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On January 29, NYDFS announced a $40 million settlement with a London-based financial services company to resolve allegations the bank engaged in unsafe and unsound practices in its foreign exchange (FX) trading business. According to the consent order, the company did not implement and maintain sufficient controls to identify illegal tactics used by traders to maximize profits or minimize losses at the expense of the company’s customers, competitors, and the market as a whole. Among other things, the order states that between 2007 and 2013 the company’s FX traders (i) improperly coordinated trading through a chat room; (ii) improperly shared confidential consumer information; and (iii) engaged in “deliberate underfills” of consumer accounts. In addition to the fine, the company is required to improve its internal controls and programs to comply with applicable New York State and federal laws and regulations, submit a written plan to improve its compliance risk management program, and provide an enhanced written internal audit program. NYDFS acknowledged the company’s full cooperation with the investigation, in addition to taking disciplinary action against those identified as engaging in the misconduct.
On June 20, the New York Department of Financial Services (NYDFS) announced a $205 million settlement with a global banking firm to resolve allegations that the bank engaged in unsafe and unsound practices in its foreign exchange (FX) trading business. According to the consent order, the bank did not implement and maintain sufficient controls to identify and prevent unsafe and unsound activities conducted by certain FX traders. Among other things, the order states that FX traders (i) used electronic chatrooms to coordinate trading activity with competitors to improperly affect FX prices; (ii) engaged in a practice known as “jamming the fix,” which entails accumulating a large trading position and subsequently making aggressive trades with the intention of moving the fix price in a desired direction; (iii) disclosed confidential customer information to competitors through electronic chatrooms; and (iv) mislead customers by hiding markups on trades. In addition to the fine, the bank is required to improve its internal controls and programs to comply with applicable New York State and federal laws and regulations, submit a written plan to improve its compliance risk management program, and provide an enhanced written internal audit program.
On May 1, the Federal Reserve Board (Fed) and the New York Department of Financial Services (NYDFS) announced (press releases available here and here) a combined nearly $110 million settlement with a global banking firm to resolve allegations that the bank engaged in unsafe and unsound practices in its foreign exchange (FX) trading business. According to consent orders issued by the Fed and NYDFS, the bank did not maintain sufficient policies and procedures to identify and prevent “unsafe and unsound” activities conducted by certain FX traders. Among other things, between 2008 and 2012 (NYDFS’ time frame goes through 2013), certain FX traders allegedly disclosed confidential customer information and trading activity with competitors through electronic chatrooms. NYDFS additionally alleged that the traders discussed coordinating their trading activities and other ways to manipulate currency prices to increase trading profits, and claimed that while the bank had policies in place intended to prevent such activity, the policies were not adequately enforced.
The bank did not admit to any wrongdoing in agreeing to the terms of the settlement, and the Fed and NYDFS noted the bank’s full cooperation with the investigations. In addition to the fine, the bank is prohibited from employing certain traders involved and is required to improve its internal controls and programs to comply with applicable New York State and federal laws and regulations, submit a written plan to improve its compliance risk management program, and provide an enhanced written internal audit program.
Global Bank and U.S. Subsidiaries Fined $246 Million for Deficiencies in Internal Foreign Exchange Trading Controls
On July 17, the Board of Governors of the Federal Reserve (Board) fined a global bank and two of its U.S. subsidiaries $246 million for allegedly lacking appropriate oversight and controls to ensure the bank’s foreign exchange (FX) trading activities were in compliance. According to the cease and desist order, the Board alleged that the bank’s “deficient policies and procedures” prevented it from detecting unsafe and unsound conduct and communications between bank traders and traders at other financial institutions concerning their trading positions. In addition to the fine, the bank is required to improve its oversight and controls over its FX trading activities, submit a written plan to improve its compliance risk management program, and provide an enhanced written internal audit program, subject to Board approval. Furthermore, the bank is prohibited from re-employing any individuals involved in the illegal communications.
It was noted in the order that the bank conducted a review of its FX trading activities covering the investigation time period, identified and reported the illegal conduct to the Board and the Federal Reserve Bank of New York, and fully cooperated with the investigation. Improvements to address identified deficiencies have already begun.
On May 24, the New York Department of Financial Services (NYDFS) announced that it had assessed a $350 million fine against a global bank and its New York branch (Bank) as part of a consent order addressing allegations that the Bank’s foreign-exchange business had engaged in long-term violations of New York banking law. According to the announcement, NYDFS investigated alleged misconduct occurring between 2007 to 2013 and found the improper conduct “included collusive activity by foreign exchange traders to manipulate foreign exchange currency prices and foreign exchange benchmark rates; executing fake trades to influence the exchange rates of emerging market currencies; and improperly sharing confidential customer information with traders at other large banks.” Specifically, the violations include the following:
- collusion through on-line chat rooms to manipulate securities prices and artificially increase profits;
- improperly exchanging information about past and impending customer trades, including sharing confidential customer information via personal email, in order to maximize profits at customers’ expense;
- manipulating “the price at which daily benchmark rates were set—both from collusive market activity and improper submissions to benchmark-fixing bodies”; and
- “misleading customers by hiding markups on executed trades, including by using secretive hand signals when customers were on the phone; or by deliberately ‘underfilling’ a customer trades, in order to keep part of a profitable trade for the Bank’s own book.”
In addition to the $350 million monetary penalty, the Bank must, within 90 days of the consent order, submit written plans to (i) improve senior management’s oversight of the Bank’s compliance with New York laws and regulations governing its foreign exchange trading business; (iii) enhance internal controls and compliance to adhere to state and federal laws and regulations; and (iii) improve its compliance risk management and internal audit programs. Additionally, the Bank terminated certain employees involved in the misconduct and has agreed it will not—directly or indirectly—re-hire these individuals in the future. As part of this process, the Bank conducted an “employee accountability review” and disciplined other employees “for misconduct or supervisory failures.”
Germany’s Largest Bank Agrees to Fix Foreign Exchange Activities Controls and Volcker Rule Compliance Program, Fined Nearly $157 Million
On April 20, the Federal Reserve issued two separate enforcement actions against a major German global bank and its subsidiaries for allegedly failing to have appropriate controls to ensure that the bank’s foreign exchange activities (Covered FX Activities) were in compliance and also allegedly failing to have an adequate compliance program to ensure its traders abided by the Volcker Rule’s requirements. The combined sanctions total almost $157 million in civil money penalties.
Covered FX Activities. According to the Fed’s cease and desist order, the Board of Governors’ investigation, covering October 2008 through October 2013, found deficiencies in the bank’s governance, risk management, compliance, and audit policies and procedures. Specifically, FX traders communicated through chatrooms with traders at other financial institutions, but due to deficient policies and procedures, the bank failed to detect and address such “unsafe and unsound conduct.” Under the terms of the order, the bank is required to submit the following: (i) a written plan to improve senior management’s oversight of the bank’s compliance with applicable U.S. laws and regulations and applicable internal policies in connection with its foreign exchange activities; (ii) an enhanced written internal control and compliance program designed to monitor and detect potential misconduct; and (iii) a written plan to improve its compliance risk management program with applicable U.S. laws and regulations with respect to foreign exchange activities. In addition, the bank must pay a $136.9 million civil money penalty.
Volcker Rule. That same day the Fed also issued a consent order to the bank for allegedly failing to establish a compliance program reasonably designed to ensure and monitor compliance with Volcker Rule requirements. The Volker Rule prohibits insured depository institutions and affiliates from engaging in proprietary trading and from acquiring or retaining ownership interests in, sponsoring, or having certain relationships with a hedge fund or private equity fund. The consent order’s findings were based on a Volcker Rule CEO attestation, “which identified the existence of weaknesses in the [bank’s] Volcker Rule compliance program, including, among other things, certain governance, design, and operational deficiencies across key compliance pillars and the design of reporting mechanisms.” Moreover, the Board of Governors’ determination was based on, among other things, (i) “significant” gaps in the bank’s compliance program which resulted in deficiencies in the scope of independent testing efforts; (ii) “significant” weaknesses in the bank’s demonstrable analyses “showing that its proprietary trading is not to exceed the reasonably expected near term demands of clients, customers, or counterparties—[referred to as “RENT-D”]—required for permitted market-making activities,”; and (iii) weakness in the bank’s metrics reporting and monitoring process which, when combined with the aforementioned, “limited the [b]ank’s ability to adequately monitor trading activity.” Under the terms of the consent order, the bank is required to submit a written plan to improve senior management’s oversight of the firm’s compliance with Volcker Rule requirements. It must also submit enhanced written internal controls and compliance risk management program measures. These submissions are in addition to paying a $19.71 million civil money penalty.
On March 19, four federal and state agencies –DOJ, the Department of Labor (DOL), the SEC, and New York Attorney General – entered into a proposed $714 million settlement agreement against a large bank to resolve allegations of fraudulent conduct involving the pricing and misleading representation of a specific foreign exchange product. According to the settlement, for over a decade the bank misled clients about the pricing they received on the bank’s automatic platform used to execute trades on the clients’ behalf. The bank quoted clients prices that were at or near the least favorable interbank rate, purchased the most favorable interbank rate for themselves, and sold the highest prices to clients, profiting from the difference. Under the proposed settlement, the bank will pay (i) a $167.5 million civil penalty to the DOJ to resolve allegations brought under federal statutes including FIRREA and the False Claims Act; (ii) $167.5 million to the State of New York to resolve claims brought under the Martin Act; (iii) $14 million to the DOL for ERISA claims, (iv) $30 million to the SEC to resolve violations of the Investment Company Act, and (v) $335 million to settle private class action suits filed by customers. The bank also agreed to end its employment relationship with senior executives involved in the conduct.
On November 12, the FCA announced that it was fining five banks for their foreign exchange practices. Specifically, ineffective controls at the banks allegedly allowed traders to strategize and manipulate exchange rates for their benefit. Additionally, confidential bank information was compromised in online chat rooms, including “the disclosure of information regarding customer order flows and proprietary Bank information, such as [foreign exchange] rate spreads.” The combined amount of civil money penalties against the banks is $1.7 billion.
On September 9, OFAC released an enforcement action against a CFTC-registered Introducing Broker and Commodity Trading Advisor that operates an electronic trading platform that allows customers to automatically place currency foreign exchange (FX) trades with broker-dealers. The company agreed to pay $200,000 to settle potential civil liability for apparent violations of Iran, Syria, and Sudan sanctions rules. According to OFAC, over “a number of years” the company maintained accounts for over 400 persons in Iran, Sudan, and Syria, and exported services to these customers by placing FX trades via its platform. The company also (i) originated eight funds transfers totaling $10,264.36 destined for two individuals located in Iran; and (ii) failed to screen or otherwise monitor its customer base for OFAC compliance purposes at the time of the apparent violations. OFAC determined that the company did not voluntarily self-disclose the apparent violations, and that the apparent violations constitute a non-egregious case. The base penalty for the apparent violations was $844,090,000. The lower settlement amount reflects OFAC’s consideration of the matter’s facts and circumstances, including the following mitigating factors: (i) the company is small with limited business operations; (ii) the company has taken remedial action in response to the apparent violations; (iii) the company has not received a penalty notice or Finding of Violation in the five years preceding the earliest date of the transactions giving rise to the apparent violations; and (iv) the company substantially cooperated with OFAC’s investigation.
Federal District Court Holds Financial Institution's Fraud On Itself Triggers Potential FIRREA Liability
On April 24, the U.S. District Court for the Southern District of New York held that a federally insured financial institution may be prosecuted under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) for allegedly engaging in fraud that “affects” the same institution. U.S. v. Bank of N.Y. Mellon, No. 11-6969, 2013 WL 1749418 (S.D.N.Y. Apr. 24, 2013). In this case, the government alleges that the bank and one of its employees provided clients with false, incomplete and/or misleading information about the way it determined currency exchange rates for its “standing instruction” foreign exchange transactions, from which the bank profited, and which ultimately exposed it to “billions of dollars in potential liability.” Based on a lengthy analysis of textual meaning and congressional intent, the court concluded that the “text and purpose of FIRREA amply encompass the alleged conduct,” and that the government’s complaint sufficiently alleged that the bank was negatively affected by the fraud. The decision represents the first time a court has interpreted the meaning of the phrase “affecting a federally insured financial institution” under FIRREA to allow the government to prosecute a financial institution for its own alleged misconduct.
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