Bank of Nova Scotia to pay $15 million CFTC penalty for recordkeeping, supervision failures
The Commodity Futures Trading Commission (CFTC) has charged The Bank of Nova Scotia (Scotiabank) and Scotia Capital USA Inc. (Scotia Capital) with failing to comply with recordkeeping requirements and proper supervision as CFTC registrants. The charges stem from the employees of these institutions using unapproved communication methods, such as personal text messages and WhatsApp, for business-related conversations. These communications were supposed to be recorded and preserved but were not maintained adequately. The use of unapproved methods also violated the firms’ own policies, and even some supervisory personnel were found to have used non-approved communication methods. The CFTC became aware of the issue and found that BNS Affiliates failed to supervise and maintain the required records.
The Securities and Exchange Commission (SEC) has also taken action in relation to this matter against both Scotiabank and HSBC Holdings . The SEC has entered an order filing and settling charges against an SEC-registered Scotiabank affiliate, imposing civil monetary penalties for related recordkeeping and supervision violations. The SEC has also charged HSBC Securities with a similar offense of widespread recordkeeping violations and charged the bank $15m.
Governor Bowman outlines need for banking reform
In a speech 21st Annual Symposium on Building the Financial System of the 21st Century on the evolving nature of banking, bank culture and bank runs Michelle Bowman, Federal Reserve Governor, said: “it is clear that we need to review the bank regulatory and supervisory framework to determine whether updates are needed”.
Specifically, Bowman covered supervision and regulation noting under each heading the following points.
- Effective bank supervision requires transparency in expectations and an assertive approach when firms fail to meet those expectations.
- Transparency in supervisory expectations promotes legitimacy, compliance culture, and understanding between banks and examiners.
- Regulators should clearly communicate expectations to banks and take strong action when expectations are not met to prevent potential damage over time.
- Remediation of technology infrastructure, data, and operational resilience issues may take longer and require appropriate time, but it should not be an excuse for inaction.
- Supervision should hold banks accountable for safety, soundness, and compliance, and regulators must also hold themselves accountable for any failures in supervision.
- Shifting banking management’s responsiveness to supervision, particularly in innovative areas, may require a reevaluation of formal and informal enforcement mechanisms.
- Supervision needs to be nimble and responsive to evolving financial landscapes and risks.
- Supervision should complement regulation by addressing emerging threats and risks that may be specific to a bank’s business model and economic conditions.
- Before making changes to the regulatory framework, it is important to identify actual weaknesses and preserve existing strengths.
- The regulatory system has been transformed since the 2008 financial crisis, leading to a strong and resilient banking system.
- Changes have been implemented to improve bank capital and liquidity, including the introduction of common equity tier 1 and additional capital requirements.
- Standardized liquidity requirements, such as the Liquidity Coverage Ratio and Net Stable Funding Ratio, have been implemented.
- Care should be taken when imposing new requirements that increase funding costs, and specific management and supervisory issues should be addressed instead.
- Regulation should be continuously improved while considering efficiency and durability throughout the economic cycle.
- The regulatory framework is complex and may require a comprehensive approach for effective changes.
IRS success in fraud case
Christin Guillory, an Accounting Manager at a manufacturing company in Washington, has pleaded guilty to wire fraud and tax fraud charges for embezzling over $2.5 million from her employer over a period of ten years.
Guillory set up accounts in the names of fake companies and transferred funds to her personal bank accounts. She used payment processors such as Square and PayPal to receive the stolen money, making false entries in the company books to conceal her theft. Guillory’s scheme was uncovered when irregularities were reported by a financial institution. In addition to the wire fraud charges, Guillory is also accused of filing a false tax return, failing to report the embezzled income. She faces up to 20 years in prison and owes $590,850 in unpaid taxes. The case was investigated by the Internal Revenue Service: Criminal Investigation (IRS-CI) and the FBI. Guillory’s sentencing is scheduled for August 11, 2023.
SEC charges against crypto websites
The Securities and Exchange Commission (SEC) has charged GA Investors and four unidentified individuals (John Does 1-4) for engaging in fraudulent offerings of securities, including crypto asset mining pools, through multiple websites. The SEC is seeking emergency relief, including the immediate takedown of the defendants’ fraudulent websites.
According to the SEC’s complaint, the defendants operated numerous fraudulent websites, including GA-Investors.org, which promised exceptionally high returns on investments, reaching up to 61.9% within 24 hours. Some of the websites impersonated legitimate companies, including a registered broker-dealer. The defendants targeted investors worldwide, including those in the United States, and managed to raise around $85,000 through their fraudulent securities offering.
Investors were lured by the promise of guaranteed daily returns ranging from 2% to 4.5% on the GA Investors website. They were instructed to purchase crypto assets from a separate trading platform and transfer them to a GA Investors wallet address. While some investors were able to make small withdrawals, the defendants froze accounts and misappropriated funds when investors sought to recoup larger portions of their investments.
The SEC’s charges highlight the fraudulent activities conducted by GA Investors and the misappropriation of investor funds. The regulatory agency is taking legal action to combat the fraud and protect investors affected by the scheme.
SEC charges individual with defrauding investors of $4.8 million
The Securities and Exchange Commission (SEC) has obtained emergency court orders against Charles Thomas Lawrence, Jr. for allegedly misappropriating over $4.8 million from 11 investors. The SEC’s complaint accuses Lawrence of engaging in a fraudulent scheme by misrepresenting himself as a managing director and offering guaranteed, high-return investment contracts. Instead of investing the funds as promised, Lawrence allegedly diverted them for personal use, including luxury purchases and payments to other entities. The SEC seeks permanent injunctions, disgorgement of funds with interest, penalties, and a ban on Lawrence serving as a public company officer. The complaint also includes relief defendants. The SEC’s actions aim to protect investors and hold Lawrence accountable for his alleged misconduct.
CFTC brings charges in commodity pool Ponzi scheme
The Commodity Futures Trading Commission (CFTC) has filed a complaint against Tyche Asset Management and its principal, Phillip Galles, along with eight other Tyche entities. The complaint accuses them of defrauding more than 50 people in the US through a Ponzi-like scheme, resulting in over $6 million obtained since October 2019. The CFTC alleges commodity pool fraud, violation of CFTC regulations, and false statements to the National Futures Association. The CFTC seeks restitution, disgorgement of profits, penalties, trading bans, and an injunction against further violations. The defendants misrepresented their expertise and success, misappropriated funds, and provided false information to regulators. The CFTC commends the investigation and vows to hold the defendants accountable.
FDIC looks at new regulation to recover SVB costs
The FDIC plans to charge the largest US banks $16 billion in additional fees over a span of two years to recover losses incurred from rescuing Silicon Valley Bank and Signature Bank in March. The fees will be calculated based on the uninsured deposits of banks, and banks with assets below $5 billion will be exempt. The payments will commence in the second quarter of 2024 and will be collected over a two-year period. This special assessment comes just two months after the FDIC, the Federal Reserve, and the Treasury Department intervened to prevent a more severe banking crisis following runs on deposits at SVB and Signature Bank.
- The FDIC expects to recover more funds through the sale of SVB assets, which has reduced the cost of rescuing SVB and Signature Bank depositors from an initial estimate of over $20 billion to $18.5 billion.
- The loss estimates provided by the FDIC will be periodically adjusted as assets are sold, liabilities are met, or expenses related to receivership accumulate.
- An emergency agreement was reached between the FDIC and JPMorgan regarding First Republic.
- The special assessment rule will undergo a 60-day comment period before being finalized.
ASIC sues for unfair and misleading contract terms
The Australian Securities and Investments Commission (ASIC) has filed a lawsuit in the Federal Court against HCF Life Insurance Company Pty Limited, alleging that three types of insurance policies issued by the company contain unfair contract terms and could mislead the public.
The case revolves around standard form contracts in HCF Life’s ‘Recover’ range of insurance products.
ASIC argues that the ‘pre-existing condition’ term in the contracts is unfair and misleading because it denies coverage if a customer did not disclose a pre-existing condition, even if they were not aware of it, and a medical practitioner later determines that symptoms existed prior to the contract, even without a formal diagnosis.
ASIC highlights that Section 47 of the Insurance Contracts Act prohibits insurers from excluding coverage for non-disclosure of a pre-existing condition if the customer was unaware of the condition and could not reasonably be expected to be aware of it.
ASIC Deputy Chair Sarah Court emphasized the importance of insurers accurately communicating the rights of customers in their contract terms, and states that unfair and misleading terms can discourage customers from making claims, which is not beneficial for consumers.
The release notes that enforcement action against unfair contract terms, including in insurance products, is one of ASIC’s priorities. The recent expansion of the unfair contract terms regime to include insurance contracts further emphasizes the need for providers to remove potentially unfair terms from their standard consumer contracts.
UK Finance publishes annual fraud report
UK Finance, the trade body representing the banking and finance industry, has published its annual report on fraud.
The report finds that more than £1.2 billion was stolen in the UK through fraud in 2022, a reduction of eight per cent on 2021. The number of fraud cases across the UK was down four per cent to almost three million cases.
Unauthorized fraud (the account holder themself does not provide authorization and the transaction is carried out by a criminal ) accounted for £727m of the total figure. This shows a decrease of less than 1% on the pervious year.
Authorized push payment (APP) fraud (where the account holder is tricked into authorizing a payment) cost £485 million, down 17 per cent compared to 2021.
This total includes:
- £177.6 million lost to impersonation scams (impersonation: police/bank staff and impersonation: other), whereby criminals impersonate a range of organizations to trick people into giving away their personal and financial information. This was the largest category of APP losses.
- £114.1 million lost to investment scams.
- 117,170 cases of purchase scams, which means this was the most common type of scam, accounting for 57 per cent of all cases
The report notes that the amount returned to customers from APP fraud has increased, rising by 5 per cent to £285.6 million in 2022.
ESMA publishes latest newsletter
The European and Securities and Markets Authority (ESMA) has published its latest Spotlights on Markets newsletter. The latest issue covers ESMA’s new data quality monitoring framework; ESMA’s consultation on simplifying sustainability disclosures and the three European Supervisory Authorities (EBA, EIOPA and ESMA – ESAs) Joint Committee Report on risks and vulnerabilities in the EU financial system.
The newsletter also outlines future speaking engagements and current consultations.
National Crime Agency issues latest fraud report
The UK’s National Crime Agency has published its latest SARs In Action bulletin which focuses on fraud.
The report covers recent analysis of fraud and some key trends including romance fraud and fraud in the accountancy sector.
PRA issues policy statement on risks from contingent leverage
The Prudential Regulation Authority (PRA) has published its final policy statement on contingent leverage following the consultation paper 12/2022 published last year. The policy is relevant to banks, building societies, and PRA-designated investment firms.
The final policy includes:
- updated supervisory statement (SS) 31/15 – ‘The Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP)’;
- amendments to the Reporting (CRR) Part of the PRA Rulebook;
- introduction of reporting templates LV49-52;
- updated ‘Instructions for reporting on leverage’; and
- updated SS45/15 – ‘The UK leverage ratio framework’, to add LV49-52 to the list of leverage reporting templates.
The ICAAP expectations for firms undertaking an ICAAP have taken effect with the publication of the policy statement. The reporting requirement for firms subject to a leverage ratio minimum requirement (LREQ) will take effect on 1 January 2024, with a first reporting reference date of 30 June 2024.
FCA publishes CP23/11
The Financial Conduct Authority has published CP23/11 Remuneration: Enhancing proportionality for dual‑regulated firms.
The consultation proposes changes to the FCA’s proportionality thresholds, while also proposing to exempt dual-regulated firms meeting the updated proportionality thresholds from the requirements relating to malus and clawback. The aims being to result in more dual-regulated firms being subject to a more appropriate and proportionate regime for the UK market.
Dual-regulated firms include banks and building societies.
Specifically, the CP proposes to:
- “amend our proportionality thresholds which allow smaller, less complex dual regulated firms to be excluded from some of the remuneration rules by increasing the total assets threshold and changing the additional criteria that firms with over £4 billion of total assets must meet
- remove the requirement for smaller, less complex dual-regulated firms to apply the rules on malus and clawback
- align some minor differences between our rules and the PRA Rulebook, including those relating to the identification of dual-regulated firms Remuneration Code Staff (Code staff)
- make corresponding changes to our non-Handbook guidance.”
Comments are requested by 9th June.