Editor's note: This item has been updated for the recent JP Morgan case.

The “naughty corner” for miscreant banks and other wealth
management institutions is getting crowded and also highlights why
compliance is such a major spending and recruitment issue for firms
these days. Charges of interbank rate fixing,
lax anti-money laundering controls and questionable pricing policies
have been
levelled - and in some cases punished heavily.

Some of the failings that have been punished, such as
Barclays’ misbehavior over the interbank interest rate rigging affair,
go back
several years and as of the time of writing, firms have moved, or say
they have
done so, to clean up their act. Some firms
making the headlines recently, most obviously HSBC (anti-money
laundering) and
Barclays (LIBOR rigging) are aware of the work they must embark upon to
improve
their reputation. These firms must engage as openly as they can with
clients
(and for that matter, constructive critics such as this publication). In
the case of Barclays, for example, it has recruited top talent such as
former UK Financial Services Authority chief executive Hector Sants to
head up its efforts to improve compliance. Other banks have added to
risk management teams in recent months, and no doubt will continue to do
so. 

By way of a guide to some of the problems that have hit
these firms, here is a summary of the main institutions. Not all of the cases
mentioned are complete and could be subject to further action. The
summary here is in no way a comment by this publication as to the specific
responsibility of the firms concerned.

We also invite readers who want to comment on what is being done to
improve compliance to share their thoughts with us at this publication,
and can email the editor at tom.burroughes@wealthbriefing.com

Readers may also wish to check Compliance Matters, a new information source on all matters about wealth management and compliance, produced by the publisher of this website. To register, click here.

JP Morgan

UK and US regulators have fined JP Morgan
a total of $920 million for “serious failings” relating to trades carried out
by the firm’s Chief Investment Office and disclosed last year.

The bank has agreed to settle actions brought by the US
Securities and Exchange Commission, who imposed a financial penalty of $200
million and required the firm to admit wrongdoing; the Office of the
Comptroller of the Currency, who imposed a financial penalty of $300 million,
and the Federal Reserve, who imposed a financial penalty of $200 million.  In addition, the UK Financial Conduct
Authority fined the bank $220 million.

Several months earlier, the UK's
Financial Conduct Authority fined JP Morgan International Bank a total of £3.08
million (around $4.6 million) for systems and controls failings at its wealth
management business. The failings persisted for two years and were not
corrected until the FCA brought them to the firm’s attention in the course of
its thematic review into wealth management firms and the suitability of their
advice. The FCA identified a number of issues with JPMIB’s processes and an
inability to demonstrate client suitability from its client files.

Among the issues identified by the FCA were: client files
which were not kept up to date or that did not retain important client
suitability information, a computer-based record system that did not allow
sufficient information to be retained, suitability reports that failed
adequately to contain a statement of the client’s demands and needs, and the
fact that communications to confirm client suitability profiles were not always
sent to the client (as required by JPMIB’s own policy).

 

 

Aberdeen
Asset Management

The Financial Conduct Authority has fined Aberdeen Asset
Managers and Aberdeen Fund Management £7,192,500 ($11,200,328) for failing to
protect client money.

The FCA said in a statement that the firm had failed to
adequately protect client money placed in money market deposits with third
party banks between September 2008 and August 2011.

Guaranty Trust Bank

The Financial Conduct Authority fined Guaranty Trust
Bank £525,000 ($814,196) for failing to have sufficient anti-money laundering controls for
high risk customers between May 2008 and June 2010, at the height of the
financial crisis. The regulator said the failings are “particularly
serious” because they affected customers based in countries associated with a
higher risk of money laundering, bribery or corruption, including accounts held
by politically exposed persons.

GT Bank, a subsidiary of Nigerian Guaranty Trust Bank,
opened an office in London
in May 2008 offering retail and wholesale banking products and services to
private, corporate and institutional clients. Its controls were reviewed in
2010 when the FCA’s predecessor, the Financial Services Authority, conducted a review
into banks’ management of money-laundering risks.

Sesame Bankhall

The UK’s
Financial Conduct Authority fined Sesame Bankhall £6,031,200 ($9.28 million) for two sets
of failings: failing to ensure that investment advice given to its customers
was suitable, and failings in the systems and controls that governed the
oversight of its appointed representatives. The penalty is made up of a £245,000 fine for Sesame’s
advice failings in relation to keydata life settlement products, and a
£5,786,200 fine for systems and controls weaknesses across its investment
advice business. All of the failings relate to Sesame’s oversight of its ARs,
which are individuals or firms that draw their authorisation from a principal -
in this case, Sesame - with the principal ultimately accountable to the
regulator for poor practice.

UBS

The Zurich-headquartered bank agreed to pay around SFr1.4
billion (around $1.53 billion) in fines and related payments to the US, Swiss and UK
authorities to settle investigations that Switzerland’s largest bank manipulated
interbank interest rates. The UK's
Financial Services Authority said that UBS' offences were widespread and
"do not make for pretty reading". The FSA said it had found at least
2,000 requests for inappropriate interest rate submissions, as well as a number
of emails and other communications about the issue. As part of the proposed
agreement with the US Department of Justice, UBS Securities Japan Co has
agreed to enter a plea to one count of wire fraud relating to the manipulation
of certain benchmark interest rates, including Yen LIBOR. Statements from other
regulators were due at the time of this update going to press.

In a separate case announced a few days ago - 11 August 2013 - the
bank agreed to pay SFr110.5 million ($119.9 million) to settle
complaints
of investors who had sued the bank in a mis-selling case of Lehman
Brothers
structured products. Lehman Brothers, a prominent producer of structured
products,
went bankrupt in September 2008. The face value of these products
collapsed. "UBS
is pleased to have resolved this legacy litigation matter arising out
of the 2008 financial crisis. UBS agreed to the settlement to avoid the
cost and uncertainty of continued litigation. The full cost of the
settlement is covered by litigation provisions established by UBS in
2012 and in prior periods," UBS said. 

Societe Generale

Japan’s
Financial Services Agency in October ordered the suspension of Societe
Generale's Japanese private banking business, after discovering “serious
violations of laws and regulations”, during an inspection.

The FSA took administrative action against the French
lender, after “serious problems that may impede sound and appropriate business
operations were recognised, regarding the governance system, the compliance
system, and the customer protection management system”.

SocGen had to suspend most of its private banking division,
which meant not accepting new money and soliciting for new money, between
23 October 2012 to 22 November 2012. SocGen had also to suspend most of its trust
business in the corporate division between 23 October 2012 to 22 January 2013,
which the bank said is a non-core asset.

The French banking giant has also been reprimanded by Hong
Kong's Securities and Futures Commission for lack of internal controls of its
wealth management activities in its Hong Kong
branch, leading it to reimburse customers more than $11 million (amounts are in
US dollars unless otherwise stated). The SFC raised concerns that, in over
3,000 transactions undertaken between April 2003 and January 2006, customers of
the bank's Hong Kong-based wealth management activities paid or received a
different price for over-the-counter products, from the actual price transacted
for them by SocGen, with the difference, or margin, being retained by the bank
as a fee.

Barclays

UK-listed Barclays has incurred penalties from US and UK authorities
totalling £290 million (around $455 million) for misconduct relating to the
inter-bank interest rate market. Chief executive Bob Diamond, a high-profile
character renowned for his large bonuses and hard-charging style in running the
bank, has resigned. Lord (Adair) Turner, chairman of the Financial Services
Authority, the UK regulator,
branded the LIBOR-rigging as a huge blow to London’s reputation as a financial capital.
The FSA is probing other banks; a letter sent to the New York Federal Reserve,
and recently published, mentioned Lloyds Banking Group as a firm that is
possibly implicated. The US
Justice Department is carrying out a criminal investigation into the
rate-rigging affair. Lloyds has declined to comment on the claims that it was
involved.

HSBC

HSBC agreed to make a total payment of $1.92 billion to
settle a US
criminal investigation over breaches of anti-money laundering and sanctions laws,
said to be the biggest penalty ever paid by a bank for such transgressions.

The UK/Hong Kong-listed HSBC created dramatic headlines
earlier in the year when its global compliance boss, David Bagley, resigned in
front of a US Senate Committee that was grilling HSBC executives and other
persons about a report claiming widespread shortcomings in how HSBC operated
anti-money laundering controls. It was said that money laundering failings
facilitated monies for drug gangs, rogue states such as Iran, and terrorists.

Coutts

The UK-based private bank was fined £8.75 million (around
$13.8 million) by the FSA, the sixth-largest fine ever handed out by the
regulator, for failing to take reasonable care to establish and maintain
effective anti-money laundering systems and controls relating to high-risk
customers, including “politically exposed persons”.

Merrill Lynch

The Bank of America-owned firm was fined $2.8 million for
supervisory failures that led to it overcharging clients $32 million in
unwarranted fees. The US Financial Industry Regulatory Authority also imposed
the fine on the US
securities firm for failing to provide certain required trade notices. Merrill
Lynch repaid the nearly 100,000 affected clients with interest.

UBS

The Irish Central Bank fined UBS' international life
insurance division in relation to various breaches of a new act introduced to
protect the financial system from money laundering and terrorist financing. The
Central Bank of Ireland
and UBS agreed on 19 June that the latter will pay a financial penalty of
€65,000 (around $81,700) for failing to comply with specific requirements of
the Criminal Justice Act 2010.

The life insurer, part of the Swiss wealth management and
banking group, was not accused of terrorist financing or money laundering as
such. Among the breaches were failing to instruct staff and directors about the
new directives promptly after the Act had come into force in July 2010. The
firm had also failed to adopt adequate written policies and procedures in
relation to the identification and reporting of suspicious transactions, the
central bank said in a statement. The central bank's anti-money laundering and
counter terrorist financing supervisory unit identified these breaches during
an inspection of the firm carried out in December 2010.

Standard Chartered

On 15 August, Standard Chartered agreed with authorities in New York to pay a civil penalty of $340 million to settle
charges over transactions linked to Iran. "The New York State
Department of Financial Services and Standard Chartered Bank have reached an
agreement to settle the matters raised in the DFS Order dated 6 August 2012.
The parties have agreed that the conduct at issue involved transactions of at
least $250 billion,” according to a statement issued by Benjamin Lawsky, New
York Superintendent of Financial Services.

In December 2012, the bank agreed a $327 million
settlement with US authorities for rules violations relating to a period
between 2001 and 2007.

“The settlements are the product of an extensive internal investigation
that led the bank voluntarily to report its findings concerning past sanctions
compliance to these US authorities, and nearly three years of intensive
cooperation with regulators and prosecutors,” it said. “Under the terms of the
OFAC Settlement Agreement, the Deferred Prosecution Agreements with the
Department of Justice and the District Attorney’s Office, and the Cease &
Desist Order and Order of Assessment of a Civil Money Penalty with the Federal
Reserve, no further action will be taken against Standard Chartered by these
authorities if it meets the conditions set out in the agreements,” it said.

Wells Fargo

The Securities and Exchange Commission has charged the
firm's brokerage firm and a former vice president for selling products tied to
mortgage-backed securities without fully understanding their complexity or
disclosing the risks to investors. Wells Fargo agreed to pay $6.5 million to
settle after the SEC found it relied excessively on rating agencies when
selling products. The money will be placed into a fund for the benefit of
harmed investors. The products were sold by Minneapolis-based Wells Fargo
Brokerage Services (now Wells Fargo Securities), between January 2007 and
August 2007.

BlackRock

The Financial Services Authority fined BlackRock Investment
Management  (UK) £9.5 million ($15.3 million)
for failing to protect client money adequately.

Nikolai Battoo

The US Securities and Exchange Commission froze the US-based assets of an asset manager
and two of his companies for fraudulently proclaiming to investors a track
record of “exceptional risk-adjusted returns”, when in fact “particularly heavy
losses” were incurred in 2008. According to the SEC, Nikolai Battoo claimed to
manage $1.5 billion on behalf of investors globally, $100 million of which was
on behalf of US-based investors. The losses he suffered in 2008 were due to his
investments in the Bernard Madoff Ponzi scheme - in which several
Battoo-managed hedge funds were heavily invested - and a failed derivative
investment programme.