Compliance Updater - April 2024

A summary of key compliance stories from around the globe in April.

1. Swiss private banker charged with theft, money laundering and fraud.
2. US regulator describes Credit Suisse rescue deal as “unhelpful”.
3. FCA proposes reversal of MiFID rules on unbundling investment research fees.
4. EU sanctions challenged successfully by two oligarchs.
5. FCA publishes preliminary findings on Woodford firm’s collapse.
6. Denmark’s tax authority in legal case against hedge fund over tax refunds.
7. FSB encourages stress tests at non-bank financial institutions.
8. Opposition mounts over FCA’s “name and shame” plans.
9. FOS “debanking” complaints up 44%.
10. BoE warns banks over private equity risk exposures.
11. SEC conviction upheld for “shadow” insider trading.
12. Frankfurt court jails man for more than three years for insider trading.

Swiss private banker charged with theft, money laundering and fraud.

A Swiss private banker, as yet unnamed due to Swiss law, was charged with stealing more than SwFr14m ($15.4m) over a seven-year period until 2015. He was a director at a Geneva-based private bank, and is alleged to have deposited money of a client in his own name at the bank. He then used the money to finance his lifestyle, as well as making large loans to associates, family and friends from the deposited funds.

US regulator describes Credit Suisse rescue deal as “unhelpful”.

The chair of the US Federal Deposit Insurance Corporation (FDIC) described the fact that the Swiss authorities engineered the rescue of Credit Suisse by UBS rather than putting it through an orderly wind down as “unhelpful”. He said that, in a similar scenario, the FDIC would put one of its globally systemically important banks (G-SIBs) into a resolution process to manage an orderly failure. The US has eight G-SIBs: JPMorgan, Citigroup, Bank of America, Goldman Sachs, Morgan Stanley, Bank of New York Mellon, State Street and Wells Fargo.

FCA proposes reversal of MiFID rules on unbundling investment research fees.

The UK’s Financial Conduct Authority (FCA) proposed that MiFID rules requiring the separation of fees charged by investment banks to asset management firms for trading execution and investment research should be rolled back. Under the proposals, asset managers would be able to choose whether to pay for research separately, or reverse the unbundling and pay together with other trade services.

EU sanctions challenged successfully by two oligarchs.

The EU’s General Court found in favour of Petr Aven and Mikhail Fridman ruling that the EU failed to prove how they were connected to Russia’s 2022 invasion of Ukraine. Sanctions against the two were based on reasons that were not “sufficiently substantiated” to prove they backed Putin’s invasion. Given that more than 1,700 individuals have been sanctioned since 2014 when Russia annexed Crimea, the court’s decision could open the proverbial floodgates with appeals.

FCA publishes preliminary findings on Woodford firm’s collapse.

The preliminary findings of the FCA found that the collapse of Woodford Investment Management and its £3.7bn Equity Income Fund was the result of Woodford’s “unreasonably narrow understanding of his responsibilities for managing liquidity risks”. The fund administrators, Link Financial Solutions, also “failed to act with due skill, care and diligence” and “failed to manage the liquidity of the fund”. Woodford and his firm are appealing against the findings.

Denmark’s tax authority in legal case against hedge fund over tax refunds.

A court case started in London in which Denmark’s tax authority is accusing Solo Capital Partners, the hedge fund run by Sanjay Shah, of conducting a three-year fraud to net about £1.4bn in dividend tax refunds. The claim is that the authority was duped into refunding the tax that was “facilitated by meticulously pre-planned and co-ordinated trading, which was specifically designed to involve no delivery of any shares or cash at any time”. The tax authority has presented about 250,000 pages of documents to the court to support its claim.

FSB encourages stress tests at non-bank financial institutions.

The Financial Stability Board issued recommendations for non-bank financial institutions to improve weaknesses in liquidity risk management and governance. After assessing recent market panics, the global policymaker concluded that hedge funds, pension funds and commodities traders needed to run stress tests on their exposures to sudden increases in margin and collateral calls, and allocate clear executive responsibilities for looking at risks from margin calls.

Opposition mounts over FCA’s “name and shame” plans.

The UK’s FCA issued a consultation paper in February 2024 proposing to “name and shame” companies under investigation more frequently and at an earlier stage. The FCA’s aim – to create more transparency and increase deterrence – has been criticised as potentially harmful to competitiveness and running the risk of driving business abroad. A member of the House of Lords added that the FCA approach could have “a highly negative impact” on companies named as being under investigation and subsequently cleared. The Chancellor Jeremy Hunt also said he hoped the FCA would “relook at their decision”.

FOS “debanking” complaints up 44%.

The year to 5 April 2024 saw the UK’s Financial Ombudsman Service receive almost 3,900 complaints about account closures, up 44% on the previous year. The increase particularly related to financial crime issues around politically exposed persons.

BoE warns banks over private equity risk exposures.

The Bank of England told banks they should routinely stress test their exposures to private equity and that “hardly any banks do it well”. Banks need to look at their combined credit and counterparty risks in aggregate, in an industry estimated to be worth some $8tn.

SEC conviction upheld for “shadow” insider trading.

A conviction was upheld in the US that saw a life sciences executive found guilty of what is often referred to as “shadow” insider trading – trading in the securities of a company that was not subject to the deal he was aware of. Matthew Panuwat worked for Medivation, a company purchased for $14.6bn by Pfizer in 2016. At the time of the deal, Panuwat purchased call options on another life sciences company called Incyte, whose shares jumped eight per cent on the announcement of the Pfizer-Medivation deal. Panuwat made around $107k on his Incyte trades. The SEC charge saw him convicted of insider trading, he then appealed against the decision and the guilty ruling has now been upheld.

Frankfurt court jails man for more than three years for insider trading.

A Frankfurt court sentenced a 48-year-old former communications manager to three years and three months in prison after finding him guilty of insider trading. His trades generated more than €14m in profits between 2017 and 2021. He also had to repay €24m in gross proceeds to the state. The individual was fed tips by a friend who was a partner at the investment bank Perella Weinberg without details of specifics about prospective bidders, offer pricing or timetables. The companies traded all involved Perella Weinberg as adviser.