It has been reported that Oppenheimer & Co. (a subsidiary of Oppenheimer Holdings Inc.) is paying $20 million in civil settlements with U.S. regulators who accused the investment firm of improper sales of penny stocks and inadequate controls against money laundering.

The facts reported are as follows:

1. The investment firm agreed to pay $10 million and is admitting wrongdoing in its settlement with the Securities and Exchange Commission
2. Oppenheimer also is paying $10 million in a settlement with the Treasury Department’s Financial Crimes Enforcement Network, known as FinCEN.
3. The SEC said Oppenheimer sold billions of shares of penny stocks in unregistered offerings on behalf of customers, ignoring red flags and aiding the customers’ illegal activity.
4. Oppenheimer admitted in its agreement with FinCEN that it failed to maintain an adequate program to prevent money laundering.
5. Oppenheimer also agreed to refrain from future violations of the securities laws and to be censured, bringing the possibility of a stiffer sanction if the violation is repeated.
   1. In addition, Oppenheimer agreed to take measures such as hiring an independent consultant to review its procedures over a five-year period.
6. The sanctions imposed on the firm “reflect the magnitude of Oppenheimer’s regulatory failures,” SEC Enforcement Director Andrew Ceresney said in a statement.
7. FinCEN and the New York Stock Exchange fined Oppenheimer $2.8 million in 2005 for similar violations:
   1. inadequate policies and procedures, reporting of suspicious transactions and customer vetting to prevent money laundering.
   2. The Financial Industry Regulatory Authority, the securities industry’s policing body, fined Oppenheimer $1.4 million in 2013 for violations of securities laws and anti-money laundering failures.
8. FinCEN said Tuesday it had identified 16 Oppenheimer customers that engaged in suspicious trading through branch offices in five states from 2008 through May 2014.
9. The agency said all the suspicious activity involved penny stocks, which are cheap, risky and thinly traded securities that can be vulnerable to manipulation by stock promoters and trading fraud schemes.
10. FinCEN said Oppenheimer failed to report to regulators patterns of activity in which customers deposited large blocks of unregistered penny stocks and made transactions in them.

http://bit.ly/1D9XxEK

The FCA and PRA are seeking to put their tough talking into practice.

Alison McHaffie, a partner at the CMS Financial Services team in London.

• assesses the extent to which the regulators are achieving their goal of holding senior management to account.
• considers recent enforcement cases, and developments such as the new senior managers regime for banks and the increasing use of personal attestations.

Click here to read her thoughts: http://bit.ly/1BeZU7b

Since this article was written, the PRA and FCA have published consultation papers on their proposals for a ‘senior insurance managers’ regime’ (SIMR).

• The PRA and FCA consultation on SIMR closes on 2nd February. http://www.bankofengland.co.uk/pra/Documents/publications/cp/2014/cp2614.pdf
• HM Treasury’s consultation on the application of the banking regime to UK branches of foreign banks closes on 30th January https://www.gov.uk/government/consultations/regulating-individual-conduct-in-banking-uk-branches-of-foreign-banks
• the latest consultation from PRA/FCA on forms, consequential and transitional aspects closes on 27th February. http://www.bankofengland.co.uk/pra/Documents/publications/cp/2014/cp2814.pdf

The JFSC has issued a Public Statement [PS] [26 JAN 2015] on Former employee of Horizon Trustees (Jersey) Limited (in liquidation) (“HTJL”) namely a Mr James Nicholls (“Mr Nicholls”), born 27 February 1967.

In the PS the JFSC state that Mr Nicholls displayed levels of incompetence of the most serious kind, with customers being placed at unnecessary risk of financial loss.

Mr Nicholls was not a principal person, he joined HTJL as a Trust Manager and was in post throughout the period of the Commission’s investigation. Given Mr Nicholls was not a principal or key person, the Commission does not consider him responsible for HTJL’s corporate governance and compliance failings.

Mr Nicholls acted as a director to a number of customer structures and was a director to the General Partner of the Media Fund.

In some cases, the relevant trustee or directors’ meeting, in respect of the customer structure in question, was held after monies had been transferred for the purposes of investing in Structure X. Mr Nicholls frequently acted as Chairman of those meetings in which it was resolved to invest customer monies in Structure X. The Commission’s investigation revealed that the minutes and resolutions were executed in the following circumstances:

• the decisions to invest were based purely on an instruction issued by a colleague;
• little, if any, consideration had been given to the key documents associated with the investments;
• no bespoke consideration had been given to the interests of the customers;
• the investments were made in the knowledge the monies were not to be remitted to Structure X but would be transferred directly to the Bid Co. for the purposes of discharging the Film Co.’s creditors;
• no consideration was given to the numerous and significant conflicts of interest associated with an investment in Structure X to include that the CLNs had, only a short time earlier, been acquired by the Bid Co., which he understood to be beneficially owned by HTJL’s CEO;
• customer structures acquired their respective interests in the CLNs by paying 80% more (the difference between £0.55 and £1.00) than had been paid by the Bid Co;
• there remained significant concerns over the previous management of the Film Co.; and
• the investments were high risk, suitable for professional investors only and were made knowing those officers of HTJL directing the affairs of the Film Co. had no experience whatsoever of the film and media industry.
• The minutes and resolutions authorising investments in Structure X were taken from a bank of pro-forma precedents, bore little or no resemblance to the facts and therefore presented a false record. The circumstances in which the investments were authorised by Mr Nicholls revealed a failure to discharge the function of a professional fiduciary. Mr Nicholls’s conduct lacked competence.

Against the above the JFSC state that Mr Nicholls acted with a disregard to his fiduciary obligations. He knew that customers’ assets, including those of vulnerable individuals, were used to reduce the risks to which a number of HTJL’s UHNWI customers were already exposed. Mr Nicholls’s conduct lacked competence.

As a result of the conduct of Mr Nicholls and others, HTJL’s customers face the loss of very significant sums.

Read more –http://bit.ly/1yQKcC7

The UK Government has updated its guidance on how businesses can combat cyber threats. The Department for Business, Innovation & Skills’ “10 Steps to Cyber Security” booklet was first published in 2012 and the Government estimates that it is now used by around two thirds of FTSE350 companies.

The 10 steps remain the same, but they have been updated to include a number of the new cyber security schemes and services of the National Cyber Security Programme.

In addition, the Government has published a new paper, “Common Cyber Attacks: Reducing the Impact”. This paper describes what a common cyber-attack looks like and how attackers typically execute an attack.

The webpage is available. http://bit.ly/1swbqXQ

Serious Crime Bill 2014

As some readers will be aware, the House of Commons is currently considering the Serious Crime Bill 2014 (the “Bill”), which proposes amendments to various pieces of existing criminal legislation, including the Proceeds of Crime Act 2002 (“POCA”).

• Serious Crime Bill 2014 http://bit.ly/1upvzAj

On 8 January 2015, Karen Bradley MP (Minister for Modern Slavery and Organised Crime) announced

• http://bit.ly/1GI5TKb

that she had tabled new amendments to the Bill, including a new clause to be included in POCA relating to the submission of suspicious activity reports (“SARs”) and protecting those who submit a SAR in good faith from incurring civil liability.

Although the Bill has yet to be enacted (and there is therefore no guarantee that POCA will be amended in the way proposed), this is a welcome development for banks and other regulated institutions, providing additional clarity and protection as they seek to navigate the POCA reporting obligations.

Background to POCA and suspicious activity reporting

POCA imposes an obligation to submit a SAR to the National Crime Agency (the “NCA”) in circumstances where there is knowledge, suspicion or reasonable grounds to know or suspect that a person is engaged in money laundering.  Additionally, where the reporter (often a financial institution or another regulated sector entity) is proposing to carry out a transaction which might otherwise involve the commission of a money laundering offence (such as transferring criminal property, or being involved in a money laundering arrangement), filing a SAR and obtaining consent from the NCA enables the reporter to avoid committing that money laundering offence.  This latter type of report, commonly called a “consent report” is formally known as an “authorised disclosure” pursuant to section 338 of POCA.

Where consent is sought for a prospective transaction, there will be a (typically short) delay between the firm filing the SAR and receiving consent, during which time the transaction cannot be processed.  Where the NCA refuses consent within seven working days, a 31 day “moratorium period” kicks in, during which the transaction cannot be processed.

Difficulties have previously arisen for firms where customers allege that they have suffered loss as a result of delays in processing transactions whilst the firm waits for consent (or waits for the expiry of the moratorium period).  The position is often exacerbated by POCA’s “tipping off” provisions, which may prevent a firm from informing its customer of the reasons for the delay.

In the long-running case of Shah and others v HSBC Private Bank (UK) Limited [2010] EWCA Civ 31 and [2012] EWHC 1283 (QB) 201

• (see briefing on the Shah litigation http://bit.ly/1ySgVWi ),

the Court of Appeal held that, in circumstances where a customer suffers loss as a result of a failure to carry out a transaction, the bank or other institution can be required to prove at trial that it in fact held a good faith suspicion of money laundering (albeit that, in line with previous case-law, ‘suspicion’ is a relatively low threshold).

Subsequently, the High Court also held that, if there is no express contractual term to this effect, the courts will imply a term that permits a firm to refuse to execute payment instructions in the absence of “appropriate consent”, where a SAR has been made.  The case-law is therefore broadly helpful to regulated firms (and HSBC was ultimately successful in the litigation), but the case underlines the litigation risk to which firms are exposed in these circumstances.

Proposed amendments to POCA

The new clause proposed to be inserted into POCA seeks to introduce a similar, but more certain, protection from civil liability in a statutory form.  The new clause

• (which can be found here –  http://bit.ly/1upvEE5 )

provides that, where an authorised disclosure is made in good faith, “no civil liability arises in respect of the disclosure on the part of the person by, or on whose behalf, it is made”.

The government has stated that this amendment will strengthen the UK’s compliance with the Third EU Anti-money Laundering Directive (2005/60/EC) (“3MLD”) and will increase trust and confidence in the SAR regime by providing greater legal certainty.  This amendment has also been supported by the British Bankers’ Association.

The new clause was debated on 13 January 2015 and has received support in the House of Commons.

• http://bit.ly/1uCOGfS

One point which does not appear to have been addressed is that the clause protects firms only when making authorised disclosures and not, therefore, when they are making SARs pursuant to sections 330/331 of POCA.

Whilst the case-law to date has focused on loss allegedly caused by the making of consent SARs, and the problem is particularly acute in this scenario, it is not impossible to envisage circumstances in which a customer could allege that it has been caused loss by a SAR made under section 330/331.

If the rationale for the introduction of the clause is indeed to comply with the 3MLD (presumably, although this is not entirely clear, the Article 27 obligation on Member States to “take all appropriate measures in order to protect employees of the institutions or persons covered by this Directive who report suspicions of money laundering…from being exposed to threats or hostile action”), it would seem preferable to extend the protection to cover any “protected disclosure” as defined in section 337, so that the civil liability protection has a consistent scope with the carve-out from otherwise applicable confidentiality restrictions.

Conclusions

Although the proposed amendment to POCA appears to have been positively received in recent debates, there remains a possibility that the position could change between now and the passage of the Bill.

If POCA is amended in the way described above, we would expect this to be a welcome development for the financial sector, allaying some of the concerns about civil liability that remain following the Shah litigation.

Ms Bradley emphasised in debate, however, that banks and other institutions should not see the amendments to POCA as a justification for the submission of “defensive” SARs; institutions should continue to only report those transactions about which they hold a genuine suspicion.

Further, even if the clause is enacted, it will remain the case that, in the unlikely event of a SAR being made in bad faith, a challenge will be possible.  It will remain important, both as a matter of good practice and risk management, for firms to continue to ensure that their internal documentation is sufficiently comprehensive to enable them to demonstrate the basis for their good faith suspicion, should this later be challenged.

http://bit.ly/15DPhmr

The FCA have published its finalised guidance on the boundaries of retail investment advice.

This work is aimed at helping firms in understanding what is, and what is not, a personal recommendation.

The FCA intend this paper to be the definitive source of information on its view on

1. the boundaries of advice for retail investment products and
2. it will take precedence over any previous non-Handbook guidance that deals with the same material, other than the Perimeter Guidance Manual.

http://bit.ly/15jPoCy

read more

FG15/1 – Retail investment advice: Clarifying the boundaries and exploring the barriers to market development

The guidance:

• Clarifies the regulatory framework in respect of different types of investments sales model.
• Provides detailed examples and our view on whether they amount to a personal recommendation or not.
• Explores specific issues in this area that our stakeholders have raised with us.

FG15/1 – Retail investment advice: Clarifying the boundaries and exploring the barriers to market development http://bit.ly/1CSXPQB

FG15/1 – Summary of feedback received http://bit.ly/1yQYilB

On 21 January, the FCA held two live webinars which are now available to watch on demand.

The first webinar focused on

• Managing money laundering and sanctions risk at smaller banks, http://bit.ly/1yB3fQx

whilst the second webinar looked at

• Managing bribery and corruption risk in commercial insurance broking. http://bit.ly/1y6UUPO

The webinars each comprise of a

• presentation from Rob Grupetta, Acting Head of Financial Crime Department,
• followed by a Q&A discussion with our expert panel.

Follow the links above to catch up on these sessions.

Financial Crime webinars

http://bit.ly/1wrB3dw

The European Central Bank (ECB) says it will inject at least €1.1 trillion into the ailing eurozone economy.

The ECB will purchase bonds worth €60bn per month until the end of September 2016 and possibly longer, in what is known as quantitative easing (QE).

The ECB has also said eurozone interest rates are being held at the record low of 0.05%, where they have been since September 2014.

ECB president Mario Draghi said the programme would begin in March.

He told a news conference the ECB would be purchasing euro-denominated investment grade securities in the secondary market.

However, “some additional eligibility criteria” would be applied in the case of countries under an EU and International Monetary Fund adjustment programme.

He said the programme would be conducted “until we see a sustained adjustment in the path of inflation”, which the ECB has pledged to maintain at close to 2%.

The value of the euro fell following Mr Draghi’s announcement, dropping by a cent against the US dollar to $1.1511 before recovering slightly.

Earlier this month, figures showed the eurozone was suffering deflation, creating the danger that growth would stall as businesses and consumers shut their wallets, as they waited for prices to fall.

The eurozone is flagging and the ECB is seeking ways to stimulate spending.

Lowering the cost of borrowing should encourage banks to lend and eurozone businesses and consumers to spend more.

It is a strategy that appears to have worked in the US, which undertook a huge programme of QE between 2008 and 2014.

The UK and Japan have also had sizeable bond-buying programmes.

‘Sizeable’ slack

Mr Draghi said the ECB’s own programme had been taken “to counter two unfavourable developments”.

“Inflation dynamics have continued to be weaker than expected,” he said, with most inflation indicators at or close to historical lows.

“Economic slack in the euro area remains sizable and money and credit developments continue to be subdued,” he added.

At the same time, it was necessary to “address heightened risks of too prolonged a period of low inflation”.

Mr Draghi said there had been a “large majority” on the ECB’s governing council in favour of triggering the bond-buying programme now – “so large that we did not need to take a vote”.

What is a government bond?

Governments borrow money by selling bonds to investors. A bond is an IOU. In return for the investor’s cash, the government promises to pay a fixed rate of interest over a specific period – say 4% every year for 10 years. At the end of the period, the investor is repaid the cash they originally paid, cancelling that particular bit of government debt.

Government bonds have traditionally been seen as ultra-safe long-term investments and are held by pension funds, insurance companies and banks, as well as private investors. They are a vital way for countries to raise funds.

Up until now, the ECB has resisted QE, although Mr Draghi reassured markets in July 2012 by saying he would be prepared to do whatever it took to maintain financial stability in the eurozone, nicknamed his “big bazooka” speech.

Since then, the case for quantitative easing has been growing.

http://bbc.in/1CFGk62