Compliance Updater - February 2024

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

1. Front companies used by Iran to evade sanctions.
2. Gap insurance in the FCA’s sights under the Consumer Duty.
3. Close Brothers suspends dividend due to car loan uncertainty.
4. Former Goldman Sachs analyst found guilty of insider trading.
5. Court case over excessive margin call starts in London.
6. Husband of BP worker insider traded on overheard conversations about M&A deal.
7. UAE removed from FATF’s grey list.
8. FCA consults on naming firms under investigation earlier.

Front companies used by Iran to evade sanctions.

The FT revealed that two front companies in the UK, holding accounts at Lloyds and Santander, were used to evade sanctions against Iran. Two sanctioned entities – Iranian state-controlled Petrochemical Commercial Company (PCC) and its UK subsidiary PCC UK – used the front companies in the UK to continue to move money around. The front companies were Pisco UK and Aria Associates with accounts at Santander and Lloyds respectively. Both were ostensibly owned by British individuals who were both previous PCC directors.

Gap insurance in the FCA’s sights under the Consumer Duty.

The UK’s Financial Conduct Authority (FCA) is looking at guaranteed asset protection (Gap) insurance with significant providers temporarily banning its sale whilst they implement changes to better deliver fair value under the Consumer Duty. Gap insurance is sold alongside car finance and is designed to protect customers from any losses that might arise if the car is written off before the loan is repaid. The policies cover the difference between the purchase price of the vehicle (which the loan is based upon) and the current market value of the car. Statistics indicate that only about 6% of the premiums collected (£300m on 2.4m policies in 2022) are being paid out in claims. This makes the policies hugely profitable for the providers and questions their fair value to the consumers.

Close Brothers suspends dividend due to car loan uncertainty.

Close Brothers suspended its dividend due to uncertainty over the outcome of a regulatory probe into motor financing deals. The FCA is investigating discretionary commissions on car deals dating back a decade. Discretionary commissions saw car dealers receive a percentage of total interest paid by customers. They could also set the interest rate at their own discretion, giving a clear incentive to charge higher rates. The practice was capped in 2016 and then banned in 2021.

Former Goldman Sachs analyst found guilty of insider trading.

Mohammed Zina, a former Goldman Sachs analyst, was found guilty of insider trading and fraud at a London court. In a case brought by the FCA, Mr Zina, who worked at Goldman’s conflict resolution group, was determined to have used information obtained at the bank to trade in stocks including Arm and Punch Taverns to generate around £140k in profits with loans fraudulently obtained for home improvements from Tesco Bank. He was sentenced to 22 months in prison.

Court case over excessive margin call starts in London.

TA court case claiming that Morgan Stanley’s margin call on Mike Ashley’s Frasers Group was excessive began at London’s High Court. The dispute relates to long positions Frasers started to accumulate in Hugo Boss in 2019 via Saxo Bank that used Morgan Stanley to execute and clear. Morgan Stanley imposed a $1bn margin call in May 2021, which led to Saxo demanding $900m from Frasers. It is claimed that the margin call was out of proportion to the risk and Frasers is demanding around €50m for the “urgent action” it needed to take to avoid the “financial and reputational fallout of a forced close-out”.

Husband of BP worker insider traded on overheard conversations about M&A deal.

The husband of a BP mergers and acquisitions manager in the US overheard conversations whilst his wife worked at home and made $1.76m in illegal profits. Tyler Loudon heard several conversations about BP’s takeover of TravelCenters of America and purchased 46,450 shares of TravelCenters stock without his wife’s knowledge before the deal was made public. The announcement of the takeover led to a 71% rise in the share price and Mr Loudon sold his shares. Mr Loudon confessed his activities to his wife after the Financial Industry Regulation Authority began asking questions. His wife reported the trading to her superior at BP. Despite finding no evidence that she knowingly leaked the inside information, BP terminated her employment. Mr Loudon was charged by the Securities and Exchange Commission and now faces disgorgement of profits and criminal charges.

UAE removed from FATF’s grey list.

The United Arab Emirates was removed from the Financial Action Task Force’s grey list. The grey list consists of countries that have strategic deficiencies in their regimes to counter money laundering, terrorist financing and proliferation financing. FATF places such countries under increased monitoring as the strategic deficiencies are addressed and resolved. The UAE had been on the grey list for two years.

FCA consults on naming firms under investigation earlier.

In an attempt to increase transparency, deterrence and disseminate best practice, the FCA is consulting on communicating more about its investigations at an earlier stage. Where it is in the public interest to do so, the regulator proposes to announce that it is investigating a firm. This will amend the current practice where, in the absence of exceptional factors, the FCA only announces the details of investigations when they conclude with some form of enforcement action.