- DFSA Signs MoU with CMA, Kuwait
- Kuwait Turkish Participation Bank (Dubai) Resolves Compliance Concerns with DFSA
- Notice of Amendments to Legislation
- Consultation Paper 101 - Proposed Miscellaneous Changes
- Consultation Paper 102 - Property Fund and Money Market Fund
DFSA Signs MoU with CMA, Kuwait
Earlier in June 2015, the DFSA signed a Memorandum of Understanding (MoU) with the Capital Market Authority (CMA) of Kuwait. The MoU was signed by Mr. Ian Johnston, Chief Executive, DFSA and H.E. Dr. Nayef Falah Al- Hajraf, Chairman of the Board of Commissioners, CMA, Kuwait.
The CMA was established in 2010 to regulate and develop the capital markets in the state of Kuwait while supervising and monitoring regulated companies with the aim of promoting fairness and transparency in transactions related to the securities markets, giving confidence to investors by protecting them from illegal practices, and by enforcing the securities law.
Both the DFSA and the CMA have agreed on a secondment that will allow regulatory members of staff to learn from each other and, in turn, to share this knowledge and experience with their colleagues.
The MoU signing was attended by the members of DFSA and CMA. Members present from DFSA were International Relations Director Mark McGinness, and Corporate Affairs Director, Waleed Saeed Al Awadhi. CMA was represented by the Board of Commissioners Office Director, Moayed Al-Shakhs, and International Relations Office Director, Khaled Al-Ghais.
Kuwait Turkish Participation Bank (Dubai) Limited Resolves Compliance Concerns with the DFSA
The Dubai Financial Services Authority (DFSA) has accepted an Enforceable Undertaking (EU) from Kuwait Turkish Participation Bank (Dubai) Limited (KTPB). KTPB is a Category 5, authorised since 19th November 2009 to conduct a range of Shari’a compliant financial services activities.
The DFSA carried out periodic Risk Assessment of KTPB in 2010, 2011 and 2013 and implemented a Risk Mitigation Plan after it identified various deficiencies in areas of risk management, corporate governance, operational controls, compliance management, organisational structure, management of outsourcing arrangements and AML systems and controls.
In May 2013, the DFSA commenced investigation into KTPB’s AML processes, systems and controls, corporate governance and customer due diligence.
On 4th March 2014, the DFSA issued a notice under Article 74 which required an external expert to provide a report in accordance with the requirement under the notice. On 2nd May 2014, the Expert Report was provided to the DFSA and KTPB which covered the full scope of KTPB's compliance framework in relation to AML (including client due diligence files) and highlighted the deficiencies and areas of improvement in KTPB's systems and controls. The Expert Report did not identify any specific contraventions of the laws and regulations applicable in the DIFC.
The deficiencies identified were:
- Certain customer Due Diligence information was missing
- KTPB did not conduct a formal Customer Risk Assessment
- KTPB did not have formal process of transaction monitoring
- KTPB did not have an effective escalation and investigation process in relation to SAR
- Requisite transaction related information missing in the 18 credit customer files that were reviewed.
- The information missing was about the shipment of the goods or their place of discharge for which the advance payment had been made, and deficiencies in the overall financial analysis of credit
The Expert Report suggested that KTPB could improve the effectiveness of the communication of responsibilities and training within KTPB in relation to AML.
Following the External Expert Report, KTPB commenced a remediation process to implement recommendations.
On 13th May 2014, KTPB provided the DFSA with an action plan to implement the recommendations.
KTPB acknowledged that it may not have acted in accordance with Principle 2 and 3 for Authorised Firms and may not have established and maintained systems and controls including financial and risk systems and controls that ensure that its affairs are managed effectively and responsibly by it senior management.
KTPB has not contravened any specific DFSA Laws and Rules and co-operated fully with the DFSA's investigation in addition to already carrying out significant remedial work.
KTPB has agreed to pay a financial penalty of USD150,000 to the DFSA of which USD50,000 is payable on or by 8th July 2015. The remaining USD100, 000 is suspended indefinitely and becomes payable if KTPB fails to comply with the Enforceable Undertaking.
Terms and Conditions for Enforceable Undertaking:
1. Appointment of External Compliance Expert: KTPB to engage a suitable qualified and experienced External Compliance Expert within 30 days of the Enforceable Undertaking to review the existing remedial work, provide recommendations and identify gaps in the implementation of Expert Recommendations through existing remedial work and identify any further deficiencies in KTPB AML policies and procedures.
2. Remediation Plan: KTPB to prepare a Remediation Plan which is subject to approval by the DFSA. After the DFSA agrees to the Remediation Plan, KTPB undertakes to implement all the tasks in the Remediation Plan and complete the tasks within 3 months of appointment of the External Compliance Expert. The External Compliance Expert is to monitor and ensure that the changes have been properly implemented and report to the DFSA on a monthly basis. The External Compliance Expert will also supervise the onboarding of new clients of KTPB to ensure that onboarding is in accordance with the DFSA AML Module.
The External Compliance Expert will provide the DFSA with a report at the end of 3 months engagement. This report will confirm the implementation measures undertaken by KTPB to ensure that they fulfill the requirements of the Remediation Plan.
3. Training and Appointment of Non Executive Director(s): KTPB to provide training on DFSA laws (with focus on risk management and AML) to every member of staff including Board of Directors within 3 months of Enforceable Undertaking.
KTPB to propose to the DFSA and appoint one or more persons as Non Executive Directors
4. Further Undertakings: Until the External Compliance Expert gives its assessment in accordance with conditions under remediation plan (which is subject to acceptance by the DFSA), KTPB is not allowed to carry out following activities:
(a) Managing a PSIA on an unrestricted basis;
(b) Providing Credit or Arranging Credit or Deals in Investments in relation to a Credit Facility with any new customer;
(a) KTPB undertakes not to make any public statement that may conflict with the intent and purpose of the Enforceable Undertaking;
(b) KTPB agrees to comply with any reasonable and lawful directions given to it by the DFSA about compliance with it obligations under the Enforceable Undertaking.
5. Remedies for Breach of Enforceable Undertaking: The DFSA has the right to determine if the terms and conditions of the Enforceable Undertaking have been implemented by KTPB effectively and failing which the DFSA reserves the right to pursue any remedy available without further notice.
Notice of Amendments to Legislation
The DFSA have made amendments to the Fee (FER) and Recognition (REC) modules after due considerations to the comments that were received in response to Consultation Paper No.100.
For the table Changes to the FER Module, please review the full PDF version of this upate.
Changes in the Recognition Module (REC)
DFSA specified that if the Recognised Body fails to submit its annual report within four month of its year end, then such failure will incur a late submission fee of $1,000.
The above rules come into effect from 1st August 2015.
Consultation Paper 101 - Proposed Miscellaneous Changes
The DFSA have proposed the following changes to Sourcebooks and Rulebooks:
Communication of Information and Marketing Material
In COB 3.2, a communication would include a financial promotion, a client agreement, terms of business, financial product terms and conditions, a mandate, power of attorney entered into for the purposes of a financial service or product and any other communication which relates in whole or in part to the provision of a financial service or product.
In COB 7.3, the DFSA proposes to replace the reference of Regulatory Law 2004 to the DFSA administered Legislation.
Place of Business
In GEN 6.5.1, the DFSA expects all Authorised Persons to have a physical presence, including Employees, in the DIFC. The DFSA does not permit ‘brass plate’ operations i.e. offices with the name of the entity but with no staff or where no meaningful activity takes place. The Companies Law, Limited Partnership Law and General Partnership Law of the DIFC also require entities to which they apply, to have a registered office in the DIFC, and to carry out their principal business activity in the DIFC.
Application of GEN Module to REP Module
Under the current regime, only chapters 1 to 3 of the GEN Module are specified to apply to a Representative Office. DFSA proposes to make clear that GEN11.2 (waivers), 11.3(application to change the scope of license), 11.11 (provision of notifications and report), 11.12(requirement to provide report) and 11.13(imposing restrictions) also apply to Representative Offices.
Additionally, the DFSA proposes to introduce new Rules into the REP Module (5.3) which will obligate a Representative Office to provide clear and accurate information to the DFSA. The DFSA also intend to specify further information that must be provided if a Representative Office seeks to have its License withdrawn.
Regulatory Law 2004 - Transfer of Business
The DFSA proposes to make changes to Rules, under the Article 113 , to:
(a) clarify that banking and insurance transfer schemes need to be approved by the Court; but
(b) allow other types of transfer not to require the approval of the Court, provided that:
(i) the Firm obtains the consent of affected customers; or
(ii) transfers are expressly permitted under the agreements the Firm has in place with affected customers; or
(iii) the Firm obtains the consent of the DFSA.
An Authorised Firm applying under GEN Rule 12.1.5 for DFSA consent to a transfer scheme must pay to the DFSA an application fee of $5,000. The FER module will be updated with the new FER regime.
Definitions under Glossary Module
The DFSA proposes to revise the definitions of Group, Holding Company, Parent and Subsidiary, making use of existing text from the Companies Law where appropriate.
The intent here is that the DFSA should be able to look upwards in a Group structure as many levels as is necessary for the purposes of its supervision, so from the DIFC entity to any Parent, however far above the DIFC entity sits in the Group structure.
The DFSA also proposes to make changes in the Glossary module to include the definition of Discretionary Portfolio Management Account.
Pursuant to above changes the AML module will also be updated.
Collective Investment Rule (App8)
Fund Managers of Hedge Funds in the DIFC to include Fund Managers of Domestic Hedge Funds that are Public Funds, Exempt Funds or Qualified Investor.
The DFSA proposes to make the following amendments to Authorised Firm Reporting Matrix:
Form Reference Type of Firm Existing Reports Proposed Changes
B60C (Operational risk) Domestic Firm Category 1, 2, 3A, 3B and 5 Category 1, 2, 3 and 5
B80 (Liquidity) Domestic Firm and Branch Category 1, 2 and 5 Category 1 and 5
B150 (Loan Restructured) Domestic Firm and Branch Category 1, 2, and 5 Category 1, 2, 3A and 5
The deadline for providing comments on the proposals in Consultation Paper 101 is 29th July 2015.
Consultation Paper No.102 - Property Funds and Money Market Funds
The DFSA proposes to change the Collective Investment Funds Regime in order to give greater flexibility to market participants and align its regime with International jurisdictions and standards, while catering to the property market, and also introduce specific rules for the establishment of Money Market Funds. The DFSA proposes to make amendments for the following:
1) Appointment of Eligible Custodian: The DFSA proposes new systems and controls for appointment of eligible custodian based on proposed changes in IOSCO principles.
2) Aligning Borrowing Limits: The DFSA proposes to align borrowing limits for Public Property Funds and REITs (including Islamic REITs) to be set at 50% of GAV (Gross Asset Value)
3) Affected Person Transactions: The DFSA propose to:
(a) Change the term Affected Person to Related Party.
(b) Include a prohibition for a Unitholder who is an Affected Person and a Unitholder who is an Associate of an Affected Person from voting in resolution.
(c) To change the threshold for prior approval required for Affected person transactions over 5% of the most recent NAV. The change in threshold will now require consent of more than 50% of unitholders in voting.
(d) Exempt Property Funds: The DFSA proposes to remove the Affected Person transaction requirements and invite views on disclosure requirements relating to the Affected Person transactions engaged in Exempt Property Funds in the Information Memorandum.
4) Valuation Requirements: The DFSA proposes that a Fund Manager of a Public or Exempt Property Fund should change the valuer every five years but if they wish to appoint the same valuation company then they must disclose the same in the interim or annual report citing the reason for re appointment and evidence supporting those reasons.
The DFSA also proposes to amend the CIR Rules to reflect that the valuation report prepared for the Fund should be no more than six months old for the purposes of any acquisition or disposal of the relevant Fund Property.
5) Listing requirements for Property Related Assets: The DFSA proposes to allow Public Property Fund to invest in non-traded and non-listed Property Related Assets provided there is review and approval by the Investment Committee of the Fund and in respect of Exempt Property Fund, it proposes to allow investment in non-traded and non-listed Property Related Assets.
Money Market Funds
1) Introduction of Money Market Fund: The DFSA Funds regime does not explicitly define Money Market Funds (MMF), therefore the DFSA proposes to include the definition of MMF. The DFSA also proposes that the Funds Regime should not allow the MMFs to be established as Constant Net Asset Value (CNAV) Funds as they are seen similar to bank deposits and that any MMF established in the DIFC operates as a Variable Net Assets Value (VNAV) Fund.
2) Liquidity, market and credit risks associated with MMFs: The DFSA proposes that a MMF may only invest in high quality deposits and debt instruments. While considering high quality, the Fund manager must consider factors including but not limited to: the credit quality of the instrument, nature and assets class, operational and counterparty risk inherent within structural financial transaction and the liquidity profile.
The DFSA provides guidance in determining factors that determine the financial instruments are of ‘high quality’.
3) Use of Credit Ratings: The DFSA proposes that a Fund Manager of a MMF must not solely use external credit rating agency credit ratings as the basis for its assessment of the risks associated with a counterparty exposure. At all times they must conduct their own credit assessment of such an exposure and when utilising external credit rating agencies as part of credit risk assessment resulting from counterparty exposure. A Fund Manager of an MMF must maintain an internal credit grading system.
4) Islamic Money Market Funds: The DFSA proposes to apply the same general framework as regards to management of liquidity risks etc to Islamic MMFs as proposed for non-Islamic MMFs. The Shari’ah compliance of actual instruments invested in would be matter for Shari’ah board of such a Fund.
5) Disclosure needs of investors: The DFSA proposes to introduce certain requirements to the CIR section relating to Prospectus disclosure requirements for MMFs. The Disclosures should clearly highlight the risk warning and the nature of investment in a Fund. The warning should include the fact that an investment is different to that of deposit and therefore the principal value may fluctuate. The investor will not therefore have the safety of a capital guarantee unless there is a firm commitment from the sponsor to provide support.
The DFSA proposes that these disclosures are also applied in case of distribution of any Foreign Fund which falls within the proposed definition of a MMF in the same manner as they would be in the case of a Domestic MMF.
The DFSA proposes to introduce an explicit requirement of issuance of confirmation notes to the investors by the Fund Managers of Public Funds.
The above proposed changes will reflect in the CIR, IFR and GLO Modules of the DFSA Rulebook.
The deadline to provide comments on this consultation paper is 28th August 2015.
If you would like to discuss these latest developments in more detail, please contact:
Clare Curtis (CCurtis@cclcompliance.com)
- UAE and USA Sign Intergovernmental Agreement on FATCA
- UAE Banking Industry to Tighten Compliance on Advertising Claims
- Investigation Continues as Private Banker is Fired by ABN AMRO Dubai for Misconduct
UAE and USA Sign Intergovernmental Agreement on FATCA
The UAE, represented by the Ministry of Finance (MOF), has announced the signing of the agreement to facilitate implementation of the Foreign Account Tax Compliance Act (FATCA).
FATCA was enacted by the U.S. Congress in 2010 to target non-compliance by U.S. taxpayers using foreign accounts. The U.S. law requires foreign financial institutions to provide annual reports on account information of customers who are U.S. persons. In the case of non-compliance with the requirements of FATCA, any non-U.S. financial organisation could face a 30 percent penalty on certain financial returns of its operations in the U.S. market.
Under the intergovernmental agreement, the first report, for the 2014 period, must be submitted to the United States by 30th September 2015. The agreement exempts certain government institutions, sovereign funds and international organisations from the reporting requirements.
As implemented, the U.S. law requires foreign financial institutions to submit reports directly to the U.S. Treasury Department or via the foreign government, providing information about financial accounts held by U.S. persons or by certain foreign companies with one or more U.S. shareholders that own more than 10 per cent of the company.
Regulatory entities have stressed the need to adhere to the requirements of FATCA through meetings, guidance on due diligence and developing reports, in addition to monitoring UAE financial institutions’ commitment to comply with these requirements.
In the DIFC the Registrar of Companies (ROC) has set up a reporting portal which can be accessed via this link: https://www.difc.ae/foreign-account-tax-compliance-act-fatca
UAE Banking Industry to Tighten Compliance on Advertising claims
The UAE Banks Federation has announced plans of a crackdown on misleading advertising as part of a series of self-regulating measures. The banking industry body has said it would appoint an independent monitor to enforce its code of conduct charter and create a new committee to oversee its 50 member banks and ensure customers are not misled by false advertising claims about interest rates and fees.
The UAE Banks Federation outlined in November 2013 a code of ethics for lenders with a focus on consumer protection. The federation’s code of conduct also includes customer service, relationships between banks, and management. The federation said at the time that it would rely on banks collectively regulating themselves without help from the Central Bank. The charter comes at a time when banks are generating increasing revenues from personal lending products.
Separately, at its meeting in Dubai, the banking federation’s council also discussed, as proposed by the UAE Central Bank, to create a Higher Sharia Authority to complement and oversee the work of Sharia boards of individual Islamic banks in the country and to make sure that there is consistency among UAE banks when it comes to the development of products. The banking federation council also added four new committees for auditing, operations, payments, IT and fraud.
Investigation Continues as Private Banker is Fired by ABN AMRO Dubai for Misconduct
ABN AMRO has fired an employee as part of an internal investigation into its private banking operations in Dubai. The bank launched the investigation after a 11th March 2015 report in a newspaper “Het Financieele Dagblad” alleged the bank suspected employees in Dubai of misconduct.
The bank stated that in early 2014 the employee had received less than $100,000 from a private banking client and transferred it through his personal account to a third account, violating company policy. The bank has not released the employee’s name. ABN AMRO said it had suffered no losses and had notified financial supervisors in Dubai and the Netherlands. The bank expects its investigation to be completed in the fourth quarter of 2015.
If you would like to discuss these updates in more detail, please contact:
Christopher Hobbs (CHobbs@cclcompliance.com)
- UK and UAE Hit Global Criminals
- Hong Kong Regulator to Head Enforcement at FCA
- New EU Anti-Money Laundering Directive in Force from 26th June
UK and UAE Hit Global Criminals
British authorities have said that large gains are being made against organised international crime syndicates through a closely knit “UK-UAE crime-fighting relationship”.
As part of the newly released UK National Crime Agency’s (“NCA”) 2015 National Strategic Assessment, the agency said the UAE is a valuable partner in helping fend off threats to the UK from highly sophisticated criminals working across borders and through the internet. NCA works in collaboration with a range of law enforcement partners and private industries in the UAE to combat the threats faced from organised crime. Unfortunately however, close links in the trade and tourism sector are still occasionally exploited by criminals. Therefore, increasing joint cooperation between the two countries to combat a multitude of underworld activities is critical.
In a statement issued by the British Embassy, officials said many high-level UK crime-fighting departments have a presence in diplomatic missions abroad, including in Abu Dhabi and Dubai.
Joint efforts by Dubai Police’s Anti-Narcotics Unit and the NCA, for example, have led to the seizure of multiple kilograms of cocaine, heroin and cannabis. Dubai Police’s Anti-Money Laundering Unit and the UK are working together and leading international operations that have dismantled organised criminal attacks on EU Revenue systems protecting over Dh6 billion.
Hong Kong Regulator to Head Enforcement at FCA
The UK’s Financial Conduct Authority (FCA) has announced that Mr. Mark Steward of the Hong Kong Regulator is to be appointed Enforcement Director of the FCA. Mr. Steward, current Director of Enforcement at the Hong Kong Securities and Futures commission, comes with a strong reputation and is known for overseeing an organisation recognised as one of the toughest and strictest.
Mr. Steward will deal with setting new priorities for the 420-strong team, as its major investigations into the rigging of the Libor benchmark interest rate and of foreign exchange markets draw to a close.
The Head of Enforcement role became vacant after Ms. Tracey McDermott was promoted to Head of Supervision at the start of the year during a reorganisation of the FCA. The position had been temporarily filled by Ms. Georgina Philippou, who will return to her role of Director of Strategy and Delivery.
The FCA issued £1.47bn-worth of fines last year, the bulk of which came from lengthy investigations into Libor and foreign exchange manipulation.
New EU Anti-Money Laundering Directive in Force from 26th June
The fourth EU Anti-Money Laundering (AML) Directive took effect from 26th June. EU countries have two years from that date to implement the rules contained in the Directive into national laws.
The Directive applies to a range of businesses, from banks and other financial
to auditors and accountants. The rules must also be complied with by any other kinds of businesses involved in making or receiving cash payments for goods worth at least €10,000, regardless of whether payment is made in a single, or via a series of linked transactions.
The new regime will bring into force new customer due diligence checking requirements, together with new obligations to report suspicious transactions and maintain records of payments. Businesses subject to these new rules will also have to install internal controls to combat money laundering and terrorist financing activities.
In addition, EU countries must set up registers to record the ultimate 'beneficial' owners of businesses. The registers will be accessible by authorities within each country, to 'obliged entities' such as banks doing due diligence into customers, and to others, such as investigative journalists, who can demonstrate a "legitimate interest" in gaining access to the information.
The most severe financial penalties that could be levied for non-compliance with the new AML Directive are fines of up to at least €5 million or 10% of a business' annual turnover.
If you would like to discuss this update in more detail, please contact:
Nigel Pasea (NPasea@cclcompliance.com)
- SEC Actions Stir Concerns Over Compliance Officer Liability
SEC Actions Stir Concerns Over Compliance Officer Liability
The U.S. Securities and Exchange Commission (SEC) has charged the chief compliance officer at BlackRock Advisors LLC with breaching the Investment Advisers Act, for failing to implement certain compliance policies and procedures. The compliance officer in question agreed to pay a $60,000 penalty; the company has also agreed to pay $12 million. Neither have admitted nor denied the SEC’s allegations.
The SEC has also charged the chief compliance officer of SFX Financial Advisory Management Enterprises Inc. with failing to implement compliance policies and procedures it says would have detected an alleged fraud by an executive at the firm. The company was fined $150,000 and the compliance officer agreed to pay a $25,000 penalty as part of a settlement agreement in which neither had to admit nor deny guilt.
By holding compliance officers liable for the implementation of programs, and not just their creation, the SEC is sending a “troubling message” that chief compliance officers “should not take ownership of their firm’s compliance policies and procedures, lest they be held accountable for conduct that is the responsibility of the adviser itself,” said SEC Commissioner Daniel Gallagher.
David Kotz, a former SEC inspector said “without a specific rule to provide clarity as to what to do, compliance officers need to look at enforcement decisions and the facts in their own cases to try to figure out what may occur. Beyond that, compliance officers need to make sure their procedures are appropriate so as to comply with the rules, while at the same time making sure those procedures are being followed”.
These aren’t the first instances of compliance officers being punished over their company’s programs. In December 2014 the U.S. Treasury Department’s Financial Crimes Enforcement Network fined the former chief compliance officer of MoneyGram International Inc. for failing to ensure the company followed anti-money laundering laws.
If you would like a more detailed discussion on this update, please contact:
Clare Curtis (CCurtis@cclcompliance.com)
- FinCEN Fines Tinian Dynasty Hotel & Casino $75 Million for AML Violations
- SEC Fines Wall Street’s Top Banks Over Fraudulent Muni Deals
- State Street Ordered to Improve Compliance Program
- Lloyds Hit by Record £117m Fine Over PPI Handling
FinCEN Fines Tinian Dynasty Hotel & Casino $75 Million for AML Violations
The Treasury’s Financial Crimes Enforcement Network (FinCEN) has fined Tinian Dynasty Hotel & Casino $75 million for what it called “wilful and egregious” violations of anti-money laundering rules going back to 2008.
This is the biggest ever fine issued against a casino by FinCEN and the fourth largest ever imposed on any entity by the agency. The penalty is a clear sign that FinCEN is following up on its recent warnings to casinos, wherein they urged them to step up their efforts to prevent money laundering. The largest previous penalty against a casino was a $10 million fine imposed on Atlantic City’s Trump Taj Mahal casino in March 2015, which at the time was seen as an increase in enforcement.
During a 2013 search of the casino, law enforcement agents found a stack of more than 2,000 unfiled currency transaction reports (CTRs). Like banks, casinos must report currency transactions of more than $10,000 in cash by any person in a single day.
The casino is also facing a related federal criminal case in Northern Mariana Islands District Court that is scheduled to go to trial 30th June, according to a court official. It follows a grand jury’s 158-count indictment for anti-money laundering violations during September 2009 to April 2013. A special agent from the IRS Criminal Investigation unit found that the casino had failed to file more than 3,600 required reports for currency transactions over $10,000, the total value of which was around $138 million.
SEC Fines Wall Street’s Top Banks Over Fraudulent Muni Deals
The U.S. Securities and Exchange Commission (SEC) has alleged that 36 underwriters, including Wall Street’s biggest banks, sold bonds for municipalities that failed to make adequate financial disclosures to investors. Bank of America Corp.’s Merrill Lynch unit, Citigroup Inc., Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley settled with the SEC and will each pay $500,000. The SEC explained they were negligent because the offering documents for the deals they sold contained false information or material omissions about borrowers’ compliance with the law.
The $9.3 million of penalties are the first against underwriters to result from an offer of leniency the agency extended to banks and localities who self-reported running afoul of securities rules. It is part of a year-long push to crack down on borrowers in the $3.6 trillion municipal-bond market that fail to provide key information to investors.
The SEC does not have direct authority to force states and cities to file updated financial statements and other documents because of exemptions that have been in place since the 1970s. However, it enforces the rules indirectly through its power over underwriters, requiring them to receive confirmation from municipalities that they will provide investors with annual financial reports and other information that could affect the value of the bonds. The penalties were capped based on the size of the firm and were dependent on how many fraudulent offerings were identified.
State Street Ordered to Improve Compliance Programme
State Street Corp. has been ordered by regulators to revamp its compliance programme after deficiencies were found relating to internal controls, customer due-diligence procedures and transaction monitoring.
The bank had warned last month that it would likely face a public enforcement action from the Federal Reserve and Massachusetts Division of Banks.
In a 1st June agreement, State Street agreed to submit a written plan to the Federal Reserve outlining how it would strengthen its Bank Secrecy Act/Anti-Money Laundering (BSA/AML) risk management program across a number of relevant areas. The agreement requires State Street to submit written plans detailing how it will strengthen board oversight of its compliance program, boost its customer due-diligence procedures and ensure compliance with the Bank Secrecy Act and anti-money laundering requirements, where deficiencies were found.
The agreement also envisages the bank submitting a separate plan and timetable within 45 days for the “full installation, testing, and activation of an effective automated transaction monitoring system” that will “reasonably ensure the timely, accurate, and complete reporting of all known or suspected violations of law” to appropriate authorities.
Lloyds Hit by Record £117m Fine Over PPI Handling
The UK’s Financial Conduct Authority (FCA) has fined Lloyds Banking Group a record £117m for failing to properly handle payment protection insurance (PPI) complaints. The FCA noted that of 2.3 million PPI complaints received against Lloyds between March 2012 and March 2013, 37 per cent were rejected.
Complaint-handling staff were told to assume the bank’s PPI sales processes were compliant and robust. This was known as the ‘overriding principle’. Some complaint handlers dismissed customer claims or did not fully investigate the complaints. The bank also failed to contact customers so that they could give their account of the sale. After intervention from the FCA, Lloyds removed the overriding principle from its complaints-handling process.
FCA’s acting Director of Enforcement and Market Oversight Georgina Philippou said: “Customers who had already been treated unfairly once by being mis-sold PPI were treated unfairly a second time and denied the redress they were owed. Lloyds’ conduct was unacceptable.”
A total of £19.2bn has been paid out for PPI misselling between January 2011 and March 2015.
As at 31st December 2014, Lloyds had set aside a total of over £12bn in relation to PPI misselling.
If you would like a more detailed discussion on these or other enforcement actions, please contact:
Clare Curtis (CCurtis@cclcompliance.com)