banks, it’s been a matter of playing constant catch-up, because rules kept changing so frequently and so rapidly,” said Tyler Nielsen, a former U.S. Treasury Department official who now consults on compliance from Copenhagen. “We have had all these questions, and even the competent authorities have been playing catch-up.”

Authorities in Latvia in recent weeks said they have seen attempts to circumvent sanctions by individuals with links to the Russian government. There is no evidence so far that those attempts were successful, said Ilze Znotina, the director of Latvia’s financial intelligence unit.

One red flag, compliance officers said, is when a corporate customer that traditionally had many counterparties in Russia suddenly switches to using counterparties in another country, such as Hungary, that may be viewed as having weaker oversight.

Executives and regulators say the country has tightened its anti-money-laundering controls since the ABLV scandal. “We cleaned up the Latvian financial sector really to an extent that no other European country has cleaned [their own] up,” said Ms. Znotina.

“I don’t have any worries in relation to the banking sector here,” she added. “They are the most experienced part of the entire sanctions regime.”

Updated: 5-4-2022

Bank Of America Fined $10 Million By CFPB For Freezing Accounts

The U.S. consumer watchdog is ordering Bank of America Corp. to pay a $10 million penalty and repay fees that the lender charged customers when garnishing wages.

The Consumer Financial Protection Bureau said on Wednesday that the Charlotte, North Carolina-based lender incorrectly froze accounts and garnished customer funds based on out-of-state court orders.

The lender should have ensured that it was complying with the laws and protections in states where its clients lived, the CFPB said.

“Bank of America imposed unlawful garnishment fees and injured its customers by inserting unenforceable clauses into contracts in an attempt to strip legal rights from families,” Rohit Chopra, who leads the agency, said in a statement. “The CFPB is ordering Bank of America to fix its systems, clean up its contracts, and make its victims whole.”

In an e-mailed statement, Bank of America said it had “enhanced our processes to ensure compliance with all applicable state laws as we execute court orders.” The lender said it would refund fees to customers related to approximately 3,700 cases.

The CFPB said that since August 2011, Bank of America customers paid almost $600,000 in fees tied to those garnishments. The cases at issue represent a small fraction of the total number of court orders processed by the bank over the period.

Updated: 5-13-2022

Treasury Targets Russia, Oligarchs As Part Of Plan To Combat Illicit Finance

Continuing efforts to close regulatory loopholes related to shell companies and all-cash real-estate purchases are an important measure in combating corrupt Russian oligarchs, officials say.

The U.S. Treasury Department outlined actions it plans to take to address illicit-finance risks, saying Russia’s invasion of Ukraine had underscored the need to close regulatory loopholes and step up the fight against corruption.

The national strategy for combating illicit finance, released Friday, is the latest iteration of a report the Treasury produces every two years.

But this year’s strategy might be among the most important it has produced, Treasury officials said, given Russia’s aggression against its neighbor.

“Illicit finance is a major national-security threat and nowhere is that more apparent than in Russia’s war against Ukraine, supported by decades of corruption by Russian elites,” said U.S. Treasury Assistant Secretary Elizabeth Rosenberg.

Among its priorities for addressing that threat, the Treasury said Wednesday, is implementing regulations that limit the ability of illicit actors such as corrupt Russian oligarchs to covertly access the financial system through shell companies and all-cash real-estate purchases.

The report released Friday responds to a number of illicit-finance risks to the U.S. financial system identified by the Treasury in March.

The Treasury at the time named fraud, drug trafficking and cybercrime as the crimes that generate the largest amount of illicit proceeds. It also identified emerging risks, including the abuse of cryptocurrencies and rising domestic extremism.

The Biden administration tied its work on illicit finance to larger national-security goals even before the Ukraine invasion. It has said that fighting corruption should be a core national-security priority, and more recently pointed to Russia’s invasion of Ukraine as one example of how corruption destabilizes nations and poses a threat to U.S. interests.

The administration has imposed far-reaching economic measures against Russia, and has stepped up sanctions against individuals and companies it alleges are involved in corruption.

On May 8, it announced new measures banning Americans from providing accounting and management-consulting services to Russian companies. That step was in line with the strategies released Wednesday, the Treasury said.

For more than a year, the Treasury has been implementing a corporate-transparency law, an effort the agency said was its top priority in countering the various illicit-finance threats it has identified.

The Anti-Money Laundering Act, passed in early 2021, calls for the Treasury to create a corporate-ownership registry that lawmakers hope will limit the use of anonymous shell companies.

The agency is also pushing for greater anti-money-laundering controls in the real-estate sector, including additional scrutiny of all-cash transactions.

Treasury officials on Wednesday said the measures were an important step in countering Russian President Vladimir Putin and corrupt Russian oligarchs with ties to the Kremlin. Corruption tied to the Russian government has played a role in funding the Ukraine invasion, they said.

“Some of the most sophisticated money launderers and financial criminals in the world work on behalf of Russia,” a senior Treasury official said during a briefing with reporters. “They take advantage of these gaps to move and hide their money, including in the United States.”

The Treasury on Wednesday said it would also focus on updating regulations that require financial institutions such as banks and money-services businesses to apply anti-money-laundering controls to the transactions they process on behalf of customers.

It also will work to improve the effectiveness of law-enforcement efforts to counter illicit financing, support technological innovation and continue to scrutinize the risks posed by cryptocurrencies and other new financial products and services, the Treasury said.

Updated: 5-17-2022

Allianz Subsidiary Pleads Guilty To Defrauding Investors As Part Of $6 Billion Settlement

Prosecutors also brought charges against three former Allianz employees, with two agreeing to plead guilty.

One of Allianz U.S. investing divisions pleaded guilty to securities fraud and agreed to pay about $6 billion in penalties and restitution to investors who suffered losses when some of the subsidiary’s hedge funds tanked during the March 2020 market selloff.

Allianz Global Investors U.S. admitted Tuesday that it lacked internal controls and oversight for a series of private-investment funds and made false and misleading statements to investors, according to a plea agreement reached with the Manhattan U.S. attorney’s office. The U.S. subsidiary also settled civil-fraud claims brought by the Securities and Exchange Commission.

The $6 billion will resolve the government’s criminal and civil claims, as well as those from defrauded investors. The agreement is among the largest criminal resolutions between a financial institution and the Justice Department in recent years.

The settlements draw a line under one of the biggest early casualties of the market meltdown sparked by the Covid-19 pandemic. Investors, including pensions that managed the retirement plans of Arkansas teachers, Milwaukee city employees and New York City subway workers, lost billions on the funds.

Allianz in a statement pointed to Justice Department findings that the criminal misconduct was limited to a handful of individuals no longer at the company. It said the Justice Department’s investigation didn’t find misconduct in other parts of Munich-based Allianz.

Three former employees of Allianz Global Investors were also charged in the scheme. Two have pleaded guilty.

Gregoire Tournant, who ran the investment group responsible for the funds’ steep losses, was indicted on several counts, including securities fraud and investment-adviser fraud. Mr. Tournant surrendered to authorities in Denver Tuesday morning.

Mr. Tournant’s lawyers said he was being unfairly targeted and was on extended medical leave during the relevant market events.

“We have faith that the justice system will reject this meritless and ill-considered attempt by the government to criminalize the impact of the unprecedented, COVID-induced market dislocation of March 2020,” they said in a statement.

Trevor Taylor, Mr. Tournant’s co-lead portfolio manager of the funds, along with a third money manager in the group, Stephen Bond-Nelson, agreed to plead guilty to charges of conspiring to commit securities fraud, as well as securities fraud and investment-adviser fraud. Mr. Bond-Nelson also agreed to plead guilty to a charge of conspiracy to obstruct justice.

The SEC also sued the three men and accused them of civil securities fraud.

A lawyer for Mr. Bond-Nelson declined to comment. A lawyer for Mr. Taylor didn’t respond to requests for comment.

The case centered on Allianz Global Investors’ Structured Alpha funds, which bet heavily on stock options that effectively sold insurance to other investors that were hedging against a potential market selloff.

The strategy had been profitable during the market’s calm stretch, and Allianz managers had assured investors that they had hedged their own trades in the event that the markets turned volatile.

“When there is a catastrophic event, we might have to pay—very much like an insurance company,” Mr. Tournant said during a May 2016 marketing video. “The positions we buy to protect ourselves from those catastrophic shocks—you could label those as reinsurance.”

By 2020, Mr. Tournant’s Structured Alpha funds managed more than $11 billion in assets.

The strategy faced a serious test that March, when the coronavirus swept around the globe and set off a market panic over the pandemic’s effect on the economy. Stocks fell sharply, credit markets seized up and volatility touched a record high.

As options contracts swung dramatically, Allianz managers scrambled to restructure their trades. They struggled to keep up; the stock market was spiraling lower at a pace the managers didn’t expect.

The Structured Alpha funds lost more than $7 billion in March 2020, according to the government. On March 25 of that year, Allianz informed investors that two of its funds would be liquidated.

Within months, investors in the funds began to sue Allianz and the SEC had launched an investigation into the losses.

On Tuesday, Allianz said it would transfer most of Allianz Global Investors’ U.S. business to Voya Investment Management in exchange for a 24% equity stake in the combined money manager.

Following the transaction, Allianz Global Investors would no longer operate as an investment adviser to U.S. mutual funds, a spokeswoman said. A separate unit will continue to advise on private funds in the U.S., she said. Allianz also agreed to distribute Voya’s funds outside the U.S.

Allianz said its guilty plea would disqualify Allianz Global Investors from advising U.S. mutual funds and certain pensions. The firm said it expects the SEC to issue waivers on Tuesday that would ensure the agreement wouldn’t affect Allianz Life or its other U.S. money manager, Pacific Investment Management Co.

Prosecutors said the Allianz scheme lasted from at least 2014 to March 2020 with Mr. Tournant reaping more than $60 million in compensation during that time.

He and his team misled investors over the risks the funds were taking and how they were producing their returns, prosecutors alleged. The Structured Alpha managers also misrepresented the hedging strategies they had used to protect the funds’ assets, prosecutors said.

The government also alleged that Mr. Tournant sought to obstruct the SEC inquiry into the losses by directing Mr. Bond-Nelson to lie to the regulator.

The SEC in its case alleged Messrs. Bond-Nelson and Tournant manipulated portfolio stress-test reports sent to clients that showed their estimated losses under certain dire scenarios.

In one case, Mr. Tournant reduced the projected loss under a market-crash simulation from 42.15% to 4.15%, the SEC alleged.

The men also misstated daily performance results sent to some investors, making returns look better than they were, the SEC said.

Allianz last week said it had set aside an additional $2 billion for legal expenses related to settlements with investors and discussions with the U.S. government. That came on top of the about $4 billion it had already provisioned.

Updated: 5-20-2022

Wells Fargo To Pay $7 Million Over Alleged Anti-Money-Laundering Glitches

Bank unit settles SEC investigation stemming from alleged failure to properly test new anti-money-laundering system.

A Wells Fargo & Co. unit has agreed to pay $7 million in a settlement with the Securities and Exchange Commission after alleged glitches in a new anti-money-laundering system let suspicious transactions escape initial notice.

Wells Fargo Advisors, a brokerage arm of the bank, failed to properly implement and then test a new version of a system designed to catch incidents of money laundering, leading to failures to file suspicious-activity reports in a timely way, the SEC said Friday.

The unit failed to file at least 34 reports between April 2017 and October 2021, the SEC said.

Wells Fargo didn’t formally admit to or deny the SEC’s allegations, the agency said.

“When SEC registrants like Wells Fargo Advisors fail to comply with their [anti-money-laundering] obligations, they put the investing public at risk because they deprive regulators of timely information about possible money laundering, terrorist financing or other illegal money movements,” SEC Enforcement Director Gurbir Grewal said.

Mr. Grewal said the agency wanted to send a message that anti-money-laundering obligations are “sacrosanct.”

Wells Fargo said that the matter “refers to legacy issues that impacted a transaction monitoring system,” adding, “The issues were resolved promptly upon discovery.”

Banks, brokers and many other money-handling businesses are required to file SARs to inform government agencies about potentially suspicious transactions. Most of Wells Fargo’s alleged shortfalls stemmed from failure to make sure that an anti-money-laundering system installed in 2019 actually worked as intended, the SEC said.

Some problems occurred because the system didn’t properly cross-reference country codes used on a money-laundering watchlist with the country codes used to process wire transfers, the SEC said.

Transactions involving countries that pose a heightened risk of money laundering then slipped through the system without triggering alerts, the SEC said.

That issue—affecting at least 25 reports that weren’t filed in a timely manner, according to the SEC—was discovered when the Financial Industry Regulatory Authority, a Wall Street self-regulatory body, pointed out that Wells Fargo didn’t seem to be receiving alerts on a number of transactions that its systems should have flagged.

At least nine additional reports weren’t properly filed because Wells Fargo’s anti-money-laundering system malfunctioned on certain days, for example, when the investment adviser was open on a bank holiday, the SEC said.

The same Wells Fargo unit previously settled with the SEC over similar alleged misconduct. The SEC, in connection with a 2017 settlement, said that Wells Fargo anti-money-laundering management had issued “confusing directives” to money-laundering investigators at the brokerage.

It’s the second time in the past five years that the SEC has penalized Wells Fargo Advisors for this type of violation, according to the agency.

Wells Fargo operates one of the nation’s largest wealth management units, fielding more than 12,000 financial advisors. The unit had $2 trillion in client assets at the end of the first quarter.

The SEC said Wells Fargo Advisors failed to file at least 34 suspicious activity reports in a timely manner between April 2017 and October 2021. The federal government requires financial institutions to file SARs in order to help it identify possible criminal or fraudulent activity.

“When SEC registrants like Wells Fargo Advisors fail to comply with their [anti-money-laundering] obligations, they put the investing public at risk because they deprive regulators of timely information about possible money laundering, terrorist financing, or other illegal money movements,” Gurbir Grewal, director of the SEC’s Division of Enforcement, said in a statement. “Through this enforcement action, we are not only holding Wells Fargo Advisors accountable, but also sending a loud and clear message to other registrants that AML obligations are sacrosanct.”

In settling the case, Wells Fargo Advisors neither admitted nor denied the charges, according to the SEC.

A company spokeswoman said in a statement: “At Wells Fargo Advisors, we take regulatory responsibilities seriously. This matter refers to legacy issues that impacted a transaction monitoring system and the issues were resolved promptly upon discovery.”

The SEC criticized Wells Fargo Advisors’ “deficient implementation” of a new internal anti-money-laundering monitoring system the firm adopted in January 2019.

The system failed to reconcile different country codes used to monitor foreign wire transfers, causing Wells Fargo to be tardy when filing suspicious activity reports.

In addition, between April 2017 and October 2021, Wells Fargo Advisors failed to timely file at least nine additional suspicious activity reports because of failures to properly enter wire transfer data into the firm’s monitoring system, the SEC said.Five years ago, the SEC penalized Wells Fargo for similar alleged violations.

The commission said Wells Fargo Advisors failed to file or timely file at least 50 suspicious activity reports in 2012 and 2013.

The SEC said a majority of those reports related to suspicious activity occurring in international customers’ accounts held at Wells Fargo Advisors’ U.S. branch offices. Wells Fargo agreed to pay $3.5 million and to amend its compliance practices to settle the charges.

The SEC in that settlement required Wells Fargo to update its internal policies and determine whether it had given investigative staff sufficient time and resources.

Wells Fargo Accused of Conducting Bogus Diversity Interviews

Wells Fargo is facing allegations that it engaged in a practice of conducting bogus job interviews with women and people of color after a position had already been promised to another candidate.

A report in the New York Times details a pattern of sham interviews with candidates who never had a chance at landing a job with Wells Fargo.

Current and former employees described it as an effort to boost the company’s claims that it was seeking to diversify its workforce. In part, the mostly unnamed sources said, the effort was aimed at placating regulators in the event of an audit.

Wells Fargo issued a lengthy statement responding to the Times article, which it did not dispute. It sought to cast the Times account as anecdotal and not representative of the company’s recent efforts to diversify its workforce.

Wells Fargo said it researched each of the allegations of bogus interviews described in the article , and “could not corroborate the claims as factual.”

In its statement, the bank went on to tout its diversity initiatives, including a 27% increase in hirings of racially or ethnically diverse candidates last year, and a 23% increase in hirings of women. Overall hiring volume increased 17% last year, the company said.

“At the same time, we take the nature of the allegations in the story seriously and, as a company, we do not tolerate the type of conduct alleged,” Wells Fargo said in its statement. “We will continue our internal review and if we find evidence of inappropriate behavior or shortcomings in our guidelines or their implementation, we will take decisive action.”

For Wells Fargo, the news comes as the latest in a string of scandals that have tarnished the company’s reputation and raised serious concerns about its workplace culture.

Just Friday morning, the Securities and Exchange Commission announced a settlement with Wells Fargo that will see the firm’s brokerage unit pay $7 million to resolve allegations that it had violated antimoney-laundering (AML) rules over a four-year period. That’s the second AML offense the SEC has cited Wells Fargo for in the past five years, according to the regulator.

Wells Fargo paid a hefty set of fines over a fake-account scandal that shook the company and precipitated a major shakeup in its leadership ranks. Taken together with a series of smaller scandals, critics say the composite picture that emerges is a deeply—perhaps irrevocably—damaged company.

“It appears that cheating consumers is simply in Wells Fargo’s DNA,” Sen. Elizabeth Warren (D, Mass.) said at a hearing in April when she called on regulators to break up the company.

The latest wave of bad news for Wells Fargo comes just a week after the company announced that the head of its advisors division—Jim Hays—will step down July 1, and be replaced by Sol Gindi, an executive who joined the bank in October 2020.

Wells Fargo seemed to downplay the extent of the hiring allegations described in the Times story, saying they were the purported work of a “handful” of managers, but that it continues to review the allegations.

The Times story quoted a former wealth management executive, Joe Bruno, who was fired after he complained to his superiors about the practice of interviewing a diverse candidate for a position that had already been filled.

Bruno says he was fired in retaliation; Wells Fargo says he was fired for “retaliating against a fellow employee,” according to the Times.

Wells Fargo changed its hiring policies in 2020, following the murder of George Floyd and the racial-justice protests that followed.

Wells Fargo had already been struggling with workforce-discrimination allegations, and two years ago pledged to consider a diverse slate of candidates for all positions paying above $100,000 a year.

However, many of the cases that Bruno described involved financial consultant roles—assistants to advisors who make well under $100,000 a year. In some cases, that process was wrapped up in recruiting advisors from other firms who wanted to bring an assistant along with them.

So even when no position was available, one manager said he was told he had to post a job opening for the assistant role and make an effort to recruit diverse candidates.

Wells Fargo Accused of Conducting Bogus Diversity Interviews

Wells Fargo is facing allegations that it engaged in a practice of conducting bogus job interviews with women and people of color after a position had already been promised to another candidate.

A report in the New York Times details a pattern of sham interviews with candidates who never had a chance at landing a job with Wells Fargo. Current and former employees described it as an effort to boost the company’s claims that it was seeking to diversify its workforce. In part, the mostly unnamed sources said, the effort was aimed at placating regulators in the event of an audit.

Wells Fargo issued a lengthy statement responding to the Times article, which it did not dispute. It sought to cast the Times account as anecdotal and not representative of the company’s recent efforts to diversify its workforce.

Wells Fargo said it researched each of the allegations of bogus interviews described in the article , and “could not corroborate the claims as factual.”

In its statement, the bank went on to tout its diversity initiatives, including a 27% increase in hirings of racially or ethnically diverse candidates last year, and a 23% increase in hirings of women. Overall hiring volume increased 17% last year, the company said.

“At the same time, we take the nature of the allegations in the story seriously and, as a company, we do not tolerate the type of conduct alleged,” Wells Fargo said in its statement. “We will continue our internal review and if we find evidence of inappropriate behavior or shortcomings in our guidelines or their implementation, we will take decisive action.”

For Wells Fargo, the news comes as the latest in a string of scandals that have tarnished the company’s reputation and raised serious concerns about its workplace culture.

Just Friday morning, the Securities and Exchange Commission announced a settlement with Wells Fargo that will see the firm’s brokerage unit pay $7 million to resolve allegations that it had violated antimoney-laundering (AML) rules over a four-year period. That’s the second AML offense the SEC has cited Wells Fargo for in the past five years, according to the regulator.

Wells Fargo paid a hefty set of fines over a fake-account scandal that shook the company and precipitated a major shakeup in its leadership ranks. Taken together with a series of smaller scandals, critics say the composite picture that emerges is a deeply—perhaps irrevocably—damaged company.

“It appears that cheating consumers is simply in Wells Fargo’s DNA,” Sen. Elizabeth Warren (D, Mass.) said at a hearing in April when she called on regulators to break up the company.

The latest wave of bad news for Wells Fargo comes just a week after the company announced that the head of its advisors division—Jim Hays—will step down July 1, and be replaced by Sol Gindi, an executive who joined the bank in October 2020.

Wells Fargo seemed to downplay the extent of the hiring allegations described in the Times story, saying they were the purported work of a “handful” of managers, but that it continues to review the allegations.

The Times story quoted a former wealth management executive, Joe Bruno, who was fired after he complained to his superiors about the practice of interviewing a diverse candidate for a position that had already been filled.

Bruno says he was fired in retaliation; Wells Fargo says he was fired for “retaliating against a fellow employee,” according to the Times.

Wells Fargo changed its hiring policies in 2020, following the murder of George Floyd and the racial-justice protests that followed. Wells Fargo had already been struggling with workforce-discrimination allegations, and two years ago pledged to consider a diverse slate of candidates for all positions paying above $100,000 a year.

However, many of the cases that Bruno described involved financial consultant roles—assistants to advisors who make well under $100,000 a year.

In some cases, that process was wrapped up in recruiting advisors from other firms who wanted to bring an assistant along with them. So even when no position was available, one manager said he was told he had to post a job opening for the assistant role and make an effort to recruit diverse candidates.

U.S., U.K. Collaborate To Spur Innovation In Tech Used To Combat Money-Laundering

New program aims to develop more robust machine-learning technologies to help governments and financial institutions tackle money laundering and other crimes while retaining data privacy.

The U.S. and U.K. governments are teaming up to encourage the development of new machine-learning technologies that could be used to combat money laundering.

The White House and the U.K. government on Monday said they are collaborating on a “prize challenge” program meant to spur innovation in ways to train software to combat financial crime.

Prize challenge programs provide financial awards to members of the public who offer solutions to a problem posed by a government agency.

Both countries require financial institutions to detect and report suspicious transactions by their customers. Those rules have created troves of data so vast that both government investigators and individual financial institutions have trouble analyzing them.

Though governments have encouraged financial institutions to create information-sharing partnerships to improve their reporting activity and make the data more meaningful, data-privacy rules create challenges for doing so.

The U.S. and the U.K. said they want to improve technology that will allow machine-learning models to be trained on data from multiple sources without that data leaving a safe environment—a method known as federated learning.

Federated learning technology, if improved, could allow more sharing of financial information, sparking the creation of more robust software for tackling money laundering and other crimes.

The new technology could be a “building block for protecting the U.S. financial system from illicit finance,” said Himamauli Das, acting director of the U.S. Treasury Department’s Financial Crimes Enforcement Network.

The U.S. and the U.K. said that the prize challenge program is expected to open to entrants this summer, with winners to be announced in 2023. They didn’t provide details on how the program would operate or what the prizes would be.

FinCEN and the U.K.’s Financial Conduct Authority as well as its Information Commissioner’s Office will make themselves available to innovators as part of the program.

Updated: 6-23-2022

Spoofing Is A Silly Name For Serious Market Rigging

It’s a new crime but it isn’t new. It has a silly name but it’s no joke. Spoofing, a way to manipulate financial markets for illegitimate profit, is blamed for undermining the integrity of trading and contributing to the scariest crash since the financial crisis.

Spoofers trick other investors into buying or selling by entering their own buy or sell orders with no intention of filling them. That creates fake demand that pushes prices up or down.

Long considered disreputable but rarely dangerous, spoofing has emerged in an era of computerized trading as a threat to market legitimacy. Regulators, lawmakers and market authorities are struggling to define and control it.

The Situation

In September 2020, JPMorgan Chase & Co. admitted wrongdoing and agreed to pay more than $920 million to resolve U.S. authorities’ claims of market manipulation in the bank’s trading of metals futures and Treasury securities over an eight-year period, the largest sanction ever tied to the illegal practice known as spoofing.

Criminal charges had been filed in 2019 against several of the bank’s employees, including former head of the precious metals desk, Michael Nowak.

In that case, the Justice Department used racketeering laws more commonly used in mafia and drug gang prosecutions, alleging the precious metals desk effectively became a criminal enterprise for eight years.

In August, Bank of Nova Scotia agreed to pay $127.4 million to settle U.S. allegations that the company engaged in spoofing of gold and silver futures contracts, and made false statements to the government. In 2017, Citigroup was fined $25 million for manipulating the U.S. Treasury futures market.

In 2016, a British futures trader, Navinder Sarao, pleaded guilty to spoofing charges in U.S. federal court in Chicago after losing an extradition battle; in January 2020 he was sentenced to a year of home detention after providing what the judge called “extraordinary cooperation” to prosecutors.

Sarao had been arrested in suburban London after U.S. authorities said his activities had contributed to the flash crash of May 2010, when almost $1 trillion was temporarily wiped out in the U.S. stock market.

“It shall be unlawful for any person to engage in any trading, practice, or conduct … that is of the character of, or is commonly known to the trade as, ‘spoofing’” –Dodd-Frank Act Section 747

The Background

Traders have always used bluffs to gauge where prices are heading. What’s changed is that they no longer stand face to face, buying and selling with hand signals on trading floors. Now they watch numbers on a screen.

When trading was done in a pit, bad behavior was easier to identify and avoid. In the electronic age, computer programs can flood markets with fake orders.

For example, Sarao was accused of changing or moving futures contracts more than 20 million times on the day of the flash crash, while the rest of the market combined totaled fewer than 19 million actions.

Rooting out spoofing is paramount for regulators and exchange operators to convince investors that markets are fair. In the U.S. stock market, the Securities and Exchange Commission has had the authority to punish spoofing as a civil violation since the 1930s.

To help police futures markets, which are overseen by the Commodity Futures Trading Commission, the Dodd-Frank Act defined spoofing and made it illegal in 2010.

The Argument

Government regulators and operators of exchanges are outgunned by sophisticated and well-financed manipulators. CME spends $45 million a year to police traders, yet has been criticized by the CFTC for not doing enough to catch spoofers.

CME says it has improved its software and suspended two traders it accused of spoofing gold and silver markets. CFTC officials have argued that the agency should have access to real-time order and messaging data to better detect spoofing.

That would be a big change, since it has always relied on CME to police its own market. Traders argue that the definition of spoofing remains too vague, making it hard to distinguish it from legitimate order cancellations. (It’s perfectly legal for a trader to change her mind.) Prosecutions of spoofing have to show that traders intended in advance to cancel their orders.

In a 2014 case, for example, prosecutors said the trader’s intent was shown by computer programs written to cancel orders automatically.

Some argue that the main victims of fake orders placed and withdrawn within milliseconds are high-frequency traders who have been blamed for a variety of market woes themselves, and many doubt that Sarao could have done more than contribute to the flash crash.

Sarao gave his perspective in 2015, when he shouted to a London courtroom, “I’ve not done anything wrong apart from being good at my job!”

Updated: 6-27-2022

Credit Suisse Found Guilty In Money-Laundering Case Tied To Cocaine Ring

Swiss bank said it would appeal the criminal court’s findings that it didn’t do enough to monitor accounts used by a Bulgarian crime ring.

Credit Suisse Group AG and a former employee were found guilty Monday in a Swiss federal criminal court of helping a Bulgarian crime ring launder money related to cocaine trafficking.

The court found Credit Suisse didn’t do enough to prevent money laundering by members of the crime ring, which prosecutors said moved tons of cocaine into Europe and washed millions of dollars through Credit Suisse. It fined Credit Suisse around $2.1 million and ordered it to pay around $20 million to the Swiss government.

The former employee, who prosecutors said regularly accepted suitcases of cash from one of the ring members that went beyond allowed limits, was given a 20-month suspended sentence. A person from another bank and two members of the crime ring were also found guilty of money-laundering charges.

Credit Suisse said it would appeal the decision. It noted that the alleged offenses date to more than 14 years ago. It had said it was astonished to be charged when prosecutors brought the case in December 2020. The bank on Monday said it is continually testing its anti-money-laundering framework and has been strengthening it over time.

The former employee’s lawyer said she wasn’t sufficiently trained by the bank, and will appeal.

The court said Credit Suisse made it possible for the crime ring to launder money through the bank between July 2007 and December 2008 by failing to adequately monitor its accounts and make sure the business complied with anti-money-laundering rules.

The crime ring allegedly recruited a Bulgarian wrestler and others in his orbit for operations transporting drugs and laundering money.

Credit Suisse had argued that prosecutors were alleging deficiencies based on rules and principles that didn’t apply at the time.

It said previously that outside lawyers and consultants had reviewed its systems against money laundering and found its organizational setup was “correct and appropriate” in the period being probed.

Prosecutors initially charged the bank with deficiencies between 2004 and 2008 but had to narrow the time frame because too much time had passed.

The conviction hits Credit Suisse as it tries to turn a corner on financial losses and other scandals, including more than $5 billion in losses related to the collapse of family office Archegos Capital Management.

On Tuesday, Credit Suisse will update investors on plans to cut costs this year to help offset falling revenue in some divisions. It previously said it expects to post its third consecutive quarterly loss for the three months ending June 30.

Updated: 7-7-2022

JPMorgan’s ‘Big Hitters’ of Gold Market Face Trial Over Spoofing

* Three Face Prison If Convicted Of Rigging Prices For Years
* JPMorgan Dominates Precious Metals Us Says Were Manipulated

Michael Nowak was once the most powerful person in the gold market.

The former JPMorgan Chase & Co. managing director ran the bank’s precious metals business for more than a decade, making hundreds of millions of dollars in profit trading everything from silver to palladium.

Now, he and two of his former colleagues face a federal jury in Chicago on criminal charges for thousands of so-called spoofing trades, which prosecutors say were used for years to generate illicit gains for JPMorgan and its top clients.

The trial, slated to kick off Thursday, threatens to lay bare the inner workings of the prestigious bank that has long dominated the market for gold.

The government says Nowak’s business operated as a criminal enterprise, manipulating prices from 2008 to 2016 by placing thousands of trade orders that were never intended to be executed. If convicted, the three men are among the biggest players yet to face prison for price manipulation.

“These are big hitters,” said Robin Bhar, a former metals strategist at Societe Generale SA who spent more than three decades in the industry. “Coming to court gives it a lot more transparency in what is a very opaque market.”

The trial comes after years of a US government crackdown on price manipulation that saw JPMorgan pay $920 million to settle spoofing claims two years ago.

With $330 billion of notional value in precious metals derivative contracts at the end of March, the New York-based bank accounts for 67% of the positions put through US banks. It holds three times as much as the next-biggest player, Citigroup Inc., data show.

Nowak, who was also a board member of the body that runs the London gold market, faces 15 counts including commodities fraud, conspiracy to engage in racketeering and price manipulation, and spoofing — planting fake orders into the market to steer others into buying or selling at prices that favor the bank.

Trader Gregg Smith faces 13 counts, while Jeffrey Ruffo, a salesman, faces two counts. A fourth defendant, trader Christopher Jordan, is scheduled to be tried separately on Nov. 28.

All four have pleaded not guilty and face decades in prison if convicted on all charges.

Nowak’s lawyer declined to comment, as did federal prosecutors. Attorneys for Smith and Ruffo didn’t respond to requests for comment.

Nowak was arrested in September 2019, sending a shock wave through the metals and proprietary trading world. Industry insiders told Bloomberg in 2020 that Nowak, an introverted and brainy young father with a house in the Manhattan suburbs, had a clean reputation. He was released on $250,000 bond.

His arrest was part of a raft of prosecutions brought by the Justice Department since spoofing was defined and made illegal by the Dodd-Frank act in 2010.

The government has extracted more than $1 billion in fines for banks and filed criminal charges against dozens of individuals, using trading records and internal bank chat logs as evidence.

US Crackdown

In 2021, two Bank of America Corp. precious-metals traders were convicted in Chicago. A year earlier, a jury found two from Deutsche Bank AG guilty, while others reached plea agreements and cooperated with authorities. The most infamous spoofer was Navinder Singh Sarao, a British day trader accused of contributing to the 2010 Flash Crash in US stock markets.

While cases have involved alleged crimes such as commodities fraud or conspiracy, prosecutors have upped the ante with the JPMorgan defendants. They’ve added charges under the Racketeer Influenced and Corrupt Organizations Act, a law more commonly used against gangs or the mafia.

The government claims members of the precious metals desk worked together to use unlawful trading practices to maximize the bank’s profit and minimize its losses on trades in gold and silver.

More recently, RICO statutes were used in criminal charges against Bill Hwang, whose Archegos Capital Management collapsed last year, costing banks billions.

“It’s the closest thing we have to a nuclear option in a financial context,” said Eugene Soltes, a professor at Harvard Business School who has written about white-collar crime.

Among the government’s witnesses are former JPMorgan employees, including John Edmonds, who told prosecutors about Nowak’s trading in 2018, as well as Armand Nakkab, Kristen Pfeiffer and Christian Trunz, court records show.

Another is former Bear Stearns and Bank of Nova Scotia trader Corey Flaum, who pleaded guilty to price manipulation in 2019. The defense witness list includes Tudor Capital trader James Phelan, former Soros Fund Management trader James Ragusa and Moore Capital Management trader Joseph Giunta.

The trial will be closely watched by gold market participants eager to learn more about how JPMorgan operated its trading desk, including evidence from internal chat logs showing how the team communicated.

In one chat entry from May 27, 2008, a bank employee informed Nowak that Smith had “just bid it up to…sell,” according to the indictment.

In another, a colleague warned his teammates that “gregg is bidding up on futures trying to get some off.” At that moment, Smith placed an order to sell seven gold futures while placing offers to buy 77, prosecutors said.

The activity was viewable for 59 seconds before Smith sold three of his contracts and canceled his swarm of buy orders.

“Appreesh,” the colleague responded, “that worked!”

JPMorgan, which has already admitted wrongdoing and agreed to cooperate with prosecutors, has been fighting to keep some of its internal communications out of the trial, including messages involving Mike Camacho, who was head of global metals.

Prosecutors said in court filings they’ll seek to show jurors communications between Ruffo and former Moore Capital Management money manager Christopher Pia about an allegedly illicit trade.

High-Frequency Trading

Market players say that before Dodd-Frank, spoofing as it’s known today was prevalent on Wall Street. Some traders sought to bluff rivals like high-frequency trading firms to gain an edge, canceling orders before a trade was executed.

“If you have a large order and the algorithms pick up that you are selling selling selling, then they are going to jump in front of you,” said Matthew Mazur, an attorney at Dechert LLP, who defended a Deutsche Bank trader in 2020. “If you telegraph to the market what you actually want to do, you would be killed.”

That argument hasn’t worked with jurors in recent trials, where defense lawyers asserted that their clients intended to execute their trades, but canceled for legitimate reasons.

In the trial for the Deutsche Bank traders, their attorneys argued that fooling competitors in financial markets is no different than bluffing in a high-stakes poker game.

“The defense is going to say the market is changing and the traders wanted to change their minds and make adjustments,” said Soltes, the Harvard professor. “But you have to have a genuine willingness to execute that trade.”

The government also intends to bring in experts in algorithmic trading, including David Pettey of Susquehanna International Group LLP. Prosecutors allege the defendants broke the law to try to outsmart firms like Susquehanna, whose edge in speed allowed them to get ahead of bankers placing high-value orders.

By placing orders with the intent to cancel them before execution, the defendants could cause markets to react to a false picture of supply and demand, creating an opening to complete trades and moving prices in favorable directions, prosecutors said in their indictment.

The case is US v. Smith et al, 19-cr-00669, US District Court, Northern District of Illinois (Chicago)

Updated: 7-8-2022

Prosecutors Say JPMorgan Traders Scammed Metals Markets By Spoofing

Defense lawyers say Justice Department has cherry-picked trading data to misrepresent their clients’ intentions.

CHICAGO—JPMorgan Chase & Co.’s precious-metals traders consistently manipulated the gold and silver market over a period of seven years and lied about their conduct to regulators who investigated them, federal prosecutors said Friday.

The bank built a formidable franchise trading precious metals, but some of it was based on deception, prosecutors said at the start of a trial of two former traders and a co-worker who dealt with important hedge-fund clients.

They said the traders engaged in a price-rigging strategy known as spoofing, which involved sending large, deceptive orders that fooled other traders about the state of supply and demand. The orders were often canceled before others could trade with them.

The criminal trial in Chicago is the climax of a seven-year Justice Department campaign to punish alleged spoofing in the futures markets. Prosecutors have alleged the former members of JPMorgan’s JPM 2.10%increase; green up pointing triangle

precious-metals desk constituted a sort of criminal gang that carried out a yearslong conspiracy that racked up big profits for the bank.

“Day in, day out for seven years, the defendants manipulated the market so that they could make more money,” U.S. Justice Department prosecutor Lucy Jennings said. “And then they lied to cover it up.”

JPMorgan paid $920 million in 2020 to resolve regulatory and criminal charges over the conduct, which involved nine futures traders and at least two salespeople who dealt with clients such as hedge funds, according to court records.

Three former traders cooperated with the Justice Department’s investigation and will testify against the three defendants: Gregg Smith and Michael Nowak, who traded precious metals; and Jeffrey Ruffo, who was their liaison to big hedge funds whose trades earned money for the bank.

Attorneys for Messrs. Smith, Nowak and Ruffo told jurors Friday that prosecutors cherry-picked a handful of trades to concoct a misleading theory of how the men traded.

Mr. Smith canceled many orders but never used them as a ruse, defense attorney Jonathan Cogan said. He often canceled orders after he realized that high-speed trading firms, which made decisions faster than he could, jumped ahead of his orders and moved the price up or down, Mr. Cogan said.

“He did not place orders with the intent to manipulate the market, not during the snippets of time the prosecutors will focus on in this case—not ever,” Mr. Cogan said.

An attorney for Mr. Nowak, who led the precious-metals desk, said his client was a gold-options trader during the years under scrutiny.

Mr. Nowak used futures mostly to limit the risk of his large options positions, attorney David Meister said, so his pay wasn’t linked to making more or less money on a futures trade.

“The stuff he’s charged with here couldn’t move the needle for Mike’s pay,” Mr. Meister said.

Mr. Smith had worked at Bear Stearns before joining JPMorgan in 2008 when the bank acquired Bear in a fire sale precipitated by the financial crisis. Mr. Nowak traded for JPMorgan in both London and New York.

Mr. Ruffo worked at the bank for a decade, communicating with hedge funds that were brokerage clients and providing the desk with important market intelligence, according to prosecutors. All three have pleaded not guilty.

Prosecutors have alleged the pattern of spoofing was continuous, a claim that allowed them to charge the three men with racketeering in addition to conspiracy, attempted price manipulation, fraud, and spoofing. The conduct allegedly spanned from 2008 to 2016.

Racketeering is a charge typically reserved for criminal enterprises such as the mafia and violent gangs, although eight soybean-futures traders in Chicago were convicted of racketeering in a crackdown on cheating in the early 1990s.

U.S. District Judge Edmond E. Chang has reserved up to six weeks for the trial, although prosecutors said Friday that they could be finished presenting their case within two weeks. Judge Chang last year dismissed part of the case—several counts of bank fraud—against the defendants.

Prosecutors also recently moved to drop allegations related to options trading that authorities claimed had been manipulative.

Prosecutors have alleged that JPMorgan employees already were spoofing when Mr. Smith got to the bank. They say Mr. Smith and another trader from Bear brought a new style of spoofing that was more aggressive than the simpler approach people at JPMorgan had been using, according to court records.

Spoofing became an important way to successfully execute trades for hedge-fund clients whose fees were critical to the trading desk, prosecutors said. “It was key to get the best prices for those clients, so that they keep coming back to the precious-metals desk at JPMorgan, and not another bank,” Ms. Jennings said.

Guy Petrillo, an attorney for Mr. Ruffo, said Friday his client was a reliable and honest salesman whose only role was to communicate with clients and pass their orders to traders such as Messrs. Smith and Nowak.

“There will be no reliable evidence that Jeff knew that traders were using trading tactics that he understood at the time were unlawful,” Mr. Petrillo said.

Federal prosecutors have honed a formula for going after spoofing defendants during their multiyear strike on the practice.

In addition to using cooperating witnesses who said they knew the conduct was wrong, prosecutors have deployed trading charts and electronic chats to depict a sequence of trades intended to deceive others in the market.

While the charts show a pattern of allegedly deceptive trading, prosecutors said the incriminating chats reveal the intent of the traders placing the orders.

Former traders at Deutsche Bank AG and Bank of America Corp. were convicted of spoofing-related crimes in 2020 and 2021, respectively.

Those trials featured chats in which some defendants boasted about spoofing.

Lawyers for Messrs. Smith, Nowak and Ruffo said there are no chats in which their clients talked about spoofing because the men didn’t engage in it.

Spoofing is a form of market manipulation outlawed by Congress in 2010. Spoofers send orders priced above or below the best prices, so they don’t immediately execute. Those orders create a false appearance of supply and demand, prosecutors say.

The tactic is designed to move prices toward a level where the spoofer has placed another order he wants to trade. Once the bona fide order is filled, the spoofer cancels the deceptive orders, often causing prices to move back to where they were before the maneuver started.

Mr. Smith’s style of spoofing involved layering multiple deceptive orders at different prices and in rapid succession, according to the settlement agreement that JPMorgan struck with prosecutors two years ago.

It was harder to pull off but also harder to detect, and other JPMorgan traders adopted his mode of trading, court records say.

In the earlier trials, prosecutors successfully defended their theory that spoofing constitutes a type of fraud. Some traders have argued spoofing doesn’t involve making false statements—usually a precondition for fraud—because electronic orders don’t convey any intent or promises.

The tactic can impose losses on those tricked by spoofing patterns. The government has portrayed some of Wall Street’s most sophisticated trading firms, such as Citadel Securities and Quantlab Financial, as the past victims of spoofers.

In the latest trial, prosecutors also plan to call individual traders who traded for their own accounts and were harmed by spoofing.

Updated: 7-12-2022

Two Asset Managers Charged In Alleged PdVSA Money-Laundering Scheme

Ralph Steinmann and Luis Fernando Vuteff were each indicted on one count of conspiracy to commit money laundering.

Two foreign financial asset managers were charged with taking part in what the U.S. said was a scheme to launder a total of $1.2 billion illegally obtained from Venezuela’s state-owned energy giant, Petróleos de Venezuela SA.

Ralph Steinmann, a 48-old-year Swiss national, and Luis Fernando Vuteff, a 51-year-old from Argentina, were each indicted on one count of conspiracy to commit money laundering, according to the U.S. Justice Department. The indictments were issued Tuesday in the U.S. District Court in Miami.

Mr. Vuteff has been arrested and is waiting to be extradited from Switzerland, but Mr. Steinmann remains at large, the Justice Department said.

Requests for comment sent through LinkedIn profiles for individuals going by the names of Ralph Steinmann and Luis Fernando Vuteff didn’t receive an immediate response. Efforts to reach PdVSA for comment weren’t successful.

U.S. prosecutors alleged that, between 2014 and 2018, Messrs. Steinmann and Vuteff worked with others to launder the illicit proceeds from a corrupt foreign currency exchange scheme involving bribing Venezuelan officials.

According to the prosecutors, Messrs. Steinmann and Vuteff and others agreed to create financial mechanisms and relationships to launder more than $200 million related to the scheme and opened accounts on behalf of at least two Venezuelan public officials to receive bribery payments.

The laundering went through the U.S. financial system and involved various bank accounts located abroad, the Justice Department said.

Messrs. Steinmann and Vuteff could face up to 20 years in prison if convicted.

The indictments are the latest development in the U.S.’s corruption probe of PdVSA. Officials of the Venezuelan energy giant have long dismissed allegations of corruption involving the conglomerate.

Several former executives and associates of the firm have been convicted or pleaded guilty in the U.S. on charges related to the misuse of funds.

Front-Running Scandal Rocks A $31 Billion Indian Investing Giant

* Axis AMC Sacked Two Employees In May Amid Internal Probe

* Investigation Comes Amid Boom For Indian Mutual Funds

A sprawling regulatory probe that’s ensnared the Indian partner of Schroders Plc is roiling one of the nation’s largest asset managers and is poised to shake up India’s $465 billion mutual fund industry.

Axis Asset Management Co., which is India’s seventh largest mutual fund manager and partly owned by Schroders, in May sacked two employees, including its chief dealer, amid an ongoing internal probe.

The fund in early July submitted its findings to regulators and said it had evidence to believe that the terminated executives had violated securities law.

Meanwhile, the Securities & Exchange Board of India has been carrying out its own investigation into potential front-running by the two men, a person familiar with the agency’s probe said, asking not to be identified discussing private information.

Front running is the trading of stocks by someone privy to information about a large impending transaction that will move prices. It’s illegal in India, and massive search and seizure operations were conducted by the market regulator at the offices and residences of Axis Mutual Fund executives, and other stock brokers and traders, the person said.

In all, the regulator’s probe covered 30 locations in different cities after it received surveillance alerts and input from the stock exchange about suspected front running in trades of Axis Mutual Fund by certain parties, the person said.

Interviews with nine people familiar with the investigations showed how a pandemic-fueled boom in India’s investment industry may have made it harder for executives and regulators to manage the fallouts of that outsized growth.

British investment giant Schroders holds a 25% stake in Axis Asset Management, with Axis Bank Ltd. holding the rest.

Some corporations have withdrawn money from the Indian firm’s funds following the allegations, another person familiar with the matter said, asking not to be named because they weren’t authorized to speak publicly.

Axis Mutual Fund didn’t answer queries about corporate withdrawals but in a public statement said that the firm has followed regulatory guidelines at all times and believes that the conduct of the concerned individuals doesn’t have any impact on its liquidity or operations.

Schroders and Axis Bank didn’t respond to emails seeking comment.

Viresh Joshi, the former chief dealer, has filed a lawsuit alleging wrongful termination and has sought 542.6 million rupees, his legal firm, Mansukhlal Hiralal & Co. said in an email.

The other employee named by the firm, Deepak Agrawal, couldn’t be contacted for comment.

Calls and a message to a mobile number previously believed to belong to him weren’t answered, and Bloomberg wasn’t able to obtain any other contact information for him or any representatives he may have hired.

Meanwhile, legal experts are predicting more scrutiny for the entire Indian mutual fund industry.

“The scale at which the regulator is investigating the case makes us believe that SEBI means serious business,” said Sumit Agrawal, founder of Regstreet Law Advisors, and a former legal adviser to the market regulator. “We expect a speedier investigation and action that could result in tighter regulations for fund managers.”

Going forward there is likely to be increased scrutiny of bank accounts and tax returns of fund managers and dealers and their immediate relatives, he said.

Mutual funds, which fall somewhere between high-risk stock trading and low-return bank deposits, have offered an attractive proposition to both young and risk-averse older investors in India.

The industry has grown nearly five-fold in the last decade, with over 37 trillion rupees ($465 billion) in assets at the end of June, according to the Association of Mutual Funds In India.

Investors were net buyers of equity-based funds for a sixteenth straight month in June, even as concerns about high inflation and tighter monetary policy kept equity markets volatile.

Axis Mutual Fund joined the industry with its first investment plan in 2009, and had 2.5 trillion rupees of assets under management at the end of June this year. Among the early members of its team was Viresh Joshi.

Over the coming years, Joshi progressed in the company and became the chief dealer, overseeing its trading operations in 2019. He was involved in executing trades in the glass-walled dealing room on the first floor of the firm’s office, until the pandemic in 2020 forced most people to work from home.

Dealing rooms for mutual funds are strictly controlled spaces equipped to record every activity inside. Axis Mutual Fund’s dealing room has cameras overseeing all activities, desk phone lines are recorded while the use of mobile phones is prohibited.
Compliance Lapses

It isn’t publicly known if Joshi worked from home during the pandemic or from the dealing rooms. But in January this year, the company management was informally told by other market participants that there appeared to be something amiss in transactions being executed by Joshi, according to two people familiar with the developments in the case, who asked not to be identified discussing confidential details.

Joshi also had unexplained absences during trading hours, the people said.

The firm decided to investigate and roped in Alvarez & Marsal Inc. to help. In early May, Axis Mutual Fund said it had put Joshi and another fund manager, Deepak Agrawal, under suspension pending an internal probe into potential irregularities.

Soon after, people familiar with the matter told Bloomberg that SEBI was investigating whether the two men were involved in front running.

“We believe that our client is being scapegoated and his termination is wrongful and unlawful and that principles of natural justice were denied to him,” Chirag Shah, of-counsel at the law firm representing Joshi, said via email.

“When we wrote to Axis Mutual Fund to let us know what the charges are or whether there was any show cause notice, they did not provide us with the same.”

The law firm also said that the asset manager didn’t take any action on several complaints filed by Joshi when he witnessed price spikes before he was able to execute orders given to him.

Axis Mutual Fund, in an emailed response, said the fund house will address the assertions made by Joshi in his lawsuit before the court.

“We have more than adequate findings concerning breaches of our policies, including non-cooperation with our internal investigation (during his suspension period). We also have strong reasons to believe that there have been serious and persistent breaches of securities laws by him,” the company said in its response.

Tighter Rules

The investigation has raised questions about potential compliance lapses and practices followed during the Covid-19 restrictions of the last two years, which saw key stock gauges scale multiple highs.

Meanwhile, the new head of SEBI in India, Madhabi Puri Buch, has attempted to crack down on market irregularities as equity mutual funds have lured billions of dollars in inflows.

In late May, the market regulator sent a circular to brokerages and fund houses, withdrawing the flexibility to work from home for employees handling critical functions linked to investments, compliance and risk management, brokers who have seen the circular but are not allowed to be quoted, said. SEBI didn’t respond to an email seeking comment.

Some analysts, meanwhile, have raised concerns about potential fallouts at Axis Asset Management.

Primeinvestor.in, a financial research platform for retail investors, has recommended exiting the company’s small cap fund and has put its midcap and flexicap funds on hold, partly because of concerns about redemptions due to the investigation as well as other challenges such as poor inflows due to market turmoil.

Axis’s media representatives didn’t respond to a request for comment on the research firm’s views.

“We do remain concerned over whether this allegation will turn into a full-fledged corporate governance issue,” said Vidya Bala, head of research and co-founder of Primeinvestor.in.

“As of now, the depth of the issue and fault lines are yet to be explained, but where allegations as serious as this are afloat, there are multiple events that can damage investors’ holdings even before the issue is resolved.”

JPMorgan Gold Desk ‘Spoofing’ Cheated Market, Ex-Trader Says

* Traders Did ‘Whatever It Takes To Make Money,’ Jury Told

* Three Ex-Precious Metals Employees On Trial For Fraud

JPMorgan Chase & Co.’s gold trading and sales team was so focused on making money that they scammed the market for years with so-called spoofing trades, according to a former colleague who testified at the trial of three former bank employees charged with fraud.

“Our job was to do whatever it takes to make money,” and using spoof trades to manipulate prices for all sorts of precious metals was an almost daily method for generating profit, said John Edmonds, who worked as a trader at the bank until 2017. “Everyone at the time did it on the desk and it worked.”

Edmonds is testifying against his former boss, Michael Nowak, the longtime head of the trading desk, gold trader Gregg Smith and hedge funds salesman Jeffrey Ruffo.

Edmonds told a federal jury in Chicago on Tuesday that the team wasn’t just buying and selling precious metals, but systematically cheating to help themselves and their top clients over the course of the decade that Edmonds worked as a trader.

Edmonds described how he learned to spoof at JPMorgan. If he wanted to sell at a higher price, he’d put orders in above the current market price, and then place a huge orders to buy at higher prices that he’d cancel before they could be executed.

“I wanted to drive the price where I wanted it to go” by creating a false indication of demand, he said.

While the technique didn’t always work, it was successful enough that everyone on the trading desk used it several times a week, Edmonds said.

“If we wanted to buy low, we could,” he said. “If we wanted to sell high, we could.”

Edmonds is the first of a handful of cooperators slated to testify that prosecutors say will bolster their claim that Nowak, Smith and Ruffo participated in a racketeering enterprise from 2008 to 2016.

Edmonds was the first on the precious-metals desk to admit to crimes and secretly cooperated against former colleagues.

He pleaded guilty to conspiracy and commodities fraud charges related to spoofing in 2018.

Traders on Nowak’s desk engaged in spoofing as a core business practice, doing it more than 50,000 times over nearly a decade, prosecutors allege, though the jury will only hear about a tiny portion of those.

Lawyers for the three said the government’s case is based on a misreading of evidence and the reliance on witnesses, like Edmonds, who are testifying in order obtain light punishments. If convicted of all charges, the three face decades in prison.

Edmonds, a Brooklyn native with a degree from St. Johns University in Queens, New York, joined JPMorgan’s precious-metals desk in 2009 at a salary of about $80,000.

Edmonds’s supervisors and more senior members on the desk showed him how to layer trades, he told the jury, adding that it was understood on the desk that this was the way to trade precious-metals futures.

“I saw people trading for 20 years doing this,” Edmonds said. “How could I not do it?” Among members of the team, the use of spoofing techniques “was expected,” he said, adding that he watched both Smith and Nowak execute spoof trades to fill client orders at favorable prices.

Edmonds said he never reported anyone for violating the bank’s compliance policy on trading. When asked why not, he told the jury: “I would have been fired. This was my dream job.”

Prosecutors on Friday described the trading desk as a small area with no walls or doors where Nowak, Edmonds and the others sat shoulder to shoulder, just a few feet from one another.

Lucy Jennings, a Justice Department fraud prosecutor, told the jury that everyone on the team “could see and hear what everyone is doing.”

‘Didn’t Cut It’

David Meister, a lawyer for Nowak, told the jury that Edmonds was “eager to please” but that his trading skills “didn’t cut it” and his job was eliminated.

Edmonds was notable even among the JPMorgan traders. At times he had placed orders with as many as 400 contracts on the opposite side of a genuine one. Edmonds pleaded guilty for transactions involving silver futures.

Earlier on Tuesday, jurors heard testimony from Christopher Jackman, a consultant at Monument Economics Group LLC who was hired by the DOJ for $1.4 million to analyze CME data and document what the government claims are spoof trades, along with chat logs from members of the JPMorgan precious-metals desk.

Jackman described on instance in 2010, when CME data show Smith placed buy orders for five gold futures contracts at 50 cents below the best bid price, and then quickly followed with another 170 sell orders.

At the time, Smith’s sell orders represented more than half of the visible order book on the market, Jackman said. Prices fell, Smith executed his five buy orders, and then canceled all 170 sell orders before they could be executed, all in the span of about three seconds, Jackman said.

In data from January 2012, data show Nowak put in orders to sell five gold contracts valued at around $800,000, followed by orders to buy 80 contracts valued at $13 million, which at the time accounted for more than a third of the orders visible to the market, Jackman said.

After prices rose, Nowak executed all five sell orders and canceled all the buy orders, Jackman said, adding that the entire episode lasted less than 15 seconds.

The case is US v. Smith et al, 19-cr-00669, US District Court, Northern District of Illinois (Chicago)

Updated: 7-18-2022

Spoofing Gold Price ‘Common’ At Bear Stearns, Ex-Trader Says

* Jury Told Of Market Manipulation Before JPMorgan Merger

* Three Ex-Precious Metals Employees On Trial For Fraud

At Bear Stearns Cos., before the bank was acquired by JPMorgan Chase & Co. in 2008, manipulating the gold futures market with bogus spoof orders was “common practice,” especially for its top trader, Gregg Smith, a former colleague told jurors in Chicago.

“It was pretty widespread” on the precious-metals trading desk, said Corey Flaum, a gold and silver trader who was later fired for spoofing and reached a criminal plea agreement to cooperate with prosecutors.

“It was done out in the open,” Flaum said Monday. “Nobody ever said boo about doing it. No one ever said it was legal or illegal. It was common practice.”

Smith, who became JPMorgan’s top gold trader after the merger, is on trial with two others on the desk: Jeffrey Ruffo, a salesman who handled orders by the bank’s biggest hedge fund clients, and Michael Nowak, the longtime head of the JPMorgan precious-metals business. They are accused of operating a criminal enterprise by manipulating prices from 2008 to 2016.

Flaum described how Smith used “spoof” trades — huge orders that are quickly canceled before they can be executed — several times a week to push precious metals up or down so he could make trades for the bank and its clients more profitable.

Flaum, who joined Bear Stearns in 2006 and sat next to Smith in their New York office, said he learned to spoof on the bank’s precious-metals desk and wasn’t aware that the practice was wrong or illegal until 2011.

“It was something I observed,” Flaum said. “Nobody from the managing director on the desk to their superior to people in compliance ever came out and said anything about it.”

The former trader said the precious-metals desk routinely spoofed because the technique usually worked, which was profitable for the bank and kept clients happy by ensuring better pricing on their orders.

‘Excessive Clicking’

Flaum said he could tell when Smith was spoofing the market because he’d hear Smith’s “excessive clicking” as he rapidly cancelled orders within seconds of placing them. That contrasted with normal trading that was “more slow and methodical,” Flaum told the jury.

Flaum said he left Bear Stearns in May 2008 to take a similar precious-metals trading job at Bank of Nova Scotia, where he worked until he was fired for spoofing in July 2016.

Flaum pleaded guilty to attempted price manipulation in 2019 and agreed to cooperate with prosecutors. He has yet to be sentenced.

He’s the second former gold trader to testify on behalf of the government in a trial that began with its first witness on July 8. Last week, John Edmonds spent four days on the stand describing how Nowak, Smith and Ruffo were involved in spoofing precious-metals markets at the JPMorgan desk for almost a decade.

Edmonds has pleaded guilty to criminal charges and is cooperating with authorities. During cross examination, defense lawyers sought to undermine his credibility by citing several lies he told to authorities.

Attorneys for Smith and Nowak have argued that all their orders were legitimate and could have been executed by anyone in the market before they were canceled. Ruffo’s lawyers emphasized that he never placed any orders because he was a salesman.

On Monday, jurors also heard testimony from Brian Wika of the CME Group Inc., which owns the futures exchanges where the US alleges thousands of spoof trades took place.

Wika lead an investigation into Smith’s trading activity following a 2012 complaint from Alex Gerko, founder of quantitative trading firm XTX Markets Ltd. The CME concluded in a report that Smith successfully placed gold spoof orders more than 3,000 times in July 2013 alone.

Wika denied they had cherry-picked examples of the defendant’s trading that were shown to the jury, saying there was “a large pattern of spoofing activity by Gregg Smith.”

Testimony will resume Tuesday.

The case is US v. Smith et al, 19-cr-00669, US District Court, Northern District of Illinois (Chicago)

Updated: 7-19-2022

JPMorgan Trader Spoofed So Fast Colleagues Urged Ice On Fingers

* Top Gold Trader’s Protege Tells Jury Of Routine Bogus Orders
* Three Ex-Precious Metals Employees On Trial For Fraud

Gregg Smith clicked his computer mouse so rapidly to place and cancel bogus gold and silver orders for Bear Stearns Cos. and later JPMorgan Chase & Co. that his colleagues would joke that he needed to put ice on his fingers to cool them down afterward, or that he must be double-jointed.

That’s how his former protege, Christian Trunz, described for jurors how he watched Smith use so-called “spoof” trades — large orders intended to manipulate prices that were quickly canceled.

Trunz, 37, said he learned how to spoof from Smith and others after joining Bear Stearns out of college in 2007, shortly before the bank was acquired by JPMorgan.

To place and cancel the orders fast required a “rapid succession of clicking on a mouse,” and Smith, the desk’s top trader, was particularly good at it, Trunz told a federal jury in Chicago on Tuesday.

That clicking was easy for everyone on the desk to hear, according to Trunz, who sat next to Smith for years and said he often pulled his chair alongside his mentor’s computer screen to watch him trade.

Trunz is the third former trader to testify at the fraud and racketeering trial of Smith and two senior employees at JPMorgan’s precious-metals desk: Managing Director Michael Nowak and hedge-fund salesman Jeffrey Ruffo.

They’re accused of systematically cheating to help themselves and their top clients for years.

“This was an open strategy on the desk,” said Trunz, who has pleaded guilty to spoofing charges and is cooperating with prosecutors. “It wasn’t hidden.”

Speed was essential to successfully spoof, especially as a growing share of the precious-metals market was being dominated by firms using computer algorithms to buy and sell futures contracts in fractions of a second, according to Trunz.

“We fully believed this was a battle” between the bank and the so-called algos, Trunz said. “This was the first time when machines were interacting with humans on a trading platform. It was man versus machine.”

The goal of spoofing was to trick the rival computers into buying or selling to benefit JPMorgan’s position, by using a large volume of bogus orders to create the false market impression, he said.

“Those trades were deceptive,” Trunz said of the thousands of spoof orders the desk placed over the years. “They were used to bring out a reaction from those algorithms to get what we needed done.”

Trunz, whose father worked at JPMorgan for decades and was a senior executive, was trading precious metals for the bank in New York, Singapore and London from 2007 to 2019, when he pleaded guilty.

He said he idolized Smith, Nowak and Ruffo and sought to learn as much as he could from them so he could emulate their success.

Trunz said he sat next to Smith for five years until 2013, and when he moved to London in 2014, worked closely with Nowak, who he got to know well.

Ruffo was “the best salesman on the street,” with a long list of big clients, and was the primary reason JPMorgan had kept the Bear Stearns team intact after the acquisition, Trunz said.

Smith spoofed almost every day, Nowak did so about once a week, and Ruffo, while not a trader, would sit next to Smith and encourage him to spoof the market to execute client orders at the best possible prices, Trunz said.

It wasn’t unusual to hear Ruffo urge Smith to “keep clicking, keep going,” with a spoof trade, Trunz said.

“We all traded that way,” Trunz said. “We utilized that strategy on the desk to make money for ourselves and for our clients.”

Smith would sometimes spoof markets one way, then the other when filling orders for Ruffo’s top hedge fund clients to make sure they felt like they were getting a good price, Trunz said.

Prosecutors showed jurors internal chat logs between Ruffo and Moore Capital Management’s Christopher Pia from April 3, 2008, in which the hedge fund trader had directed Ruffo to sell 100,000 ounces of silver for him.

Smith filled the order, then rapidly placed a large number of additional sell orders that he quickly canceled as the price of silver dropped.

Ruffo then congratulated Pia on his decision to sell. “Did well with that, lower already,” he said in a message.

Asked to explain why Smith made the spoof trades, Trunz said, “Gregg looks like he was able to execute at a great level. Chris Pia looks like he made a great decision to sell 100,000 ounces when he did.” Trunz added, “Everybody has an ego.”

The case is US v. Smith et al, 19-cr-00669, US District Court, Northern District of Illinois (Chicago)

Updated: 7-20-2022

JPMorgan Gold Trader Says Boss Coached Him on Spoofing Lie

* ‘You’re Not Going To Turn Around And Plead Now, Are You?’
* Three Ex-Precious Metals Employees On Trial For Fraud

A former JPMorgan Chase & Co. precious-metals trader said his boss coached him to lie to compliance officials about price-manipulating orders and later counseled him against pleading guilty as prosecutors were preparing criminal charges against top executives on the trading desk.

Christian Trunz, who spent more than a decade at JPMorgan, told a Chicago jury that so-called spoof orders he’d placed and quickly canceled in platinum and palladium markets had sparked a four-month probe by bank officials.

Trunz said Michael Nowak, the managing director who ran the precious-metals business, advised him to mislead investigators about his intent to execute the trades.

“Mike made it clear to me that this was something that could get me fired,” Trunz, 37, said Wednesday, even though the bogus orders were a trading strategy used by everyone on the desk and a method he’d learned after joining the precious-metals team out of college. “I wanted to keep my job,” he said, so he decided to lie to bank investigators.

Before Trunz was to meet with compliance officials, he said Nowak urged him to say “every order you put into the market you intended to trade.”

But that wasn’t true, Trunz said, because he and others at JPMorgan routinely placed large orders in gold and silver that they never intended to execute to push prices up or down. “These trades were the exact trading pattern we’d used for years.”

Trunz, who pleaded guilty in 2019 to spoofing conspiracy and is cooperating with prosecutors, is the third former trader to testify at the fraud and racketeering trial of Nowak; Gregg Smith, JPMorgan’s top gold trader; and hedge-fund salesman Jeffrey Ruffo.

They’re accused of systematically manipulating precious-metals markets with spoof orders to help themselves and big hedge-fund clients for years.

Nowak was once the most powerful person in the gold market. He ran the trading desk for a bank with some of the biggest hedge-fund clients and often dominated order flow in precious-metals futures.

Nowak, Smith and Ruffo are accused of operating a criminal enterprise, facing racketeering charges more often used by prosecutors against members of the mafia or street gangs.

According to Trunz, who was working in London for JPMorgan at the time, the advice Nowak gave him about telling investigators that he intended to execute his palladium trades was “not an ask” but a subtle message to lie.

Trunz said the experience was unnerving because his mentors, Nowak and Smith, had never told him spoofing wasn’t permitted.

“I was nervous, shocked,” Trunz said. “It was a coaching moment and it was, ‘OK. Got it.’” He added, “Mike, I think he liked me. This was a way for me to understand how I was going to get through this four-month compliance review and be relatively unscathed.”

After the review was complete, Trunz said he got a written warning, was placed on probation and had his bonus docked. He kept his job, but likely would have lost it if he’d told the truth, he said.

In 2014, two years before the probe, Trunz had earned about $240,000 in base pay and a bonus of $205,000, according to records presented in court. In 2016, his bonus was about $72,000.

Later, JPMorgan included his platinum and palladium trades as an example of banned market-manipulating activity in the bank’s compliance manual. Trunz said he agreed to allow the use of his trades in the manual because others needed to know it wasn’t permitted.

While he stop spoofing in 2016, Trunz said he became a “nervous wreck” after he was stopped by FBI agents in the Fort Lauderdale, Florida, airport in December 2018 on his way back from his honeymoon to Puerto Rico.

He said he lied when he denied spoofing, telling the agents the claims were ridiculous, but became increasingly concerned he could face prosecution.

Trunz said he confided in Nowak, who encouraged him to hold fast.

“You’re not going to turn around and plead now, are you?” Nowak said, according to Trunz.

“We all have our reasons for trading the way we did,” Nowak told him. But Trunz told jurors that wasn’t true. Everyone on the desk had the same reason for spoofing, because it was part of their strategy to move prices in the direction they wanted, he said.

“My impression at the time was that he was trying to protect me, that whatever happens, we’re going to win…to keep me on board,” Trunz said.

During his testimony Tuesday and Wednesday, Trunz described several examples of his spoofing trades, and explained how they mimicked those by Smith, Nowak and others on the precious-metals desk at JPMorgan.

Trunz was hired in 2007 on the precious-metals desk at Bear Stearns Cos. in New York after graduating from college, shortly before the firm was acquired by JPMorgan the following year. He moved to the bank’s Singapore office in 2013 and then London in 2014, trading precious metals.

During cross-examination on Wednesday, defense lawyers emphasized as they have since the trial began almost two weeks ago, that there may be other explanations for what Nowak, Smith and Ruffo were doing.

“In all of the years you worked with Mr. Smith, he never once sat you down and in a single conversation said this is how you spoof?” asked Jonathan Cogan, Smith’s attorney. “Never said I am trying to manipulate the market? Never heard him say I am going to rip people off?”

“No,” Trunz replied to each question.

The case is US v. Smith et al, 19-cr-00669, US District Court, Northern District of Illinois (Chicago)

Updated: 7-25-2022

Banks Start Using Information-Sharing Tools To Detect Financial Crime

Technology can help banks team up to find money launderers, but the legal basis for information-sharing is murky in many countries.

Banks have long struggled to spot illicit transactions among the multitudes they process daily because criminals move dirty money from one institution to another to cover their tracks, leaving compliance staff with only a partial road map of their actions.

That has started to change, with financial institutions and service providers in several countries creating information-sharing platforms and messaging tools with the potential to vastly improve the detection of money laundering and fraud.

A research project supported by the Royal United Services Institute, a U.K. think tank, has identified at least 15 information-sharing initiatives around the world.

Although most countries don’t allow banks to share information, several recent efforts have shown significant success in identifying crime, according to the Future of Financial Intelligence Sharing project.

Countries with information-sharing platforms include the U.S., U.K., the Netherlands and Estonia. The types, uses and origins of the platforms studied by FFIS vary widely. Some focus on specific problems, like money mules, or simply offer secure messaging to participating banks.

Others have brought sophisticated technology to bear to help banks comply with far-reaching anti-money-laundering obligations.

One cutting-edge example is Transactie Monitoring Nederland (TMNL), a joint venture of the five largest Dutch banks. The utility-style platform, launched in July 2020, allows participating banks such as ABN AMRO Bank NV, ING Groep and Rabobank to pool encrypted transactional data about customers.

Consulting with the banks and the Netherlands’ financial intelligence unit, TMNL has developed models that let the group search shared data for potentially unusual transaction patterns that could indicate money laundering or terrorist financing.

Privacy-enhancing technology permits TMNL to generate alerts from the pool of anonymized data it oversees while shielding the identity of bank clients.

TMNL, a private entity with about 70 employees, is tight-lipped about initial results at identifying potential money-laundering activity. Chief Executive Norbert Siegers said TMNL is still experimenting and hasn’t yet developed outcome metrics.

So far, the platform has generated around 2,000 alerts, which were sent to relevant banks for further investigation, he said.

“We are basically an analytics factory, where we create [anti-money-laundering] models to find potential patterns, but the investigation of the alert is still done by the banks,” he said.

Anti-money-laundering rules require financial institutions to monitor transactions and report suspicious activity to regulators. Many banks have monitoring software to help flag potentially suspicious transactions, but the hope is that by pooling data, TMNL will spot patterns its members wouldn’t otherwise see.

In some cases, alerts generated by TMNL’s models have led to banks filing suspicious activity reports with the Dutch financial intelligence unit that, in turn, prompted further investigation by law enforcement authorities, Mr. Siegers said.

Hennie Verbeek-Kusters, the director of the Netherlands’ financial intelligence unit, applauded TMNL’s work. “This is really a very straightforward way to take information exchange and cooperation between banks to the next level,” she said. “We are very positive about the initiative.”

An early pilot exercise described in the FFIS study allowed TMNL and Dutch authorities to cut the time needed to map out a complex anti-money-laundering network from three weeks to two days.

Ms. Verbeek-Kusters said the partnership with TMNL involved a lot of trial and error, as the group refined its models to produce more useful results.

“It finally led to really very good reporting from the several banks, to analysis that we might have gotten to in the traditional way of working but it would have taken us months more,” she said.

One limitation of TMNL is that it is currently focused exclusively on business clients of banks. While the platform uses technology that allows only its member banks to decipher its alerts, privacy protections are much tougher for individual bank customers than for legal entities such as companies.

Data privacy concerns are one of the primary obstacles to more widespread adoption of information-sharing platforms in most countries. For TMNL, the next step would be to recruit more banks and add transactional data from individual customers.

But that would require legislation clarifying how such information sharing relates to the European Union’s stringent data protection rules, a move the Netherlands is considering, Mr. Siegers said.

The U.S. was among the first countries to give financial institutions a legal gateway for sharing information about customers to identify money laundering or terrorist financing activity, with the enactment of the USA Patriot Act in the aftermath of the Sept. 11 terrorist attacks.

But such information-sharing is voluntary, and use of the gateway has been slow to pick up.

The legislation has led to the creation of several platforms and partnerships by service providers and financial institutions. Verafin Inc., a software company offering a transaction-monitoring and case-management product, has developed a messaging portal through which about 2,500 banking users can submit information requests to each other.

Oracle Corp. is building a similar tool in partnership with Duality Technologies Inc., which would include automated query and response capabilities—meaning a requesting financial institution wouldn’t need to reveal the existence of their query to the party from which they are requesting information.

A more formal association of five of the largest U.S. banks has also produced some interesting results, according to the FFIS study.

The partnership, launched in 2015, enables participating banks to pool investigative resources, generating thousands of new subjects of potential interest to law enforcement.

Still, most such collaboration in the U.S. and elsewhere remains fairly limited, according to the study. Nick Maxwell, the head of the FFIS program, said the main obstacles are pre-existing legal frameworks.

Governments, he said, need policies that explicitly pave the way for further information-sharing initiatives.

“Technology is not the issue,” he said. “It’s really about whether the country has a clear policy environment to support sharing, which is rare.”

Updated: 7-26-2022

Money Laundering Seen A High Risk Threat For South African Banks

South Africa’s banking regulator said there is a high risk of money laundering and terrorist financing activity in the industry, citing the extensive use of cash and exposure to overseas lenders.

The Prudential Authority of the South African Reserve Bank in a report published in May 2020 had assessed the risk to the banking sector as medium to high.

In a report published on Tuesday, the regulator said the nation’s five largest banks, which control 89% total assets, were most at risk.

“One of the large banks indicated a total of 8,388 clients with unknown citizenship, which poses a high risk within the sector,” the authority said in the report.

Large banks are “still targeted by criminals as clients use cash extensively and can use non-face-to-face methods such as automated teller machines to deposit cash, while the source of funds and details of depositors are largely unknown.”

The latest report may help banks improve their procedures, just as the Africa’s most-industrialized nation battles to stay off the Financial Action Task Force’s gray list.

The watchdog found South Africa had shortcomings in combating money laundering and the financing of terrorism, and gave the government until October to show a credible plan to address the deficiencies.

Updated: 7-27-2022

Barclays Latest Bank To Make Provision For US WhatsApp Fine

* British Lender Said It’s Booking A $200 Million Charge

* Credit Suisse, Deutsche Bank Also Took Charges This Week

European banks are counting the cost of their employees’ messaging habits, which have caught the attention of US regulators in a global investigation.

Barclays Plc said in second-quarter results Thursday that it has reached an agreement with US regulators to pay a $200 million penalty in connection to a probe into business communications by employees “over electronic messaging channels that had not been approved by the bank.”

The proposed resolution will see Barclays pay a $125m penalty to the Securities and Exchange Commission and a $75m fine to the Commodity Futures Trading Commission.

Bloomberg reported Wednesday the bank was working with US regulators in relation to the investigation.

The British lender’s disclosure comes after Credit Suisse AG announced a $200 million charge in its earnings on Wednesday. Deutsche Bank AG increased its regulatory enforcement provisions by 165 million euros ($167 million) on Wednesday, which it said covered issues including the probe on unapproved devices and record-keeping requirements.

The German lender is rolling out new software on corporate mobile phones that archives WhatsApp messages, while members of the management board have agreed to pay cuts of about 75,000 euros each as they take responsibility for the widespread use of unapproved messaging among staff, Bloomberg has reported.

UBS Group AG on Tuesday also confirmed it was cooperating with US authorities.

The finance industry has long prohibited staff from doing business on non-approved platforms in order to comply with record-keeping rules, yet regulators have found multiple examples of employees communicating on personal accounts.

HSBC Holdings Plc, which said in February it was part of the US probe, recently fired a trader in London after scrutinizing the personal mobile phones of some staff.

Regulators are poised to extract about $1 billion in fines from the five biggest US investment banks.

JPMorgan Chase & Co. settled its case in December by agreeing to pay $200 million, while Morgan Stanley disclosed earlier this month that it expects to pay a similar amount. Citigroup Inc., Goldman Sachs Group Inc. and Bank of America Corp. are also preparing for penalties.

Updated: 7-28-2022

JPMorgan Must Face Former Compliance Employee’s Lawsuit, Judge Rules

The behavior that the bank claims justified Shaquala Williams’s termination was inseparable from activity protected under a whistleblower anti-retaliation law, Judge Jed Rakoff said.

A judge in New York declined to block a lawsuit brought against JPMorgan Chase Bank NA by a former compliance employee who says she was fired for raising concerns about the bank’s compliance program.

Shaquala Williams, a former JPMorgan vice president, sued her former employer last year, arguing that the concerns she raised, including that the bank had insufficient sanctions screening and anticorruption practices, were protected under a whistleblower anti-retaliation law.

Ms. Williams’s lawsuit accused JPMorgan of violating the anti-retaliation law by firing her and by taking actions that caused the New York State Attorney General’s office to withdraw a job offer.

Ms. Williams later secured a job at Wells Fargo & Co. similar to the one she held at JPMorgan, according to court filings.

District Judge Jed Rakoff on Wednesday said he was throwing out the claim that JPMorgan’s action had adversely impacted Ms. Williams’s job offer. But he said the claim that she was improperly fired in the first place could proceed to a trial currently scheduled for December.

On their face, the facts of the case and the sequence of events supported an inference that Ms. Williams may have been fired for the issues she was raising internally, the judge said.

Ms. Williams was hired to work on JPMorgan’s global anticorruption compliance team in New York in July 2018. Within weeks, she began voicing complaints about the bank’s compliance software, saying it was ineffective at sanctions screening and assigned inaccurate risk ratings to business partners in sanctioned regions.

She later began raising concerns about inaccurate record-keeping, illicit payments to third-party intermediaries and misleading reports to regulators, among other concerns, according to an agreed-upon sequence of events described in court filings.

Repeated complaints from Ms. Williams caused friction with supervisors, and she was fired in November 2019.

In a bid to avoid the lawsuit, JPMorgan had argued that Ms. Williams’s compliance concerns weren’t a contributing factor to her termination. The bank also argued it was able to demonstrate that it would have fired her for performance reasons anyway.

A bank spokesman on Thursday declined to comment on Judge Rakoff’s ruling.

The judge ultimately disagreed with JPMorgan’s arguments. The allegedly problematic behavior the bank described, he said, was inextricably intertwined with activity protected under the whistleblower anti-retaliation law, supporting Ms. Williams’s case.

Ms. Williams’s complaints occurred when JPMorgan was subject to an administrative settlement with the U.S. Securities and Exchange Commission and a nonprosecution agreement with the Justice Department over violations of the U.S. Foreign Corrupt Practices Act.

The agreements, which required the bank to update authorities on efforts to strengthen its compliance program, stemmed from an investigation by the government into an alleged scheme to win business in China by giving jobs to relatives and friends of Chinese government officials.

Updated: 7-29-2022

JPMorgan’s Gold Chief Caught Red-Handed Manipulating Precious Metal

* Prosecutors Allege Gold Desk Spoofed To Manipulate Prices

Michael Nowak, the man who led the highly profitable JPMorgan Chase & Co. precious-metals desk, isn’t the cheater and crook that federal prosecutors painted him out to be in a massive market-rigging case against him and two others, his lawyer told a jury in Chicago.

Prosecutors relied on bad evidence and dubious witnesses to support their theory that Nowak led a racketeering enterprise, defense attorney David Meister said.

Testimony during a three-week trial showed something very different, revealing Nowak was an expert trader and leader who encouraged his team and openly worked with bank compliance officials to stamp out so-called spoofing orders on his desk, the attorney said.

“Mike is not a criminal mastermind from the government’s narrative,” Meister said during closing arguments Friday.

The defense statements come a day after the prosecution wrapped up its case accusing Nowak, top trader Gregg Smith and salesman Jeffrey Ruffo of working together at the world’s biggest bank to earn profits for the precious-metals desk by manipulating markets from 2008 to 2016.

Prosecutors claimed Thursday that Nowak was the “boss” of the conspiracy to use bogus buy and sell orders that he and others quickly canceled and never intended to trade to push prices in the direction they wanted.

Nowak and Smith are charged with racketeering conspiracy as well as conspiring to commit price manipulation, wire fraud, commodities fraud and spoofing. Ruffo is charged with racketeering and conspiracy. They face years in prison if convicted, and the case is the biggest so far in the US government crackdown on market manipulation since the financial crisis.

‘Worst Spoofer’

Meister, on Friday, said the defense team’s analysis of 100 different instances of spoofing alleged by the government showed that Nowak’s big, scaled orders were executed about 25% of the time.

“If he was really intending to avoid execution all the time, that stat would make him just about the worst spoofer in the world,” Meister said.

Lawyers for all three defendants attacked the credibility of two junior members of the JPMorgan team who testified for the government. Christian Trunz and John Edmonds, who have already pleaded guilty, described how the bank’s precious-metals desk used the strategy for years.

The defense attorneys said Trunz and Edmonds had an incentive to tell the prosecutors what they wanted to hear, so as to avoid prison.

Ruffo’s lawyer, Bethany Biesenthal, said it’s not a crime to be a good salesperson or for her client to have sat next to Smith and trust in his trading strategies. She also asked jurors to consider the witnesses the government never called to the stand: including other JPMorgan sales staff, the hedge fund clients, bank compliance officials. Why didn’t they do that, she asked.

“The conspiracy didn’t actually exist,” Biesenthal said. “There has to be real hard evidence. It didn’t exist just because they say it did. They’ve got to show it to you.”

On Thursday, the lawyer for Smith said his client’s alleged spoof orders were legitimate, and that there are other explanations for entering large orders to buy and sell futures contracts at the same time on behalf of clients.

Spoof trades are buy or sell orders placed and quickly canceled, with the trader having no intention of executing them.

‘Conspiracy Happened’

In an hour-long rebuttal, federal prosecutor Avi Perry pushed back against defense claims that the entire case was a set up by the government — built through cherry picked trading data and forced confessions from former traders who previously pleaded guilty.

“Only one of two things happened here,” Perry said. “Either the government strong-armed three innocent men into pleading guilty and we spoon fed them specific lies and specific phrases to say on the stand. Either that happened or this conspiracy happened.”

In a direct response to Meister’s earlier argument that Nowak committed no crimes, Perry pointed out that during his time running the desk, four of his traders were accused of spoofing the market. The prosecutor said Nowak spoofed the markets and lied to regulators.

Perry also reminded the jury of the conversation Trunz testified about, between the junior trader and Nowak shortly after they learned that Edmonds had pleaded guilty and was cooperating with prosecutors. Trunz said Nowak coached him not to cooperate.

“They said he doesn’t seem like some racketeer,” Perry said. “You know what a racketeer boss says: ‘you’re not going to plea are you’. That’s who Mike Novak is.”

Jurors began their deliberations late Friday afternoon and are scheduled to resume on Monday morning.

The case is US v. Smith et al, 19-cr-00669, US District Court, Northern District of Illinois (Chicago)

Updated: 7-31-2022

JPMorgan’s Gold Manipulation Secrets Revealed In Court

* Business Made More Than $100 Million Each Year From 2008
* Defendants’ Compensation Drew Gasps From Chicago Jury

The trial of JPMorgan Chase & Co.’s former head of precious metals has offered unprecedented insights into the trading desk that dominates the global gold market.

Michael Nowak, who ran precious metals trading at JPMorgan for over a decade, is being tried in Chicago along with colleagues Gregg Smith and Jeffrey Ruffo for conspiring to manipulate gold and silver markets.

The focus now is on the jury, which began deliberations late Friday, but the proceedings have already shone a new light on the inner workings of the business, from its profitability and market share to its largest clients.

Annual Profits

The court was shown internal figures detailing the bank’s annual profits from precious metals, the first time such detailed information has ever been made public.

JPMorgan’s earnings reports don’t break out the results from the precious metals desk, or even its broader commodities unit. A spokesperson declined to comment on the disclosures in the trial.

In summary: the business is a consistent moneymaker for JPMorgan, notching up annual profits between $109 million and $234 million a year between 2008 and 2018.

The lion’s share of that comes from trading in financial markets, but the bank does plenty of physical business as well. Trading and transporting physical precious metals makes the bank about $30 million a year on average.

Still, the profits disclosed in the trial have been overshadowed more recently: in 2020, JPMorgan made $1 billion in precious metals as the pandemic created unprecedented arbitrage opportunities, according to people familiar with the matter.

Market Share

JPMorgan holds tens of billions of dollars in gold in vaults in London, New York and Singapore. It is one of four clearing members of the London market, where global gold prices are set by buying and selling metal held in a few London vaults — including JPMorgan’s and the Bank of England’s.

JPMorgan is the biggest player among a small group of “bullion banks” that dominate the precious metals markets, and internal documents presented by prosecutors provided a glimpse of just how dominant a role the bank has played.

In 2010, for example, 40% of all transactions in the gold market were cleared by JPMorgan.

Big Bonuses

JPMorgan’s top precious metals employees on the desk were remunerated handsomely, and some jurors audibly gasped when the court was told how much the defendants had earned.

Ruffo, the bank’s hedge fund salesman, was paid $10.5 million from 2008 to 2016. Smith, the top gold trader, got $9.9 million. Nowak, their boss, made the most of all: $23.7 million over the same period.

Their pay was linked to the profits they made for the bank. FBI agent Marc Troiano, citing internal JPMorgan data, told the court that the total profit allocated to Ruffo from 2008 to 2016 was $70.3 million.

Smith generated about $117 million over the same period, while Nowak made the bank $186 million, including $44 million in 2016.

Key Clients

Hedge funds like Moore Capital, Tudor Investment Corp and George Soros’s eponymous firm were some of the desk’s most important clients.

Getting access to those clients was the main reason for retaining Ruffo after the bank’s acquisition of Bear Stearns, according to ex-trader Christian Trunz, who testified against his former bosses and referred to Ruffo as the best salesman on Wall Street.

Being a top client of JPMorgan came with perks: employees at the funds could be provided with free tickets to the US Open, according to messages involving Nowak shown during the trial.

Another set of important clients were central banks, which trade gold for their reserves and are among the biggest players in the bullion market. At least ten central banks held their metal in vaults run by JPMorgan in 2010, according to documents disclosed in court.

Updated: 8-10-2022

Ex-JPMorgan Traders Convicted In Federal Fraud Trial

Justice Department had alleged that the precious-metals traders spoofed gold futures for years.

A federal jury in Chicago convicted two former traders of JPMorgan JPM 2.10%increase; green up pointing triangle

Chase & Co.’s precious metals desk who had been charged with manipulating gold prices, finding they used misleading orders to rig prices.

The convictions are the capstone of a seven-year Justice Department campaign to punish a style of deceptive trading in futures markets known as spoofing.

The rapid-fire strategy was prevalent at some Wall Street banks before Congress outlawed spoofing in 2010, and persisted even after its prohibition, according to prosecutors.

JPMorgan paid $920 million in 2020 to settle regulatory and criminal charges against the bank over the traders’ conduct.

After deliberating for more than eight days, the jury convicted Gregg Smith, once the bank’s top gold trader, and Michael Nowak, the former head of its precious-metals desk, of charges including spoofing and wire fraud.

A sales executive who worked with them, Jeffrey Ruffo, was acquitted.

Spoofing is defined as sending orders that traders intend to cancel. The misleading orders are a ruse to trick the market into thinking supply or demand have changed. That causes other traders to update their prices, benefiting the spoofer.

Prosecutors used charts of trades and orders to show a pattern they said was spoofing. Proving the case was harder than in some prior spoofing trials because the Justice Department lacked chats or other messages to reveal the traders’ intent for their orders.

In earlier spoofing cases, prosecutors found electronic messages that showed traders bragging about spoofing. The case against Mr. Ruffo was also different—he wasn’t a trader but was nonetheless charged with involvement in a conspiracy.

The jury cleared all three defendants of conspiracy and racketeering charges. The latter count indicated prosecutors believed the precious-metals desk essentially functioned as a criminal enterprise inside JPMorgan.

David Meister, a lawyer for Mr. Nowak, said, “While we are gratified that the jury acquitted Mr. Nowak of racketeering and conspiracy, we are extremely disappointed by the jury’s verdict on the whole, and will continue to seek to vindicate his rights in court.”

Guy Petrillo, a lawyer for Mr. Ruffo, said, “We always believed in Jeff’s innocence, and we are grateful that these unfortunate charges are now behind him.” Attorneys for Mr. Smith didn’t return a request for comment.

In addition to charts, prosecutors used a trio of cooperating witnesses—former traders at JPMorgan or other banks—who testified over the course of three weeks about how they spoofed and watched Messrs. Smith or Nowak do the same thing to get better prices on gold futures trades and make more money for the bank.

Mr. Smith was a rapid-fire trader who used his mouse to manually enter and cancel orders so fast that colleagues joked he needed to put ice on his fingers to cool them down, according to trial testimony.

Mr. Smith spoofed “all the time,” according to Christian Trunz, a former junior trader who pleaded guilty in 2019 and testified that he learned the tactic by looking over Mr. Smith’s shoulder.

Attorneys for Mr. Smith told jurors that prosecutors cherry-picked a handful of trades to concoct a misleading theory of why he traded so fast and successfully.

Mr. Nowak was the head of JPMorgan’s precious-metals desk during the period scrutinized by prosecutors. He also spoofed, but less than Mr. Smith, according to the traders who testified.

Prosecutors alleged that spoofing was critical to JPMorgan’s ability to serve hedge-fund clients such as Moore Capital Management, Soros Fund Management LLC and Tudor Investment Corporation.

Mr. Ruffo, who was acquitted, was the bank’s salesman dealing with those big traders and sometimes encouraged spoofing to get better prices for them, according to John Edmonds, a former JPMorgan trader who pleaded guilty in 2018 and testified for prosecutors.

Defense attorneys during the trial sought to undermine the credibility of the cooperating witnesses, pointing out that they had misled authorities in the past about their trading.

Mr. Edmonds acknowledged lying to FBI agents when they first approached him about his trading. Mr. Trunz admitted lying to JPMorgan’s compliance team about spoofing in 2016.

Mr. Nowak’s attorneys said the charges against him weren’t credible. He traded differently than Mr. Smith and used gold futures to offset the risk of his options positions, they said.

After a JPMorgan trader in London was fired for spoofing in 2013, Mr. Nowak told his traders that if any of them were doing the same thing, he wanted to know.

The DOJ’s fraud section, which tried the case, won convictions in two prior spoofing trials in Chicago, where the futures exchange operated by CME Group Inc. is based.

Former gold and silver traders at Deutsche Bank AG and Bank of America Corp. were convicted of spoofing-related crimes in 2020 and 2021, respectively.

In the Deutsche Bank case, the defendants were sentenced to serve one year and a day in prison. The former Bank of America traders haven’t been sentenced. Messrs. Smith and Nowak will be sentenced at a future date.

Updated: 8-19-2022

Banks Nearing $1 Billion Settlement Over Traders’ Use of Banned Messaging Apps

Federal regulators intend to levy the fines over alleged breach of rules that require retention of business records.

Many of Wall Street’s biggest banks are nearing agreements to pay as much as $200 million each and admit that their employees’ use of personal messaging apps such as WhatsApp violated regulatory requirements, according to people familiar with the matter.

The total amount of fines will likely top $1 billion, the people said, and will be announced by the end of September. The roster of banks poised to pay $200 million each includes Bank of America Corp., Barclays PLC, Citigroup Inc., Deutsche Bank AG, Goldman Sachs Group Inc., and Morgan Stanley and UBS Group AG, the people said.

Jefferies Financial Group Inc. and Nomura Holdings Inc. are nearing settlements with regulators but will pay lower fines, reflecting their smaller size, the people said.

The Securities and Exchange Commission and the Commodity Futures Trading Commission plan to announce the deals with the banks by Sept. 30, the end of the government’s current fiscal year. That would put the penalties in the government’s annual enforcement statistics.

Spokesmen for the SEC and CFTC declined to comment. Spokespeople for the banks declined to comment. A spokesman for UBS couldn’t be reached.

The agencies’ investigations examined how traders and brokers used encrypted apps such as WhatsApp to discuss investment terms, client meetings and other business.

Under SEC and CFTC rules, brokerage firms are supposed to preserve and monitor their employees’ written communications, which creates a paper trail for regulators who check compliance with investor-protection laws.

Services such as WhatsApp and Signal give priority to privacy, and can be set up to automatically delete messages after a number of days or after a chat has been read.

Traders and brokers aren’t supposed to use such products to conduct the firm’s business. The practice became more common—and harder to detect—during the early stages of the pandemic, when employees switched to working entirely from home.

Regulators and compliance experts also worry that spreading a bank’s business across personal and business devices raises the risk that hackers will find a way to steal lucrative commercial secrets, said Mark Berman, a regulatory consultant at CompliGlobe, which serves overseas companies that have to follow SEC rules.

Fines above $100 million are outliers in both Democrat and Republican administrations, generally only assessed against the biggest market participants and often based on claims of investor harm. The median fine ordered in the 2020 fiscal year, the last full year of the Trump administration, was $194,000.

The record-keeping enforcement initiative likely won’t end with the big banks, some of the people said, because the SEC is now probing whether regulated money managers broke the same rules.

“The fines are high to try to serve as a deterrent,” Mr. Berman said. “On the other hand, Democrats like to increase the amount of fines. In this case it is probably more of the former, because they have to send a really strong message.”

The anticipated settlements are patterned on a deal that JPMorgan Chase & Co.’s brokerage arm reached with the SEC and CFTC in December, the people said. J.P. Morgan Securities LLC paid $200 million–$125 million to the SEC and $75 million to the CFTC—over the breakdown in record-keeping diligence. The SEC said the failure was “firm-wide, and involved employees at all levels of authority.”

JPMorgan’s policies prohibited the use of WhatsApp for business. But regulators identified over 100 people at J.P. Morgan Securities and tens of thousands of messages that weren’t properly retained by the firm, according to the SEC’s settlement order.

Bank of America, Morgan Stanley and Barclays have disclosed in the past month that they would pay $200 million, the same amount as JPMorgan, to resolve the investigations.

Barclays said in a securities filing that regulators found its business units “failed to comply with their respective record keeping and supervisory obligations, where such communications were sent or received by employees over electronic messaging channels that had not been approved by the bank for business use by employees.”

Several other banks have disclosed they are negotiating with the SEC and CFTC to settle the probes but haven’t said how much they would pay. Goldman Sachs, for instance, said this month it was “in advanced discussions with the SEC and CFTC” to resolve the investigations. A Goldman Sachs spokeswoman declined to comment.

The SEC’s push for big fines has irked many defense lawyers and legal executives at the banks, according to people familiar with the negotiations. That’s because the investigations don’t allege any fraud or harm to clients.

SEC officials have said the practice of using personal-messaging apps was improper and undermined their ability to conduct investigations. In the JPMorgan settlement, the SEC said the bank didn’t always search the personal devices of its employees when it responded to subpoenas and other requests for information.

Updated: 8-20-2022

JPMorgan Gold Traders Found Guilty After Long Spoofing Trial

* Jury Finds Nowak, Smith Used Bogus Orders To Manipulate Prices

* A Third Defendant, Gold Desk Salesman Jeffrey Ruffo, Acquitted

The former head of the JPMorgan Chase & Co. precious-metals business and his top gold trader were convicted in Chicago on charges they manipulated markets for years, handing the US government a win in its long crackdown on bogus “spoofing” orders.

Michael Nowak and Gregg Smith were found guilty Wednesday by a federal jury after a three-week trial and more than eight days of deliberations. Prosecutors presented evidence that included detailed trading records, chat logs and testimony by former co-workers who “pulled back the curtain” on how Nowak and Smith moved precious-metals prices up and down for profit from 2008 to 2016.

A third defendant, Jeffrey Ruffo, who was a salesman on the bank’s precious-metals desk, was acquitted of charges he participated in the conspiracy.

The case was the biggest yet in a crackdown by the US Justice Department. Nowak, the managing director in charge of the desk, and Smith, its top trader, were convicted of fraud, spoofing, market manipulation.

The government alleged the precious-metals business at JPMorgan was run as a criminal enterprise, though the jury acquitted all three men of a separate racketeering charge.

“They had the power to move the market, the power to manipulate the worldwide price of gold,” prosecutor Avi Perry said during closing arguments.

US District Court Judge Edmond Chang said Nowak and Smith will be sentenced next year. Each faces decades in prison, though it may be far less. Two Deutsche Bank AG traders convicted of spoofing in 2020 were each sentenced to a year in prison.

“While we are gratified that the jury acquitted Mr. Nowak of racketeering and conspiracy, we are extremely disappointed by the jury’s verdict on the whole, and will continue to seek to vindicate his rights in court,” his lawyer, David Meister, said in an email.

An attorney for Smith didn’t respond to messages seeking comment.

Ruffo’s lawyer, Guy Petrillo, said in an email, “Mr. Ruffo, his family and we always believed in Jeff’s innocence and are grateful that these unfortunate charges are now behind him.”

JPMorgan, the largest US bank, agreed in 2020 to pay $920 million to settle Justice Department spoofing allegations against it, by far the biggest fine by any financial institution accused of market manipulation since the financial crisis.

With Wednesday’s verdict, the Justice Department has secured convictions of 10 former traders at Wall Street financial institutions, including JPMorgan, Merrill Lynch & Co., Deutsche Bank AG, The Bank of Nova Scotia, and Morgan Stanley, Assistant Attorney General Kenneth A. Polite Jr. said in a statement.

“Today’s conviction demonstrates that no matter how complex or long-running a scheme is, the FBI is committed to bringing those involved in crimes like this to justice,” Assistant Director Luis Quesada of the FBI’s Criminal Investigative Division said in a statement.

The criminal case against some of the biggest players in the precious-metals markets was closely watched. Spoofing became illegal with the passage of the Dodd-Frank Act in 2010.

“It’s something that’s been on the minds of many people that were involved in the precious-metals markets in that point in time, and I would say this verdict closes a chapter,” said Phil Streible, the chief market strategist at Blue Line Futures.

“This kind of thing had been going on for at least 15 years or more with people waiting for justice, and I never thought it would ever get closed.”

Dennis Kelleher, co-founder and Chief executive officer at Better Markets, an organization advocating stricter financial regulation, said the verdict “should signal to Wall Street’s biggest financial firms and executives that they are not above the law.”

The star witnesses at the criminal trial were former co-workers who said they participated in the spoofing activity over years. Traders John Edmonds and Christian Trunz testified about market manipulation by all three defendants at JPMorgan, while trader Corey Flaum described similar behavior when he worked with Smith and Ruffo at Bear Stearns, before it was acquired by JPMorgan in 2008.

The JPMorgan case wasn’t a complete victory for prosecutors.

All three defendants were acquitted of violating the Racketeer Influenced and Corrupt Organizations Act, a law more commonly used against gangs or mafias. Jurors didn’t agree with claims by prosecutors that the JPMorgan precious-metals desk was run as a criminal enterprise.

No witnesses or chat logs presented during the trial showed the defendants openly discussing their intent to spoof.

Racketeering charges also are part of the federal government’s case against Bill Hwang, whose Archegos Capital Management collapsed last year and cost banks billions.

The case is US v. Smith et al, 19-cr-00669, US District Court, Northern District of Illinois (Chicago)

Updated: 8-16-2022

Wall Street’s Record Fines Over WhatsApp Use Were Years In The Making

* SEC, CFTC Struggled To Access Messages, Prompting Probes

* Banks Expected To Pay $2 Billion In US Fines For Recordkeeping

Record fines that the world’s biggest investment banks are expected to pay in the coming months reflect years of frustration among US regulators that their investigations were being hampered by unmonitored messaging among bankers.

Investigators at the Securities and Exchange Commission and Commodity Futures Trading Commission were repeatedly hindered by firms not archiving communications as required, according to people familiar with the matter.

The watchdogs worried that missives on bankers’ personal phones about cutting deals, trading and courting clients were being completely lost and would ultimately make it harder to look for wrongdoing.

At the SEC, separate probes revealed a troubling dynamic: key conversations across finance were happening beyond the government’s reach, according to one of the people.

At the CFTC, similar concerns grew as officials probed whether banks were manipulating the interest rates swaps market and they found that many communications were happening outside of official channels, people said.

The scrutiny intensified at the SEC after Chair Gary Gensler took over in April 2021. After investigating JPMorgan Chase & Co. over the lapses, the regulator opened an industrywide sweep across Wall Street to figure out how many business-related communications were missing.

The crackdown is now expected to result in about 10 banks paying fines totaling around $2 billion, with lenders from Goldman Sachs Group Inc. to Barclays Plc saying they expect comparable penalties to JPMorgan, which announced in December it would pay $200 million in penalties to the SEC and CFTC.

That dwarfs the $15 million Morgan Stanley agreed in 2006 after being accused of similar lapses.

“There is some sticker shock,” Howard Fischer, partner at law firm Moses Singer and former senior SEC trial attorney, said of the fines.

“They’re basically as large as they can go, while both representing a great headline for the enforcement agencies without actually threatening the continuation of anyone’s business,” he added.

The speed of the dragnet caught some by surprise.

“We were not anticipating the $200 million charge,” Credit Suisse Group AG’s Chief Financial Officer David Mathers said on an earnings call last month. “I think you will be seeing that across the industry, but I wasn’t expecting that at the end of the first quarter.”

Representatives at the SEC and CFTC declined to comment.

Tense Meeting

During a tense meeting over allegations that JPMorgan executives routinely shirked surveillance duties by tapping out work communications on personal messaging platforms and email, SEC officials said previous fines shouldn’t serve as guideposts for the penalty the bank would have to pay to settle the case.

Enforcement Director Gurbir Grewal said past punishments hadn’t gotten banks to take recordkeeping seriously enough, according to people familiar with the conversation.

The irregularities included “records preservation requirements applicable to broker-dealer firms, swap dealers and futures commission merchants,” according to JPMorgan’s 2021 annual report.

The CFTC said in December it became aware of such breaches at the lender as it conducted a separate “investigation into certain of JPMorgan’s trading,” without providing further details.

Despite believing that their actions had been less severe than those uncovered at US competitors, executives at some European banks decided to try to settle as soon as possible, two people familiar with the matter said.

The regulators have taken the view that any use of personal devices for business communications is problematic, they said.

Beyond planning to pay hefty fines, some banks have already let go traders for improperly exchanging information on personal mobiles.

HSBC Holdings Plc, which said in February it was facing a US probe over the issue, recently fired a trader in London after scrutinizing the personal mobile phones of some staff in relation to the WhatsApp probe.

Fischer, the Moses Singer lawyer, expects more records preservation cases to come from the markets watchdogs as a result of much of the world of finance working from home during the early months of the Covid-19 pandemic and as more companies accept hybrid work.

There will likely be a renewed push at some of the larger banks reminding staff to operate through official channels and preserve records, but that’s unlikely to stop the widespread use of communications apps and personal devices, Fischer said.

Wall Street banks are concerned how realistically they can comply with the records rules “when they really run counter to the way a lot of business is done today,” he said.

Updated: 8-19-2022

Banks Nearing $1 Billion Settlement Over Traders’ Use of Banned Messaging Apps

Federal regulators intend to levy the fines over alleged breach of rules that require retention of business records.

WASHINGTON—Many of Wall Street’s biggest banks are nearing agreements to pay as much as $200 million each and admit that their employees’ use of personal messaging apps such as WhatsApp violated regulatory requirements, according to people familiar with the matter.

The total amount of fines will likely top $1 billion, the people said, and will be announced by the end of September. The roster of banks poised to pay $200 million each includes Bank of America Corp., Barclays PLC, Citigroup Inc., Deutsche Bank AG, Goldman Sachs Group Inc., and Morgan Stanley and UBS Group AG, the people said.

Jefferies Financial Group Inc. and Nomura Holdings Inc. are nearing settlements with regulators but will pay lower fines, reflecting their smaller size, the people said.

The Securities and Exchange Commission and the Commodity Futures Trading Commission plan to announce the deals with the banks by Sept. 30, the end of the government’s current fiscal year. That would put the penalties in the government’s annual enforcement statistics.

Spokesmen for the SEC and CFTC declined to comment. Spokespeople for the banks declined to comment. A spokesman for UBS couldn’t be reached.

The agencies’ investigations examined how traders and brokers used encrypted apps such as WhatsApp to discuss investment terms, client meetings and other business.

Under SEC and CFTC rules, brokerage firms are supposed to preserve and monitor their employees’ written communications, which creates a paper trail for regulators who check compliance with investor-protection laws.

Services such as WhatsApp and Signal give priority to privacy, and can be set up to automatically delete messages after a number of days or after a chat has been read.

Traders and brokers aren’t supposed to use such products to conduct the firm’s business. The practice became more common—and harder to detect—during the early stages of the pandemic, when employees switched to working entirely from home.

Regulators and compliance experts also worry that spreading a bank’s business across personal and business devices raises the risk that hackers will find a way to steal lucrative commercial secrets, said Mark Berman, a regulatory consultant at CompliGlobe, which serves overseas companies that have to follow SEC rules.

Fines above $100 million are outliers in both Democrat and Republican administrations, generally only assessed against the biggest market participants and often based on claims of investor harm.

The median fine ordered in the 2020 fiscal year, the last full year of the Trump administration, was $194,000.

The record-keeping enforcement initiative likely won’t end with the big banks, some of the people said, because the SEC is now probing whether regulated money managers broke the same rules.

“The fines are high to try to serve as a deterrent,” Mr. Berman said. “On the other hand, Democrats like to increase the amount of fines. In this case it is probably more of the former, because they have to send a really strong message.”

The anticipated settlements are patterned on a deal that JPMorgan Chase & Co.’s brokerage arm reached with the SEC and CFTC in December, the people said. J.P. Morgan Securities LLC paid $200 million–$125 million to the SEC and $75 million to the CFTC—over the breakdown in record-keeping diligence.

The SEC said the failure was “firm-wide, and involved employees at all levels of authority.”

JPMorgan’s policies prohibited the use of WhatsApp for business. But regulators identified over 100 people at J.P. Morgan Securities and tens of thousands of messages that weren’t properly retained by the firm, according to the SEC’s settlement order.

Bank of America, Morgan Stanley and Barclays have disclosed in the past month that they would pay $200 million, the same amount as JPMorgan, to resolve the investigations.

Barclays said in a securities filing that regulators found its business units “failed to comply with their respective record keeping and supervisory obligations, where such communications were sent or received by employees over electronic messaging channels that had not been approved by the bank for business use by employees.”

Several other banks have disclosed they are negotiating with the SEC and CFTC to settle the probes but haven’t said how much they would pay. Goldman Sachs, for instance, said this month it was “in advanced discussions with the SEC and CFTC” to resolve the investigations. A Goldman Sachs spokeswoman declined to comment.

The SEC’s push for big fines has irked many defense lawyers and legal executives at the banks, according to people familiar with the negotiations. That’s because the investigations don’t allege any fraud or harm to clients.

SEC officials have said the practice of using personal-messaging apps was improper and undermined their ability to conduct investigations. In the JPMorgan settlement, the SEC said the bank didn’t always search the personal devices of its employees when it responded to subpoenas and other requests for information.

Updated: 9-1-2022

HSBC Enforcement Order Ended (After Paying $1.9 Billion) By Federal Reserve After A Decade

* Order Was Ended On Aug. 26, The Fed Said On Thursday

* HSBC Had Agreed In 2012 To Pay $1.9 Billion To Us Authorities

The Federal Reserve ended an almost decade-long enforcement order against HSBC Holdings Plc for violations of US sanctions and anti-money laundering rules.

Without explaining the impetus for ending the order, the Fed said in a statement on Thursday that it was terminated on Aug. 26. The regulator’s 2012 action stemmed from a high-profile case against the firm for shirking US laws that allowed for Latin American drug cartels to launder money, as well as for violating rules in handling transactions from Iran, Cuba, Libya, Sudan and Burma.

In December 2012, HSBC admitted to US allegations and entered into a deferred prosecution agreement with the Justice Department. In settling the case, the bank agreed to pay a then-record $1.9 billion in penalties to US authorities.

Five years later, the Justice Department ended the oversight agreement.

“Over the last decade HSBC’s employees have worked hard to transform the bank’s financial crime risk management capabilities,” the bank said in a statement on Thursday. “We are pleased with the Federal Reserve’s decision to terminate the 2012 consent order and remain committed to our efforts to combat financial crime.”

Updated: 9-2-2022

Wells Fargo Fined $22 Million For Alleged Whistleblower Retaliation

U.S. Labor Department says the bank fired a senior manager after the person reported concerns about falsified customer information, price-fixing and interest-rate collusion.

Wells Fargo & Co. was fined more than $22 million by the U.S. Labor Department for allegedly firing a senior manager in its commercial banking unit after the employee reported concerns about misconduct to company management.

The Labor Department’s Occupational Safety and Health Administration, which imposed the penalty, ordered the bank to pay a Chicago-based whistleblower a range of damages, including back wages, interest, lost bonuses and benefits, and compensatory damages.

Wells Fargo disagrees with the finding and intends to appeal with an administrative law judge, a bank spokeswoman said. The bank’s employees are encouraged to report concerns, she said, adding that Wells Fargo conducts prompt and thorough investigations.

OSHA said Wells Fargo fired the manager illegally when the unnamed employee reported being directed to falsify customer information and expressed concerns over price-fixing and interest-rate collusion to managers and to a corporate ethics line.

The bank fired the employee in 2019, at first offering no reason for the dismissal and then claiming the termination was part of a restructuring process, OSHA said. Investigators later determined that the firing wasn’t consistent with the dismissals of other managers let go during that process.

The employee filed a complaint with OSHA, alleging retaliation under the whistleblower protection provisions of the Sarbanes-Oxley Act, the agency said.

The OSHA Whistleblower Protection Program enforces whistleblower provisions of Sarbanes-Oxley, protecting employees from retaliation after reporting workplace violations of safety and health, securities, tax, criminal antitrust and anti-money-laundering laws, among others.

The fine was a particularly large one for OSHA, said Jordan Thomas, a lawyer who helped establish the Securities and Exchange Commission’s whistleblower program who now works at law firm SEC Whistleblower Advocates PLLC.

“Whistleblower advocates view this substantial sanction as a welcome sign of life at OSHA and that Wall Street will not be given a pass on workplace violations,” Mr. Thomas said. “It is a big win that will help other similarly situated financial whistleblowers.”

San Francisco-based Wells Fargo has been the subject of other regulatory action in recent years. In 2020, it reached a $3 billion settlement with the Justice Department and the SEC over its long-running fake accounts scandal.

In September 2021, regulators fined Wells Fargo $250 million for a lack of progress in addressing longstanding issues in its mortgage business.

And in May, the bank agreed to pay $7 million in a settlement with the SEC over alleged glitches in a new anti-money-laundering system that let suspicious transactions escape initial notice.

Updated: 9-19-2022

Bankers Should Get Years In Jail For Maple’s Role In Tax Scheme, Court Told

* Frankfurt Prosecutors Deliver Closing Arguments In Maple Case

* American Banker Should Get Highest Term: 5 Years And 9 Months

Four former bankers at bankrupt Maple Bank GmbH should get as much as almost six years in prison for their role in a Cum-Ex case that allegedly cost German taxpayers 388.6 million euros ($388.1 million), prosecutors asked a German court.

One of the accused, a 58 year-old American, should get the highest term and serve five years and nine months, Frankfurt prosecutors said in closing arguments on Monday, according to a spokesman for the court.

Ex-Chief Executive Officer Wolfgang Schuck, 68, should get five years and three months, while a 51 year-old trader should get three years and nine months. Another 62 year-old banker who cooperated with prosecutors should be handed a suspended sentences, according to the prosecutors.

Prosecutors also want the men to give up the money they made while working on the deals. The court should seize 5.5 million euros from Schuck, 2 million euros form the American and 1.5 million euros from the trader.

The highest amount, 10.9 million euros, should be paid by the banker whom prosecutors want to spare jail time.

Germany’s justice system is cracking down on perpetrators of transactions dubbed as a “blatant money grab” by the nation’s top criminal court last year. A court in Bonn has already convicted four bankers in three trials.

Judges in the Maple case already in February warned the four men that their actions would highly likely result in jail time.

Cum-Ex, a trading strategy set up to gain refunds on taxes that were never paid, syphoned off at least 10 billion euros in government revenue over several years.

Named for the Latin term for “with-without,” Cum-Ex took advantage of German tax laws that seemed to allow multiple investors to claim refunds of a tax that was paid only once. The nation moved to abolish the practice in 2012.

The Maple bankers dubbed the strategy they ran from 2006 to 2009 the “German Pair.” Initially, they organized the trades within the bank’s group.

Starting in 2008, they added other financial players on the short-seller side, including Barclays Plc, Bank of America Corp.’s Merrill Lynch and Fortis Bank Nederland NV.

These banks and Maple prearranged the trades to obtain the illegitimate tax refunds, according to preliminary findings in the case.

The trial has been pending since May of last year. Defense attorneys are scheduled to start their closing arguments next week and continue them in October. A verdict may come only in November, a court spokesman has said.

Updated: 9-20-2022

Morgan Stanley Paying $35 Million To Settle Claims Of Failing To Protect Customer Records

Firm’s servers and hard drives were resold with customer data still on them, SEC says.

WASHINGTON—Morgan Stanley will pay $35 million to settle allegations that it scrapped computer servers and hard drives without ensuring they no longer held sensitive customer information, regulators said.

Some of the computer hardware was resold with customer data still on it, according to the Securities and Exchange Commission. The brokerage and money-management firm agreed to pay the fine without admitting or denying wrongdoing, the SEC said.

The SEC also alleged that Morgan Stanley lost track of 42 computer servers that potentially contained unencrypted customer data. The missing servers were used in local offices where stockbrokers and investment advisers dealt with clients, the SEC said.

The conduct violated a regulation that requires brokers and money managers to protect the security and confidentiality of certain customer records, the SEC said.

The $35 million fine represents a steep penalty for an alleged record-keeping misstep. Last year, the SEC imposed fines of $300,000 or less on three smaller financial-advisory firms accused of similar violations.

“If not properly safeguarded, this sensitive information can end up in the wrong hands and have disastrous consequences for investors,” SEC Enforcement Director Gurbir Grewal said.

A Morgan Stanley spokesperson said the firm was pleased to resolve the investigation. “We have previously notified applicable clients regarding these matters, which occurred several years ago, and have not detected any unauthorized access to, or misuse of, personal client information,” the spokesperson said.

Updated: 9-27-2022

Wall Street To Pay $1.8 Billion In Fines Over Traders’ Use of Banned Messaging Apps

Eleven banks and brokerages admit they violated rules that require storage of written communications.

WASHINGTON—Eleven of the world’s largest banks and brokerages will collectively pay $1.8 billion in fines to resolve regulatory investigations over their employees’ use of messaging applications that broke record-keeping rules, regulators said Tuesday.

The firms include brokerage units of Bank of America Corp., Barclays PLC, Citigroup Inc., Credit Suisse Group AG, Deutsche Bank AG, Goldman Sachs Group Inc., Morgan Stanley, UBS Group AG  and Nomura Holdings Inc.

Brokerage firms Jefferies LLC and Cantor Fitzgerald & Co. also settled the claims with the Securities and Exchange Commission and the Commodity Futures Trading Commission.

The fines, which many of the banks had already disclosed to shareholders, underscore the market regulators’ stern approach to civil enforcement.

Fines of $200 million, which many of the banks will pay under the agreements, have typically been seen only in fraud cases or investigations that alleged harm to investors.

But the SEC, in particular, has during the Biden administration pushed for fines that are higher than precedents, saying it wants to levy fines that punish wrongdoing and effectively deter future potential harm.

The SEC’s focus on record-keeping is likely to be extended next to money managers, who also have a duty to maintain written communications related to investment advice.

Last month, the SEC alleged that hedge-fund manager Deccan Value Investors LP and its chief investment officer failed to maintain messages sent over Apple iMessage and WhatsApp.

In some cases, the chief investment officer directed an officer of the company to delete their text messages, the SEC said. The claims were included in a broader enforcement action, which Deccan settled without admitting or denying wrongdoing.

The Wall Street Journal reported last month that the settlements announced Tuesday were likely to top $1 billion and would be announced before the end of September.

Eight of the largest entities, including Goldman Sachs and Morgan Stanley, agreed to pay $125 million to the SEC and at least $75 million to the CFTC.

Jefferies will pay a total of $80 million to the two market regulators, and Nomura agreed to pay $100 million. Cantor agreed to pay $16 million.

The SEC said it found “pervasive off-channel communications.” In some cases, supervisors at the banks were aware of and even encouraged employees to use unauthorized messaging apps instead of communicating over company email or other approved platforms.

“Today’s actions—both in terms of the firms involved and the size of the penalties ordered—underscore the importance of recordkeeping requirements: they’re sacrosanct. If there are allegations of wrongdoing or misconduct, we must be able to examine a firm’s books and records to determine what happened,” said SEC Enforcement Director Gurbir Grewal.

Bank of America, which faced the highest fine from the CFTC, had a “widespread and long-standing use of unapproved methods to engage in business-related communications,” according to the CFTC’s settlement order. One trader wrote in a 2020 message to a colleague: “We use WhatsApp all the time, but we delete convos regularly,” according to the CFTC.

One head of a trading desk at Bank of America told subordinates to delete messages from their personal devices and to communicate through the encrypted messaging app Signal, the CFTC said. The head of that trading desk resigned this year, although the bank was aware of his conduct in 2021, the CFTC said.

At Nomura, one trader deleted messages on his personal device in 2019 after being told the CFTC wanted them for an investigation, the agency said. The trader made false statements to the CFTC about his compliance with the records request, the regulator said.

Broker-dealers have to follow strict record-keeping rules intended to ensure regulators can access documents for oversight purposes. The firms settling with the SEC and CFTC admitted their employees’ conduct violated those regulations.

JPMorgan Chase & Co.’s brokerage arm was the first to settle with the two market regulators over its failure to maintain required electronic records. JPMorgan paid $200 million last year and admitted some employees used WhatsApp and other messaging tools to do business, which also broke the bank’s own policies.

Regulators discovered that some JPMorgan communications, which should have been turned over for separate enforcement investigations, weren’t collected because they were sent on employees’ personal devices or apps that the bank didn’t supervise.

Wall Street Hires WhatsApp Cops As US Blasts Bosses Who Text

* Eleven More Banks Settle Inquiries Into Surveillance Failures

* Lapses Among Leadership Force Firms To Hire Compliance Experts

A US investigation into unauthorized texting on Wall Street is forcing many of the world’s biggest banks to create a new compliance role: the WhatsApp cop.

Firms can blame the bosses who broke the rules.

As US regulators punished 11 Wall Street banks Tuesday for failing to stop staff from using unauthorized messaging platforms, investigators took a moment to describe some of the worst offenders — including heads of trading desks, dealmaking teams and executives with national and global responsibilities.

In some cases, managers even texted with employees in charge of ensuring that banks complied with the law.

So as part of the solution — on top of more than $2 billion in fines levied so far — a roster of firms including Bank of America Corp., Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley each promised to hire a compliance consultant to review how they monitor and archive any work-related communications, including on employees’ mobile phones or other personal devices.

The US Securities and Exchange Commission underscored past failures in oversight by describing at least a few senior managers at each firm who engaged in rampant texting with colleagues and clients.

The agency previously said it’s particularly frustrated with executives who were supposed to help enforce the rules but broke them instead.

Boss’s Advice

At Bank of America, which disclosed the most in penalties Tuesday, one head of a trading desk told brokers at other firms to delete messages they had exchanged on personal devices and to switch to Signal, which is encrypted, according to the Commodity Futures Trading Commission. The executive resigned this year.

The SEC’s decision to call out executives — based on a sampling of messages that banks were asked to gather for the investigation — may ramp up the pressure on firms to ensure certain managers are held accountable.

JPMorgan Chase & Co., the first bank to settle the probe last year, ousted a few executives over the inquiries and disciplined many others, sometimes lowering their bonuses.

Authorities didn’t name anyone in the settlements. And a person close to one of the largest banks said investigators didn’t necessarily specify to companies which employees were described.

Two executives close to the banks said that some of the people described as employed are no longer there and that people who left didn’t necessarily go because of the probe.

A spokeswoman for Citigroup said in a statement that the lender is pleased to have the case resolved. Deutsche Bank AG “proactively deployed fully compliant and convenient text and chat platforms and will continue to scale these technologies to meet the expectations of our regulators and our clients,” a spokesman said in a statement.

Representatives for the other banks either declined to comment or didn’t immediately respond to messages seeking comment.

Spotlighting Managers

Here are some of the executives singled out in SEC settlement documents with major investment banks for allegedly broking the rules:

Bank of America: A managing director at the investment bank with a US-wide role sent and received thousands of messages, including to colleagues, clients and personnel at other firms.

And the head of an equities trading desk texted with more than 50 colleagues and numerous people outside the firm.

Barclays Plc: A managing director in the investment bank exchanged thousands of business-related messages. And the head of a fixed-income trading desk texted with more than 29 colleagues, as well as people at other firms.

Cantor Fitzgerald: A managing director in a leadership role in the firm’s investment bank swapped about 3,000 messages with colleagues, investment banking clients and staff at other financial services firms.

Another senior managing director with a leadership role in equities trading exchanged about 1,000 messages with colleagues.

Citigroup: A now-former managing director with a global role in the investment bank sent and received thousands of messages. And the head of a fixed-income trading desk texted with more than 70 colleagues.

Credit Suisse Group AG: A managing director in a leadership role at the investment bank exchanged thousands of messages. And a managing director in equities trading exchanged more than 1,000 messages with colleagues.

Deutsche Bank: A managing director in a US leadership role at the investment bank and a managing director overseeing fixed-income, trading and financing personnel each sent or received hundreds of messages.

Jefferies Financial Group Inc.: A managing director in a global leadership role in Jefferies’s investment bank exchanged thousands of messages with colleagues, investment banking clients and staff at other financial services firms.

Another managing director and trading desk head texted with at least 90 colleagues using messaging platforms including WhatsApp and Signal.

Morgan Stanley: A managing director with a US-wide role in the institutional securities business sent and received more than 1,400 messages. And an associate on a derivatives trading desk exchanged more than 2,500 messages with colleagues.

Nomura Holdings Inc.: A managing director in a US leadership role in the firm’s investment bank exchanged more than 1,000 messages with colleagues, investment banking clients and personnel at other financial firms.

Another managing director in a global leadership role in fixed-income trading sent and received more than 1,000 messages with colleagues.

UBS Group AG: Three managing directors sent or received more than 1,000 messages with one another, other managing directors and employees under their supervision. One of those three and another executive communicated with personnel whose responsibilities included ensuring UBS’s compliance with the law.

Updated: 9-27-2022

Wall Street Banks Settle SEC’s WhatsApp Probe For $1.1 Billion

Banking giants including Goldman Sachs Group Inc. and Citigroup Inc. agreed to pay regulators $1.1 billion in penalties for failing to monitor employees using unauthorized messaging apps.

The banks, along with Bank of America Corp. and Morgan Stanley, are among the 16 financial firms that reached agreements with the Securities and Exchange Commission, the regulator said in a statement Tuesday.

Finance firms are required to closely monitor staffers’ communications to limit improper conduct. That system, already challenged by the proliferation of mobile-messaging software including WhatsApp, was strained as financial firms sent workers home shortly after the start of the Covid-19 outbreak.

Updated: 9-29-2022

Finra Spells Out Penalties For Anti-Money-Laundering Violations

For bigger companies, fines related to certain shortfalls come with no upper limit, Wall Street’s self-regulator says.

The Financial Industry Regulatory Authority, Wall Street’s self-regulator, has for the first time provided guidance to its member broker-dealers on the potential penalties it could impose for violating rules intended to prevent money laundering.

The guidelines from Finra, announced Thursday, could signify it plans to step up scrutiny of member firms’ anti-money-laundering efforts, observers said.

Under the new guidelines, Finra could impose a fine ranging from $10,000 to $310,000 for small firms that haven’t done a reasonable amount of monitoring work to report suspicious transactions, for example.

Fines for the same violation that could be imposed on midsize and large firms start at $50,000 and have no upper limit, Finra said.

Compliance with anti-money-laundering rules under the Bank Secrecy Act has been a continuing focus of Finra’s enforcement efforts, a spokeswoman said in an email, referring to the regulator’s actions against Interactive Brokers LLC, BNP Paribas SA and Morgan Stanley.

“By creating specific AML guidelines, Finra has provided greater transparency and relevant factors that identify when AML violations are more serious and should result in higher fines,” she added.

In recent years, Finra fined Interactive Brokers $15 million, BNP Paribas $15 million and Morgan Stanley $10 million over anti-money-laundering issues.

Emily Gordy, a partner at law firm McGuireWoods LLP and a former enforcement official at Finra, said in an email that while much of this information was available through a survey of cases the agency has worked on over the years, it was important to bring it all together.

“The industry and practitioners don’t have to go on a ‘treasure hunt’ to find the relevant information,” she added.

Beyond fines, Finra said it would also consider suspending or even expelling firms for certain wrongdoing.

In cases where Finra finds a firm’s anti-money-laundering program deficient, the agency recommends fines of $10,000 to $100,000 for small firms, and $20,000 to $310,000 for midsize and large firms.

The factors it takes into consideration when imposing a fine include the nature, size and risk profile of the firm’s customer base and whether deficient procedures allowed violations of AML rules to not be detected.

The agency also set up a schedule of fines for firms that don’t establish a written AML program that includes independent testing of that program, that don’t designate and identify to Finra individuals responsible for the day-to-day operations of its AML program, and that don’t provide continuing AML training programs for personnel.

Fines stemming from violating these rules range from $5,000 to $50,000 for small firms and $20,000 to $200,000 for midsize and large firms.

Updated: 10-14-2022

Wells Fargo Earnings Marred By $2 Billion Regulatory Charge

* Net Interest Income Tops Estimates As Rate Hikes Help Margins

* CEO Scharf Says Credit Losses To Rise, Though Timing Unclear

Wells Fargo & Co. set aside an additional $2 billion to resolve a variety of legacy regulatory and legal woes as Chief Executive Officer Charlie Scharf continues wrestling with the costly fallout from scandals he was hired to resolve.

The charge hampered a third quarter that was better than expected on some metrics. Net interest income, for example, rose 36% to $12.1 billion in the three months ended Sept. 30, the San Francisco-based bank said Friday in a statement.

That’s the most since 2019 and better than the 31% average estimate of analysts surveyed by Bloomberg.

“Our top priority remains strengthening our risk and control infrastructure, which includes addressing open historical issues and issues that are identified as we advance this work,” Scharf, 57, said in the statement.

“We remain at risk of setbacks as we work to complete the work and put these issues behind us.”

The results, and those also reported Friday by JPMorgan Chase & Co., provide early evidence that US lenders are getting a big boost from higher interest rates.

Net interest margin — the difference between what banks earn on loans and what they pay for deposits — expanded to 2.83% at Wells Fargo, up from 2.39% in the preceding quarter.

Shares of Wells Fargo rose 5.2% to $44.58 at 9:40 a.m. in New York, paring their decline for the year to 7%.

Investors also are looking for more economic insights from industry executives heading into year-end. In one signal of continued caution, Wells Fargo set aside $784 million in provisions for potential credit losses, more than the $611 million analysts had expected.

Wells Fargo is monitoring the effects of high inflation and rising rates, as well as geopolitical risks, but remains “bullish” on its opportunities because of higher operating margins and a strong capital position, Scharf said in the statement.

The bank expects delinquencies and credit losses to rise, though the timing of those increases is unclear, he said.

“We will continue to prudently manage our capital levels to be appropriately prepared for a range of scenarios, including a slowing economy and market volatility,” Scharf said.

Net income fell 31% to $3.53 billion, or 85 cents a share. The one-time regulatory charge cut earnings by 45 cents a share. Analysts had expected net income of $1.09 a share.

Updated: 10-19-2022

The German Tax-Dodge Probe That Is Haunting Global Banks

The investment seemed virtually risk-free, guaranteeing hefty returns after only a short period of trading. By exploiting how Germany once taxed dividend payments, dozens of bankers, brokers and lawyers helped investors snatch billions of euros from the national treasury.

A decade later prosecutors won their first convictions for tax crimes. By late 2022, some 1,600 people were facing investigation in Germany alone in what’s come to be called the Cum-Ex affair.

1. What’s A Cum-Ex Trade?

The trades exploited an interpretation of the tax code that appeared, at the time, to let multiple people claim ownership of the same stock and — crucially — the right to a refund of taxes withheld from dividends. The transactions relied on the sale of borrowed shares just before a company was scheduled to pay dividends. This enabled more than one investor to claim a refund on a tax that was paid only once, according to German authorities. The practice was named after the Latin terms cum/ex, meaning with/without, because the stock was sold with — but delivered without — a dividend payment.

2. Why Is It Controversial?

For years tax authorities granted the refunds despite having knowledge that the process could lead to multiple payouts. While there were several attempts to mend the practice, in 2007 lawmakers said tax officials had to tolerate occasional incidents. Law enforcement authorities, however, started to investigate a few years later, arguing that parliament had focused on the unintended side effects of legitimate transactions — not trades set up deliberately to generate tax refunds. Prosecutors argue that people involved in the transactions knew they were double-dipping on the refunds. The practice ended in 2012 when Germany revamped how it collects dividend tax. Similar deals were being reviewed in Denmark and Belgium.

3. Which Banks And Investors Used It?

According to a parliamentary inquiry, the practice was first noticed by banks as early as the 1990s. A decade later, transactions were set up by traders at structured finance units of banks, mainly in London. Cum-Ex spread beyond the banking industry as some former bankers set up funds to allow wealthy individuals to take advantage of the loophole. Many investment banks across Europe and the US participated at some level: buying or selling stock, lending shares to the short seller, providing capital or acting as custodians.

4. How Wide Are The Investigations?

At least half a dozen probes were started in Germany, with one in Cologne being the broadest. Major banks including JPMorgan Chase & Co., Barclays Plc, Bank of America Corp.’s Merrill Lynch and Morgan Stanley have seen their Frankfurt offices raided. At Deutsche Bank AG alone, dozens of former and current employees were under investigation, including five former board members. Its headquarters as well as the home of a former co-chief executive officer, Juergen Fitschen, were raided in October 2022. The banks say they are cooperating with prosecutors. Investigations were opened in other countries including Belgium and Denmark.

5. Has Anyone Been Charged And/Or Convicted?

Yes. Former M.M. Warburg Chief Executive Christian Olearius in July 2022 became the first leading banker to be charged. A former colleague described as his “right-hand man” was convicted of aggravated tax evasion in 2021 and sentenced to 5 1/2 years in prison. Hanno Berger, a German tax attorney, made a partial confession in a German court after being extradited from Switzerland. Executives linked to Duet Group, a London asset manager, were charged in Germany in September. Paul Mora, a former investment banker at UniCredit SpA’s HVB unit from New Zealand, was placed in 2021 on Interpol’s Most-Wanted list. Two former London bankers were convicted in 2020 but given suspended sentences after cooperating with Cologne investigators. Germany’s top criminal court in July backed these verdicts, dubbing the trades a “blatant money grab.” The cases are likely to continue for years.

Updated: 11-25-2022

Shinhan Financial’s U.S. Unit Ordered To Beef Up Money Laundering Oversight

An order from the FDIC follows an earlier admonishment from that agency.

A U.S. unit of South Korea’s Shinhan Financial Group has agreed to bolster the oversight of its anti-money-laundering program as part of a settlement with the Federal Deposit Insurance Corp.

Shinhan Bank America, which operates bank branches in the U.S., agreed to ensure that its AML program was sufficiently capable of combating the risk of money laundering, after the FDIC in 2021 found deficiencies and weaknesses, according to an FDIC order issued in October and made public Friday.

Shinhan Bank America neither admitted nor denied any allegations of unsound banking practices or violations of the law, the order, which was issued with Shinhan Bank America’s consent, said.

The FDIC issued a similar order demanding improvements in the bank’s internal controls in 2017. The agency said its 2021 report is confidential.

A representative for the bank said it wouldn’t be appropriate to comment on an ongoing case.

Shinhan Financial Group, the ultimate parent company of Shinhan Bank America, is one of South Korea’s leading financial conglomerates with the equivalent of $486 billion in assets in 2021, according to its most recent annual report.

Shinhan Bank America operates 15 branches in the U.S., mostly in places with relatively large Korean populations, including New York, California, Texas and Georgia.

The FDIC order requires Shinhan Bank America to retain a third party to review the management and staffing of its AML program, and directs the bank’s board to immediately increase its oversight of the program.

Additionally, Shinhan was ordered to ensure it has accurately assessed its risks and to revise its internal controls.

The FDIC also ordered Shinhan Bank America to adopt an effective training program to educate its staff on AML policies and to validate its suspicious-activity monitoring system.

The bank must review transactions from September 2020 onward for suspicious activity, and could be ordered to review transactions dating back to 2017.

Gu Seon Song, Shinhan Bank America’s former chief audit executive, sued the bank last year in New York for allegedly firing him after he refused to downplay the weaknesses in the bank’s AML program.

Mr. Song in his lawsuit said the then-chief executive of Shinhan Bank America demanded that he alter an internal audit report’s conclusion that Shinhan Bank America had an unsatisfactory AML program.

That report, which was produced following the FDIC’s 2017 order, attributed the alleged problems to inappropriate management oversight and a high turnover in the office supervising the program, Mr. Song said.

Mr. Song said he later submitted the negative report to an FDIC examiner and was subsequently fired. He sued the bank under a U.S. law that protects bank staff from retaliation if they engage in whistleblowing.

That lawsuit is still underway. Shinhan Bank America in a legal filing has denied Mr. Song’s allegations about giving instructions to Mr. Song to alter the audit report and that he was fired because he provided the report to the FDIC.

A lawyer for Mr. Song didn’t respond to a request for comment.

Updated: 12-13-2022

Danske Bank To Pay $2 Billion To Resolve Estonia Money-Laundering Probes

The bank in the settlement admitted to defrauding other banks regarding its Estonia customers and its anti-money-laundering controls.

Danske Bank A/S, Denmark’s largest bank, has agreed to pay about $2 billion to settle long-running probes into anti-money-laundering failures that led to hundreds of billions of dollars of suspicious transactions flowing largely unchecked through a former branch in Estonia.

The Copenhagen-based bank on Tuesday said it had reached coordinated settlements with the U.S. Justice Department, U.S. Securities and Exchange Commission and Denmark’s Special Crime Unit.

The bank admitted to defrauding other banks regarding its Estonia customers and its anti-money-laundering controls.

Danske representatives appeared in Manhattan federal court to formalize an agreement under which the bank pleaded guilty to conspiracy to commit bank fraud.

The bank said that under its plea agreement with the Justice Department it will be placed on probation for three years.

Under the agreements, Danske Bank will pay about $1.21 billion as part of its deal with the Justice Department and about $178.6 million as part of its deal with the SEC, as well as an additional $678 million, or around 4.75 billion Danish Krone, to Danish authorities, the bank said.

The resolutions bring to an end U.S. and Danish investigations, although scrutiny of the bank’s anti-money-laundering controls will likely continue for years. Danske Chairman Martin Blessing said the bank has put robust measures into place to try to avoid a repeat of the failures.

In Denmark, the bank’s efforts to implement a financial crime prevention plan, which executives say will be complete by the end of 2023, is subject to oversight by financial regulators and an independent expert.

“We offer our unreserved apology and take full responsibility for the unacceptable failures and misconduct of the past, which have no place at Danske Bank today,” Mr. Blessing said.

Danske previously booked provisions to cover the amount of the settlement, and in October said it was working toward a deal.

The bank came under investigation in 2018 after it disclosed that more than $230 billion had flowed from Russia and other former Soviet states through its Estonia branch. The bank said a large portion of the transactions were likely illicit.

The scandal dealt a blow to the reputation of the Nordic financial sector, and further tarnished that of the Baltic nations, where banks already were facing scrutiny for the business they had built servicing nonresident clients, particularly wealthy Russians, who were looking for ways to move money into the West.

What started at Danske soon spread to other Nordic banks with operations in Estonia, including Swedbank AB and Skandinaviska Enskilda Banken AB in Sweden.

Both banks have disclosed ongoing investigations by U.S. authorities. Representatives for those banks didn’t immediately respond to requests for comment.

Banks in the region working to strengthen their anti-money-laundering safeguards have faced new pressures this year as countries have imposed far-reaching sanctions on Russia in response to its invasion of Ukraine. Danske Bank in 2019 closed its operations in Russia and the Baltic countries.

The problems at Danske Bank occurred between 2008 and 2016, during which bankers at its Estonia branch maintained a lucrative business serving nonresident customers by ensuring they could transfer large amounts of money with little oversight, according to admissions made in U.S. court documents on Tuesday.

Danske Bank relied on its access to U.S. banks to attract customers, but it also was required to assure its partners about its anti-money-laundering protections.

By early 2014, the bank knew that some of its Estonian customers were engaged in potentially criminal transactions, partly as a result of an internal whistleblower who later went public, according to its admissions.

Instead of alerting regulators and counterparts, the bank and its employees lied to its U.S. partners about the strength of those safeguards, and worked with customers to hide the nature of their transactions, including by using shell companies to obscure who was behind the money, the documents show.

The Estonia branch ultimately processed $160 billion through U.S. banks on behalf of its nonresident customers, U.S. prosecutors said.

Updated: 1-11-2023

Islamic Bank Fined In U.K. For Anti-Money-Laundering Violations

Al Rayan Bank, a Sharia-compliant bank in the U.K., will pay a $4.9 million fine for failing to adequately monitor the source of its customers’ funds.

Al Rayan Bank, the U.K.’s largest Islamic bank, will pay £4 million, equivalent to about $4.9 million, for failing to maintain sufficient money-laundering protections, regulators said Wednesday.

The fine stems from a two-year period during which the bank failed to perform required checks into the source of its customers’ wealth, according to the U.K. Financial Conduct Authority, which brought the regulatory action.

The penalty is the second that the FCA has levied this week for anti-money-laundering failures. The regulator on Tuesday imposed a £7.6 million fine on Guaranty Trust Bank UK Ltd., the U.K. subsidiary of Nigerian bank Guaranty Trust Bank PLC, for failing to undertake customer risk assessments.

Al Rayan is a subsidiary of Masraf Al Rayan, Qatar’s second largest bank by market value. It has closed many of its retail branches in recent years, saying that clients prefer to access its services digitally.

The problems at Al Rayan, which occurred between 2015 and 2017, were aggravated by a lack of proper training for staff about how to handle large deposits.

The bank was aware of the weaknesses in its anti-money-laundering program and failed to fix them, even after the FCA raised concerns, the regulator said.

After an inspection by the FCA in 2017, Al Rayan agreed not to take on additional high-risk customers. That restriction has been lifted, though the bank remains subject to some limited constraints, the FCA said Wednesday.

In a statement, Al Rayan Chief Executive Giles Cunningham said the bank cooperated with the FCA’s inquiry and that the fine wouldn’t have a material impact on its financials.

“Maintaining strong defenses against the evolving threats of financial crime is an essential part of our business plan and is being led by the new board and executive team,” Mr. Cunningham said.

Al Rayan received a 30% discount off its fine for agreeing not to dispute the regulator’s finding, the FCA said.

Updated: 1-12-2023

A 29-Year-Old’s Alleged Fraud Has Stained Jamie Dimon’s Acquisition Spree

A lawsuit filed by the bank against the founder of one of those ventures — a complaint alleging she concocted millions of fake customers — risks renewing concerns about JPMorgan’s rapid deployment of shareholder cash in recent years.

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon has spent the past year reassuring analysts and investors that the bank’s multibillion-dollar binge on technology ventures is part of a carefully designed plan that will pay off.

The largest US bank accused Charlie Javice, who founded college financial-planning website Frank, and one of her former lieutenants of misleading JPMorgan into completing the $175 million takeover in 2021, a lofty moment for financial-technology startups.

A lawyer for Javice, just 29 when she sold the venture to New York-based JPMorgan, disputed the allegations and accused the bank of trying to “retrade the deal.”

“This raises to the fore questions about whether JPMorgan is spending too much too fast,” Mike Mayo, a veteran bank analyst at Wells Fargo & Co., said in an interview.

“The purchase price is less than half of 1% of this year’s earnings, but it still stands as a potential microcosm of a broader issue that perhaps JPMorgan is wasting more money than desired as it pursues such aggressive spending.”

The dispute over the Frank acquisition “will be resolved through the legal process,” a JPMorgan representative said.

The hot topic on an analyst call last January was the bank’s heightened spending projections for 2022, a concern that sent the stock into a dive that day.

The bank has scooped up seemingly far-flung ventures focused on asset- and wealth-management, payments, restaurant reviews and even timberland as it seeks to build a more-digital business for the future.

Under pressure to provide more specifics, Dimon and other senior executives later sketched out the bank’s strategy at an investor day in May, describing their expectations for investments to eventually pay off.

Analysts praised the level of detail and the shares rose the most in a year and a half.

JPMorgan is scheduled to report annual results Friday. The conference call that morning may give analysts an opening to ask the firm about a pair of lawsuits between the bank and Javice that landed in Delaware federal court last month and emerged in media reports this week.

“What should be raised is why the weak due diligence,” said David Donovan, who leads the Americas financial-services practice at technology-consulting firm Publicis Sapient. “They are blaming straight fraud, which could be true, but that means their vetting teams need to be better detecting this.”

Updated: 2-27-2023

TD, HSBC, Independent Bank Group Inc., Trustmark National Bank, Societe Generale (Suisse) Banks To Pay $1.2 Billion To End Suit Tied To Ponzi Scheme

* TD, HSBC Settle Claims Tied To $7 Billion Allen Stanford Fraud
* Settlement Reached On Eve Of Texas Trial Set For Monday

Toronto-Dominion Bank said Monday it agreed to pay more than $1.2 billion to settle a lawsuit by investors claiming it aided R. Allen Stanford’s $7 billion Ponzi scheme more than a decade ago.

Settlements also were reached with HSBC Holdings Plc, which will pay another $40 million, and Independent Bank Group Inc., formerly known as Bank of Houston, which will pay $100 million, according to Ralph Janvey, the court-appointed receiver for Stanford International Bank.

TD is shouldering the largest share because it played an out-sized role in Stanford’s wire transactions, according to the receiver.

The deals were disclosed the same day the suit against the three banks was set for trial in Houston, 14 years after the collapse of Stanford’s scheme to divert billions to support his lavish lifestyle. He was convicted of fraud and money laundering in 2012 and is serving a 110-year sentence.

The banks, which denied wrongdoing, were accused of ignoring red flags for years. They faced potentially billions in damages had jurors sided with investors.

According to the lawsuit, Stanford promised above-market returns on certificates of deposit the banks should have known were bogus, especially given the unusually massive wire transfers and daily shipments of bags crammed with investors’ checks that flowed from the Texas financier’s bank on the Caribbean tax haven of Antigua to his US accounts.

Including the three settlements, Stanford investors will recoup $1.6 billion from financial institutions accused of aiding the fraud. Societe Generale Private Banking (Suisse) said Feb. 21 it will pay $157 million, and Trustmark National Bank said in December it will pay $100 million. Neither admitted wrongdoing.

‘Monumental Recovery’

The settlements are “nothing short of a monumental recovery,” Kevin Sadler, the lead attorney for the receiver and the investors in the case, said in an emailed statement.

“Evidence at trial would’ve shown that TD took in almost $7 billion in CD purchase money from investors, far more than any other bank,” with transfers that “bore numerous red-flag indications of money laundering,” Sadler said in an interview. These included “large, round-dollar, high-velocity, in and out layering transactions, with no apparent connection to any investing that Stanford claimed he was doing,” he said.

‘Routine Banking Services’

In a statement Monday, TD Bank said it “denies any liability or wrongdoing with respect to the multi-year Ponzi scheme operated by Stanford.” The Canadian bank said it “elected to settle the matter to avoid the distraction and uncertainty of continuing a long legal proceeding.”

TD Bank said it “provided primarily correspondent banking services to Stanford International Bank Limited and maintains that it acted properly at all times.” It cited an earlier trial in Canada where the court “ruled entirely in TD’s favor and found no liability.”

Independent Bank settled “to avoid the cost, risks and distraction of continued litigation,” it said in a regulatory filing Monday.

“The company believes the settlement is in the best interests of the company and its shareholders,” will be tax-deductible and won’t impact the bank’s capitalization, it said.

Toronto-Dominion shares fell 0.6% at C$90.55 at 4 p.m. in Toronto trading, while Independent Bank Group slid 0.8% to $60 in New York as of 5:20 p.m.

In a statement, HSBC said it “is pleased to have resolved this claim, which relates to matters over a decade old, with no admission of any liability or wrongdoing.”

In earlier court filings, all the banks claimed they simply “provided routine banking services” to Stanford “and did not know – and could not have known – about the Ponzi scheme.”

‘Actual Knowledge’

Investors alleged the banks “had actual knowledge of the wrongdoing” by Stanford, his aides and entities and “nevertheless, aided and stood by and watched” while Stanford engaged in a systematic pattern of account activities that conflicted with the company’s stated business model, according to a summary of the claims by US District Judge Kenneth Hoyt in November.

In their lawsuit, the investors claim the banks should have seen the signs that Stanford’s operation was a sham. For one, Stanford International Bank’s CDs paid 11.5% interest in 2005, allowing the financier to claim they outperformed the S&P 500 by 13% from 2000 through 2005.

CD holders were also in the dark about where their money was distributed, according to the suit. Between January 2008 and February 2009, court records show Stanford deposited about $1.7 billion in CD sale proceeds into a TD bank account instead of keeping the funds in the Caribbean bank investors thought held their money.

Moving Money

In 2008, about $474 million was shifted from the TD account to SIB’s Bank of Houston account, and then mostly distributed to various Stanford entities. One was Stanford Financial Group, a broker dealer, which got at least $47.5 million to cover operating expenses and as capital for its own Trustmark account.

According to investors, email records from 2006 indicate Trustmark had expressed “concerns” with Stanford entities about its unusual pattern of “wire activity.”

At its peak in December 2008, SIB claimed to have 30,000 clients from 131 countries and $8.5 billion in assets, mostly from sales of CDs.

But instead of putting the money in conservative, liquid assets as promised, Stanford and his lieutenants threw money into risky ventures, vanity projects and island resort developments, most of which never earned a dime.

According to evidence at his criminal trial, Stanford lived large, spending as much as $2 billion of investor money on a jet-set lifestyle that included five overlapping families, yachts, private islands, and sponsorships for charity golf tourneys, professional cricket teams, celebrity golfers and tennis players.

Bribing Regulators

Stanford also plowed investors’ funds into hospitals and infrastructure on Antigua, where he bribed auditors and regulators to hide his scheme.

Antigua knighted him, and he leveraged that “Sir Allen” aura to misdirect US investigators and enthrall busloads of unsophisticated retirees with catered lunches and dog-and-pony shows at his Houston headquarters.

His scheme collapsed during the financial crisis in late 2008, when investors began cashing CDs at an unsustainable rate and Stanford was forced to halt redemptions.

In a bid to staunch the bleeding, Stanford told nervous employees at an all-hands meeting that SIB had $5 billion in “excess liquidity,” while his controller was sending frantic texts telling him it had just $173 million on hand. In February 2009, US regulators seized Stanford’s financial empire, ending his two-decade run.

The US Securities and Exchange Commission appointed a receiver to recover assets for investors. If the five bank deals win court approval, the receiver will have collected more than $2.7 billion through settlements, claw-back litigation and the sale of Stanford assets, including more than 100 mostly money-losing companies and properties scattered across the Caribbean and Latin America.

At least $340 million has gone to pay attorneys and the receiver, leaving just pennies on the dollar for losses by SIB’s 18,000 remaining investors.

Stanford has argued in court filings that he could’ve paid everyone back in full if the SEC hadn’t shut him down and liquidated his businesses.

The case is Rotstain et al v Trustmark National Bank et al, 4:22-800, US District Court, Southern District of Texas (Houston).

Updated: 3-15-2023

Former Wells Fargo Executive Blamed In Fake-Accounts Scandal Agrees To Plead Guilty

Los Angeles prosecutors accused the executive of obstructing regulators’ examination.

The former head of Wells Fargo & Co.’s community bank has agreed to plead guilty to obstructing regulators who tried to examine allegations of sales misconduct at the business she ran, prosecutors said Wednesday.

Carrie Tolstedt’s deal with Los Angeles federal prosecutors would resolve a criminal investigation into her role in the bank’s long-running, fake-accounts scandal, which severely damaged Wells Fargo’s reputation and contributed to an asset cap imposed by the Federal Reserve that limited its size.

Under Ms. Tolstedt’s plea agreement, she could serve up to 16 months in prison, prosecutors said. She is expected to enter her plea at a court hearing that will likely take place in the coming weeks. A judge must decide whether to accept the agreement and will set her sentence at a future hearing.

Ms. Tolstedt, who retired from the bank in 2016, also reached a settlement with the Office of the Comptroller of the Currency that bars her from the banking industry and requires her to pay a $17 million fine.

An attorney for Ms. Tolstedt declined to comment.

Ms. Tolstedt, 63 years old, was a key figure in the fake-accounts scandal that erupted in public eight years ago. Regulators alleged that executives created a pressure-cooker environment in branches where low-level employees were so beset by high sales goals that they opened up fake and unauthorized bank accounts.

Wells Fargo paid $3 billion in 2020 to settle investigations by the Justice Department and the Securities and Exchange Commission.

As part of its settlement, Wells Fargo admitted that it “unlawfully misused customers’ sensitive personal information” and harmed some customers’ credit ratings, collecting millions of dollars in fees and interest in the process.

The community bank, which Ms. Tolstedt led, managed many of the products that Wells Fargo sold to individuals and small businesses, including checking and savings accounts, CDs, debit cards, bill pay and other products. Prosecutors accused her of having been aware of sales-mispractice issues at Wells Fargo as early as 2004.

In May 2015, she participated in a memo about sales-practice issues that was intended to be provided to the OCC. Prosecutors said Ms. Tolstedt obstructed the examination by failing to disclose statistics on the number of employees who were fired or resigned during an investigation for sales-practices misconduct.

She also failed to disclose that Wells Fargo’s community bank proactively investigated only a small percentage of employees who participated in potential sales-practices misconduct, prosecutors said.

“The justice system and regulators rely on corporations and their executives to fully cooperate during investigations into potential wrongdoing. But, in this case, Ms. Tolstedt took steps to cover up misconduct at Wells Fargo,” acting Los Angeles U.S. Attorney Joseph T. McNally said.

“Obstructing an investigation compromises the mission of those seeking the truth, and we will hold accountable any individual who attempts to conceal wrongdoing.”

Citigroup Trims Exec’s Pay After $200 Million In WhatsApp Penalties

* Firms Fined A Combined $2 Billion Over Unauthorized Messaging

* Institutional Clients Chief Ybarra Paid $18.9 Million For 2022

Citigroup Inc. withheld some compensation it planned to award to Paco Ybarra, who leads the sprawling institutional clients group, after the bank was forced to pay $200 million in penalties over employees’ use of unauthorized messaging channels like WhatsApp last year.

Citigroup made a “downward adjustment” to Ybarra’s pay, citing cultural issues that arose in his division that require remediation, according to a regulatory filing.

The pay cut stems from the messaging issue, said a person with knowledge of the matter who asked not to be identified discussing confidential information.

Even with the cut, Ybarra’s $18.9 million in compensation for 2022 still rose from $18.4 million a year earlier.

Revenue from the institutional clients group, which is home to nearly 75,000 employees, climbed 3% to $41.2 billion last year, despite an industrywide slowdown in deal activity and capital markets origination.

“ICG posted strong revenue and overall positive financial results despite volatile macroeconomic conditions,” Citigroup said in the filing. “Mr. Ybarra showed strong leadership in implementing strategies to combat attrition while continuing to display sound judgment.”

Even so, there is “much work to be done” to improve market share and client satisfaction in the unit.

Citigroup was among a dozen global banks that paid a combined $2 billion in penalties to US regulators last year when their employees used unmonitored communications channels such as WhatsApp for business.

Other banks including Morgan Stanley and Barclays Plc have trimmed compensation over the matter.

Citigroup last year expanded the use of so-called performance share units as part of its efforts to more closely align executive incentives with shareholders’ interests.

The board’s compensation committee this year decided it wouldn’t make any payments for PSUs granted in 2019 because the company’s stock performance between 2020 and 2022 didn’t meet the necessary levels, the filing shows.

Separately, the bank said it’s made progress toward closing the gender pay gap in 2022. On a global basis, median pay for women was 22% less than for men, a smaller disparity than the 26% it reported a year earlier.

The firm also made progress on the racial pay gap: In the US, minorities made 97 cents for every dollar earned by non-minorities, up a penny a year earlier.

Citigroup remains one of the few major companies to disclose its unadjusted pay gap. Instead, many competitors offer an adjusted look that takes into account an employee’s role and location.

On that basis, women globally are paid on average more than 99% of what men are paid at Citigroup.

Updated: 3-20-2023

JPMorgan Owned The LME ‘Nickel’ That Was Actually Bags of Stones

* Bank Had Put The Metal On To The Exchange Early Last Year

* Development Is Latest Headache For JPMorgan’s Commodities Unit

JPMorgan Chase & Co. owned the London Metal Exchange nickel contracts that turned out to be backed by bags of stones rather than metal, according to people familiar with the matter.

The LME last week announced it had canceled nine nickel contracts — worth about $1.3 million — after discovering “irregularities” at a certain warehouse, which Bloomberg has reported was owned by Access World.

The news has been met with shock in the metals world, because LME contracts are generally viewed as beyond question.

JPMorgan was the owner of the nine invalidated contracts, according to people familiar with the matter. The bank registered the bags of material as being deliverable against LME contracts in early 2022, said the people, who asked not to be identified discussing private information.

There’s no suggestion that JPMorgan did anything wrong. The material was already inside Access World’s Rotterdam warehouse when the bank bought it several years ago, according to one of the people.

Still, its central role in another nickel crisis will be a headache for the bank. JPMorgan’s commodities business has been under scrutiny since last year’s nickel short squeeze on the LME, where it played a key part as the largest counterparty to Chinese tycoon Xiang Guangda’s short position.

JPMorgan declined to comment. The bank’s ownership of the nine invalidated nickel warrants was first reported by Fastmarkets.

Access World said it is inspecting the “warranted” bags of nickel briquettes at all its locations, but believes that the issue that led to the nine warrants being suspended “is an isolated case and specific to one warehouse in Rotterdam.”

It’s not clear whether the bags ever contained nickel, and whether the issue is a result of error, theft or fraud. Under the LME’s rules, warehouses are responsible for inspecting and verifying metal.

Warehouses are required to hold insurance, while physical metal traders typically are insured against risks such as theft.

The discovery has set off a wider scramble across the metals world, with warehouse companies racing over the weekend to re-inspect and re-weigh thousands of tons of metal after the LME asked them to verify all the nickel currently on warrant.

The LME has also been carrying out its own inspections in Europe and Asia, one of the people said. So far, the mass inspection has found no other issues with LME material, the person said.

JPMorgan is the leading bank in metals markets, but it has been at the center of several high-profile crises in the past year.

It reported a $120 million loss related to nickel a year ago, in the wake of the short squeeze centered on Xiang and his company, Tsingshan Holding Group Co.

It also had a financing relationship with Chinese copper trader Maike Metals International Ltd., which ran into trouble last summer and last month said it was working on a debt restructuring. Bloomberg reported last year that JPMorgan was reviewing its commodity exposure.

Updated: 3-22-2023

JPMorgan Sold $10 Million In Jewels Left In Bank Safe Deposit Box, Suit Claims

* Jorge And Stella Araneta Say Items Worth $10 Million Auctioned

* JPMorgan Says Bills Were Unpaid And Aranetas Were Warned

JPMorgan Chase & Co. is facing a suit by a couple who claim the bank sold $10 million in jewelry and other valuables that they stored in safe deposit boxes.

Jorge and Stella Araneta said that JPMorgan sent the bills for the boxes to a wrong address, causing them to fall behind in their account.

They claim they paid the delinquency in full after discovering it, and JPMorgan promised to return the property stored in the boxes. But the bank instead auctioned off the contents.

US District Judge Naomi Reice Buchwald on Wednesday threw out one of the 2022 suit’s claims under New York banking law, but the case is proceeding with negligence and other counts.

JPMorgan declined to comment on the decision. In court filings, the bank has said a delinquency remained and that it sent warnings to the Aranetas before the auction. JPMorgan decided to stop offering new safe deposit boxes as of December 2021.

The couple, who reside in the Philippines but have a Manhattan apartment on Park Avenue, sued the bank last year.

They claim they’d leased safe deposit boxes at JPMorgan branches in New York City starting in 2006 after the bank bought and had renewed them annually, with payments deducted from their checking accounts and sending invoices and statements to addresses in Manhattan and Miami.

In March 2016 the bank mailed notices about the renewal of two of the boxes, warning that they would be drilled open and the contents removed if payments weren’t received within 60 days, the Aranetas claim.

According to the suit, those notices weren’t sent to the New York or Miami addresses but to a PO Box in Baton Rouge, Louisiana, where the Aranetas say they never saw them.

In February 2017, the bank drilled into four of the couple’s seven boxes, removed the contents and transferred them to a secure location.

The couple claims they learned in October 2019 that the boxes had been opened and brought their accounts current, after which JPMorgan allegedly assured them their valuables would be returned.

But the bank sold the contents at auction less than 10 months later for a total of more than $552,700, according to the suit. The Aranetas claim that’s only a fraction of what the contents — consisting mostly of precious metals, jewelry and coins — were worth. They put the value at between $8 million and $10 million.

The bank said in a response to the complaint that Stella Araneta hadn’t submitted payment on some of the boxes for a number of years and that it sent multiple rounds of correspondence to addresses that it had on file.

While it admitted that some payments were made on the boxes in October 2019, the bank said it sent further notices in July 2020 warning the contents would be sold at auction later that year if payment wasn’t made in full.

JPMorgan also says Stella Araneta wrote multiple checks bearing the Louisiana address.

The case is Araneta v JPMorgan Chase Bank, 22-cv-2346, US District Court, Southern District of New York (Manhattan).

Updated: 3-28-2023

Banks In France Face More Than $1.1 Billion Fines After Raids

* About 150 Investigators Involved In Raid Of Lenders In France

* HSBC, Natixis, BNP’s Exane Also Among Firms Being Searched

French banks including Societe Generale SA and BNP Paribas SA face collective fines of more than 1 billion euros ($1.1 billion) as part of a probe into tax fraud and money laundering related to dividend payments.

HSBC Holdings Plc, Natixis SA and BNP’s Exane unit are also part of the investigation, according to the prosecutors office in Paris, which said that the fines include penalties and back interest. Preliminary investigations related to the raids were opened in December 2021, the prosecutor said.

The raids relate to a dividend arbitrage strategy known as Cum-Cum where shareholders transferred stock for a short period to investors based abroad to avoid a dividend tax.

Investors held the shares during the period when dividends were paid out and either weren’t taxed or taxes were refunded. They then sold the securities back to the original owner and the amount saved was split between the parties.

BNP, HSBC, and Natixis representatives didn’t immediately respond to requests for comment. A spokesman for SocGen confirmed that the bank is part of the probe.

The raids add to further negative sentiment around the banking industry in both the U.S. and Europe, where investors have been hit by the emergency rescue of Credit Suisse Group AG and seizure by regulators of Silicon Valley Bank.

SocGen declined as much as 2.4% before paring gains to trade down 1% as of 1:03 p.m in Paris. BNP was 0.5% lower and HSBC fell about 0.2% in London.

French Investigation

The French investigation, which the prosecutor said has been in preparation for months, involves 16 local magistrates, more than 150 investigators and 6 prosecutors from Cologne.

The avoidance of tax payments on dividends in Germany has been an ongoing scandal in that country for the best part of a decade. A similar scheme, known as Cum-Ex, allowed short-sellers and the actual holder of shares to all claim tax credits on a dividend paid only once.

A trader in a German Cum-Ex trial in 2019 told the court that Cum-Ex was five to six times more profitable than Cum-Cum. However, Cum-Cum was far more widespread, especially in interbanking trading, as the legal risks were deemed to be much lower.

Cum-Cum has been widely practiced because it was believed to not raise any legal issues in the same way that Cum-Ex did.

That long-running investigation has swept up thousands of potential suspects across the financial sector and seen almost every major international bank raided in Germany. It has spawned civil and criminal cases in Germany, the UK and Denmark.

The French prosecutor also invited anyone wishing to bring further information related to the French inquiry to come forward.

Updated: 3-31-2023

Shorts Made Over $2 Billion Betting Against Banks in Meltdown

* Led By SVB, Banks Earned Most For Short Wagers In Q1: S3 Data
* But Failed Tech Bets Mean Short Sellers Set For Losing Quarter

Investors betting against bank stocks earned more than $2 billion this quarter as turmoil engulfed the battered sector, making the shares the most profitable for short sellers to start 2023.

Speculators who sold borrowed shares of collapsed lender SVB Financial Group, wagering the stock would decline, reaped the biggest windfall — a mark-to-market profit of roughly $1.1 billion through Thursday, data compiled by S3 Partners show. First Republic Bank and Signature Bank rounded out the quarter’s three most profitable shorts.

The results highlight the forces at play in markets to start 2023, which saw investors flood back to beaten-down tech stocks with strong balance sheets and cash flows. Meanwhile, the crisis that enveloped banks crushed those shares broadly.

“In recent memory, I’ve never seen banks in the top shorts,” said Ihor Dusaniwsky, S3’s head of predictive analytics, who has tracked the data since 2015. “Usually their price changes are not as dramatic as the tech and health-care stocks.”

Stark Divide

Benchmark indexes lay out the stark divide in performance. The KBW Bank Index is down about 19% this year, for its worst quarter since early 2020.

Updated: 4-4-2023

Toronto-Dominion Becomes Biggest Bank Short With $3.7 Billion On The Line

* Merger Arb, Schwab Stake, Canada Housing Woes Seen As Drivers
* S3 Sees Risk Of Profits Evaporating As Quickly As They Came

Turns out, the biggest short in the banking industry anywhere in the world isn’t in Switzerland or Silicon Valley, but rather, in the relatively tame financial center of Canada.

In recent weeks, short sellers have upped their bearish bets against Toronto-Dominion Bank, and now have roughly $3.7 billion on the line vis-à-vis Canada’s second-largest lender, according to an analysis by S3 Partners.

That’s the most among financial institutions globally and puts TD ahead of the likes of France’s BNP Paribas SA and Bank of America Corp.

Part of it has to do with the general skittishness toward the banking sector after three US regional banks failed and Credit Suisse was forced into a shotgun wedding with UBS Group AG.

And there are few signs Canadian lenders have any of the liquidity issues that investors have zeroed-in on recently. But analysts also point to worries about TD’s exposure to the country’s housing slowdown, as well as its ties to the US market through its stake in Charles Schwab Corp. and a planned regional bank acquisition.

“Short sellers have been actively shorting into a declining banking sector,” said Ihor Dusaniwsky, S3’s managing director of predictive analytics.

TD didn’t immediately respond to requests for comment from Bloomberg.

Granted, short interest as a percentage of TD’s shares available for trading, or float, remains relatively low at 3.3% and up from 2.8% a year ago. By that measure, TD is third among the top 20 US and Canadian financial firms.

TD’s position atop the list of biggest bank shorts comes as it seeks to close a $13.4 billion deal for First Horizon Corp., which would expand its foothold in the US. TD is widely expected to renegotiate the deal after the recent bout of turmoil among US regional banks drove share prices lower in March.

As a result, traders are “playing with short interest for TD more than normally” because the bank has become a merger arbitration play, according to Daneshvar Rohinton, a portfolio manager at Industrial Alliance.
Housing Bubble

Rohinton says some short sellers also have targeted TD because of its roughly 10% stake in Charles Schwab — which recently lost $47 billion in market value as it came under scrutiny over its unrealized bond losses — as well as TD’s position in Canada’s housing market, where variable-rate mortgages are common and consumer insolvencies are on the rise.

“TD sits uniquely in the middle of two broad headwinds,” Rohinton said. “The fears around Canadian housing will be projected onto TD.”

So far, the TD short has been a winner. In March, shares of TD tumbled 11%, which was the biggest decline in the S&P/TSX Banks Index. The decline wiped out C$18.1 billion ($13.5 billion) from the bank’s market value.

Nevertheless, S3’s Dusaniwsky cautions that short-seller profits can evaporate just as fast, particularly when they are the result of a broad-based rally.

“Outsized short-selling like we saw in the banking sector are usually knee-jerk reactions to market turmoil,” he said, “and can reverse as quickly as they occur.”

Updated: 4-7-2023

Bank Regulator Drops Money-Laundering Charge Against Ex-Rabobank U.S. Compliance Chief After Bungling The Case

Office of the Comptroller of the Currency to ‘reluctantly’ end a case allegedly involving a coverup.

“While dismissal of this enforcement action is a resounding victory for Laura Akahoshi, a onetime OCC employee, it is also a transparent attempt by the OCC to avoid subjecting the agency’s own conduct and meritless enforcement action to public and judicial scrutiny in federal court,” said Justin Weddle of Weddle Law PLLC.

Ms. Akahoshi’s defense team argued the report was rejected because it was riddled with errors.

A U.S. banking regulator has dropped a case against a former Rabobank NA compliance chief who allegedly tried to cover up problems in the bank’s anti-money-laundering program, finding the judge in the case hadn’t given her a fair hearing.

The U.S. Office of the Comptroller of the Currency said it would “reluctantly” end its case against Laura Akahoshi, a onetime OCC employee who later worked as Rabobank’s compliance chief. She was accused of obstructing OCC efforts to investigate Rabobank by allegedly working to hide a critical report produced by an accounting firm.

Rabobank NA, a California subsidiary of Netherlands-based Rabobank that closed in 2019 after selling its assets, in 2018 pleaded guilty in federal court to conspiring to conceal its problems from the OCC, agreeing to forfeit about $369 million. The OCC brought a related case against Ms. Akahoshi that year in its own internal court.

But the OCC said the judge in the case didn’t let Ms. Akahoshi sufficiently defend herself, and the case was too old to return to the judge for additional proceedings.

“While the allegations in this matter are troubling and allude to conduct that doesn’t comport with the OCC’s expectations of a banking professional, the comptroller, reluctantly, will not remand this matter and will not reach final findings of fact,” the regulator said in an order on Wednesday.

A lawyer for Ms. Akahoshi said the OCC dismissed the case to bury its enforcement “fiasco.”

The OCC declined to comment beyond the ruling. The Dutch Rabobank, which no longer owns the U.S. unit at the center of the case, didn’t respond to a request for comment.

Prosecutors said Rabobank looked the other way after learning large numbers of customer transactions had the hallmarks of international drug trafficking, organized crime and money laundering, and then obstructed the OCC’s investigation into those issues.

The regulator was tipped off in 2013 that an accounting firm had been engaged to look into Rabobank’s anti-money-laundering compliance program, and then asked the bank to turn over the report. That report found significant deficiencies, according to the OCC.

Bank management had seen a presentation summarizing the report, according to the OCC. But rather than turning over what the accounting firm had produced, Ms. Akahoshi discussed how the bank would respond with other high-level staff, considering whether they could say no report had ever been produced because it was only a draft, the OCC said.

She emailed an OCC staffer that the outside accounting firm didn’t “complete” an assessment, later telling the bank’s then-chief executive she would say the bank didn’t “accept” the report and thus didn’t consider it an official document, the OCC said. The bank ultimately handed over the accounting firm’s work.

A judge at the agency ruled in 2022 that Ms. Akahoshi had been dishonest and should pay a $30,000 fine and be barred from banking. But the OCC said the judge made that decision in a summary fashion when a fuller hearing was required.

Though the OCC would normally require more proceedings, the case is about events from more than 10 years ago, and it would be difficult for witnesses to recall facts about their states of mind.

The OCC said, despite the decision in Ms. Akahoshi’s favor, it expects banks to turn over records quickly when asked.

“While the Comptroller doesn’t condone [the] respondent’s alleged actions…institutions subject to the OCC’s supervisory authority must promptly produce their books, records, or documents to OCC examiners on request,” the OCC said.

Updated: 5-4-2023

Nobody Trusts The Banks Now

The Fed’s SVB report, Goldman’s SVB dealings, PacWest, Western Alliance, First Horizon and stock buyback rules.

Oh Banks

What Is Going On? I Think There Are Two Ways To Think About The Basic Business Of Banking:

* Banks borrow short to lend long. They use deposits (which can be withdrawn at any time) to fund loans and buy bonds (which don’t get repaid for a long time).

* Banks really borrow long to lend long. They use deposits to fund loans and buy bonds, and as a technical legal matter those deposits are short-term (and can be withdrawn at any time), but they aren’t really. Most people — and most businesses — keep their money at a bank because it is convenient, it’s where their paycheck direct deposit and bill auto-pays are set up, and it would be a pain to move to a new bank.

Most people do not obsessively check the interest rates on their bank accounts to find the highest one, or obsessively check the financial condition of their bank to see if it’s safe.

Banks invest in customer relationships — by building branches and cross-selling services and offering conveniences like online banking — and those relationships are long-term and sticky and include deposits. In a real economic sense, banks are making loans and buying bonds that match the duration of their long-term, relationship-driven deposits.

In Theory 1, banking is an inherently risky business model (if the depositors all ask for their money back at once, you are in trouble). Specifically, it is a model with a ton of interest-rate risk.

More specifically, if interest rates go up, that’s bad. You got all these short-term deposits and used them to buy long-term fixed-rate assets; when rates go up, your long-term assets lose value and you have to pay more interest on the short-term deposits.

In Theory 2, banking is less risky, and in particular it has less interest-rate risk. But also, the interest-rate risk goes the other way. If your model is “we have all these deposits that are locked up indefinitely, and we pay 0% interest on them, and we always will, and we use them to make loans and buy bonds,” then you want interest rates to go up. If interest rates go up:​​​​​​

* You don’t pay any more interest on your deposits: They are locked up forever at 0% interest, nobody checks their rate, nobody asks for more or moves their money.

* Your long-term fixed-rate assets (bonds, loans) lose market value, but you don’t care. If you bought a 3% bond when rates were 3%, and now rates are 5%, your bond is only worth, say, 85 cents on the dollar. If you sold it today, you’d have a 15% loss.

But you have no reason to sell it today: You bought it using long-term funding, so you just hold it to maturity, when it will pay off 100 cents on the dollar. In the meantime, it will keep paying you 3% interest, which is less than the market interest rate, but still a lot more than the 0% you are paying on deposits.

* Your net interest income goes up. Some of your assets have floating interest rates, so when rates go up they pay you more. Other assets have fixed interest rates, but some of them mature each day, and you take the money and use it to make new loans and buy new bonds with higher interest rates.

Your interest expense stays flat (because your depositors never withdraw their money or ask for higher interest), but your interest income goes up, so you make more money.

I think a crude way to put it is that Theory 1 is the sort of modern-finance, markets-oriented, mark-everything-to-market approach. It is the way almost everybody in financial markets thinks about almost everything:

If you have funding that can be withdrawn at any time, that is short-term funding; if you buy long-term fixed-rate assets and interest rates go up, you have a mark-to-market loss, and that loss is in every meaningful sense “real.”

And then the crude way to put it would be that Theory 2 is the traditional theory of bankers. Theory 2 is a sort of sociologically accurate description of how banking has actually worked in practice, most of the time, for the last few hundred years.

Banks do not expect all their depositors to withdraw money on a moment’s notice, because they usually don’t. Banks do not worry too much about marking all of their assets to market, because they plan to hold those assets until they mature, and they usually do. Banks generally find that their net interest income is higher when interest rates are higher and lower when rates are lower, so they like higher interest rates.

I am exaggerating the differences here to make the contrast clearer. Of course no actual banker would say Theory 2 the way I have said it; actual bankers seem to have some blend of Theory 1 and Theory 2. Every banker is aware of the risk of bank runs.

Sometimes depositors do all ask for their money back at once, and that’s bad, and banks and regulators think about that problem and do things to prevent and mitigate it.

Nobody says “interest rates on deposits will be zero forever,” but what they do is talk about a thing called “deposit beta,” which means that when short-term interest rates go up by 1%, bank deposit rates go up by some fraction (the beta) of 1%: Bank depositors are slow to react to changing interest rates, for the reasons — relationships, convenience, rational ignorance — that I talked about in Theory 2.

Nobody says “the market value of a bank’s assets doesn’t matter,” but banks generally do get to ignore that market value in their financial statements and in their capital accounting, 1 disclosing it only in a footnote near the back of the financials.

I am tempted to say that Theory 1 is correct and Theory 2 is wrong, but that is just because I grew up in a modern-finance, markets-oriented, mark-everything-to-market world. 2 But Theory 2 has a lot going for it, empirically; it probably gives you a better sense of what banks are doing (building long-term relationships, accumulating sticky deposits, investing them in a way that roughly matches their stickiness) than Theory 1 does. 3 You don’t build a bank branch just to attract overnight funding; a branch suggests that you expect deposits to stick around.

It’s just that in the US regional banking mini-crisis of 2023, Theory 1 completely dominates. “We have built long-term relationships with our depositors so we expect them to stick around even as rates rise”: wrong! “We hold our bonds to maturity, so changes in their mark-to-market value don’t matter”: wrong! “Actually rising interest rates are good for us”: wrong! And the bankers and bank regulators, who sort of had Theory 2 rattling around in their brains, were taken by surprise.

Consider The Collapse Of Silicon Valley Bank. On Theory 1, This Collapse Is Incredibly Simple:

* SVB took a lot of short-term deposits from venture capitalists and tech firms, and invested the money mostly in long-term US government bonds.

* When the Federal Reserve rapidly raised interest rates, the market value of those bonds fell.

* SVB’s losses on those bonds came close to, and at some points exceeded, the value of its equity: If SVB had to sell all its bonds and pay back all its depositors, there wouldn’t be enough money left. It was, on a mark-to-market basis, insolvent.

* People noticed this, and SVB’s unusually well-informed and connected depositors all rapidly asked for their money back.

* There wasn’t enough money, the bank failed, it was seized by the government, depositors got their money back but the government lost billions of dollars because SVB’s assets were worth much less than its deposits.

This story is almost too simple. When you write it like that it sounds dumb. None of this is arcane or unpredictable stuff. The Fed said it was going to raise interest rates a lot, and then it did. Long-term bond prices are sensitive to interest rates, so everyone knew that they would fall when the Fed raised rates, and they did.

It was pretty easy to calculate that this would make SVB insolvent, and it did, and then SVB put out financial statements saying — deep in the footnotes, but still — that it was insolvent.

But on Theory 2, SVB looked better. It had invested in building strong relationships with those VCs and tech firms, and it figured that made its business extra sticky. Those VCs loved SVB; it gave them (and their portfolio companies) loans that no one else did, and understood their businesses better than everyone else. (Also a lot of startups got loans from SVB that required them to keep their cash on deposit at SVB, which helps with stickiness.)

And, sure, rates went up and SVB’s bond portfolio went down and it was technically a little insolvent, but that doesn’t matter as long as its deposits stick around.

SVB’s depositors were busy running their tech businesses and enjoying SVB’s great customer service; why would they bother reading the footnotes to its financial statements and noticing it was insolvent? Why would they care if they did? 4

Last week the Fed released its “Review of the Federal Reserve’s Supervision and Regulation of Silicon Valley Bank,” picking over the failings of SVB’s management and the Fed’s supervision, and proposing some changes to regulation and supervision to prevent this from happening again. 5 I mostly want to talk about the section on interest-rate risk. It describes two ways that banks measure interest-rate risk (“IRR”):

* Earnings at risk (EaR) or net interest income (NII) at risk: This is an IRR metric that captures short-term exposure to interest rate movements. It measures NII volatility generally over a oneyear horizon based on yield curve shocks. For example, firms will shock interest rates by 100, 200, or more basis points (bps) in either direction then estimate the impact to NII.

A variety of different yield curve shocks and twists can be used for this exercise. Deposit assumptions are important for this analysis as firms must assume the amount of the market rate movement they will pass through to deposit accounts (also known as “deposit betas”).

* Economic value of equity (EVE): This is an IRR metric that estimates the structural mismatches of a bank balance sheet relative to yield curve movements. It is often viewed as a longer-term measure as it is a discounted cash flow approach that estimates the present value (PV) of balance sheet cashflows to estimate economic equity (PV of assets – PV of liabilities = economic value of equity).

The IRR portion of this exercise comes from shocking interest rates by various amounts (e.g., +/− 100, 200, or more bps) to estimate exposures as cashflow paths change. Deposit assumptions are important in this exercise, so cashflows must be estimated based on customer characteristics.

Notice how this works. The model is not “if interest rates go up by 100 basis points, our assets will lose X% of their value, which seems bad.”

Instead it is “if interest rates go up by 100 basis points, our cash flows from our assets will go up by $Y, and our interest expense on deposits will go up by $Z”: Implicitly, the model treats both the assets and the deposits as long-term and only partially rates-sensitive.

If Y is greater than Z, then it is good for interest rates to go up. And Z — how much more the bank will have to pay on deposits if interest rates go up — is very much an estimate.

SVB’s Estimates Were Bad:

* SVBFG’s IRR results showed that there was a mismatch between the repricing of assets and liabilities on the bank’s balance sheet. The results showed that SVBFG had historically been asset sensitive, which means that NII increased as rates increased.

This was due to the nature of SVBFG’s balance sheet that had consisted of predominantly non-interest-bearing deposits on the liability side and a mix of floating rate loans and fixed rate securities on the asset side. SVBFG expected to benefit in a rising rate environment, as it generally assumed that deposit betas would be low.

* In response to EVE breaches, SVBFG made model changes that reduced the level of risk depicted by the model. In similar fashion to the response to liquidity shortfalls, management changed assumptions rather than the balance sheet to alter reported risks.

In April 2022, SVBFG made a poorly supported change in assumption to increase the duration of its deposits based on a deposit study conducted by a consultant and in-house analysis. Under the internal models in use, the change reduced the mismatch of durations between assets and liabilities and gave the appearance of reduced IRR; however, no risk had been taken off the balance sheet.

The assumptions were unsubstantiated given recent deposit growth, lack of historical data, rapid increases in rates that shorten deposit duration, and the uniqueness of SVBFG’s client base.

And It Made Bad Choices:

* In early 2022, at a time when rates were rising rapidly, SVBFG became increasingly concerned with decreasing NII if rates were to decrease, rather than with the impact of rates continuing to increase. This was based on observed yield curve inversion that could be an indication of an impending recession and a subsequent decrease in rates.

The bank began positioning its balance sheet to protect NII against falling interest rates but not rising ones. SVBFG was very focused on NII and profits and the NII sensitivity metrics were showing that NII was exposed to falling rates.

Rising rates were seen as an opportunity to take profits on hedges, and the bank began a strategy to remove hedges in March 2022, which were designed to protect NII in rising rate scenarios but also would have served to constrain NII if rates were to decrease.

And so you can read SVB’s annual report for 2022. On pages 89-90, SVB reports its analysis of interest-rate risk, which shows that SVB’s net interest income will go up if rates go up: Rising rates will be good for SVB, said SVB.

Meanwhile page 164, in Note 22 to the financial statements, is where SVB reports the $15 billion of interest-rate-driven mark-to-market losses on its held-to-maturity bonds that left it nearly insolvent and that would be its undoing: Rising rates were in fact very very bad for SVB.

But those mark-to-market losses were just not a factor in its interest-rate risk analysis! Didn’t come up! Didn’t seem relevant!

Just the purest Theory 2 stuff: Deposits are sticky, mark-to-market values of assets are irrelevant, and rising rates are good for the bank. The Fed supervisors pushed back on this a bit at the time, but not very much:

* A review of the supervisory record shows that Federal Reserve supervisors identified some but not all of the interest rate risk-management issues that contributed to the failure of SVBFG. Supervisory responses for IRR were not rapid or severe enough given the fundamental issues in this area that actually drove poor decisions at SVBFG. …

* Limit breaches with respect to the EVE metric were evident in the 2020, 2021, and 2022 CAMELS exams. In the 2020 CAMELS exam, the examiner proposed an advisory on the lack of escalation, monitoring, and taking actions to remediate breaches.

Additionally, in several CAMELS exams (2020, 2021), examiners identified issues related to lack of sensitivity testing, back-testing, gaps with policies, ineffective control functions, and lack of oversight from senior management and the board of directors. During the 2021 CAMELS exam, the examiner proposed an observation related to lack of sensitivity testing of key assumptions.

“Lack of sensitivity testing of key assumptions,” fine. But nobody said the dumb simple thing of “hey if interest rates go up all your fixed-rate bonds will lose value and your balance sheet will look insolvent and people will get nervous.”

The dead simple thing that brought SVB down, the thing that everyone knows and that seems obvious in retrospect, the simple Theory 1 story that rising interest rates are bad for a bank with a lot of long-term fixed-rate assets, is not really how banks or bank examiners think.

They think about banks as having long-term assets but also long-term liabilities, so the effect of rising rates is complex and unpredictable.

I think this is the basic explanation for how rapid and serious and surprising this banking crisis is. Banks and regulators have historically operated in large part in Theory 2, treating bank funding as pretty long-term and trying to match banks’ assets to that effectively long-term funding.

And in spring 2023 that just doesn’t work at all.

Why? I Don’t Know. Some Speculations 6 :

* This is the first large rapid interest-rate hiking cycle in a long time, and so Theory 2 hadn’t been tested in a while. And things have changed since it was last tested.

* Like the internet? It is much easier to move your money out of a 0%-interest bank account and into a 5%-interest money-market account (or an online high-yield savings account, etc.) than it was 30 years ago, or even 10 years ago. You are more likely to see an online ad encouraging you to do that, and more likely to do it with a few clicks.

* Similarly, more information is available online, and more people are in the business of curating it for you and emphasizing the juicy bits. So if your bank has huge mark-to-market losses, you are more likely to hear about it.

And if you are worried about the solvency of your bank, you can tweet or Whatsapp or group-text about it, and worries can spread faster, and you can withdraw your money via app. “Game’s the same, just got more fierce,” is the diagnosis of the vice chairman of the Federal Deposit Insurance Corp.

* Also, though, the world has become more financialized, and specifically more mark-to-market. Thirty years ago you could say “well we are a bank, it doesn’t matter if the market value of our securities goes down, as long as we don’t have to sell them,” and that was sort of coherent.

Now it sounds crazy; it sounds like fraud. Mark-to-market discipline has taken over the financial world, and to the extent that banking is about the opposite — about not marking assets to market — it has a hard time. 7

* The 2008 financial crisis involved a lot of businesses — “shadow banks” — that borrowed short to lend long and sort of figured that their short-term funding was actually pretty stable and long-term. That worked out poorly, and people are skeptical about similar claims even from actual banks with branches and everything.

* Relationship businesses in general are on the decline. In a world of electronic communication and global supply chains and work-from-home and the gig economy, business relationships are less sticky and “I am going to go into my bank branch and shake the hand of the manager and trust her with my life savings” doesn’t work.

“I am going to do stuff for relationship reasons, even if it costs me 0.5% of interest income, or a slightly increased risk of losing my money” is no longer a plausible thing to think. Silicon Valley Bank’s VC and tech customers talked lovingly about how good their relationships with SVB were, after withdrawing all their money. They had fiduciary duties to their own investors to keep their money safe! Relationships didn’t matter.

Raising Equity

Or just, like, you are a regional bank, your assets have lost value, you look a little bit mark-to-market insolvent, what do you do? Well, the traditional approach is that you raise equity: You sell stock to investors, so that you will have more equity, so that you will no longer be insolvent.

Why would the investors buy the stock? Well, the traditional answer is that a bank is worth more than just its balance sheet, more than its assets minus its liabilities. It has those relationships! It can generate income in the future, which is worth something, even if its assets have technically lost value. 8

But it turns out that if you are a troubled regional bank and you go out to raise equity in the spring of 2023, investors will say “hmm it says here that your assets are worth less than your liabilities,” they will not buy the stock, and your depositors will also notice and panic and flee. It is tempting to sit very still and hope no one notices; raising equity is too risky. Anyway:

* Goldman Sachs Group Inc.’s role in Silicon Valley Bank’s attempt to raise funds in March is under review by US governmental agencies, which are looking into the failed transaction that helped push the US regional-banking system into turmoil.

* The Wall Street titan is cooperating and providing information to the government in connection with their investigations and inquiries into Silicon Valley bank, including the role the firm played with the now-failed bank in March, according to a regulatory filing.

* SVB offloaded a $24 billion portfolio to Goldman at a loss and sought the firm’s help in raising more than $2.2 billion to cover the shortfall, according to disclosures in March. Goldman couldn’t pull off the deal and a bank run in the wake of that offering effectively doomed SVB. …

* On March 8, Goldman pitched a plan to investors to help plug [SVB’s capital] hole, and then some, by raising $2.25 billion in capital from General Atlantic and other investors.

* Rival banks and investors have privately and publicly pointed fingers at Goldman for failing to line up the capital in advance and spooking the market. In the bankers’ view, they were racing the clock to defuse the Moody’s threat [of a ratings downgrade]. That didn’t leave them enough time to canvass the market, line up the funding and present a neatly put-together deal.

* SVB’s customers raced to pull their deposits from the bank, concerned about its health. On March 9, customers sought to yank $42 billion of deposits from SVB, or roughly a quarter of its year-end deposits.

* The spiraling chaos forced Goldman to shelve the offering, and by the end of the week regulators had seized the California firm, which at the time was the second-biggest bank failure in US history.

I assume the investigation is less about “did you mess up the capital raise” and more about “did you buy the bond portfolio at a price that was good for you and made the capital situation worse,” but the capital raise did not help.

Elsewhere, here is a proposal for “Resolving the Banking Crisis” by Peter DeMarzo, Erica Jiang, Arvind Krishnamurthy, Gregor Matvos, Tomasz Piskorski and Amit Seru. Their basic argument is:

* A ton of banks have big mark-to-market losses due to interest-rate moves: They estimate that “2,315 banks — accounting for $11 trillion of assets in aggregate — fall below” zero equity if their assets are marked to market.

But “the mark-to-market test … is a component of solvency, but is not determinant. Banks have franchise value that is not reflected in the value of the securities and loans they own. Thus it is likely that a large fraction of the 2,315 banks in the figure are solvent on a long-term basis even after the interest rate shock we have experienced.”

* So the Fed should force them to raise equity: “Economic solvency requires a market test. The ability to raise new equity or long-term unsecured debt from outside investors is a market test that draws a clean line between solvent but illiquid and insolvent. In addition, new capital inflows will reduce fragility and restore ‘skin in the game’ for these institutions.”

Maybe! But the recent experience is that trying to raise equity can cause the collapse: If you need to raise money, nobody wants to hear about “franchise value.”

This is a problem, because DeMarzo et al. are not wrong: Most of these banks probably are economically viable, and the solution to a banking crisis really is to raise more equity. But it seems to be a bit stuck.

PacWest, Western Alliance

Et Cetera:

* PacWest Bancorp., a regional bank teetering following the collapse of three rival California-based lenders, has been weighing a range of strategic options, including a sale, according to people familiar with the matter.

* The Beverly Hills-based bank has been working with a financial adviser and has also been considering a breakup or a capital raise, said the people, who asked to not be identified because the matter isn’t public. While it is open to a sale, the company hasn’t started a formal auction process, the people said.

* An outright sale has been hindered because there aren’t many potential buyers interested in the entire bank, which comprises a community lender called Pacific Western Bank and some commercial and consumer lending businesses, the people said. A potential buyer would also have to potentially book a big loss marking down some of its loans, the people said. …

* PacWest, led by Chief Executive Officer Paul W. Taylor, tried multiple times to reassure investors about its stability, with the bank saying on March 10 that it had taken steps to bolster itself, and then on March 22 saying that deposits had stabilized.

* But it also put aside efforts to raise capital at the time, explaining it wouldn’t be prudent under current conditions.

Selling the bank seems like it might be easier than raising equity. On the other hand:

* Western Alliance Bancorp denied a report that it’s exploring strategic options including a possible sale of all or part of its business.

* “This story is absolutely false, there is no truth to this,” Stephanie Whitlow, Western Alliance’s chief marketing officer, said in an email.

* The Financial Times reported Thursday morning that the Phoenix-based company has hired advisers to explore its options, citing two people familiar with the matter, adding that the bank’s deliberations were at an early stage and might not come to anything.

Doing a deal is probably good for stability, but a rumor that you are trying to do a deal is bad.

First Horizon

Weird:

* Toronto-Dominion Bank and First Horizon Corp. have agreed to terminate their previously announced merger amid uncertainty about the possibility of regulatory approvals.

* The lenders said in a statement Thursday that they “entered into a mutual agreement” to terminate their 2022 merger. TD will make a $200 million cash payment to Memphis-based First Horizon, on top of a $25 million reimbursement due as part of the merger agreement.

* The move is a reversal of TD’s push into the US, at a time when the nation’s regional banks are being roiled by deposit outflows and investor caution after a series of smaller firms collapsed. Banking indexes have fallen more than a third since the deal was first agreed. …

* Even before the market turmoil, doubts about the deal had been swirling for months amid concerns that US regulators may block the deal. President Joe Biden has been urging tougher oversight of mergers and Senator Elizabeth Warren criticized the Toronto-based bank over its sales practices.

JPMorgan Chase & Co. bought a bigger bank than First Horizon three days ago! My rough model of bank merger regulation is that there are people whose job is basically “antitrust regulator,” and in the current administration they are generally skeptical of bank mergers, particularly ones in which a big bank gets bigger.

And then there are people whose job is basically “financial stability regulator,” and in the current regional banking chaos they are going out and pitching mergers themselves.

I think if you’re a financial-stability person right now, any regional bank merger is a good regional bank merger. But the antitrust people have had longer to work on this one and they don’t like it.

People Are Worried About Stock Buybacks

I wrote yesterday about the US Securities and Exchange Commission’s theory of stock buybacks. In particular, there is sort of a background theory of “buybacks are bad because companies should be spending that money on salaries or research instead,” but the SEC’s concern is the more niche theory that “buybacks are bad because executives sell stock when companies are buying.” I quoted a 2018 speech by former SEC Commissioner Robert Jackson:

* In half of the buybacks we studied, at least one executive sold shares in the month following the buyback announcement. In fact, twice as many companies have insiders selling in the eight days after a buyback announcement as sell on an ordinary day. So right after the company tells the market that the stock is cheap, executives overwhelmingly decide to sell.

Like three people emailed me to say: Well, of course. Most of the time, companies announce a buyback when they announce quarterly earnings.

And most public companies have “blackout periods,” in which executives are not allowed to trade stock for some portion of each quarter (when they might have nonpublic information about earnings), but are allowed to sell stock in the “open window” shortly after the company announces earnings (because then all of the information is public).

If executives can only trade on 30 days each quarter, and those 30 days are the ones right after an earnings announcement, then executives will naturally concentrate their trading in the times after buyback announcements. But it is not because of the buyback; it is because of how public-company calendars work.

Anyway though the SEC does seem keen on this theory, and the new rules it adopted yesterday include that each public company will have to disclose “any policies and procedures relating to purchases and sales of the issuer’s securities during a repurchase program by its officers and directors, including any restriction on such transactions.”

I pointed out that this is a soft way for the SEC to say “companies should restrict executives from trading stock during a buyback.”

Combine That With The Open-Window Point, And You Get Something Like The Following:

* Executives can only trade in a short window after earnings.

* The SEC wants to ban them from trading during a stock buyback.

* If a company does a buyback, it’s going to be in the short window after earnings.

* Therefore, if a company does buybacks regularly, its executives will pretty much never be able to trade stock.

* Therefore executives will have to stop selling stock, or companies will have to stop doing buybacks.

Feels Like The Sort Of Result The SEC Might Like.

Things Happen

Swiss Hit With 120 Lawsuits Over Credit Suisse AT1 Bond Wipeout. SVB Financial Must Wait in Line for Its $2 Billion, FDIC Says. Big Hedge Funds Face New 72-Hour Deadline to Report Losses. Scrambling to Avoid Default, White House Weighs Debt-Limit Fallback Options.

Veteran of 1980s banks crisis hits out at sale of First Republic to JPMorgan. Federal Agency Suspends Inspector General After Oversight Body Alleged ‘Substantial Misconduct.’ The unknown Indian company shipping millions of barrels of Russian oil.

Coinbase Is Facing an ‘ Existential Risk’ as SEC Reins In Crypto. Bill Gates, Leon Black, Thomas Pritzker: ​One​ Day in the Life of Jeffrey Epstein. Epstein’s Islands Sell to Finance Buyer Planning Luxury Resort.

Paris shaking off ‘backwater’ tag as international banks expand. Twitter’s Unpaid Bills Threaten to Be an Even Bigger Problem for Elon Musk. “About 60% of First Republic’s outposts are just a five-minute walk — or less — from a Chase branch.”

(1). I am being very general here, and this description is accurate mainly for held-to-maturity bonds and loans. Banks classify other bonds as available-for-sale, and their market value is a bit more relevant for accounting and capital, though there is some controversy about the details there.

(2). In particular, I worked at Goldman Sachs Group Inc. during the global financial crisis, including when Goldman became a bank holding company in 2008. I recall that, before 2008, Goldman could be a bit snooty about the regular banks: “We mark everything to market, which imposes discipline and makes us smart and careful,” was the message, “while regular banks can just say that their loans are ‘held to maturity’ and never reflect their true value in their financial statements.”

(3). I have cited it a few times now, but this 2021 Journal of Finance paper by Itamar Drechsler, Alexi Savov and Philipp Schnabl, “Banking on Deposits: Maturity Transformation without Interest Rate Risk,” is a good modern explanation of this theory. A sample: “We show that despite having a large maturity mismatch banks do not take on significant interest rate risk. Rather, because of the deposit franchise, maturity transformation actually reduces the amount of interest rate risk banks take on.

Two essential properties of the deposit franchise drive this result. First, the deposit franchise gives banks market power over retail deposits, which allows them to borrow at rates that are both low and insensitive to market interest rates.

Second, while running a deposit franchise incurs high operating costs (branches, salaries, marketing, technology), these costs do not vary much over time and hence are also insensitive to interest rates. Thus, even though deposits are short term, funding via a deposit franchise resembles funding with long-term fixed-rate debt.”

(4). Even Byrne Hobart, who shorted SVB and flagged its insolvency back in February, didn’t really think it was a big deal: He wrote at the time that “one reason banks aren’t required to mark assets to market is that they can hold them indefinitely as long as they have deposits,” and that “it would take an absolutely titanic bank run to actually impair the company’s liquidity, so a run is unlikely.”

(5). Here is Bloomberg News on the proposed regulatory changes. Here is a column from Bank Reg Blog. Here is a Twitter thread from Dan Davies.

Here is one more that is so speculative that I am embarrassed and putting it into a footnote: Last year’s collapse of a bunch of big levered crypto firms, and particularly FTX, put a distinct focus on the *balance-sheet* value of leveraged financial institutions, not their *franchise value*.

Even at the end for FTX, as its balance sheet was public and horrifying, Sam Bankman-Fried was out trying to raise money with the argument that FTX’s franchise value — its customer base, its reputation, its regulatory licenses — was worth enough to fill the balance-sheet hole. That didn’t work at all, and a lot of people viewed it as sort of insane and fraudulent, and the whole idea is tarnished now.

(7). I think I get this idea, that banking is a relic of a pre-mark-to-market world but that the world around it has changed, from my reading of Nicholas Dunbar’s “The Devil’s Derivatives” and Friedman and Kraus’s “Engineering the Financial Crisis.”

(8). Also, on Theory 2, if the assets have lost value then the liabilities have also become smaller: Your sticky core deposits, which still pay low interest rates, offset some of the asset losses. Part of the value that JPMorgan Chase & Co. attributed to First Republic Bank was this “core deposit” value.

(9). This is loose. Companies can do buybacks using 10b5-1 plans or accelerated share repurchases where much or all of the purchasing happens during a blackout period, though they will *sign* those plans (and presumably announce them) during an open window.

TD, First Horizon End $13 Billion Merger As Regulators Stall

* Canadian Bank Said It Couldn’t Provide A Regulatory Timeline
* Deal’s Collapse Comes With Us Regional Lenders Under Pressure

Toronto-Dominion Bank and First Horizon Corp. scrapped their $13.4 billion deal after the Canadian lender said it couldn’t see a clear path to getting regulatory approval.

First Horizon Chief Executive Officer Bryan Jordan said the two banks made the decision very recently and signed the termination late Wednesday. Toronto-Dominion will make a $200 million cash payment on top of a $25 million reimbursement that was part of the merger agreement.

The move ends weeks of speculation about the fate of a deal that was announced in February 2022, right before the world’s major central banks began a historic campaign of interest rate increases.

The rapid change in the rate environment has strained the balance sheets of some US regional banks, causing deposit outflows and contributing to the collapse of firms including Silicon Valley Bank and First Republic Bank.

Shares in First Horizon tumbled 35% to $9.82 as of 9:58 a.m. in New York. The Memphis-based bank held an early-morning conference call, aiming to reassure investors that it has stable funding and plenty of capital. “We have seen no notable changes to our outflows. It’s been consistent since the beginning of March,” Chief Financial Officer Hope Dmuchowski said.

The two banks said the unspecified regulatory issues clouding the deal weren’t related to First Horizon. TD shares rose 1.5% in Toronto.

“While today’s announcement is unfortunate and unexpected, First Horizon will continue on its growth path,” Jordan said in the statement. Toronto-Dominion CEO Bharat Masrani said the decision provides “colleagues and shareholders with clarity.”

TD’s deal for First Horizon for $13.4 billion would have been its largest ever, expanding its US footprint by adding more than 400 branches in the US Southeast. For Masrani, the deal was a major milestone, his most significant strategic M&A decision since taking the role in 2014.

The deal’s collapse leaves with TD with a large amount of capital, with a common equity tier 1 ratio of 15.5% as of Jan. 31, giving it the balance sheet to potentially seek other deals.

“Given the precipitous drop in regional bank valuations since TD made its announcement to purchase First Horizon, the fact that it is not preceding at the original valuation is a positive,” Barclays analyst John Aiken said in note to investors. “However, we are surprised that the parties could not come to an agreed upon lower price and believe that there could be broader repercussions from walking away from the deal.”

The transaction had valued First Horizon at just over double its tangible book value. The KBW Regional Banking Index traded at a weighted average of 2.05 times tangible book at the time the deal was announced, but now has fallen to about 1.4 times, according to data compiled by Bloomberg.

Even before the recent market turmoil, doubts about the deal had been swirling for months. President Joe Biden has been urging tougher oversight of mergers and Senator Elizabeth Warren criticized the Toronto-based bank over its sales practices. First Horizon closed Wednesday at $15.05 a share in New York, far below TD’s $25 offer.

What Bloomberg Intelligence Says

* The mutually agreed termination of Toronto-Dominion Bank’s offer for First Horizon will leave TD with C$21 billion in surplus capital over the new hurdle, more than all peers and ample for uncertain times ahead. With excess capital, the lender may be able to do buybacks, and also look for another acquisition target to accelerate its US growth strategy, but future offers may carry lower valuations.

Updated: 5-5-2023

Bank Stocks’ Volatility Draws Scrutiny For Potential Market Manipulation

Biden administration to monitor short-selling pressures on healthy banks.

State and federal authorities are looking into the possibility of market manipulation behind recent volatility in bank stocks, according to a report Thursday.

Reuters reported that the wild stock swings and increased short-selling activity for banks that have solid fundamentals, including sufficient capital, have drawn the attention of state and federal officials and regulators, who are assessing potential market manipulation.

Regional bank stocks plummeted Thursday, with PacWest Bancorp PACW, 53.92%, Western Alliance Bancorp WAL, 32.09% and Zions Bancorp ZION, 15.50% hit hard following a report Wednesday that PacWest was weighing a possible sale, though all three saw shares rally somewhat in after-hours trading.




The sector has seen extreme volatility in recent months, following the failures of Silicon Valley Bank, Signature Bank and First Republic Bank.

The Biden administration is keeping a close eye on the situation.

“The administration is going to closely monitor the market developments, including the short-selling pressures on healthy banks,” White House press secretary Karine Jean-Pierre said Thursday during a briefing.

In a statement Thursday, Securities and Exchange Commission Chair Gary Gensler added: “In times of increased volatility and uncertainty, the SEC is particularly focused on identifying and prosecuting any form of misconduct that might threaten investors, capital formation or the markets more broadly.”

Updated: 5-24-2023

Ex-Morgan Stanley Adviser Gets Seven Years for Fleecing Clients in Ponzi Scheme

A former Morgan Stanley financial adviser was sentenced to more than seven years behind bars for ripping off retirees and other clients in a decade-long Ponzi scheme.

Shawn Edward Good took in $7.2 million from at least 13 victims, according to federal prosecutors in Raleigh, North Carolina.

Instead of investing the money in real estate projects and tax-free municipal bonds, he used it to pay off earlier investors and to fund a lavish lifestyle, they said, calling him a “financial predator.”

Good’s fraud lasted from 2012 to 2022 and cost his clients more than $3 million, prosecutors said in a court filing. He was sentenced Wednesday to seven years and three months in prison by US District Judge James C. Dever III, according to a statement from Michael Easley, US attorney for eastern North Carolina.

He was also ordered to pay $3.6 million in restitution to victims.

“Shawn Good robbed the savings and retirements of clients who trusted him – including a widow, a single mom, and a retired police officer,” Easley said in the statement.

Good pleaded guilty in September 2022 to wire fraud and money laundering.

Good’s lawyer, Joe Zeszotarski, didn’t immediately respond to a voicemail and email seeking comment on the sentencing.

“This individual has not worked at Morgan Stanley since February 2022,” a spokesperson for the bank said in a statement. “The conduct he was convicted of, which affected a small number of clients, is plainly unacceptable.

We cooperated fully with law enforcement and other authorities, and appreciate that the criminal prosecution has been successfully concluded.”

Good used client money for high-end restaurants, a home and vacation condo and trips to Europe and Disney World, according to the government. He also paid for cars, including a Lexus RX350, a Porsche Boxster, a Tesla Model 3 and an Alfa Romeo Stelvio.

Between September 2017 and August 2019, he transferred $136,000 in investor funds to “a female acquaintance,” according to prosecutors. His Venmo account showed $110,000 in payments with memo lines that included “tattoo,” “because your sexy,” “Hotel for Destiny,” “Nailz” and “shopping.”

Good told clients he was putting their money into low-risk investments that would return as much as 10% in three- or six-month terms.

He persuaded some to take out lines of credit secured by their Morgan Stanley investment and retirement accounts, according to the government.

The case is US v. Good, US District Court, Eastern District of North Carolina (Raleigh).

Updated: 6-6-2023

Wells Fargo Seeks To Settle ‘Banking While Black’ Mortgage Case

* Private Mediation To Be Led By Retired Oklahoma Federal Judge

* Bank Is Accused Of Bias Against Black Refinancing Applicants

Wells Fargo & Co. is pursuing private mediation to settle claims of widespread discrimination against Black homeowners by denying them lower interest rates through refinancing and forcing them to pay more for loans.

Lawyers for the bank and borrowers said they’ve agreed to work with a former federal judge to try to resolve a group of class-action lawsuits — which, if successful, would spare Wells Fargo from having to publicly litigate allegations that it engaged in a modernized version of “redlining.”

The attorneys committed to holding a mediation session within the next six months with Layn Phillips, a retired judge from Oklahoma, and one of his partners, according to a filing late Friday in San Francisco federal court. Any settlement would require court approval.

“The parties are unsure at this time whether settlement is likely, but agree to work together in good faith to achieve settlement, if possible and at the appropriate time, with the assistance of a highly regarded private mediator,” the opposing lawyers said in a joint court filing last month.

The lawsuits cite reporting by Bloomberg News last year showing that Wells Fargo rejected a disproportionate number of Black homeowners’ refinancing applications in 2020 when the pandemic set off a rush to lock in lower rates.

Civil rights lawyer Ben Crump, who is part of the team representing homeowners, has denounced the company’s practices as “banking while Black.”

A Wells Fargo representative had no immediate comment. In a court filing last June, the company denied that it “engages in any discrimination.”

When Bloomberg News reported on the disparities in March 2022, Wells Fargo declined to comment about individual customers but didn’t dispute Bloomberg’s statistical findings.

It said it treats all potential borrowers the same, is more selective than other lenders, and an internal review of the bank’s 2020 refinancing decisions confirmed that “additional, legitimate, credit-related factors” were responsible for the differences.

Wells Fargo Mortgage Discrimination Litigation, 22-cv-00990-US District Court, Northern District of California (San Francisco).

Updated: 6-7-2023

Supreme Court Rulings Make White-Collar Fraud Charges In The US Harder

Recent decisions on bid-rigging and college admissions scandals could be a precedent in cases of alleged financial crime.

The US Supreme Court has long been divided on everything from abortion to immigration. But there’s one issue on which the justices have been in broad agreement: They think federal prosecutors have overreached with certain kinds of white-collar fraud cases.

Recent rulings by the court and a lower appellate panel may make it more difficult to bring charges related to suspected financial schemes including bank fraud, money laundering and insider trading. Some defense attorneys see the decisions as a way out for their clients.

In May the Supreme Court narrowed the use of federal fraud statutes in two rulings involving scandals in New York. On the same day, a Boston panel overturned the convictions of the only two parents who went to trial in the high-profile “Varsity Blues” college admissions scandal, saying the government had tried to “criminalize a wide swath of conduct” that isn’t illegal, even if it might be unethical.

The decisions brushed back attempts to use federal wire fraud charges to criminalize conduct that didn’t involve stealing money or tangible property.

“You are beginning to see a string of cases—that are somewhat related—that are pushing back on these very aggressive theories used by prosecutors,” says Andrew Boutros, a white-collar defense attorney at Dechert.

“Rather than going after cases that are straightforward layups, you have a scenario where the government is taking shots from the half-court line and missing.”

In one of the key cases, the court overturned the wire fraud conviction of New York real estate developer Louis Ciminelli.

Prosecutors said he was part of a bid-rigging scheme in which the requests for bids on a $750 million public development contract were narrowly tailored so that his company would be the likely winner.

Based on a theory called “right to control”—the idea that information needed to make economic decisions can be a kind of property—prosecutors argued that Ciminelli defrauded the nonprofit agency in charge of the project of its ability to make a sound decision about which developers to hire.

The court shot this idea down. “The ‘right-to-control theory’ vastly expands federal jurisdiction without statutory authorization,” wrote Justice Clarence Thomas in its opinion.

“Because the theory treats mere information as the protected interest, almost any deceptive act could be criminal.” Thomas wrote that such cases might be a matter for civil suits or state law.

Since 2010, prosecutors have used the right-to-control theory in the Second US Circuit Court of Appeals against at least 125 people, according to an amicus brief filed by the New York Council of Defense Lawyers in support of Ciminelli.

The brief listed a number of financial schemes where juries found defendants guilty of wire and bank fraud. In one case, the government charged defendants for tricking banks into processing marijuana-related transactions.

Another involved a chief executive officer who was found guilty of inflating bond values to get loans for his company. Another found that money managers inflated hedge fund values to keep investors from redeeming.

The Supreme Court’s decision will likely drag out cases, because the government will now question theories it previously relied on, says Miriam Baer, vice dean at Brooklyn Law School and a former federal prosecutor in New York.

“That level of uncertainty certainly harms consumers and investors, because the government isn’t sure what it can or cannot enforce,” she says.

The decision could also hurt efforts to clamp down on money laundering and evasion of sanctions in situations where foreign banks and individuals are accused of deceiving US financial institutions to process dirty money.

“The more fraud and criminality you have in our financial markets, the more reluctant investors are going to be to invest,” says Dennis Kelleher, co-founder and CEO at Better Markets, an organization advocating stricter financial regulation.

“It’s going to hurt capital formation, it’s going to hurt business formation, it’s going to hurt employment. And the question is: to what degree, and how soon?”

The tough-on-prosecution rulings aren’t limited to the right to control. On the same day as the Ciminelli case, the high court also partially overturned the conviction of Joseph Percoco, a onetime adviser to former New York Governor Andrew Cuomo.

He had been found guilty of taking payments to benefit a developer, but the justices said he couldn’t be prosecuted for conduct that took place after he resigned his official position.

The decision limits the scope of prosecutions for the theft of honest services—that is, violating the expectation that an official will act ethically.

Likewise, in the Varsity Blues case, prosecutors alleged honest services theft because parents had made donations to persuade university officials to admit their children. But the Boston appeals panel rejected this because the alleged victim, the University of Southern California, was also the one receiving the money.

Some defense attorneys may use the latest rulings to push for their clients’ release or persuade the government to drop investigations.

Michael Binday, a former insurance agent who was sentenced to 12 years on mail and wire fraud charges, has spent more than eight years unsuccessfully challenging the right-to-control theory. On May 22 the Supreme Court said that, in light of Ciminelli, the Second Circuit must reconsider his case.

Binday was accused of tricking life insurance companies into issuing policies they would have otherwise rejected. Prosecutors contended that his conviction should be upheld even if the right-to-control theory is tossed, because his commissions from the insurance companies were essentially stolen.

Binday has disputed the idea that he stole money from the companies, which he argued reaped premiums from the policies.

David Shapiro, Binday’s lawyer, has asked for bail.

“Michael is very frustrated that the government doesn’t recognize that he should not be in prison,” Shapiro says. “He has made the argument over and over.” Binday is currently on home confinement.

Former FTX CEO Sam Bankman-Fried is also trying to take advantage of the rulings, arguing that some charges against him were based on the right-to-control theory.

A day after the high court released its decision, his lawyers wrote to US District Judge Lewis Kaplan arguing that Ciminelli has “direct bearing” on his case. The 31-year-old is accused of orchestrating a multibillion-dollar fraud through his once-bustling cryptocurrency exchange.

“The end of the right to control won’t affect many cases overall,” says Daniel Richman, a former federal prosecutor in New York who now teaches at Columbia Law School. “But it will affect the way a lot of important cases are prosecuted, and maybe even whether some get prosecuted at all.”

Updated: 6-22-2023

Banks Should Adopt Google’s AI-Driven Anti-Money-Laundering Product If Their Serious #GotBitcoin

Meanwhile, Bitcoin’s blockchain offers complete transparency and accountability.

The company is looking to set itself apart from a crowded field of surveillance platforms by reducing the amount of human input in the process of screening for money-laundering risks

Financial institutions have long relied on human judgment to calibrate systems that help spot potentially risky transactions and customers. Now, Google Cloud wants them to let its artificial intelligence technology take greater control of that process.

Alphabet’s cloud business on Wednesday announced the launch of a new AI-driven anti-money-laundering product. Like many other tools already on the market, the company’s technology uses machine learning to help clients in the financial sector comply with regulations that require them to screen for and report potentially suspicious activity.

Where Google Cloud aims to set itself apart is by doing away with the rules-based programming that is typically an integral part of setting up and maintaining an anti-money-laundering surveillance program—a design choice that goes against the prevailing approach to such tools and could be subject to skepticism from some quarters of the industry.

The product, an application programming interface dubbed Anti Money Laundering AI, already has some notable users, including London-based HSBC, Brazil’s Banco Bradesco and Lunar, a Denmark-based digital bank.

Its launch comes as leading U.S. tech companies are flexing their artificial intelligence capabilities following the success of generative AI app ChatGPT and a race by many in the corporate world to integrate such technology into a range of businesses and industries.

Financial institutions for years have relied on more traditional forms of artificial intelligence to help them sort through the billions of transactions some of them facilitate every day. The process typically starts with a series of human judgment calls, then machine learning technology is layered in to create a system that enables banks to spot and review activity that might need to be flagged to regulators for further investigation.

Google Cloud’s decision to do away with rules-based inputs to guide what its surveillance tool should be looking for is a bet on AI’s power to solve a problem that has dogged the financial sector for years.

Depending on how they are calibrated, a financial institution’s anti-money-laundering tools can flag too little or too much activity. Too few alerts can lead to questions—or worse—from regulators. Too many can overwhelm a bank’s compliance staff, which is tasked with reviewing each hit and deciding whether to file a report to regulators.

Manually inputted rules drive up those numbers, Google Cloud executives argue. A user, for example, could tell the program to flag customers that deposit more than $10,000 or send multiple transactions of the same amount to over 10 accounts.

As a result, the number of system-generated alerts that turn out to be bad leads, or what the industry calls “false positives,” tends to be high. Research by Thomson Reuters Regulatory Intelligence puts the percentage of false positives generated by such systems at as high as 95%.

With Google Cloud’s product, users won’t be able to input rules, but they will be able to customize the tool using their own risk indicators or typologies, executives said.

By using an AI-first approach, Google Cloud says its technology cut the number of alerts HSBC received by as much as 60%, while increasing their accuracy. HSBC’s “true positives” went up by as much as two to four times, according to data cited by Google.

Jennifer Shasky Calvery, the group head of financial crime risk and compliance at HSBC and the former top U.S. anti-money-laundering official, said the technology developed by Google Cloud represented a “fundamental paradigm shift in how we detect unusual activity in our customers and their accounts.”

For many financial institutions, ceding control to a machine-learning model could be a tough sell. For one, regulators typically want institutions to be able to clearly explain the rationale behind the design of their compliance program, including how they calibrated their alert systems. The usual line of thinking among banks and their regulators is that such systems should be tailor-made to the specific institution and its risk profile.

And while compliance experts say machine-learning-driven anti-money-laundering tools have improved over the years, their limitations have made some in the industry skeptical of their ability to substitute for a human’s capacity to figure out where the risks actually lie.

“There’s so much contextual information that isn’t accounted for by these systems,” Sarah Beth Felix, a consultant who helps banks vet and calibrate their anti-money-laundering tools, said of the existing tools on the market. “AI is only as good as the humans who train it.”

Google Cloud executives said they hope to ease these concerns, both by showing better results and through another feature of their product—what they called its “explainability.”

Instead of focusing on providing transaction alerts, the company’s product draws on a range of data to identify instances and groups of high-risk retail and commercial customers. Anytime the product flags a particular customer, it also provides information about the underlying transactions and contextual factors that led to the high-risk score, said Zac Maufe, global head of regulated industries solutions at Google Cloud.

“We spent a lot of time making sure that the language that the model was able to provide to the analysts spoke their words,” Maufe said. “It’s not just ‘give them the answer,’ it’s also ‘show them the homework.’”

For her part, Calvery said getting regulators to accept HSBC’s new approach was accomplished through testing and validation of the new tool.

“As soon as we saw that [Google Anti Money Laundering AI] was finding more, and was doing it with significantly less noise…we started asking ourselves, ‘What’s not the case for using it?’” she said.

Updated: 6-22-2023

JPMorgan To Pay $4 Million Over Accidentally (For The Third Time) Deleted Emails??? #GotBitcoin

The bank has faced questions from regulators in the past about its policies concerning retention of written communications.

In December 2021, the brokerage arm of JPMorgan agreed to pay $200 million in fines in settlements with the SEC and the Commodity Futures Trading Commission, and admit it failed to keep track of employees’ use of personal messaging apps such as WhatsApp that circumvented record-keeping requirements.

“Because the deleted records are unrecoverable, it is unknown—and unknowable—how the lost records may have affected the regulatory investigations,” the SEC said.

Brokerage arm settles with SEC over electronic communications mistakenly wiped from its archives.

JPMorgan Chase’s brokerage arm will pay $4 million in a settlement with the U.S. Securities and Exchange Commission after the accidental deletion of 47 million electronic messages it was supposed to retain.

While trying to clear a backlog of communications dating back to the 1970s, JPMorgan inadvertently wiped the messages, the SEC said in an order published Thursday.

The deletion, which took place in 2019, violated rules requiring brokers to retain communications for three years, the regulator said.

JPMorgan’s corporate compliance technology department was working on a project to delete old emails, instant messages and Bloomberg messages, but had difficulty deleting historical communications from the 1970s and 1980s, the SEC said.

During troubleshooting, messages from 2018 that should have been kept were wiped after an outside provider of archival services gave faulty information about the electronic protections the documents were supposed to have, according to the regulator.

The bank’s legal discovery team discovered the mix-up several months later, but the documents couldn’t be recovered, the SEC said.

JPMorgan “takes its record keeping obligations seriously,” a spokeswoman said. “We have taken steps to enhance our process and procedures.”

The bank, which itself reported the incident in 2020, didn’t admit or deny the allegations, according to the order.

The missing messages hampered regulatory investigations, according to the SEC. In 12 investigations, including eight directly involving the SEC, JPMorgan was unable to produce communications that were sought because they were no longer there, the regulator said.

Updated: 6-30-2023

Wells Fargo Staffers Claim Anti-Latino Bias In Predatory Lending Scheme

* Bilingual Mortgage Sales Consultants Sue In San Antonio Court

* Bank Accused Of Pushing High-Cost Products Without Disclosure

Wells Fargo & Co. was sued by current and former members of its bilingual mortgage sales team who claim the company discriminated against both them and its Hispanic customers in a predatory lending scheme.

The complaint was filed Friday in federal court in San Antonio as a proposed class action on behalf of more than 20 Spanish-speaking mortgage sales consultants “of Hispanic ethnicity or from Mexico or other Central and South American countries.”

Wells Fargo directed its bilingual team to steer customers away from products with no closing costs toward “predatory lending options” without disclosing the costs, in part by refusing to provide Spanish-language written materials, according to the complaint.

“Customers sometimes call into the bilingual team months after closing a refinance cash out, surprised to discover they have been charged substantial closing costs,” according to the complaint. “Nevertheless, management instructs the bilingual team, ‘Don’t mention cash out.’”

The suit cites previous reporting by Bloomberg News showing that Wells Fargo rejected half of its Black applicants during the mortgage refinancing boom in 2020.

This month, in response to a court order to pursue private mediation, lawyers for Wells Fargo and for borrowers told a judge they will work with a retired federal judge’s mediation service to try to resolve lawsuits alleging widespread discrimination against Black homeowners.

Friday’s complaint also alleges racism and discrimination by the bank toward its own employees. Wells Fargo refused to allow the bilingual team to join a pilot program that allows its mortgage consultants commissions regardless of their sales, according to the complaint.

When the mortgage industry crashed last year, it decimated the income of employees on the bilingual team, as they were “not permitted to join the pilot program in equal numbers to the English team,” according to the complaint.

The plaintiffs are seeking unspecified monetary damages from the bank.

Wells Fargo had no immediate comment on the suit.

The case is Garcia v. Wells Fargo Bank NA, 23-cv-00825, US District Court, Western District of Texas (San Antonio).

Updated: 7-10-2023

Wall Street Banks Face $8 Billion In Municipal Bond Price-Fixing Claims

* BofA, JPMorgan, Citigroup Among Banks Named In Lawsuits

* Banks May Settle FCA Suits For About $1.5 Billion, BI’s Stein

After almost a decade and untold millions of dollars in legal fees, some of Wall Street’s biggest banks will finally get their day in court on allegations of price-fixing in the municipal bond market — that is if they don’t settle first.

Bank of America, Barclays Capital Inc., BMO Financial Corp., William Blair & Co. LLC, Citigroup Inc., Fifth Third Bancorp, JP Morgan Chase & Co. and Morgan Stanley are expected to go to trial in Illinois next month to face allegations they inflated interest rates on bonds to finance public works to discourage investors from returning them for cash and colluded in setting the rates.

It is the first of four such cases originally filed under seal in 2014 by a Minnesota financial adviser, B.J. Rosenberg, saying that the banks caused a collective $1.5 billion in damages and seeking restitution for triple that amount.

Another $6.5 billion in damages hangs in the balance in antitrust litigation in New York.

A dozen banks are defendants across the four lawsuits which also span California, New York and New Jersey. The lawsuits allege that from 2008 until relatively recently the banks — acting as remarketing agents for long-term bonds with periodic rate adjustments, called variable-rate demand obligations or VRDOs — failed to get issuers the lowest possible interest rates on securities where rates were typically reset on a daily or weekly basis to discourage investors from returning them for cash.

After a preliminary hearing on July 12, the Illinois trial filed on behalf of the state by an entity called Edelweiss Fund LLC is scheduled to begin in Cook County Circuit Court on Aug. 7.

A settlement is likely, according to Elliott Stein, a senior litigation analyst with Bloomberg Intelligence.

“One critical reason to settle is that potential damages in these cases can be tripled, so settling can mitigate the potential fallout,” said Stein in an email Friday. “Settling can also avoid bad evidence coming out or a bad outcome, which could potentially then be used in the other related cases.”

Settlement of the four False Claims Act cases could run to about $1.5 billion, Stein estimated. Barclays and Citigroup declined to comment; the other banks haven’t responded to requests for comment.

In their most recent motion for summary judgment, the banks said they exercised their judgment in setting rates for VRDOs, and that “cannot be second guessed; it is ‘conclusive’ and ‘binding.’”

They also said that since the lawsuit was unsealed in 2017, issuers “have continued to pay Defendants to perform the very remarketing services attacked” under the lawsuit with no evidence suggesting issuers are conditioning payment on any specific interest-rate standards.

In addition to the four False Claims Act lawsuits, an antitrust lawsuit was filed by Philadelphia and Baltimore in 2019 in the Southern District of New York, also alleging manipulation of VRDO rates.

The New York suit is likely to produce claims of $6.5 billion in damages with compensation sought again tripling, according to BI’s Stein.

He expects a settlement of about $1 billion, with Bank of America on the hook for the most — about $225 million.

The market for VRDO debt has been shrinking since the financial crisis when in 2008 more than $115 billion of debt was sold to refinance both auction-rate and insured floating-rate debt, as the auction market froze and insurance companies were downgraded amid the chaos.

In the early years of this century, issuers sold between $30 billion and $60 billion of VRDO debt annually. In 2022, they sold around $6 billion in such debt, according to data compiled by Bloomberg.

So far this year, issuers have sold $4.2 billion. There are currently around $128 billion in VRDOs outstanding.

Updated: 7-11-2023

US Consumer Watchdog Puts Card Issuers On Notice After BofA ‘Junk Fee’ Settlement

* Consumer Watchdog Won’t Tolerate ‘Bait-And-Switch’ Tactics

* Bank Of America Agrees To $250 Million Us Enforcement Action

The top US consumer watchdog will closely monitor whether credit-card issuers follow through on their marketing promises of sign-up bonuses and other perks following Tuesday’s $250 million enforcement action against Bank of America Corp.

“We will be looking at whether there are similar practices at other credit-card issuers,” Rohit Chopra, head of the US Consumer Financial Protection Bureau, said in an interview Tuesday after regulators announced the settlement with BofA.

“We are not going to tolerate any credit-card issuer that deceives consumers or engages in bait-and-switch tactics.”

Chopra said the CFPB received consumer complaints about card lenders failing to make good on sign-up bonuses and that it dedicates its investigative efforts to matters that attract complaints.

Bank of America, which didn’t admit or deny wrongdoing, agreed to pay $150 million in fines and $100 million to customers for improperly charging extra fees, withholding rewards and opening unauthorized accounts.

In 2012, American Express Co. paid $112.5 million to settle CFPB allegations that included duping consumers into believing they would receive $300 as well as bonus points if they signed up for a specific offering.

“Bank of America operates a sprawling empire of consumer businesses, so certainly it’s critical that the CFPB continue to closely scrutinize its business practices,” Chopra said.

He acknowledged that banks are in a “fierce war” with one another to win over credit-card users, turning to bonus points and other inducements. The marketed sign-up bonuses are in many ways as important as credit-card interest rates or annual fees, he added.

“When looking to sign up for a new card, many people closely scrutinize how many points they might get at sign up,” he said. “This is a very important piece of how consumers decide on which credit card they’re going to spend with.”

Merrill Lynch To Pay $12 Million For Failing To File Hundreds of Suspicious Activity Reports

Anti-money-laundering rules require broker-dealers to report to regulators on transactions over $5,000, but Merrill’s parent used a $25,000 threshold since their tie-up.

Broker-dealer Merrill Lynch has agreed to pay a total of $12 million in fines to regulators for failing to file about 1,500 suspicious activity reports over more than a decade.

Under U.S. anti-money-laundering rules, broker-dealers like Merrill Lynch are required to file suspicious activity reports to the Financial Crimes Enforcement Network on transactions above $5,000 when they might signal criminal activities, such as tax evasion, to assist U.S. government agencies in detecting and preventing money laundering.

Merrill Lynch’s parent company, which was implementing the broker-dealer’s anti-money-laundering program following Bank of America’s acquisition of Merrill during the 2008-09 financial crisis, used a $25,000 threshold, instead of the $5,000 one, for reporting SARs between 2009 and late 2019, the Securities and Exchange Commission said Tuesday.

Merrill agreed to pay $6 million to settle the SEC charges.

In a parallel enforcement action, the Financial Industry Regulatory Authority, the brokerage industry’s self-regulator, fined Merrill another $6 million for longstanding anti-money-laundering program failures, the regulator said Tuesday.

Finra alleged Merrill failed to apply the right threshold for SARs reporting for more than 10 years and failed to file nearly 1,500 SARs to regulators.

“Following an internal review, we reported this matter to regulators and have enhanced our process and training regarding these filings,” a spokeswoman for Merrill Lynch said in an email.

Bank of America, in a separate enforcement action Tuesday, was ordered to pay a $250 million penalty for opening credit-card accounts in customers’ names without their consent and double-charging fees, regulators said.

The Consumer Financial Protection Bureau said the bank opened credit-card accounts without permission from customers using credit reports it obtained illegally.

Broker-dealers’ compliance with filing SARs has been one of the top priorities for examinations by the SEC and Finra in recent years.

The SEC’s examination division, in a risk alert published in 2021, called attention to the compliance issues related to SARs monitoring and reporting by broker-dealers and provided guidance in strengthening firms’ anti-money-laundering programs.

Finra, in its 2023 examination findings report, listed the lack of ongoing monitoring and reporting of suspicious transactions as one of the top findings.

Updated: 7-12-2023

Bank Of America Will Pay Customers $100 Million For ‘Double-Dipping’ On Fees And Opening Fake Accounts. Will You Be One Of Them?

The $100 million in redress to customers is one part of Bank of America’s $250 million tab on the now-halted practices.

Federal regulators have ordered Bank of America to pay $100 million to customers for allegedly mistreating them with unfair fees, withholding credit-card rewards, and opening fake accounts.

The good news: Customers tangled up in the scandal do not have to do anything except wait to get paid by the bank if they have not been paid already, the Consumer Financial Protection Bureau said Tuesday.

“Depending on the circumstances of the consumer, Bank of America will deposit funds into the consumer’s deposit account or will send the consumer a check,” a CFPB spokesperson told MarketWatch.

“There’s no question that we needed to obtain substantial redress for the victims that Bank of America affected. Those consumers will not have to lift a finger in order to get those refunds,” CFPB Director Rohit Chopra said in an NPR interview airing Wednesday.

The $100 million in redress to customers is one part of Bank of America’s $250 million tab on the now-halted practices.

Bank of America also has to pay $90 million in penalties to the CFPB and $60 million to the Office of the Comptroller of the Currency.

The bank also dangled credit-card sign-up bonuses, but did not follow through on those rewards, the regulators said. To meet now-ceased sales goals, bank workers signed up certain consumers for credit cards without their knowledge, the CFPB also alleged.

“Bank of America wrongfully withheld credit card rewards, double-dipped on fees, and opened accounts without consent,” Chopra said in a statement.

“These practices are illegal and undermine customer trust. The CFPB will be putting an end to these practices across the banking system,” Chopra added.

“We voluntarily reduced overdraft fees and eliminated all non-sufficient fund fees in the first half of 2022. As a result of these industry-leading changes, revenue from these fees has dropped more than 90%,” a bank spokesperson said.

The bank did not admit wrongdoing in the matter, CFPB documents show.

A fee for insufficient funds is tied to a bounced payment. Overdraft fees can kick in when banks cover transactions even though there’s not enough money to cover it. Bank of America reduced its overdraft fee to $10 from $35 last May.

The fine for Bank of America comes at a time when the Biden administration is targeting the array of junk fees imposed on consumers.

Banks and credit unions last year raked an estimated $9.9 billion in overdraft and non-sufficient funds fees, down from $10.6 billion a year earlier, and well below the $15.5 billion in 2019, according to the nonprofit Financial Health Network.

Bank of America said it’s turned the page, but the story is not over yet.

There’s still approximately $80 million in repeat non-sufficient funds fees that still have to be refunded, the CFPB spokesperson said.

The bank has already paid approximately $23 million to the customers who were hoping for credit-card sign-up bonuses, the CFPB added. These customers were “deprived of hundreds of dollars each,” Chopra noted in the NPR interview.

The CFPB alleged people with accounts unknowingly opened in their name wound up getting charged for fees. The unauthorized card openings harmed the credit profiles of these customers because, on paper, they were setting up new credit lines.

It’s Bank of America’s job to find these customers and fix the fallout, the CFPB spokesperson said. “Consumers who are eligible for redress do not have to do anything. Bank of America will be sending redress to affected consumers.”

Bank of America’s fines were small compared to the $3.7 billion fine that the CFPB ordered last year against Wells Fargo & Co

In wide-ranging allegations, the CFPB said that bank wrongfully repossessed cars, foreclosed homes and hit deposit accounts with surprise fees. Wells Fargo did not admit wrongdoing in the settlement.

“As we have said before, we and our regulators have identified a series of unacceptable practices that we have been working systematically to change and provide customer remediation where warranted,” Wells Fargo CEO Charlie Scharf said in a December statement.

“This far-reaching agreement is an important milestone in our work to transform the operating practices at Wells Fargo and to put these issues behind us.”

The latest action comes as a question mark hangs over the future of the federal agency. The Supreme Court is poised to hear a case challenging the ways the CFPB gets its funding. The case is an “existential” issue for the agency, one CFPB official has said.

However, the actions taken against Bank of America are a timely reminder of the agency’s importance, another watchdog said Tuesday.

“The Consumer Financial Protection Bureau’s strong enforcement action shows why it makes a difference to have a federal agency monitoring the financial marketplace day in and day out,” said Mike Litt, consumer campaign director at U.S. PIRG. “We need the government to ensure that the CFPB continues to get reliably funded to do its one job: protecting consumers.”

Illinois Nears Settlement With Wall Street Banks Over Muni Price-Fixing Case

Illinois reached a tentative deal to settle a nearly decade-long lawsuit that alleged about a dozen of the biggest US banks engaged in price fixing in the municipal bond market.

The banks have offered to pay the state $68 million, according to Todd Schneider, an attorney who is representing plaintiff side.

The proposal comes as Bank of America, Barclays Capital Inc., BMO Financial Corp., William Blair & Co. LLC, Citigroup Inc., Fifth Third Bancorp, JPMorgan Chase & Co. and Morgan Stanley were expected to go to trial in Illinois next month to face allegations they inflated the interest rates on certain types of municipal bonds to discourage investors from returning them for cash and colluded in setting the rates.

Barclays, Citigroup, JPMorgan and Morgan Stanley all declined to comment on the proposed settlement. Representatives from Bank of America, BMO, William Blair and Fifth Third didn’t respond to email requests for comment.

A spokesperson for the Illinois Attorney General’s Office declined to comment.

The case revolved around allegations that the banks, which acted as remarketing agents for long-term bonds with periodic rate adjustments, called variable-rate demand obligations or VRDOs, failed to get issuers the lowest possible interest rates on securities where rates were typically reset on a daily or weekly basis.

This was allegedly done to discourage investors from returning them for cash.

The market for VRDO debt has been shrinking since the financial crisis when in 2008 more than $115 billion of debt was sold to refinance both auction-rate and insured floating-rate debt, as the auction market froze and insurance companies were downgraded amid the chaos.

“A $68 million settlement would be about 20% of the $349 million in damages sought by the Illinois plaintiff (before tripling).

That’s a pretty good outcome for the defendant banks, especially if spread across the 8 of them,” said Elliott Stein of Bloomberg Intelligence.

“And it signals that the other False Claims Act cases in California, New York and New Jersey are manageable for the banks too if they’re unable to prevail on some of their remaining defenses.”

Stein on Monday wrote that the banks were all likely to settle rather than face trial, and put a settlement value on the four False Claims Act cases at $1.5 billion.

He said an antitrust lawsuit with similar allegations filed in the Southern District of New York might reach $1 billion.

Updated: 7-13-2023

Regulators Should Be Tightening Anti-Money-Laundering Rules, Not Watering Them Down

Nigel Farage has a new Brexit crusade: Softening European Union-era anti-money-laundering laws that see him and other UK political figures as a high banking risk.

As others take up his call, including Rishi Sunak’s government, it’s a good time to recall why these rules exist – and why they should be toughened up instead of toned down.

Politicians weren’t always viewed with nervousness by their banker, after all. One Washington D.C. lender, Riggs, thrived as “the Bank of Presidents.”

The Sept. 11, 2001, attacks changed the mood: Probes into accounts run by former Chilean dictator Augusto Pinochet and Saudi diplomats flagged huge lapses in controls, and became a call for wider action. Riggs was taken over in 2005 as the winds of change blew far and wide.

Enter the scarlet letters of “PEP”: politically exposed persons. People in public office or prominent positions, as well as their family members and associates, have increasingly required more due diligence from banks and other gatekeeper firms.

As scandals exposing the offshore wealth of world leaders and officials show — such as the Pandora Papers — politicians do need to be held to a higher standard in a world of dirty money. “Some of them can either abscond with public funds or can be bribed,” says compliance expert David Caruso.

Farage and his backers today argue the PEP regime is sweeping up too many innocent bystanders. They say banks fearful of fines simply prefer to completely “de-risk” – i.e., ditch – some clients instead of proportionately weighing hazards.

Outsourced AML systems screening 2 million-plus PEPs around the world are criticized for lazily lumping domestic politicians in with those from countries with far bigger corruption issues.

UK PEPs say they and their families are stigmatized, with an MP from Sussex put in the same risk bracket as an African oil minister.

Fair enough: Being de-banked is distressing, as ordinary expats caught out by Farage’s original Brexit campaign can attest, and compliance is hair-pulling stuff.

But are PEPs being barred from public life, as Jeremy Hunt put it? His complaint of being refused an account at fintech Monzo would put him in good company, judging by how many consumer accounts the unprofitable neobank has quietly shuttered.

Farage’s grievance is contested — the BBC reported that Farage’s account at Coutts, which caters to high-net-worth customers, was closed because he fell below the required threshold.

It’s also hard to feel too much sympathy for other tales of woe from baronesses and lords over form-filling and intrusive questions — “demanding to know how many mortgages we have, how many necklaces we wear and things like that.”

The risk of trying to roll back PEP scrutiny in response is that it might go too far. The UK is seen in surveys as tougher on corruption than several of its neighbors to the South and East of Europe, but it’s hardly risk-free.

MPs’ shareholdings don’t need to be disclosed, raising the possibility of conflicts of interest; procurement scandals are bubbling up, with the UK health department seeking to recover £133 million ($172 million) in Covid-era spending from a firm linked to a Tory peer; and a (now-scrapped) golden visa scheme rewarding foreign investors with the right to live in the UK was used by 10 Russians who were later sanctioned after the invasion of Ukraine.

“The reality is that politicians are high-risk individuals and banks face big consequences for getting it wrong,” says Shelley Schachter-Cahm, compliance chief at Cex.io, a crypto trading platform. PEP probes aren’t just for Brexiteers.

In fact, the global PEP system looks more porous than it does draconian — raising the issue of whether rules should actually be tightened. Swiss bankers were hit with criminal charges in March after allegedly failing to carry out proper checks into a cellist confidant of Vladimir Putin; in February the Financial Times reported Russian warlord Yevgeny Prigozhin had passed AML checks at a London law firm by producing his mother’s gas bill.

Maybe a real Brexit benefit would be to deliver even more robust safeguards against financial crime. A Chatham House report in 2021, co-written by Thomas Mayne, recommended going beyond EU rules and toughening up oversight of PEPs who are beneficial company owners and who make big transactions above a certain level.

Due-diligence expert Robert Mitchell says defining a PEP should be clarified, perhaps being extended to officials in charge of big city-planning contracts, while setting expiry dates to ensure compliance headaches don’t go too far.

Yes, banks’ gold-plating of compliance has caused collateral damage, ensnaring those with just the “wrong” name and with the “wrong” passport. And yes, some PEPs are being unduly squeezed. But this is one political backlash that’s going in the wrong direction.

Updated: 7-14-2023

UBS Agrees To Settle Botched Muni Statements Suit For $2.5 Million

* Lawsuit Claimed Bank Inflated Muni Investors’ Taxable Income

* Hundreds Of Clients Could Qualify For Payment Under Agreement

UBS Financial Services agreed to pay $2.5 million to settle a class-action lawsuit claiming the bank provided inaccurate tax information to holders of taxable municipal bonds.

A federal judge in New Jersey gave preliminary approval to the deal Wednesday and scheduled a hearing in December to iron out details and make a final determination, according to a court filing.

Richard Goodman sued in 2021 on behalf of himself and other customers who bought taxable municipal bonds in accounts maintained by UBS.

He claimed the bank, which was overseeing more than $90 billion of municipal bonds, didn’t report amortizable bond premiums on forms clients used to prepare tax returns, resulting in overstatement of income and tax payments.

The settlement, reached after private mediation, didn’t specify how many clients will be part of the class, but there are “likely at least hundreds,” according to the filing.

Attorneys for UBS and Goodman didn’t return messages seeking comment on Friday.

The case is Goodman v. UBS Financial Services, 21-cv-18123, U.S. District Court, New Jersey.

Cantor Fitzgerald Failed To Report Large Traders For Years, SEC Alleges

Cantor Fitzgerald LP agreed to pay $1.4 million to settle allegations from the US Securities and Exchange Commission that it failed to properly let the regulators know about clients who were considered to be large traders.

Over several years, Cantor seldom submitted required forms that identify which clients can have significant sway over the market, the SEC said. Cantor failed to pinpoint more than 100 accounts with significant daily and monthly transactions, the Wall Street regulator said.

The brokerage didn’t admit or deny the SEC’s allegations as part of the settlement. A representative for Cantor didn’t immediately respond to a request for comment.

Updated: 7-24-2023

UBS To Pay Nearly $400 Million In Fines To Settle Credit Suisse’s Archegos Failures

Fed says Credit Suisse engaged in ‘unsafe and unsound’ credit-risk management practices in its dealings with investment firm.

UBS agreed to pay U.S. and U.K. regulators around $390 million in fines related to the investment firm Archegos Capital Management, whose collapse hammered Credit Suisse, a rival it acquired earlier this year.

Credit Suisse engaged in “unsafe and unsound counterparty credit risk management practices” related to its dealings with Archegos, the Federal Reserve said.

UBS completed its rescue of Credit Suisse in June, a merger forced on it by Swiss regulators after the smaller rival lost the confidence of clients and investors.

UBS said it already is addressing the regulatory findings across Credit Suisse, and “will implement its operational and risk management discipline” across the combined bank.

The sudden unraveling of Archegos in March 2021 triggered more than $10 billion of losses across Wall Street trading desks. The family office, run by Bill Hwang, a longtime hedge-fund manager, took extremely concentrated and leveraged positions in a few stocks.

When the value of the stocks plunged, Archegos was left owing billions of dollars to its lenders, who said they were unaware of the large positions Hwang had at rival banks.

None was hit worse than Credit Suisse, which took more than $5 billion in damage.

An investigation commissioned by the Credit Suisse board detailed how the bank for years granted Archegos special dispensation to avoid rules meant to protect the bank.

It ignored staff warnings before the family investment firm’s collapse and said parts of the bank had a “lackadaisical attitude towards risk and risk discipline.”

The failure to detect the risks associated with Archegos led to soul searching at the Swiss lender. Executives were fired, whole divisions were eliminated and the bank set out to remake itself as a safer version of its previous self.

But investors remained unpersuaded that Credit Suisse could reform itself sufficiently to exorcise the ghosts revealed by the Archegos debacle.

When UBS took over Credit Suisse, it said it would resolve the legacy bank’s outstanding regulatory and legal issues and set aside $4 billion to do so.

The fine might turn out to be a template for other banks who took losses in the Archegos case, including UBS itself, which detailed a $861 million hit at the time. Nomura, Morgan Stanley, and Mitsubishi UFJ also announced losses.

The Federal Reserve’s fine was $268.5 million.

The U.K. Prudential Regulation Authority imposed a fine of £87 million, the agency’s largest ever penalty. The amount was equivalent to $119 million, according to the agency—or about $111 million by current exchange rates.

Credit Suisse broke four fundamental rules, the regulator said, including that a firm should “conduct its business with due skill, care and diligence.”

Finma, the Swiss regulator, said it opened enforcement proceedings against a former Credit Suisse manager. It declined to name the person or provide further details.

Updated: 7-25-2023

UBS Accused of Spoofing Stock of Trump-Linked Software Company

A unit of UBS Group AG was accused in a New York lawsuit of using deceptive spoof orders to manipulate the shares of a software company that worked on Donald Trump’s 2020 reelection campaign.

Phunware Inc., based in Austin, Texas, sued UBS Securities LLC Tuesday in federal court in Manhattan, alleging it “deliberately engaged in repeated spoofing that interfered with the natural forces of supply and demand” from January 2021 to March 2023, and repeatedly drove the shares lower.

UBS placed “baiting orders” that were never intended to be executed and had “no legitimate economic purpose” other than to create a “false illusion of market interest,” Phunware said in its complaint. UBS quickly canceled those sell orders and executed buy orders once prices fell, the software company said.

Phunware “sold over 34 million shares at manipulated prices as a result of defendant’s actions,” causing “significant losses” from “artificially depressed prices,” according to the suit.

UBS didn’t immediately respond to requests for comment on the suit.

Spoofing was made illegal in the Dodd-Frank Act of 2010 in response to the growth of high-speed algorithms that could execute trades in less time than it takes to blink.

UBS, Deutsche Bank AG and HSBC Holdings Plc in January 2018 agreed to pay about $50 million to settle civil claims of manipulating precious metals futures markets, while eight people were charged.

A UBS precious metals trader, Andre Flotron, was found not guilty in 2018 of scheming to manipulate futures markets with spoofing trades.

Phunware, which went public in 2018, built an app for Trump’s 2020 campaign that allowed his staff to communicate with his supporters.

The company earlier this month announced plans to cut about 33% of its work force in a series of cost saving measures. The shares have fallen more than 76% in the past 12 months.

The case is Phunware Inc. v UBS AG, 23-cv-6426, US District Court, Southern District of New York.

Updated: 7-27-2023

BNP Paribas To Settle SEC, CFTC Probes Over Use of Banned Messaging Apps

The French bank said it has reached proposed resolutions with the regulators.

BNP Paribas said the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission are investigating it over its employees’ use of messaging applications that broke record-keeping rules.

The French bank and its broker-dealer division have reached proposed resolutions with the respective regulators to resolve the probes, BNP Paribas said in its second-quarter earnings report that became public Thursday.

The proposed resolutions are subject to approval by the CFTC and SEC, the bank said.

BNP Paribas, while not specifying the amount of fines it expects to pay as part of its proposed resolutions, disclosed that it has also set aside €125 million, or about $137.3 million, for litigation, according to the financial statements.

A spokesman for the bank declined to comment.

The SEC and CFTC have been probing BNP Paribas Securities Corp., the bank’s U.S. registered broker-dealer, over its “compliance with records preservation requirements relating to the use of unapproved electronic messaging platforms for business communications,” according to the earnings report.

Its parent, BNP Paribas SA, has also been under investigation by the CFTC over its compliance with requirements to maintain electronic records.

BNP Paribas is the latest financial institution to face charges over record-keeping requirements. Off-channel communications—those that take place outside a firm’s formal, approved methods—have been a focal point for Wall Street regulators for the past few years.

Eleven of the world’s largest banks and brokerages in September agreed to collectively pay $1.8 billion in fines to resolve regulatory investigations, admitting that they violated rules that require storage of written communications.

Updated: 8-2-2023

SEC Tells Some Wall Street Brokers To Clean Up Their Anti-Money-Laundering Controls

Regulator issues risk alert citing flaws in certain broker-dealers’ efforts to combat the flow of dirty money.

Some Wall Street stockbrokers must do more to ensure their services aren’t being used to launder dirty money, the U.S. Securities and Exchange Commission said.

The SEC’s examinations unit this week issued a risk alert saying it had observed broker-dealers that weren’t putting enough resources or staffing into their anti-money-laundering programs.

The unit also found that some firms were inconsistent in their implementation of policies and procedures designed to stop financial criminals. No firms were named.

Under U.S. laws, banks and other financial-services firms are required to maintain controls to stop the flow of illicit funds. The SEC for years has policed broker-dealers’ anti-money-laundering programs, occasionally issuing fines to firms that fall short.

The SEC in July fined Merrill Lynch $6 million for failing to file so-called suspicious-activity reports, which are intended to alert authorities to possible instances of money laundering.

Merrill Lynch also agreed to pay another $6 million fine to the Financial Industry Regulatory Authority, the brokerage industry’s self-regulator.

Russia’s invasion of Ukraine has placed more pressure on financial institutions such as broker-dealers, which are required to screen for any efforts to evade economic sanctions placed on Moscow in response to the war.

U.S. authorities have promised to crack down on sanctions evasion by oligarchs or others with ties to the Kremlin.

The SEC’s examinations unit said it witnessed a variety of flaws in broker-dealers’ anti-money-laundering programs during the periodic, on-site reviews it conducts of Wall Street firms.

For one, some broker-dealers weren’t conducting timely testing of their anti-money-laundering controls, or keeping documentation to show they had conducted such testing, according to the regulator. Independent testing of the programs also was inadequate, the SEC said.

Some broker-dealers haven’t been updating their training materials to reflect changes to anti-money-laundering laws, or weren’t able to demonstrate that their employees had taken the appropriate training, the SEC added.

Anti-money-laundering laws require broker-dealers to do some basic vetting of customers that seek to open accounts with them, but some firms aren’t making the effort to ensure they have a reasonable idea of the real identity of their customers, the regulator said.

The U.S. Treasury in 2016 adopted rules that require certain financial institutions to identify the beneficial owners behind any legal entities they do business with. In 2021, Congress passed legislation to crack down on the use of anonymous shell companies.

But some broker-dealers haven’t updated their anti-money-laundering programs to account for the Treasury’s 2016 rule and are at times opening accounts for customers without collecting any information about the owners behind the accounts, the SEC’s examinations unit found.

Updated: 8-3-2023

Wells Fargo, SocGen to Settle With SEC, CFTC Over Use of Messaging Apps

Truist Financial also disclosed this week that some of its subsidiaries have received requests for information from regulators related to compliance with record-keeping requirements.

Wells Fargo and Société Générale are in talks with U.S. regulators to settle investigations into their employees’ use of messaging applications that might have broken record-keeping rules.

Wells Fargo disclosed in its quarterly earnings report filed Tuesday that it is in discussions with the U.S. Securities and Exchange Commission and the Commodity Futures Trading Commission to resolve the matter, but it said there is no guarantee of the outcome.

The bank reported the investigations in its previous quarterly and annual reports.

Société Générale and its U.S. investment banking subsidiary have reached settlements with the SEC and CFTC over its employees’ use of messaging apps and the settlements are pending regulatory approval, SocGen said Thursday in its second-quarter earnings report.

SG Americas Securities, the investment banking unit, received a request for information in December from the SEC regarding its compliance with record-keeping requirements related to business messages sent on platforms not approved by the company.

In March, Paris-based SocGen and SG Americas Securities both received a similar request from the CFTC, the bank said Thursday.

Representatives for Société Générale and Wells Fargo declined to comment.

U.S. regulators have been probing financial institutions over compliance with record-keeping requirements. Banks and brokerage firms are supposed to preserve and monitor their employees’ written communications, which creates a paper trail for regulators.

Truist Financial disclosed Monday that its subsidiaries involved in broker-dealer, investment adviser and swap dealer activities have received requests for information from the SEC and CFTC over their compliance with the record-keeping requirements for business-related electronic communications, according to its latest quarterly report. The Charlotte, N.C.-based regional bank said it is cooperating with these requests.

Representatives for Truist declined to comment.

BNP Paribas said last week that it had reached proposed resolutions with the SEC and CFTC to resolve similar probes.

These disclosures come after 11 of the world’s largest banks and brokerages in September agreed to collectively pay $1.8 billion in fines to resolve regulatory investigations, admitting that they violated rules that require storage of written communications.

Those investigations examined how traders and brokers used encrypted apps such as WhatsApp to discuss investment terms, client meetings and other business.

Updated: 8-8-2023

Wall Street WhatsApp, Texting Fines Exceed $2.5 Billion

* BNP, Wells Fargo Among Firms To Pay Fines To SEC And CFTC

* Regulators Say Probes Discovered Recordkeeping Lapses

Wells Fargo & Co. and BNP Paribas SA are among firms that will pay hundreds of millions of dollars in penalties for employees using unofficial communications like WhatsApp, personal texts or email to conduct business — the latest in US regulators’ crackdown on Wall Street’s failure to keep records.

Three Wells Fargo units agreed to pay a total of $125 million to the Securities and Exchange Commission, and BNP will pay $35 million, the regulator said Tuesday.

The two lenders will pay $75 million each over similar violations by their derivatives brokers, the Commodity Futures Trading Commission said.

In all, the CFTC announced penalties of $266 million on Tuesday, while the SEC said firms had agreed to pay it $289 million.

Total fines for the probes into messaging practices have now crossed $2.5 billion since December 2021, making this one of the biggest financial enforcement efforts of the past decade.

What began as a look at trading desks’ use of chat apps has expanded into a look into all of finance’s use of any kind of communication tool that doesn’t save records appropriately. Hedge funds and private equity firms are also under investigation for their use of personal communication apps.

Wells Fargo spokesperson Laurie Kight said in a statement that the company was pleased to resolve the matter. BNP declined to comment.

SEC officials said they were well aware of other companies that weren’t complying. “So here are three takeaways for those firms who haven’t yet done so: self-report, cooperate and remediate,” said Gurbir Grewal, the SEC’s head of enforcement. “If you adopt that playbook, you’ll have a better outcome than if you wait for us to come calling.”

Tuesday’s slate of penalties is nowhere near the end of regulators’ efforts to crack down on Wall Street’s use of unmonitored messaging apps.

A wide swath of firms have disclosed that regulators are looking at their messaging practices, including banks Fifth Third Bancorp and Truist Financial Corp., and the private equity titans Apollo Global Management Inc. and Carlyle Group Inc.

Financial firms are required to monitor and save communications involving their business to head off improper conduct. When they don’t, regulators say it’s significantly harder to investigate wrongdoing.

Their work is made even more difficult when bankers use messaging tools that delete communications automatically.
Investigations Harder

Tuesday’s actions follow a string of cases released last September. At the time, the SEC announced $1.1 billion in fines against companies including Bank of America Corp., Citigroup Inc. and Goldman Sachs Group Inc., while the CFTC said firms agreed to pay $710 million in penalties.

In May, HSBC Holdings Plc and Scotiabank settled regulators’ probes into their communications practices, paying fines of $45 million and $22.5 million, respectively.

On Tuesday, the SEC said that its investigation “uncovered pervasive and longstanding off-channel communications.” As part of the settlements, the companies admitted that their employees had used platforms like iMessage, WhatsApp and Signal to discuss business. The companies didn’t maintain sufficient records, according to the SEC. The CFTC said it found similar violations.

Other notable firms that agreed to settle on Tuesday included units of Bank of Montreal, Mizuho Financial Group and Societe Generale SA.

A BMO spokesperson said the company has “made significant enhancements to our compliance procedures in recent years,” and was pleased to have resolved the probe.

Mizuho, SocGen, Houlihan Lokey Inc., Moelis & Company LLC and SMBC Nikko declined to comment on Tuesday’s announced settlements. A representative for Wedbush Securities Inc. didn’t respond to a request for comment.

Updated: 9-15-2023

Ex-JPMorgan Gold Trader Sentenced to Six Months in ‘Spoof’ Case

* Last Criminal Penalty Imposed In A Years-Long Spoofing Saga

* Case Among The Crown Jewels In Federal Spoofing Crackdowns

A former JPMorgan Chase & Co. gold trader was ordered to serve six months behind bars for a fraud conviction tied to deceptive orders, the last criminal penalty imposed in a years-long spoofing saga at the bank.

Christopher Jordan was sentenced Friday in Chicago by US District Judge Edmond Chang. Jordan was convicted in December for placing deceptive spoofing orders from 2008 to 2010 that witnesses testified were rampant among traders on JPMorgan’s precious-metals desk.

The sentence comes weeks after JPMorgan’s former top gold trader, Gregg Smith, was given a two-year prison term — the stiffest sentence in the US government’s crackdown on questionable trading practices.

The desk’s former “boss,” Michael Nowak, got a year behind bars, while two others who pleaded guilty in the case and cooperated with authorities avoided prison.

The JPMorgan cases were the crown jewels of the federal spoofing crackdowns on some major Wall Street banks, including Bank of America Corp., Deutsche Bank AG and Morgan Stanley.

JPMorgan agreed in 2020 to pay $920 million to settle allegations brought by the Justice Department. It was the biggest fine by any financial institution accused of market manipulation since the Global Financial Crisis.

Spoofing has long been known throughout in commodity trading, but it became illegal after the Dodd Frank Act was adopted in 2010.

The practice involves placing large buy or sell orders that a trader has no intention of executing that are quickly canceled, but not before they create the false impression of market demand that can move prices.

‘Price Manipulation’

The defense, as part of their case against prison time, argued that Jordan’s actions took place prior to the Dodd-Frank financial law that defined spoofing and made it illegal. The judge rejected this argument.

“There was no need to spell out exactly what spoofing was because price manipulation was barred, and that’s what this is,” the judge said.

“This was a very serious offense. You did put out lies into the market in the form of those spoof orders, and the government is correct that market integrity is a paramount value to our economy.”

Jordan worked on the JPMorgan precious-metals desk for about three years and then spent a few months in 2010 working for Credit Suisse AG.

It was during 2008, 2009 and 2010 that prosecutors alleged Jordan was placing orders to buy and sell precious metals without the intent to execute the trades.

At the center of the case was a meeting between Jordan and an FBI agent in 2018, during which prosecutors argued that Jordan admitted to fraudulent trading.

Defense attorneys for Jordan said their client never admitted specifically to spoofing or fraud or any other kind of illegal activity — claims that the FBI agent, Jonathan Luca, confirmed during his testimony on the witness stand.

The government said Smith was the most prolific spoofer on JPMorgan’s powerful global trading desk, which bought and sold gold and silver.

Smith clicked his computer mouse so fast to place and cancel orders that colleagues joked he needed to ice his fingers to cool them down, according to testimony at his trial.

Federal jurors in Chicago convicted Smith and Nowak last year after concluding the two had used deceptive trade orders to move precious-metals prices up and down for profit from 2008 to 2016.

In earlier trials, two former precious-metals traders at Deutsche Bank and two from Bank of America also were convicted of spoofing. All four got one-year sentences.

During Jordan’s trial in December, his lawyers argued he’d traded “according to the rules as he understood them,” telling jurors to be careful not to apply current standards to his trading from 2008 to 2010.

The case is US v. Smith et al, 19-cr-00669, US District Court, Northern District of Illinois (Chicago).

Former Wells Fargo Executive Avoids Prison Time In Fake-Accounts Scandal

Carrie Tolstedt pleaded guilty in March to obstructing a regulatory investigation; ‘I am unspeakably sorry.’

A former Wells Fargo executive won’t serve prison time for her role in the bank’s fake-accounts scandal.

A Los Angeles judge on Friday sentenced Carrie Tolstedt to three years’ probation and six months of home confinement. She will also pay a $100,000 fine and serve 120 hours of community service.

In a brief statement to the court, Tolstedt fought back tears as she took responsibility for her conduct.

“I sincerely apologize and I know that as the leader of the community bank, the responsibility sat on my shoulders,” she said. “I am unspeakably sorry.”

Tolstedt hugged her husband, Brad, after being sentenced and left court with several supporters without comment.

Tolstedt became the public face of a scandal that burst into the open in 2016, when the bank was revealed to have created perhaps millions of fake accounts because branch employees were under the gun to meet aggressive sales goals.

She pleaded guilty earlier this year to obstructing regulators who probed misconduct in the business she ran, a crime that carried a maximum prison term of 16 months.

Justice Department lawyers had asked that she serve one year, while Tolstedt’s lawyers asked for three years’ probation.

U.S. District Judge Josephine Staton cited federal guidelines that are set to ease prison sentences for cases like Tolstedt’s. The judge said she was imposing a “reasonable and not greater than necessary” sentence.

Justice Department prosecutors had argued that a jail sentence was necessary to deter corporate executives who are tempted to deceive regulators to protect their jobs. Staton, however, said such a punishment wasn’t necessary to send that message.

“General deterrence is better served, in the court’s view, by holding more people accountable,” she said. “A just punishment cannot morph into a harsh punishment.”

It has been exceedingly rare for bankers to get prison time for committing crimes on the job. Only one banker served time as a result of the financial meltdown of 2008.

The Wells Fargo scandal brought to light the bank’s aggressive sales culture in which employees were told to push as many products on to customers as possible, known internally as cross-selling. Some opened fake accounts to meet sales goals.

The initial revelations opened the door to further scrutiny, revealing problems across the bank, from wealth management to auto loans.

Regulators imposed billions of dollars in penalties and restricted the bank’s growth. It is still working to overhaul itself seven years later.

Tolstedt ran the retail arm of the bank for nearly a decade. That included its thousands of branches and gave her oversight of the cross-selling goals for employees who worked in them.

She was known for her attention to detail. For much of her tenure, she was lauded for the retail bank’s strong financial performance.

Underneath, thousands of employees were being terminated for opening fake accounts. As problems started to pop up, Tolstedt mismanaged the response, according to a report later commissioned by the board of directors.

The report found she refused to change the broken sales model, resisted scrutiny and presented incomplete information to the board.

Tolstedt left the bank in 2016, but since then has had about $65 million of compensation clawed back by the bank. She agreed in March to pay $17 million and accept a ban from the banking industry to settle a separate case with the Office of the Comptroller of the Currency. She paid a $3 million settlement to the Securities and Exchange Commission in May.

Other executives, including then-CEO John Stumpf, were also implicated. Stumpf was banned from the industry in 2020 and paid $20 million to settle charges. He gave up more to clawbacks.

But Tolstedt is the only executive to face criminal charges. She pleaded guilty in March to the charge that she stood in the way of the OCC’s investigation into sales practices when she contributed to a memo on the topic in May 2015.

Prosecutors alleged she omitted statistics on the number of workers who were fired or resigned during an investigation of sales-practices misconduct.

She also failed to disclose that Wells Fargo proactively identified only a small percentage of employees who participated in potential sales-practices misconduct, prosecutors said.

Prosecutors acknowledged in their sentencing request this month that Tolstedt had no criminal history and little risk of recidivism. But they said a jail sentence was necessary to deter wrongdoing.

Tolstedt’s legal team argued that she has already been penalized by regulators and faced public shaming, which serves to deter potential offenders.

The filing also contended that the criminal charge stands in contrast to all other facets of her life. She is the daughter of a baker who grew up in Nebraska and found success by outworking others, it said.

Wells Fargo paid $3 billion in 2020 to settle investigations by the Justice Department and the SEC. As part of its settlement, Wells Fargo admitted that it “unlawfully misused customers’ sensitive personal information” and harmed some customers’ credit ratings, collecting millions of dollars in fees and interest in the process.

Updated: 9-18-2023

Morgan Stanley Sued For $750 Million By Private Equity Firms Claiming Fraud

* Certares, Knighthead Say They Were Cheated In Brightline Deal

* Morgan Stanley Says It Believes The Claims Have No Merit

Morgan Stanley was sued for at least $750 million by private equity firms who claim they were defrauded in a deal to invest in a credit agreement for a luxury high-speed rail line.

Certares Management LLC and Knighthead Capital Management LLC filed suit Monday in New York state court, alleging Morgan Stanley unlawfully restructured the deal by which they invested in a loan to Miami-based Brightline Holdings, a Fortress Investment Group-backed company currently developing a Los Angeles-Las Vegas rail line. Brightline is also a defendant in the suit.

Certares and Knighthead claim that, in late 2022 and early 2023, Morgan Stanley convinced them to invest around $280 million in the loan by highlighting a “make-whole” provision that would guarantee them a certain amount based on future interest if the loan were repaid early.

They claim Morgan Stanley misrepresented and concealed terms of the deal that were used to ratify a preferred-share issue by a Brightline subsidiary.

Morgan Stanley said in a statement, “The Firm does not believe the claims have merit and will defend itself vigorously.” Brightline didn’t respond to a request for comment.

According to the suit, Certares and Knighthead invested in the Brightline loan through their jointly managed CK Opportunities Fund, which was launched during the pandemic to focus on distressed assets in the travel and tourism industry.

‘Undetected For Month’

The firms claim Morgan Stanley went out of its way to hide revisions to the original credit agreement allowing the share issue, even attaching an earlier CK signature page to avoid showing them the amendments.

“Given Morgan Stanley’s concealment,” the suit claims, the language “went undetected for months.”

The issue should have triggered the deal’s prepayment make-whole provisions, the firms claim. They are asking for an order requiring Brightline to prepay the loan and make the make-whole payments.

Brightline describes itself as the only privately owned and operated intercity railroad in the US. It currently operates between Miami and West Palm Beach and is set to extend service to Orlando on Friday.

The company hopes to break ground later this year on its West Coast service, which it claims will take riders from Southern California to Las Vegas in just over two hours at 186 miles per hour.

According to the suit, Morgan Stanley was motivated to defraud Certares and Knighthead because it wanted to “position itself for future lucrative investment-banking business with Brightline Holdings and its private equity owners at Fortress, including through handling municipal debt transactions for Brightline Holdings which could generate sizable fees for Morgan Stanley.”

Certares also claims it has faced retaliation from Morgan Stanley for objecting to the bank’s actions. According to the suit, Morgan Stanley last month declined to participate in another, unrelated financing deal with Certares because of the Brightline dispute.

“This kind of retaliation is unfair and unbecoming of a global financial institution,” the plaintiffs state in the suit.

The case is CK Opportunities Fund v. Morgan Stanley, New York State Supreme Court, New York County (Manhattan).

Updated: 9-20-2023

Former Deutsche Bank Exec Pleads Guilty Over ‘R3 Crypto Fund’ Scheme

Rashawn Russell faces up to 30 years in prison for his role in the fraudulent cryptocurrency trading scheme.

A former Deutsche Bank investment banker — who was charged earlier in 2023 in relation to a fraudulent cryptocurrency trading scheme — has pleaded guilty to investment fraud and could face up to 30 years in prison.

According to a Sept. 19 statement from the United States Department of Justice (DOJ), 27-year-old Rashawn Russell pleaded guilty to participating in a scheme where he operated a fraudulent crypto investment fund dubbed the “R3 Crypto Fund.”

Between November 2020 and August 2022, Russell defrauded 29 investors out of $1.5 million by leveraging his reputation as an investment banker and licensed financial broker to promise that he would be able to generate guaranteed, outsized returns on a series of crypto investments.

CRYPTO CRIMES CONTINUED: Former Deutsche Bank investment banker Rashawn Russell, who had denied defrauding investors in a #cryptocurrency fraud, today pled guilty in # EDNY. He was indicted in April & accused of duping investors by promising “guaranteed returns.” pic.twitter.com/Da0gYrbqqV

— Inner City Press (@innercitypress) September 19, 2023

On multiple occasions, Russell lied to investors about their investments and fabricated multiple documents that displayed false information concerning their returns, according to the DOJ.

The prosecution found that Russell sent altered images of his bank balance to his investors. Another time, when an investor sought to cash in on one of their crypto investments, Russell never sent the money and instead sent his victim a fabricated money transfer confirmation.

According to prosecutors, most of the $1.5 million obtained from his victims was never used to invest in crypto assets. Instead, the funds were misappropriated by Russell and were used “for his personal benefit, to gamble, and to repay earlier investors” in the scheme.

In addition to his investment scheme, Russell also pleaded guilty to his role in a separate identity theft scheme where he fraudulently obtained credit cards and other devices using false information.

The DOJ said Russell obtained these identity documents with the intention of using them to undertake illegal and unauthorized transactions.

Upon sentence, he faces up to 30 years in prison for his crimes, with U.S. Magistrate Judge Sanket Bulsara ruling that he must pay more than $1.5 million in restitution.

Updated: 9-22-2023

Goldman, Citadel Securities Pay SEC Millions Over Trade Labeling

* Wall Street Giants Each Reached Settlements With SEC On Friday

* Goldman Fined $6 Million; Citadel Securities Pays $7 Million

Goldman Sachs Group Inc. and Citadel Securities each reached multimillion-dollar settlements with the Securities and Exchange Commission on Friday over how they labeled millions of trades.

Goldman agreed to pay a $6 million fine for sending inaccurate or incomplete trading data to the SEC on at least 163 million transactions over the course of a decade.

Meanwhile, the SEC said that a coding error at Citadel Securities led to short sales being labeled as longs, and vice versa, and that Ken Griffin’s market-making firm would pay $7 million.

Gurbir Grewal, the SEC’s enforcement director, has made recordkeeping lapses a priority of his tenure. Unrelated to Friday’s cases, more than a dozen Wall Street firms have paid over $2.5 billion in fines combined for using personal phones and messaging services like WhatsApp to conduct business — fines brought under recordkeeping rules.

Friday’s settlements are part of a flurry of activity from the SEC’s enforcement staff before the end of the fiscal year next week.

The agency’s penalty and case volume is closely watched by Congress, and September is historically the busiest month.

A looming government shutdown adds additional pressure to finish probes. Many SEC employees will not be able to work starting in October, if Congress cannot agree on a deal to fund the government.

Internal Lapses

At Goldman, the regulator said it found 43 different types of errors in data files known as blue sheets. These files include detailed trading information that regulators request to investigate suspect trading.

The New York-based bank admitted to the SEC’s findings and said Friday that it was “pleased to have resolved this matter.”

The errors included reporting trades in US Central Time, instead of the required Eastern Time, and misreporting long sales as shorts. The bank, which self-reported many of the errors, is in the process of submitting corrected blue sheets to the SEC.

The alleged inaccuracies at Citadel Securities did not impact the way the broker handled client orders, and were fixed within the day, the SEC said. Citadel Securities said the issue stemmed from a coding change that affected a small percentage of order markings.

“We detected the issue and promptly fixed it more than three years ago,” Citadel Securities said in a statement.

Updated: 9-25-2023

SEC Fines Deutsche Bank Fund Unit For ESG Claims, Money Laundering Allegations

Commission says investment arm misled investors in how it incorporated ESG factors into its investment process.

Deutsche Bank’s investment arm agreed to pay $25 million to settle allegations including that it overstated how it used environmental, social and governance factors in its funds, one of the first cases that questioned ESG claims by money managers.

The investment arm, DWS, also settled allegations from the Securities and Exchange Commission that it failed to comply with anti-money-laundering rules for its mutual funds.

The SEC charged DWS Investment Management Americas, a New York-based investment adviser subsidiary of Deutsche Bank, in two separate enforcement actions on Monday.

DWS Investment Management didn’t admit or deny the charges, but it agreed to two separate cease-and-desist orders related to the anti-money-laundering violations and the ESG misstatements.

A whistleblower at DWS raised questions about its ESG claims in 2021, saying DWS had struggled to define and implement an ESG strategy, at times painting a rosier-than-reality picture to investors.

The claims by its former sustainability chief, Desiree Fixler, who was fired by the firm, were earlier reported by The Wall Street Journal.

DWS, a global investment firm with 859 billion euros of assets under management at the end of June, equivalent to $908 billion, had said in an annual report: “As a firm, we have placed ESG at the heart of everything that we do.”

DWS, like many other investment firms, were chasing a flood of investor cash going to ESG funds.

The SEC alleged that DWS made materially misleading statements about its controls in incorporating ESG factors into its research and investment recommendations for ESG-integrated products, including actively managed ESG mutual funds and separately managed accounts. DWS agreed to pay $19 million for this settlement.

A DWS spokesperson said the firm has already taken steps to address the weaknesses in its processes and procedures identified in the SEC ESG order.

The SEC has rarely taken enforcement action against fund firms for their ESG marketing and for anti-money-laundering controls.

Goldman Sachs’s asset-management arm agreed last year to pay $4 million to settle a regulatory investigation that found it failed to follow a consistent investing framework in how it managed ESG mutual funds and other products.

The SEC alleged that DWS failed to adopt and implement policies and procedures for its mutual funds to prevent money laundering and terrorism financing, in breach of Bank Secrecy Act and related Financial Crimes Enforcement Network regulations.

It agreed to pay about $6 million to settle the charges.

A DWS spokesman said it is “committed to maintaining a robust risk management framework” and that the firm has taken steps to improve its anti-money-laundering processes for its U.S. mutual fund business since 2020. A spokesman for Deutsche Bank declined to comment further.

Deutsche Bank’s DWS to Pay $25 Million to Settle SEC Probes

* DWS Failed To Follow Marketing Claims On ESG, SEC Says

* SEC Found No Misstatements In Financial Disclosures, DWS Says

Deutsche Bank AG’s DWS asset management arm agreed to pay a total of $25 million to settle Securities and Exchange Commission probes into alleged greenwashing and anti-money laundering lapses.

The penalties include $19 million for “materially misleading statements” about how it incorporates environmental, social, and governance factors into research and investment recommendations and $6 million for failing to develop a mutual fund AML program, the SEC said in a statement on Monday. DWS didn’t admit or deny the SEC’s findings.

DWS has been under scrutiny by various agencies including the SEC since a former employee, Desiree Fixler, went public over two years ago with claims that the asset manager had inflated its ESG credentials.

The allegations and ensuing probes hit the firm’s share price as investors sought to assess the financial impact.

“Investment advisers must ensure that their actions conform to their words,” Sanjay Wadhwa, deputy director of the SEC’s enforcement division, said in the statement on Monday.

“DWS advertised that ESG was in its ‘DNA,’ but, as the SEC’s order finds, its investment professionals failed to follow the ESG investment processes that it marketed.”

A spokesman for DWS said the firm is “pleased that the SEC recognized our cooperation in the investigation and our remediation efforts.” The ESG order found “no misstatements in relation to our financial disclosures or in the prospectuses of our funds.”

“The order also makes clear that there was no intent to defraud, and the weaknesses identified by the SEC are in relation to processes and procedures that the firm has already taken steps to address,” the spokesman said.

DWS has rejected Fixler’s claims from the outset and Chief Executive Officer Stefan Hoops has said he stands behind the disclosures targeted in the probes. He has also said that some of the firm’s past marketing claims may have been “exuberant.”

DWS said in July that it had made €27 million ($28.7 million) of “other” provisions in its second-quarter results.

The vast majority of that was for expected settlements from several probes in the US and Germany, a person familiar with the matter said at the time.

The settlement is the biggest fine that the SEC has extracted thus far in its push under Chair Gary Gensler to crack down on how asset managers label ESG funds.

Goldman Sachs Group Inc. agreed to pay $4 million to settle claims last November that its asset-management unit didn’t properly weigh ESG factors in some of its investment products.

A Bank of New York Mellon Corp. arm agreed to pay $1.5 million to settle allegations in May 2022 that it falsely implied some mutual funds had undergone an ESG quality review.

On the policy front, last week, the Wall Street regulator also imposed the most sweeping overhaul for fund-labeling regulations in more than two decades. The backers of the overhaul say the measures in particular will help rein in overblown claims about ESG investments.

Updated: 9-28-2023

Citi To Pay $2 Million For Failing To Mail Disclosures, SEC Says

* Bank’s Electronic-Delivery Policies Probed By Regulator

* Citi Broker Recommended Trades, Didn’t Mail Disclosures: SEC

Citigroup Inc. will pay almost $2 million to settle a US regulator’s allegation that two of the bank’s brokerages recommended trades to customers without appropriately mailing disclosures to them.

The brokerages recommended trades to roughly 13,600 customers who weren’t mailed required disclosures of the broker’s obligation to act in the customer’s best interest, the Securities and Exchange Commission said in its settlement order.

Under SEC guidelines, a customer has to affirmatively opt in to getting disclosures delivered electronically. But Citi stopped mailing documents to customers unless they objected, the agency said.

As a result, the 31,600 securities recommendations that Citi made to those customers from June 2020 to at least March 2021 were in breach of securities rules, according to the SEC.

A spokeswoman for Citi declined to comment. The bank didn’t admit to or deny the SEC’s findings. The bank mailed the documents to the customers by April 2021.

Updated: 4-11-2024

Morgan Stanley’s Wealth-Management Division Investigated For Money-Laundering Risk

Some Of The US Government Investigating Agencies Include:

* The Securities And Exchange Commission
* The Office Of The Comptroller Of The Currency
* The Treasury Department
* The Federal Reserve
* The Treasury’s Financial Crimes Enforcement Network, Known As FinCEN
* Treasury’s Office Of Foreign Assets Control

The SEC’s list includes a billionaire with ties to Russia who has been sanctioned by the U.K. and an individual who claimed she was based in the U.S. but whose activity on E*Trade indicated she was located on a Caribbean island and had more money in her account than would be typical for someone with her stated occupation.

The wealth-management juggernaut overseeing a total of about $5 trillion. The division, which accounts for about half of the company’s total revenue these days, generates steady revenue streams Morgan Stanley.

Pass Misdeeds ($600 Million In Fines) Of Morgan Stanley:

? July 2014

Morgan Stanley agreed to pay $275 million to settle SEC charges that it misled investors in a pair of residential mortgage-backed securities securitizations that it underwrote, sponsored, and issued.

? December 2014

The SEC hit Morgan Stanley with a $4 million penalty for violating the market access rule.

? December 2015

Morgan Stanley Investment Management, its capital management arm, agreed to pay $8.8 million to settle charges that one of its portfolio managers illegally prearranged trading, known as “parking,” that favored certain advisory client accounts over others.

?‍? June 2016

Morgan Stanley Smith Barney (MSSB) — its U.S. wealth management business, now called Morgan Stanley Wealth Management — agreed to a $1 million penalty to settle charges related to its failures to protect customer information, some of which was hacked and offered for sale online.

? December 2016

Morgan Stanley agreed to pay $7.5 million to settle charges that it used trades involving customer cash to lower its borrowing costs in violation of the SEC’s Customer Protection Rule.

? January 2017

MSSB agreed to a $13 million penalty to settle charges that it overbilled investment advisory clients due to coding and other billing system errors.

Later that same month, the unit agreed to another $2.96 million penalty to settle charges that they made false and misleading statements about a foreign exchange trading program they sold to investors.

? February 2017

MSSB agreed to an $8 million penalty and admitted wrongdoing to settle charges related to single inverse ETF investments it recommended to advisory clients.

? June 2018

MSSB agreed to pay a $3.6 million penalty and implemented procedural and policy changes over its failure to prevents its personnel from misusing or misappropriating funds from client accounts.

? May 2020

MSSB agreed to create a $5 million fund to be distributed to harmed investors, settling charges that it provided misleading information to clients in its retail wrap fee programs regarding trade execution services and transaction costs.

? September 2020

MSSB agreed to a $5 million penalty to settle charges that it violated regulations governing short sales in its brokerage prime swaps business.

ℹ️ September 2022

MSSB agreed to pay $35 million to settle SEC claims that it repeatedly failed to protect millions of customers’ personal information.

?January 2024

Morgan Stanley agreed to pay more than $249 million to settle fraud charges and for failing to enforce information barriers.

Meanwhile:

The Securities and Exchange Commission, the Office of the Comptroller of the Currency and other Treasury Department offices are involved, according to people familiar with the matter. That is in addition to the Federal Reserve, whose similar probe The Wall Street Journal reported in November. The Fed has told the bank that supervisory action is under consideration.

The main issues regulators are looking at boil down to whether Morgan Stanley has been sufficiently investigating the identities of prospective clients and where their wealth comes from, as well as how it monitors its clients’ financial activity. Some of the probes are focused on the bank’s international clients.

The bank has been working on addressing the issues regulators have raised. When asked about some of the regulatory scrutiny in January, Morgan Stanley’s former chief executive and current executive chairman, James Gorman, told the Journal the bank is investing in compliance, technology and artificial intelligence to better understand the flow of money tied to its wealth business.

Morgan Stanley shares fell sharply after the Journal reported on the wider probe, and were down more than 5% in afternoon trading on Wednesday.

The SEC last year sent Morgan Stanley a list of current and former clients with questions about how they were vetted. It also questioned why Morgan Stanley’s financial-adviser unit, which works directly with affluent individuals, did business with some clients who were cut off by E*Trade, the Morgan Stanley-owned digital trading platform, because of red flags.

The SEC’s list includes a billionaire with ties to Russia who has been sanctioned by the U.K. and an individual who claimed she was based in the U.S. but whose activity on E*Trade indicated she was located on a Caribbean island and had more money in her account than would be typical for someone with her stated occupation.

The Treasury’s Financial Crimes Enforcement Network, known as FinCEN, also sent the bank a list of client names, at least some overlapping with the SEC’s.

Morgan Stanley also received an administrative subpoena from Treasury’s Office of Foreign Assets Control requesting information on the firm’s sanctions policies and procedures, according to a bank document viewed by the Journal.

The OCC late last year sent Morgan Stanley what is known as a matter requiring attention over customer due diligence. That followed an annual exam of the bank’s anti-money-laundering and related programs, according to some of the people and a Morgan Stanley document that says the firm sent detailed action plans to the regulator.

Morgan Stanley’s wealth unit has been critical to the firm’s strategy since the 2008-09 financial crisis. The bank made several acquisitions, including those of Smith Barney and, more recently, E*Trade, that turned it into a wealth-management juggernaut overseeing a total of about $5 trillion.

The division, which accounts for about half of the company’s total revenue these days, generates steady revenue streams Morgan Stanley relies on to help smooth out downturns in investment banking and trading.

The wealth division has been showing signs of slowing down, with revenue flat in the fourth quarter from a year earlier. Net new assets totaled $47.5 billion in the period, down 8% from a year earlier after a 45% decline in the third quarter.

The SEC and FinCEN have taken an interest in differences in the vetting procedures of E*Trade and Morgan Stanley’s financial-adviser unit.

They have been asking the bank about how it compared E*Trade’s technology and vetting processes with Morgan Stanley’s before deciding to replace much of E*Trade’s procedures with its own.

Updated: 4-21-2024

Billions In Dirty Money (Actual Paper Currency) Flies Under The Radar At World’s Busiest Airports

Money launderers surreptitiously introduce more than $2 trillion in proceeds from illegal enterprises to global financial systems every year.

The Heathrow-to-Dubai flights have two big money-laundering features: One airport doesn’t scan outbound luggage for cash and the other welcomes sacks of it.

Jo-Emma Larvin wheeled a baggage cart piled with suitcases through London’s Heathrow Airport in August 2020 and handed her passport to an Emirates Airline agent for a flight to Dubai.

Larvin was traveling business class with another woman and together they heaved seven heavy suitcases onto the conveyor belt. She exchanged texts with her boyfriend en route to the security line.

“Do you feel ok?” he asked.

“Yes phew,” Larvin wrote. The suitcases carried millions of dollars worth of British pounds wrapped with rubber bands and bundled in plastic.

The money was headed to an international money launderer who charged a hefty fee to clients to exchange cash for gold or other currencies. His preferred route was to Dubai from Heathrow, Nos. 1 and 2 of the world’s busiest airports for international passengers.

The U.K. requires passengers to tell customs authorities if they are leaving the country with more than the equivalent of around $10,000, but Larvin didn’t, risking arrest.

The seven suitcases entered Heathrow’s baggage handling system and slid through a 3-D scanner that checked only for explosives and other potentially dangerous items.

The next morning, the women collected their luggage in Dubai without having too much to worry about: Any amount of cash is allowed to enter the United Arab Emirates, as long as it is declared.

The women followed signs to customs and told authorities they had brought the equivalent of $2.8 million.

Most airports worldwide, including in the U.S., don’t scan passenger luggage for cash, a costly undertaking in equipment and personnel. Countries where all money is welcome have no obligation to report about suitcases full of cash arriving from abroad.

The loopholes allow billions of dollars worth of cash to fly out of the U.K. and elsewhere to countries with fewer rules, law-enforcement officials said.

Money launderers surreptitiously introduce more than $2 trillion in proceeds from illegal enterprises to global financial systems every year, according to estimates.

International airplane passengers likely ferry hundreds of billions of dollars worth of that in cash, according to figures from the United Nations Office on Drugs and Crime and the Financial Action Task Force, an intergovernmental agency that develops anti-money-laundering standards for countries.

One reason for so much airline smuggling is that penalties and scandals over customers engaged in money-laundering have prompted more banks around the world to report suspicious transactions.

“You just can’t walk into a bank with this much money without being flagged,” said George Voloshin, of ACAMS, an industry group for financial crime-fighting professionals. “You will be arrested at the next branch.”

A U.K. government spokesperson said customs officers respond effectively with airport security to smuggling risks. A Heathrow airport spokesman declined to comment on its security equipment and practices.

An Emirates Airline spokesperson said detecting cash smuggling was the responsibility of authorities where the cash originated.

A U.A.E. official said it was working to combat illicit financial flows, including through shared intelligence and joint operations with the U.K. The U.A.E., a global destination for the rich, was recently removed from a global financial watchdog’s list of places needing more monitoring.

Officials and industry groups said smuggling cash via airline is a relatively low risk for people hired to do the job. Larvin and her boyfriend were among an alleged three dozen smugglers working for a money launderer from the U.A.E. It seemed like easy money.

Authorities believe they transported $125 million, largely from July to October in 2020.

“How the hell did they get away with it—so much money in such a short space of time?” said Ian Truby, a senior investigating officer at the U.K. National Crime Agency. One answer, he said, is that airport security isn’t for crime detection, only flight safety.

Three weeks later, Larvin left for Heathrow with her boyfriend and a few million more dollars worth of cash in eight suitcases. Her boyfriend had worried about drawing undue attention with so much luggage. “It’s f—ing ridiculous,” he texted. “Talk about conspicuous.”

This account of the Heathrow cash-smuggling operation is based on documents and evidence released by U.K. authorities, court records that included text messages and photos, court testimony by money couriers, as well as interviews with investigators and people familiar with the matter.

Cash And Carry

Abdulla Alfalasi started flying cash from Heathrow to Dubai around 2017 and expanded his operation during the pandemic.

On New Year’s Day 2020, Alfalasi left Heathrow with 11 cases, weighing 463 pounds, and reported the equivalent of $850,000 in Dubai.

He told a former business partner he had connections with the royal family. His father-in-law ran Dubai airport customs back when it was a shed and a table. He developed the airport into a global hub as director-general of aviation.

Later that month, Alfalasi texted Michelle Clarke, an executive assistant looking to relocate to Dubai with her children and husband, a former pro soccer player. She belonged to a fun-loving crowd in the northern city of Leeds, where she worked for the pay TV group Sky.

Alfalasi sent Clarke a ticket for an overnight flight from Heathrow to Dubai, returning the same day. She had a text with the photo of a letter authorizing her to carry the cash for a company Alfalasi owned, lending a false sense of legitimacy to the job.

After Clarke landed, Alfalasi guided her in texts and voice messages to report the cash at an airport office, and said he was waiting outside. She flew three more times in February 2020 and Alfalasi enlisted other couriers.

In July 2020, Clarke texted a friend, saying she needed 12 people to work. The job criteria: “Can’t talk, trust, and reliable and fit!!!” A friend put Clarke in touch with Larvin, saying that Clarke worked for the U.A.E. embassy.

The women met over a coffee. Clarke’s teenage son sat at a nearby table. Clarke showed Larvin stamped certificates she would carry as a document courier and offered £3,000, around $3,750, to fly the suitcases. Clarke also would pay for Larkin to stay at a resort until she returned home with the empty bags.

Larvin had worked in digital marketing and done some modeling and wildlife photography. She had acted in a chart-topping British band’s music video in 2008.

Her 2009 breakup with her world-champion boxer boyfriend, Joe Calzaghe, made the British tabloids after he started dating his partner on the TV show “Strictly Come Dancing.”

The following month, Larvin sent Clarke a photo of her passport and traveled by train to London’s King’s Cross station, on her way to Heathrow Airport. Her heart rate was going up, she texted her new boyfriend, Jonathan Johnson, an executive recruiter.

“Please be careful,” he wrote. “I’m beside myself here.”

Larvin headed to a Starbucks in an expensive shopping district and met her traveling companion, a 25-year-old woman from a town outside London. A driver picked them up in a black Mercedes and drove to an address nearby to collect the suitcases.

At the airport, they went to Emirates Airline and put the seven suitcases on the conveyor belt. The luggage entered the mouth of a 3-D scanner that uses computed tomography, or CT, to find explosives.

These images, unlike at passenger security, aren’t watched by people unless the software identifies an item that might set fire or explode.

The machines can be programmed to find cash, but they aren’t because they are operated by airport-security agents, responsible for passenger safety, not customs and immigration officials.

Larvin and her travel companion settled into their business-class seats, and baggage handlers stowed their suitcases below them in the hold. The trip, there and back, went without a hitch.

Cashed Out

In October 2020, two other women weren’t so lucky. They were questioned at a Heathrow departure gate by officers of the Border Force, the agency in charge of U.K. customs and immigration.

One of the women told officers she checked five suitcases to Dubai because she wasn’t sure what to wear.

“Omg shel. We’ve been held,” the woman texted Clarke, who was in Dubai. “Wtf.”

The suitcases were unloaded from the plane. They contained nearly £2 million in cash, around $2.4 million. They also had videos of bundled notes being dumped from shopping bags for repacking.

Investigators suspect that the timestamped videos were intended as proof of cash transfers for money-laundering clients.

Authorities identified a woman in the videos as another member of the smuggling group from a tattoo on her forearm.

Investigators searched the phone of one of the women and from that information began piecing together how Alfalasi’s money-laundering operation grew to 36 international couriers.

In December 2020, Clarke was arrested with around $9 million worth of gold on a private plane in Zanzibar, off the coast of Tanzania, said Truby, the senior investigating officer in the case.

U.K. authorities arrested eight more alleged couriers in May 2021. Seven months later, Alfalasi unexpectedly visited London with his wife and children, staying at an apartment owned by his wife’s family on an exclusive Belgravia square.

One day around lunchtime, government investigators knocked on Alfalasi’s door. They seized three phones that revealed details of his operation, which later surfaced in court documents.

Before each trip, Clarke sent Alfalasi photos of the travelers’ passports so he could buy their airline tickets.

He booked them in pairs in Emirates business class to take advantage of the extra baggage allowance.

His couriers returned in economy class. Alfalasi paid with his credit card and collected the air miles.

Clarke paid the couriers for the work, as well as some expenses, such as Covid tests, from her U.K. bank account.

Alfalasi arranged for cash pickups from clients around the U.K., and managed the logistics of counting and packing the cash. He charged around 10% of the total.

In Dubai, he exchanged the sterling notes into gold and local currency through banks, money changers and in parking-lot transactions.

Truby, the senior investigator in the case, said he suspected that Alfalasi and his operatives smuggled as much as $250 million from 2017 until his arrest in December 2021.

Prosecutors said the cash came from criminal conduct. Alfalasi never identified his clients, according to authorities.

Alfalasi pleaded guilty in June 2022 to money laundering and was sentenced to a 9-year, 7-month prison term. The government seized around £3.5 million of Alfalasi’s assets, including a Mercedes G63, Ford pickup truck and three Rolex watches.

His lawyer said in court that Alfalasi was a useful idiot for higher-ups, people whom Alfalasi never named.

Clarke is under investigation in Dubai for money laundering. U.K. authorities would like to question her and others in Dubai about their alleged involvement. Clarke’s husband launched a cryptocurrency company that sponsored boxing matches at a Dubai arena.

Three of the couriers were sentenced to prison, and one was acquitted. A courier who flew $5 million in August 2020 died by suicide. Authorities said his phone contained texts with details about the operation.

Larvin and Johnson were found guilty of money laundering last year. In court, they sought to blame Heathrow, Emirates Airline and the U.A.E. for failing to ask questions.

The couple and several other couriers received suspended sentences. Two other couriers were convicted in January and are scheduled for sentencing later this month.

Johnson said in texts to The Wall Street Journal that he and Larvin were two ordinary people who got hoodwinked, and he blamed corruption and politics for allowing so much cash to pass through Heathrow Airport to Dubai without detection.

If what they did was such a big crime, Johnson said, why don’t airports scan luggage for cash?

Updated: 5-2-2024

TD Bank Probe Tied To Laundering of Illicit Fentanyl Profits

The Canadian bank is contending with three other U.S. probes into its anti-money-laundering controls.

A Justice Department investigation into TD Bank’s internal controls focuses on how Chinese crime groups and drug traffickers used the Canadian lender to launder money from U.S. fentanyl sales.

The investigation was launched after agents uncovered an operation in New York and New Jersey that laundered hundreds of millions of dollars in proceeds from illicit narcotics through TD and other banks, according to court documents and people familiar with the matter.

In that case and at least one other, prosecutors also allege the criminals bribed TD employees.

While TD disclosed a Justice Department probe into its anti-money-laundering practices last year, the focus on money laundering related to illegal drug sales hasn’t been previously reported.

TD’s anti-money-laundering practices have been under scrutiny for years.

The bank said Tuesday that in addition to the Justice probe, it is the subject of three other anti-money-laundering investigations in the U.S. TD set aside $450 million to resolve one of those inquiries and said it expects additional penalties.

On Thursday, a Canadian banking regulator fined TD the equivalent of $6.7 million for failing to file suspicious activity reports and document risks related to money laundering and terrorist activity, among other things.

The issues have already stalled TD’s ambitious expansion plans. TD built one of the largest U.S. regional banks over the past two decades with a flurry of acquisitions.

Early last year, it was on the cusp of extending its reach into the Southeast with a $13.4 billion deal to buy Tennessee’s First Horizon.

But regulators’ concerns over how TD tracked and flagged suspicious customer transactions helped scuttle the deal, The Wall Street Journal reported a year ago.

A TD spokeswoman said in a statement Thursday that it is cooperating with law-enforcement officials and regulators and strengthening its anti-money-laundering program.

She said criminals constantly seek to use banks to launder money and the bank’s systems didn’t effectively thwart these activities. “This is unacceptable, and we must and we will do better,” she said.

TD’s shares closed down 1% Thursday following the Journal’s report.

‘Financial Institution No. 1’

Illicit forms of fentanyl, a synthetic opioid that can be as much as 50 times more potent than heroin, have contributed to a surging number of overdose deaths.

Since 2021, more than 100,000 Americans have died annually from overdosing on drugs that are often mixed with fentanyl, according to the Centers for Disease Control and Prevention.

As law-enforcement authorities mobilized to counter the threat posed by fentanyl, their attention turned to networks of Chinese money-brokers that Mexican cartels use to launder their proceeds.

Officials say these networks pioneered a trade-based method of laundering cash out of the U.S. But investigations in recent years also revealed they made extensive use of the U.S. banking system.

The U.S. government relies on banks to help detect and prevent money-laundering. The Bank Secrecy Act requires financial-services companies to report suspicious activity within 30 days of discovery.

The Justice Department’s investigation into TD’s anti-money-laundering practices is led by the U.S. Attorney’s Office in New Jersey, people familiar with the matter said.

The probe stems in part from a criminal case into an operation that laundered at least $653 million in proceeds from illicit narcotics, according to court documents. Federal prosecutors in New Jersey in 2021 unsealed a complaint charging Da Ying Sze, who went by “David,” with coordinating the money-laundering scheme.

Sze pleaded guilty to charges related to the money-laundering conspiracy in 2022. The U.S. Attorney’s Office in New Jersey declined to comment.

In 2021, agents from the Drug Enforcement Administration and Internal Revenue Service’s criminal investigations unit tailed suspected participants in the money-laundering operation through the streets of Flushing, Queens, and observed them taking large bags of cash into bank after bank.

The suspects operated across multiple financial institutions, often using accounts under the name of small local businesses.

As the investigation evolved, prosecutors came to focus on the money launderers’ use of one bank in particular, identified in court documents as “Financial Institution No. 1.”

That institution was TD, people familiar with the matter said.

Under Surveillance

During one day of surveillance, agents followed members of Sze’s organization in a box truck as they stopped at three separate TD branches. Prosecutors alleged that Sze and others provided gift cards and other bribes worth at least $57,000 to employees of the bank.

He concealed the laundered funds by purchasing cashier’s checks and wired funds to thousands of individuals and entities in the U.S., Hong Kong and elsewhere, prosecutors say.

In a separate 2023 case, the U.S. Attorney’s Office in New Jersey charged Oscar Marcelo Nunez-Flores, an employee at a TD branch in Scotch Plains, with taking bribes and using his position to facilitate the laundering of millions of dollars in drug proceeds. A lawyer for Nunez-Flores declined to comment on the charges, which remain pending.

The Treasury Department’s Financial Crimes Enforcement Network, which serves as the U.S.’s money-laundering watchdog, has since 2018 warned financial institutions under its supervision of the threat posed by networks of Chinese money-laundering organizations.

In a national money-laundering risk assessment released this year, FinCEN said the groups have become increasingly prevalent and now represent one of the most significant money-laundering threats facing the U.S. financial system.

TD Probe Tied To Laundering Drug Money, Journal Says

* Report Says Bank Was Linked To A $653 Million Laundering Case

* Justice Department, Three Us Regulators Are Probing Lender

A US law-enforcement probe into Toronto-Dominion Bank’s internal controls is tied to the laundering of hundreds of millions of dollars in proceeds from illegal drug sales, the Wall Street Journal reported.

The US Department of Justice launched an investigation after discovering evidence of a drug-money-laundering operation in New York and New Jersey, the Journal said

Thursday, citing court documents and people familiar with the matter. There are allegations that the criminals bribed Toronto-Dominion employees in that case and at least one other, the newspaper said.

Toronto-Dominion disclosed last year that it was under investigation by the department. Canada’s second-largest lender also faces probes by three US regulators over its handling of suspicious customer transactions.

The bank has set aside an initial $450 million with respect to just one of those regulatory probes, it said earlier this week, noting that it can’t estimate the final size of any fines or other penalties it might face tied to the anti-money-laundering investigations.

Toronto-Dominion’s shares dropped after the Journal report Thursday afternoon, and closed down 1.7%.

“Criminals constantly seek to use banks to launder money. Regrettably, our US AML program did not effectively thwart these activities. This is unacceptable, and we must and we will do better,” Toronto-Dominion spokeswoman Lisa Hodgins said in an emailed statement to Bloomberg News.

“As previously disclosed, we have been and continue to cooperate with law enforcement and our regulators. A comprehensive effort is underway to strengthen our AML program, including investments in talent, tools and technology.”

Bribery Allegations

The Journal cited a criminal case that included the laundering of at least $653 million in proceeds from drug sales. Da Ying Sze, a Queens, New York, man pleaded guilty in February 2022 to conspiring to commit money laundering and bribing a bank employee, among other charges.

“Sze routinely accepted illicit proceeds in cash and deposited the cash into financial institutions in New York, New Jersey, Pennsylvania and elsewhere, utilizing bank accounts in the names of shell companies and conspirators,” according to a statement at the time from the US Attorney’s Office for the District of New Jersey, which said that Sze received a fee of about 1% to 2% of the cash laundered.

The statement doesn’t name any specific bank. The Journal, citing people familiar with the matter, said that the investigation focused on the money launderers’ use of one particular bank, and it was Toronto-Dominion.

“From 2020 through 2021, Sze routinely provided gift cards and other things of value to employees of at least one financial institution in connection with financial transactions, seeking to corruptly influence financial institution employees to provide Sze with special benefits and to avoid suspicion and reporting of his unusual financial transactions,” the US Attorney’s Office said.

The office declined to comment on Thursday. Hodgins, the Toronto-Dominion spokeswoman, said she couldn’t answer specific questions about the bank’s involvement, if any, in that case.

The Journal also cited the previously reported case of Oscar Marcelo Nunez-Flores, a former Toronto-Dominion branch employee in New Jersey who was charged in October with accepting bribes to facilitate millions of dollars in money laundering tied to drug proceeds. That case remains in court.

An attorney for Nunez-Flores didn’t immediately respond to a request for comment Thursday.

Toronto-Dominion’s $13.4 billion deal to buy Memphis-based First Horizon Corp. was called off a year ago after it became clear that the Canadian bank couldn’t get timely regulatory approval for the deal.

Separately, the Financial Transactions and Reports Analysis Centre of Canada announced a C$9.2 million ($6.7 million) fine against Toronto-Dominion on Thursday.

The penalty followed an investigation that found several administrative violations of Canada’s anti-money-laundering and terrorist-financing laws. That probe didn’t involve criminal allegations.

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