SEC - companies cannot silence whistleblowers

BY Richard Summerfield

On 1 April, the Securities and Exchange Commission (SEC) announced its first ‘enforcement action’ regarding the use of what it deemed to be restrictive language in a confidentiality agreement.

The decision handed down by the SEC found that technology and engineering firm KBR Inc had violated whistleblower protection rule 21F-17, enacted under the Dodd-Frank Act. “By requiring its employees and former employees to sign confidentiality agreements imposing prenotification requirements before contacting the SEC, KBR potentially discouraged employees from reporting securities violations to us,” said Andrew Ceresney, the SEC’s enforcement director, in a statement announcing the enforcement action.

The confidentiality agreements KBR’s employees were required to sign were discovered as a result of a lawsuit brought against the firm. In the suit, Harry Barko, a former employee of the company, accused KBR and Halliburton of inflating the cost of a military supply contract for US bases in Iraq.

As a result of the enforcement action against it, KBR agreed to pay a fine of around $130,000 to settle the SEC’S investigation and has also agreed to amend its confidentiality agreements, a step which has been welcomed by the SEC. However KBR did not admit any wrongdoing as part of the settlement. Furthermore, the company was not found to have specifically prevented an employee from reporting fraud. Indeed the firm’s use of confidentiality agreements pre-dated the enactment of the SEC’s whistleblower protection rules.

In a statement, KBR’s chief executive officer, Stuart Bradie, noted that the “SEC’s order acknowledges that it is not aware of KBR having ever prevented anyone from reporting to the SEC, nor has the company taken any action to enforce the agreement, and that is because we have never done so.” Mr Bradie added, “We are pleased to have amicably resolved this matter and look forward to putting it behind us.”

Yet with this action, and with a number of other enforcement actions imminent, the SEC has once again reiterated that it is willing to diligently implement the whistleblower protections it has at its disposal.

News: SEC: Companies Cannot Stifle Whistleblowers in Confidentiality Agreements

HSBC in tax dodging scandal

BY Richard Summerfield

British banking group HSBC Bank plc is facing potential legal action in both the US and the UK over claims that the bank conspired with clients of its Swiss subsidiary, helping them avoid paying tax in the run up to the financial crisis.

According to a number of leaked bank account files, HSBC helped over 100,000 clients across 203 countries to hide around $118bn worth of assets. The documentation, which was leaked to a number of global media outlets, has sparked an outpouring of outrage across Europe, the US and elsewhere. Though the relevant tax authorities have had access to the leaked files since 2010, HSBC’s misconduct is only now being made public.

Prosecutors in the US have begun to intensify their investigations into HSBC’s conduct given the revelations, and are now looking into allegations that the bank may also have manipulated currency rates as part of its wider malfeasance. The US Department of Justice may also choose to re-evaluate the $1.9bn deferred prosecution agreement reached with the bank in 2012 as a result of the leak. In the UK, the bank may face possible criminal charges.

In many respects, the HSBC revelations are indicative of a dubious culture permeating the banking sector, and the latest revelations will do little to convince the public that banking and financial institutions can be trusted. With many of the wounds from the financial crisis still raw, HSBC’s alleged collusion with tax dodging clients will undoubtedly provide a significant setback for those attempting to clean up the industry’s image. As the UK’s general election is mere months away, the issues of tax avoidance and corporate misconduct are likely to remain high on the political agenda in the short term.

Given the potentially damaging nature of the revelations, HSBC has moved swiftly to calm the quickening storm. In a statement the bank said, “We acknowledge that the compliance culture and standards of due diligence in HSBC’s Swiss private bank, as well as the industry in general, were significantly lower than they are today. At the same time, HSBC was run in a more federated way than it is today and decisions were frequently taken at a country level.”

News: HSBC could face U.S. legal action over Swiss accounts

S&P agrees $1.5bn settlement

BY Richard Summerfield

After years of legal wrangling, credit rating agency Standard & Poor's has agreed to pay the federal, state and D.C. governments around $1.5bn to resolve several lawsuits covering the firm’s role in the 2008 financial crisis.

While the settlement does not bring an end to the scrutiny placed upon the wider ratings business (indeed, S&P’s competitors Fitch and Moody’s are still embroiled in legal battles), the agreement does bring to a close an embarrassing chapter in S&P’s history. The firm, much like its rival agencies, stood accused of issuing falsely inflated ratings of mortgage-backed securities during the housing boom of 2004 to 2007, which contributed to the onset of the 2008 financial crisis. “As S&P admits under this settlement, company executives complained that the company declined to downgrade underperforming assets because it was worried that doing so would hurt the company’s business,” said Attorney General Eric Holder. “While this strategy may have helped S&P avoid disappointing its clients, it did major harm to the larger economy, contributing to the worst financial crisis since the Great Depression.”

Under the terms of the agreement, S&P’s parent group, McGraw Hill Financial Inc, will pay $687.5m to the US Department of Justice, and $687.5m to 19 states and the District of Columbia, which had all filed similar lawsuits. According to S&P, the firm agreed to the settlement in order “to avoid the delay, uncertainty, inconvenience and expense of further litigation".

S&P has also reached a separate $125m settlement agreement with the California Public Employees’ Retirement System. The pension fund opened legal proceedings against S&P in 2009.

The agreement reached between S&P and the DOJ is a so-called ‘no fault’ deal. Accordingly, the firm has admitted no wrongdoing as part of the settlement. No fault agreements have been particularly unpopular in the past and the S&P agreement has drawn fierce criticism from some circles. Critics of the plan have been particularly vocal in their opposition to the deal as S&P was not found to have violated the law under the terms of the deal. Some commentators had hoped that the firm would be held accountable for its actions, in order to act as a preventative measure in the future.

News: S&P reaches $1.5 billion deal with U.S., states over crisis-era ratings

Regulators hit banks with £2.7bn fine following FOREX investigation

BY Fraser Tennant

Six banks have been hit with fines totalling £2.7bn for their part in failing to stop traders who were manipulating the financial system by rigging the £3.5 trillion-a-day foreign exchange (FOREX) markets.

The penalties were handed out to Royal Bank of Scotland (RBS), HSBC, JPMorgan, UBS, Citibank and Bank of America Merrill Lynch following an 18-month investigation by the Financial Conduct Authority (FCA) and its counterparts in Switzerland and the US.

The FCA’s portion of the fines represents the biggest financial punishment ever levied by the British regulator. 

Yet another British bank, Barclays, has been told to expect similar punitive action for its part in the scandal.

The regulators’ investigation discovered that some traders, who referred to themselves as ‘the A-team’, ‘the Players’ and ‘the 3 musketeers’, made millions for their banks while pocketing bonuses worth hundreds of thousands of pounds – often in just a single afternoon.

Evidence collected showed that traders posted messages on forums bragging about making 'free money' and collecting eye-watering profits – the very same forums where, over a five-year period, they colluded to share privileged client information. 

The regulators have also warned that anyone found guilty of manipulating the FOREX market could face jail but although it’s believed that 30 traders have been sacked or suspended, not one has faced charges.

Martin Wheatley, chief executive of the FCA, said “The FCA does not tolerate conduct which imperils market integrity or the wider UK financial system. These record fines mark the gravity of the failings we found and firms need to take responsibility for putting it right. They must make sure their traders do not game the system to boost profits or leave the ethics of their conduct to compliance to worry about. Senior management commitments to change need to become a reality in every area of their business.

“But this is not just about enforcement action. It is about a combination of actions aimed at driving up market standards across the industry. All firms need to work with us to deliver real and lasting change to the culture of the trading floor. This is essential to restoring the public’s trust in financial services and London maintaining its position as a strong and competitive financial centre.”

News: Six Banks to Pay $4.3 Billion in First Wave of Currency-Rigging Penalties

Standard Chartered probes fresh allegations

BY Matt Atkins

In response to fresh US allegations over money laundering, the UK bank Standard Chartered will soon begin trawling its extensive data banks for signs of questionable activity, in an effort to avoid additional penalties. Standard Chartered clears approximately two million US dollar transactions each month. The process of sifting through the data will therefore prove a mammoth task.

The UK bank came under scrutiny in 2012, when flaws in its anti-money laundering program were uncovered by a monitor imposed by the New York Department of Financial Services (DFS). The DFS and federal authorities took separate actions against Standard Chartered at the time fining the bank a total of $667m for violating US sanctions by hiding transactions linked to Iran.

Standard Chartered is again under scrutiny from the DFS, the bank disclosed in an earnings announcement last week. A penalty of more than $100m and an extension of the monitorship is possible.

The bank's issues stem from a  problematic transaction-monitoring software system installed in the 2000s. The system is intended to flag suspect transactions, however the so-called 'detection scenarios' that tell the system what activity to flag for human review have not been properly calibrated, according to a Reuters source. Most of the scenarios have now been corrected, said the source, and efforts are underway to fix the others before the bank moves to a new system early in 2015.

The news comes in the same week that a senior executive at Standard Chartered slammed regulators for treating banks and their employees unfairly. "Banks have been asked to play the role of policing anti-money laundering … [but when] we have a lapse we don't get treated like a policeman, we are treated like a criminal," said Jaspal Bindra, who runs Standard Chartered's business in Asia.

The bank said the remarks by Mr Bindra reflected his personal views. Standard Bank's CEO, Peter Sands, said when he was presenting the bank's results, that he respected the views of regulators.

News: Standard Chartered to scour records for money laundering, with penalty at stake