Apart from Allen Stanford, last week USB was in the spotlight. SEC filed an enforcement action against UBS, charging the firm with acting as an unregistered broker-dealer and investment adviser and assisting its cross-border US clients in tax avoidance.
SEC's complaint alleges that UBS's conduct facilitated the ability of certain US clients to maintain undisclosed accounts in Switzerland and other foreign countries, which enabled those clients to avoid paying taxes related to the assets in those accounts. UBS agreed to settle the SEC's charges by consenting to the issuance of a final judgment that permanently enjoins UBS and orders it to disgorge US$200 million. In connection with a related criminal investigation, UBS has entered into a deferred prosecution agreement with the Department of Justice pursuant to which UBS will pay an additional US$180 million in disgorgement, as well as US$400 million in tax-related payments.
From at least 1999 through 2008, UBS acted as an unregistered broker-dealer and investment adviser to thousands of US persons and offshore entities with US citizens as beneficial owners. UBS had at least 11,000 to 14,000 of such clients and held billions of dollars of assets for them. The US cross-border business provided UBS with revenues of US$120 to US$140 million per year.
UBS conducted that cross-border business largely through client advisers located primarily in Switzerland, who were not associated with a registered broker-dealer or investment adviser. These client advisers traveled to the US, on average, two to three times per year on trips that generally varied in duration from one to three weeks. In many instances, the client advisers attended exclusive events such as art shows, yachting events, and sporting events that were often sponsored by UBS, for the purpose of soliciting and communicating with US cross-border clients. UBS also used other US jurisdictional means such as telephones, fax, mail and e-mail to provide securities services to its US cross-border clients.
SEC further alleges that UBS was aware of the requirement for registration with SEC. UBS took action to conceal its use of US jurisdictional means to provide securities services. Among other things, client advisers typically traveled to the US with encrypted laptop computers that they used to provide account-related information, to show marketing materials for securities products, and occasionally to communicate orders for securities transactions to UBS in Switzerland. Client advisers also received training on how to avoid detection by US authorities of their activities in the US.
UBS has been ordered to terminate its US cross-border business and to retain an independent consultant to conduct an examination of its termination of the business. If UBS is further required to disclose the identities of all "secret accounts", this would probably be a disaster for the offshore private banking business in Switzerland.
Wednesday, February 25, 2009
Wednesday, February 18, 2009
Cross-Border Market Manipulation
US SEC recently charged George Georgiou of Toronto, Ontario, with manipulating the market in four separate microcap stocks — Avicena Group, Neutron Enterprises, Hydrogen Hybrid Technologies, and Northern Ethanol. SEC alleges that Georgiou, who controlled the publicly traded stock of each company, manipulated the market from 2004 through Sep 2008 to artificially inflate each company's stock price or create the false appearance of an active and liquid market. He made at least US$20.9 million in ill-gotten gains from his manipulation schemes.
SEC alleges that each of the manipulation schemes followed a similar pattern. Georgiou controlled all or a large percentage of the unrestricted, publicly-traded stock of each company. He had influence with management, access to confidential shareholder lists, and was able to coordinate the release of company news with his illegal trading. In conversations and through his own e-mails, Georgiou admitted his intent to manipulate each of the stocks, and gave directions to his nominees.
Georgiou used many nominee accounts at offshore broker-dealers in Canada, the Bahamas, Turks and Caicos, and other locations. He asserted direct control over some accounts by issuing trading and wiring instructions directly to broker-dealers, and indirect control over others by communicating trading instructions to nominees who, in turn, executed Georgiou's trading instructions.
Through these accounts, Georgiou used a variety of manipulative techniques in each scheme, including controlling the trading volume through promises of profits to nominees; executing or directing matched orders, wash sales, or other prearranged trades; marking-the-close; and paying illegal kickbacks in exchange for purchases.
Georgiou's manipulation of Hydrogen Hybrid Technologies was in the nature of a pump-and-dump scheme in which Georgiou arranged and paid for the publication of a promotional mailer sent to seven million US addresses. Georgiou coordinated manipulative trading with the publication of the mailer, and ultimately received more than US$3.8 million when he dumped his shares into the artificially inflated market. Part of Georgiou's manipulation of Northern Ethanol stock involved the payment of an illegal kickback to a person Georgiou believed was a corrupt registered representative, but who was in reality an undercover FBI agent.
Georgiou also defrauded two offshore broker-dealers by obtaining margin loans using the manipulated stocks as collateral, further funding his manipulations and allowing him to withdraw cash that he wired to offshore bank accounts.
This guy is really a manipulator at an "international level".
SEC alleges that each of the manipulation schemes followed a similar pattern. Georgiou controlled all or a large percentage of the unrestricted, publicly-traded stock of each company. He had influence with management, access to confidential shareholder lists, and was able to coordinate the release of company news with his illegal trading. In conversations and through his own e-mails, Georgiou admitted his intent to manipulate each of the stocks, and gave directions to his nominees.
Georgiou used many nominee accounts at offshore broker-dealers in Canada, the Bahamas, Turks and Caicos, and other locations. He asserted direct control over some accounts by issuing trading and wiring instructions directly to broker-dealers, and indirect control over others by communicating trading instructions to nominees who, in turn, executed Georgiou's trading instructions.
Through these accounts, Georgiou used a variety of manipulative techniques in each scheme, including controlling the trading volume through promises of profits to nominees; executing or directing matched orders, wash sales, or other prearranged trades; marking-the-close; and paying illegal kickbacks in exchange for purchases.
Georgiou's manipulation of Hydrogen Hybrid Technologies was in the nature of a pump-and-dump scheme in which Georgiou arranged and paid for the publication of a promotional mailer sent to seven million US addresses. Georgiou coordinated manipulative trading with the publication of the mailer, and ultimately received more than US$3.8 million when he dumped his shares into the artificially inflated market. Part of Georgiou's manipulation of Northern Ethanol stock involved the payment of an illegal kickback to a person Georgiou believed was a corrupt registered representative, but who was in reality an undercover FBI agent.
Georgiou also defrauded two offshore broker-dealers by obtaining margin loans using the manipulated stocks as collateral, further funding his manipulations and allowing him to withdraw cash that he wired to offshore bank accounts.
This guy is really a manipulator at an "international level".
Wednesday, February 11, 2009
Segregation of Wealth Management Business
The HKMA's Lehman Report has made a number of recommended actions for banks to take in order to avoid mis-selling of investment products. One of the most controversial recommendations is that steps should be taken to ensure clear differentiation between traditional deposit-taking activities and retail securities business, including:
- physical segregation of banks' retail securities business from their ordinary banking business
- a requirement that staff involving in selling investment products to retail customers should not be involved in ordinary banking business
- a requirement that banks make clear, through physical signs and warnings, the distinction between deposits and investments and particularly the risks attached to the latter
- a requirement that there be complete information separation between a retail customer's deposit accounts and his investment accounts and a prohibition on a bank's making use of deposit-related information to target and channel retail customers into investment activities
HKMA also recommends that the above forms of segregation should apply to banks' insurance activities and other investment activities.
Recently I read an Finance Asia article about China's recent measures to tighten the distribution of investment-linked policies which are also prevailing in Hong Kong and vulnerable to mis-selling complaints. It is said that investment-linked policies have been a key revenue generator for China's insurance companies in the past few years. As a result of the bursting of product bubble in 2008 and widespread revelations of mis-selling, China Insurance Regulatory Commission (CIRC) is taking the following measures to revamp the way these products are sold, in order to restore consumer confidence:- Banks are banned from selling investment-linked policies from their regular counters. They should instead put up counters dedicated to wealth management or set up wealth management centres for this purpose to prevent banking customers from confusing policies as saving products.
- The minimum premium size of these policies is raised to Rmb30,000, which might differentiate the middle-class customer who can afford to invest from the everyday customer who may not understand the risks associated with the product.
- Insurers are required to develop an internal risk rating system for their distribution channels. Staff involved in distribution should know their customers' financial status, experience in investment and risk tolerance level, and recommend a suitable product accordingly. Both customer and the sales staff are now required to acknowledge the recommendation with signatures on a legally binding document. If the staff believe a customer to be unsuitable for a product, the customer will be required to counter-sign on an endorsement of the risk assessment report.
- Distribution of investment products in rural regions is clamped down and selling of investment-linked policies by agents with less than one-year of experience is banned. All agents involved in investment-related products will be required to sit through at least 40 hours of training, while third-party distributors such as banks will have their suitability to sell reassessed every six months.
The key rationale for requiring banks to segregate their wealth management business is to make it more professional. As far as I know, some giant banks in China have already arranged their sales staff to take professional certification trainings (like CWM) to enhance their service quality.
(Extended reading: Survey identifies weaknesses in selling process)
Wednesday, February 04, 2009
AML Program for e-Brokers
Given the popularity of financial crime committed via electronic means, the regulatory bodies have requested e-brokers to put in place more automated surveillance tools for detecting suspicious transactions.
Recently US FINRA imposed a US$1 million fine against E*Trade Securities, LLC and E*Trade Clearing, LLC, collectively, for failing to establish and implement anti-money laundering (AML) policies and procedures that could reasonably be expected to detect and cause the reporting of suspicious securities transactions.
FINRA requires brokerage firms to establish and implement AML procedures that address a number of areas, including monitoring the trading in customer accounts as well as the flow of money into and out of these accounts. Firms are required to monitor trading in customers' accounts for certain types of suspicious trading activity and file with Department of Treasury's Financial Crimes Enforcement Network (FinCEN) a report of any suspicious transaction relevant to a possible violation of law or regulation.
FINRA has further instructed each broker/dealer that its AML program must be tailored to its business. A firm needs to consider factors such as its size, location, business activities, the types of accounts it maintains and the types of transactions in which its customers engage. One of the factors that brokerage firms are instructed to consider generally is the technological environment in which the firm operates. On-line firms such as E*Trade specifically have been instructed to consider conducting computerized surveillance of account activity to detect suspicious transactions and activity.
FINRA found that between Jan 2003 and May 2007, E*Trade did not have an adequate AML program based upon its business model. Because E*Trade did not have separate and distinct monitoring procedures for suspicious trading activity in the absence of money movement, its AML policies and procedures could not reasonably be expected to detect and cause the reporting of suspicious securities transactions. The firm relied on its analysts and other employees to manually monitor for and detect suspicious trading activity without providing them with sufficient automated tools. FINRA determined that this approach to suspicious activity detection was unreasonable given E*Trade's business model.
Apart from money laundering activities, I think e-brokers should also enhance their automated surveillance systems to monitor trading activities for market abuse.
Recently US FINRA imposed a US$1 million fine against E*Trade Securities, LLC and E*Trade Clearing, LLC, collectively, for failing to establish and implement anti-money laundering (AML) policies and procedures that could reasonably be expected to detect and cause the reporting of suspicious securities transactions.
FINRA requires brokerage firms to establish and implement AML procedures that address a number of areas, including monitoring the trading in customer accounts as well as the flow of money into and out of these accounts. Firms are required to monitor trading in customers' accounts for certain types of suspicious trading activity and file with Department of Treasury's Financial Crimes Enforcement Network (FinCEN) a report of any suspicious transaction relevant to a possible violation of law or regulation.
FINRA has further instructed each broker/dealer that its AML program must be tailored to its business. A firm needs to consider factors such as its size, location, business activities, the types of accounts it maintains and the types of transactions in which its customers engage. One of the factors that brokerage firms are instructed to consider generally is the technological environment in which the firm operates. On-line firms such as E*Trade specifically have been instructed to consider conducting computerized surveillance of account activity to detect suspicious transactions and activity.
FINRA found that between Jan 2003 and May 2007, E*Trade did not have an adequate AML program based upon its business model. Because E*Trade did not have separate and distinct monitoring procedures for suspicious trading activity in the absence of money movement, its AML policies and procedures could not reasonably be expected to detect and cause the reporting of suspicious securities transactions. The firm relied on its analysts and other employees to manually monitor for and detect suspicious trading activity without providing them with sufficient automated tools. FINRA determined that this approach to suspicious activity detection was unreasonable given E*Trade's business model.
Apart from money laundering activities, I think e-brokers should also enhance their automated surveillance systems to monitor trading activities for market abuse.
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