Each quarter, Laven looks at the most interesting and relevant financial crime news to give an idea of the ongoing regulatory approach taken against money laundering and terrorist financing. This allows us to make clients and other regulated firms aware of the potential risks they face. We also provide alerts on any preventive measures firms can take. Passages are linked throughout to more in-depth articles should our readers want to explore certain aspects of this summary further.
UK
FCA launches consultation for best practice note on identifying, controlling and disclosing inside information
The Financial Conduct Authority (FCA) has announced that they are consulting on a best practice note for government departments, industry regulators and public bodies, on identifying, controlling and disclosing inside information.
The FCA has written the practice note to provide updated guidance, as earlier guidance for industry regulators issued by the Financial Services Authority (FSA) is no longer in circulation. The FCA has also been looking at how best it can support these organisations in handling and disclosing inside information. This is because the FCA is aware that some of these organisations may be unclear as to how the Market Abuse Regulation (‘MAR’) applies to them; as such, the practice note aims to provide clarification.
The full text of the proposed best practice note is set out in the Primary Market Bulletin No. 25. The note offers guidance on identifying and assessing inside information, such as the relevant questions to ask in each case. These include:
- Has the information been made public?
- Is the information ‘precise’?
- Is this inside information when combined with other information?
- If this was released, would a reasonable investor be likely to use it as part of the basis of their investment decision, and
- Is this information about a financial instrument which is covered by MAR?
The note also suggests internal protocol, systems and controls organisations should have in place to classify, handle and disclose inside information. Guidance on dealing with information leaks is additionally included, such as having a contingency plan in place should inside information leak before the planned announcement date.
The FCA are accepting comments from the relevant organisations on the content of the proposed practice note until 15 January 2020 (sent comments to [email protected]).
FCA fines Henderson £1.9 million for failing to treat customers fairly
The FCA has fined Henderson Investment Funds Limited (‘HIFL’) £1,867,900 for failing to fairly treat more than 4,500 retail investors in two of its funds: the Henderson Japan Enhanced Equity Fund and the Henderson North American Enhanced Equity Fund. This was in violation of Principle 6 of the FCA’s Principles for Business, whereby a firm must pay due regard to the interests of its customers and treat them fairly.
In November 2011, HIFL’s appointed investment manager, Henderson Global Investors Limited (‘HGIL’), decided to reduce the level of active management of its Japan and North American funds.
HGIL informed nearly all of its institutional investors who were affected by the change and offered to manage the two funds for those investors free of charge. However, HGIL did not inform the change in investment strategy to its retail investors, through an amendment to the funds’ prospectus or otherwise. This meant that for nearly five years, HGIL charged retail investors the same level of fees as it had before it made the decision to reduce the level of active management of the funds. As a result, retail investors paid the same amount of fees while HGIL was not providing the same level of active management.
Mark Steward, Executive Director of Enforcement and Market Oversight at the FCA stated that “For retail clients, the Japan and North American funds were in effect operating as “closet trackers” as the fees charged to them were inappropriate given the diminished level of active management. He also stated that the matter was aggravated by the length of time HIFL took to identify the harm caused and to fix it.
Serious weaknesses were identified in HIFL’s systems and controls in relation to the management, oversight and governance of an area of its business, which included the Japanese and North American funds. These weaknesses breached Principle 3 of the FCA’s Principles for Business, whereby a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems.
HGIL’s failure to treat customers fairly in deciding not to reduce management fees for retail investors affected 4,713 direct retail investors, 75 intermediary companies with underlying non-retail investors and two institutional investors in the Japanese and North American funds.
HIFL agreed to resolve this matter and qualified for a 30% (stage 1) discount under the FCA’s executive settlement procedures. Were it not for this discount, the FCA would have imposed a financial penalty of £2,668,547.40.
Number of independent investigations by UK regulators rises for the first time in 4 years
The number of independent investigations into financial institutions has risen for the first time in 4 years, according to data cited by the Financial Times. This is due to ever-increasing concerns regarding money laundering and white-collar crime.
51 “skilled persons’ reports” were ordered by regulators in the 2018-2019 financial year, an increase of 16% on the previous year. These reports are ordered when the FCA or the Bank of England have particular concerns about an element of a financial institution’s business. Skilled persons reports are also known as Section 166 reviews. They serve as an initial exploratory step in an investigation into a financial institution but can also be used to launch full-scale investigations. Regulators charge fees to investigate financial institutions and it may cost the company upwards of £100,000, even if no breach is found.
Accountancy firm BDO compiled the data and is expecting more reviews to be ordered by the regulators in the coming months. The City’s controls against financial crime have been a particular concern, with 14 of the 51 reports ordered alluding to failures in this area.
Fiona Raistick, a BDO partner, stated that the regulators are using the reviews as a means to focus on businesses where there is a high risk of money laundering activity. Ms Raistick further highlighted that the FCA has been putting “particular pressure” on online trading firms and the FCA has “urged them to tighten transaction monitoring to help reduce their exposure to potential money laundering and fraud.”
EU
Deutsche Bank pays 15 million euros in money laundering settlement
Deutsche Bank has been fined 15 million euros by Frankfurt prosecutors for failing to have adequate money laundering controls and oversight. However, prosecutors have dropped a criminal investigation into suspected tax evasion by the bank.
The decision undermines the bank’s assurances that it has addressed past money laundering failings. Deutsche Bank was previously criticised by the BaFin, the German financial regulator, in September for its weak anti-money laundering processes. The BaFin later placed an external monitor for three years to supervise improvements, which was triggered by a delay in the roll-out of the bank’s new, standardised KYC procedures.
The investigation focused on potential misconduct at a former Deutsche Bank’s subsidiary, Regula Ltd, in the British Virgin Islands. It led to a raid by 170 police officers of the bank’s Frankfurt offices for two days in November 2018, which caused its share price to drop to all an all-time low, worrying investors. The two relevant employees there, however, will not be charged due to lack of evidence.
Prosecutors have imposed the fine to reflect a lack of timely reporting on money laundering issues concerning Regula, the lack of adequate management and supervision and a staff shortage in the bank’s anti-money laundering team from 2015 to early 2018.
US
SEC releases annual Division of Enforcement Report
The SEC has recently released its annual Division of Enforcement Report which confirmed the large number of enforcements throughout 2019. In the introduction the SEC also highlights its continued focus on “Cyber-Related Misconduct” and “Retail Investor Protection” categorising both as “Initiatives and Areas of Focus in the Fiscal Year 2019”. The report highlights the areas on which the SEC has focused this year, as well as some of the biggest cases it has dealt with.
In one of the biggest cases of the year for the SEC, it announced in June that a private fund manager involved in mortgage-backed securities had agreed to pay a $5 million penalty. The manager was charged by the SEC for compliance deficiencies that contributed to the firm’s failure to ensure that certain securities in its flagship fund were valued properly.
An SEC investigation launched into Colorado-based investment adviser Deer Park Road Management Company LP found that, together with its flagship STS Partners’ fund, it failed to have policies and procedures in place to address the risk that its traders were undervaluing securities and selling for a profit. The STS fund has been ranked as one of the most consistent performing hedge funds in the US.
The firm also failed to prevent its traders from providing inaccurate information to a pricing vendor and using the incorrect information received from the vendor to value bonds. The fund’s chief investment officer (CIO), Scott Burg, oversaw the valuation of certain assets in the flagship fund and approved valuations that traders flagged as “undervalued” with notations to “mark up gradually”. The valuation was also overseen by a committee comprised of the principal’s relatives and others without relevant expertise. Scott Burg agreed to a personal penalty of $250,000 for his role in the asset valuation.
Daniel Michael, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit, stressed that the valuation of client assets is a “critically important” area for investment advisers. By marking up the assets gradually instead of marking them to market, the traders violated the accounting principles they are required to follow.
Deer Park agreed to a censure and with Burg, agreed to cease and desist from committing or causing any violations and future violations of the Investment Advisers Act’s parts requiring reasonably designed policies and procedures.
How can we help?
At Laven, our consultants are on hand to help identify the actions your firm needs to take to ensure you are in compliance with new regulations and aware of all the risks outlined in this report. Whether this is through assisting with new policies and procedures that need to be put in place or providing online/in-person training for staff to make them fully aware of the regulatory burden.
Laven has also built Laven Tech, a unique Regulatory Technology (RegTech) solution that leverages advanced technology combined with our vast subject matter expertise. Our RegTech solution is designed to assist fund managers, service providers and investors to meet today’s growing demands.
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