The few regulatory and legal developments in the worldwide financial services industry this past week were centered in Europe where a bank, its senior compliance officer and its sole internal auditor were sanctioned for misleading a regulator, while a European court ruled that the European Central Bank could not require all clearinghouses processing euro–denominated transactions to be located solely in the Eurozone as opposed to in the United Kingdom too. A European-based bank was also fined by a US futures exchange for not maintaining required documents to support exchange for related position transactions. As a result, the following matters are covered in this week’s Bridging the Week:
The Bank of Beirut was fined GBP 2.1 million (approximately US $3.16 million) by the Financial Conduct Authority for not fixing issues related to its anti-money laundering program in a timely fashion after being told by FCA to address the issues, and for misleading FCA that it had fixed the issues when it had not.
In addition, Anthony Wills, the bank’s former compliance officer (equivalent to a Commodity Futures Trading Commission-regulated chief compliance officer), was fined GPB 19,600 (approximately US $29,500), for providing incorrect information to FCA on a number of occasions, claiming that the bank had completed its requirements to improve its AML program when this was not accurate.
Finally, Michael Allin, the bank’s sole internal auditor, was also fined GBP 9,900 (approximately US $14,900) for preparing writings given to FCA that suggested that the bank had completed its FCA-mandated action points, when it failed to do so. Mr. Allin has been employed in a part-time capacity since January 2012.
Following visits in 2010 and 2011, FCA (including its predecessor, the Financial Services Authority) initially advised the bank to improve its AML program through implementation of a number of “remediation plan action points,” including addressing various AML deficiencies in customer files.
FCA charged that Mr. Wills affirmatively provided FCA incorrect or misleading information “on a number of occasions” when he had an obligation to deal with FCA in an “open and cooperative way and to disclose any information of which FCA would reasonably expect notice.” Indeed, said FCA, it identified one email where Mr. Wills expressly conceded that he had been “fairly guarded” during a conversation with FCA.
Mr. Wills claimed that he had insufficient resources to conduct his role as compliance officer and felt pressured from senior management to be “careful” in his communications with FCA. FCA did not accept this defense:
While the [FCA] recognizes that Mr. Wills’ actions were influenced by comments made by senior management, this does not excuse his misconduct. As Compliance Officer with responsibility for communicating with the [FCA], Mr. Wills’ role at the Bank was particularly significant. Mr. Wills was uniquely placed to understand the full position in relation to Bank of Beirut’s regulatory compliance and as such should have resisted any senior management influence in this regard. As a [regulated] person, he remained personally bound by his own regulatory responsibilities.
In addition to its fine, Bank of Beirut agreed not to open accounts for new customers that are resident or incorporated in high-risk jurisdictions for 126 days.
The FCA has evidenced a penchant among international regulators for naming compliance officers in its enforcement actions. (Click here, for an example, in the article, "Compliance Officers Are in the Cross Hairs Once Again of the UK FCA and the US SEC," in the September 30 to October 4 and October 7, 2013 edition of Bridging the Week.)
My View: Although this matter involving the Bank of Beirut and Mr. Wills was handled by a non-US regulator applying non-US rules, the action may cause pause for chief compliance officers with express, enumerated responsibilities under CFTC rules who wonder what their potential liability might be if something goes wrong at their institution. Among the many responsibilities for CCOs of future commission merchants, swap dealers and major swap participants is “tak[ing] reasonable steps to ensure compliance with the Act and Commission regulations relating to the swap dealer’s or major swap participant’s swaps activities, or to the futures commission merchant’s business as a futures commission merchant.” What this means practically is unclear. However, in adopting its CCO rules, the CFTC expressly rejected industry requests to confirm that the CCO role was solely advisory and suggested that their role is something more. According to the Commission:
[i]n response to comments advocating a purely advisory role for the CCO, the Commission observes that the role of the CCO required under the [Commodity Exchange Act], as amended by the Dodd-Frank Act, goes beyond what has been represented by commenters as the customary and traditional role of a compliance officer. While the Commission does not believe, as some commenters have suggested, that the CCO’s duties under the CEA or [CFTC Rule] § 3.3 requires that the CCO be granted ultimate supervisory authority by a registrant, it is the Commission’s expectation that the CCO will, at a minimum, be afforded supervisory authority over all staff acting at the direction of the CCO. Recent events have demonstrated the importance of the active compliance monitoring duties required of the CCO under the Dodd-Frank Act, as implemented through these regulations.
This is puzzling language at best and leaves CCOs in the United States wondering if they are effective guarantors of their firm’s compliance with laws and rules. It would be helpful for the CFTC to better articulate its expectations for CCOs, considering, again, some of the arguments made by the industry in the lead-up to the adoption of the CCO rules and now the experience of CCOs after a few years. CCOs should ordinarily never be held responsible for the conduct of persons they do not supervise. (Click here to access the CFTC’s discussion of CCO responsibilities in the Federal Register release in connection with adoption of CFTC Rule § 3.3, at pages 20159-20163.)
Compliance Weeds: Last year, IFUS, like CME Group before it, updated its rules related to EFRPs and issued a revised “EFRP FAQs.” Among other matters, IFUS’s rules require each of the parties to an EFRP (regardless of whether they are exchange members) to maintain “all documents customarily generated in accordance with the relevant market practice” in connection with the related position. Many firms have been penalized by CME Group and IFUS for failing to prepare and later produce these required documents. (Click here for background on IFUS’s new requirements in the article “ICE Futures U.S. Issues Amendments to Rule and New Frequently Asked Questions Related to EFRPs” in the August 11 to 15 and 18, 2014 edition of Bridging the Week.)
And even more briefly:
For more information, see:
Broker-Dealer Fined by SEC for Lax Supervision and Violating Customer Protection Rules in Connection With Oversight of Salespersons Who Stole Customer Funds:
Cybersecurity to Be Focus of CFTC Staff Roundtable:
Deutsche Bank AG Fined $650,000 by IFUS for Documentation Lapses Related to EFRPs:
European Court Rules That ECB Wrong to Mandate Clearinghouses Clear Euro-Denominated Trades in Eurozone Only:
FCA Sanctions Bank, Former Compliance Officer and Former Internal Auditor for Providing Misleading Information Regarding AML System and Controls Remediation:
LME Proposes Further Reforms to Reduce Warehouse Delivery Delays:
NFA to Require Swap Dealers and MSPs to Submit Documents to Satisfy Registration Requires Via EasyFile System:
US Banks Pass Stress Tests; International Banks Meet Newest Capital Requirements:
The information in this article is for informational purposes only and is derived from sources believed to be reliable as of March 7, 2015. No representation or warranty is made regarding the accuracy of any statement or information in this article. Also, the information in this article is not intended as a substitute for legal counsel, and is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The impact of the law for any particular situation depends on a variety of factors; therefore, readers of this article should not act upon any information in the article without seeking professional legal counsel. Katten Muchin Rosenman LLP may represent one or more entities mentioned in this article. Quotations attributable to speeches are from published remarks and may not reflect statements actually made.