Big win for SFO in LIBOR trial – Tom Hayes sentenced to 14 years. More SFO prosecutions to come in financial sector?

The conviction of Tom Hayes in the first UK LIBOR trial (click here to read more) is a watershed moment. It’s a big win for the SFO, although it must be said that a more damning book of evidence could not be imagined. The judge’s sentencing remarks (link to repay detailed study. Hayes received 14 years, one of the heaviest sentences on record for this offence. The judge’s summary reads like a case-study of how an accused should not behave, both before and after they are accused.

We will have more to say on this and similar cases in due course. For now it suffices to say that the huge profile of the trial and the very heavy sentence mean that a clear message is going to the dealing rooms and the C-suites of the City of London: Fraud is fraud. Financial professionals don’t get special treatment. Clever people who try to “play” the judicial system like they did the markets risk total disaster.

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Chris Borg
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Claude Brown
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George Brown
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Rob Falkner
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Jacqui Hatfield
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Charles Hewetson
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Iran: Joint Comprehensive Plan of Action agreed, but no immediate sanctions relief

On 24 November 2013, the P5+1 countries (comprising the United States, Russia, China, the United Kingdom, France and Germany) together with Iran, agreed the Joint Plan of Action (JPOA), which relaxed some of the sanctions imposed against Iran by the EU and U.S. The JPOA was intended to provide interim sanctions relief, while the parties worked towards a more comprehensive and long-term solution.

On 14 July 2015, the Joint Comprehensive Plan of Action (JCPOA) was agreed.

The EU and U.S. have agreed to lift the majority of nuclear-related sanctions against Iran, provided Iran implements certain agreed measures in respect of its nuclear programme. If certain goals are reached, the UN arms embargo could be removed in five years, and the restrictions on ballistic missile technology could be lifted in eight years. The implementation of such measures by Iran must be verified by the International Atomic Energy Agency (IAEA).

All sanctions remain in place for the time being. However, a plan has been agreed which may lead to an eventual lifting of certain sanctions.

In the meantime, the EU has published Council Decision (CFSP) 2015/1148, which extends the limited sanctions relief put in place by the JPOA until 14 January 2016. This is to allow time for the necessary arrangements and preparations for the implementation of the JCPOA. Relevant contracts which fall within the JPOA relaxation must be executed within that date. For further details on the JPOA limited sanctions relief, see our previous alert of 23 January 2014.

We will be publishing more detailed comments on and analysis of the JCPOA shortly.

47 Attorneys General to Congress: Federal Breach Legislation Should Not Preempt the States

 On July 7, 2015, attorneys general from 47 states and territories sent a letter to Congressional leaders urging them to consider federal data breach notification legislation that does not preempt the states. The move comes on the heels of a data breach announcement made by the Office of Personnel Management, and renewed interest on the Hill in passing federal privacy and data security legislation. Some of the pending bills include preemption provisions.

The attorneys general are consistently vocal about the need for any federal data breach legislation to uphold a state’s right to implement more restrictive state laws and to investigate data breaches that affect their citizens. A group of states sent a similar letter to Congressional leaders in 2005, urging them to respect the work that the state had begun in this area. Illinois Attorney General Lisa Madigan sent the same message to Congress in her February 2015 testimony. The most recent letter emphasized the states’ work in the areas of data security, identity theft, and privacy over the past decade, pointing specifically to the Illinois Attorney General’s work with identity theft victims.

Illinois is not the only state active in the area of data security and privacy. Massachusetts was the first state to pass data security regulations and continues to be at the forefront of large-scale data breach investigations. Connecticut recently created a Privacy and Data Security Department, which furthers the goals of that office’s four-year-old privacy task force. Many states, including Florida, have updated their state data breach notification laws to change with the evolving nature of breaches and breach investigations. California, Indiana, New Jersey, and Texas have also been especially active in this area.

Separate from data breaches, privacy is a hot-button issue for the attorneys general, as well. As Congress considers omnibus privacy legislation that addresses not only data breach notification, but also substantive privacy regulation, the debate over state preemption is likely to heat up. And as we have previously noted, states increasingly are acting in the absence of a breach to investigate privacy practices as unfair or deceptive under state UDAP laws. All businesses should be tuned in to the states’ continued focus on all things privacy.



Iran: Further extension of limited sanctions relief to 13 July 2015

In our alert of 8 July, we reported that the P5+1 and Iran had announced the extension of the Joint Plan of Action Relief Period (the JPOA Relief Period) to today, 10 July 2015.

Negotiations with Iran continue. To allow more time for the parties involved to reach a long-term solution, the JPOA Relief Period has been further extended to Monday, 13 July 2015. As with the previous extension, the suspension and relaxation of sanctions remain in place in identical form. No additional sanctions have been suspended. All activities conducted under the JPOA must be concluded by 13 July 2015.

Click here to read the full issued Client Alert.

Financial Conduct Authority (FCA) publishes its Annual Report and Accounts for 2014/15

On 2 July 2015, the UK’s financial regulatory, the Financial Conduct Authority (FCA), published its annual report and accounts 2014/15.

Overview  The annual report highlighted several areas in which the FCA has been active over the past 12 months, including:

  • The use by the FCA of its new consumer credit powers
  • The launch of ‘Project Innovate’ to encourage innovation in the financial services sector
  • The FCA review into competition in the wholesale market
  • Working towards the implementation of the Senior Managers Regime
  • The publication of the FCA’s cash savings and retirement income market studies
  • Implementing the new pension reforms
  • Enforcement action, especially in relation to LIBOR and FX
  • Responding to the findings of the Davis Review into the FCA’s own handling of the launch of its 2014/15 business plan

Click here to read the full issued Client Alert.

FinCEN Speech Outlines “Core Principles” on Enforcement

A recent Reed Smith Client Alert discusses a June 2015 speech by Stephanie Brooker, Associate Director for Enforcement at the Financial Crimes Enforcement Network (“FinCEN”). Although Ms. Brooker’s comments were specifically directed at the casino and card club industries, she discussed six “core principles” that have and will continue to guide FinCEN’s BSA/AML enforcement activities against all financial institutions, including banks and mortgage lenders. In particular, the alert discusses FinCEN’s focus on transparency, supervisory goodwill, recidivism, targeting individual directors, officers, and other employees of regulated entities, developing a remedial framework to correct prior deficiencies, and accountability. As to this last point, the alert discusses the extent to which FinCEN – and other regulators (e.g., the OCC) – have required respondents to actually admit liability for the charged violations, rather than merely “neither admit nor deny” as has been the historical practice. Additionally, the alert discusses FinCEN’s expectations that regulated entities develop and exhibit a “culture of compliance.” While insured depository institutions will likely be familiar with this mantra, which has been sounded by federal bank regulators for decades, other regulated entities, such as mortgage lenders, money services businesses, and casinos, might not be accustomed to FinCEN’s expectations. To read the alert in full, click here.

FinCEN Enforcement Stacks the Deck in AML Compliance for Casinos and Card Clubs

Introduction Stephanie Booker, Associate Director for Enforcement, Financial Crimes Enforcement Network (“FinCEN”) recently gave a speech at the Nevada Bar Association’s Bank Secrecy Act Conference in Las Vegas. Involved in the conference were the State Bar of Nevada’s Gaming Law Section, the American Gaming Association, and the University of Nevada-Las Vegas’ International Gaming Institute.

FinCEN is one of the Treasury Department’s primary agencies to oversee and implement policies to prevent and detect money laundering, and the only federal agency to oversee anti-money laundering (“AML”) compliance by casinos and card clubs. FinCEN polices for compliance with AML laws, including the Banking Secrecy Act (“BSA”), which requires certain reporting and recordkeeping by casinos and card clubs in an effort to prevent various financial and crimes. FinCEN works closely with the Internal Revenue Service (“IRS”) Small Business/Self-Employed Division, which is FinCEN’s delegated examiner for casinos and card clubs. The IRS refers significant violations of AML laws to FinCEN for enforcement action. FinCEN also receives referrals and coordinates its enforcement investigations with criminal law enforcement agencies, including the IRS-Criminal Investigations, the FBI, the Department of Justice’s Asset Forfeiture and Money Laundering Section, and U.S. Attorney’s Offices and state authorities, as well as other regulatory partners, including the Nevada Gaming Control Board.

Click here to read the full issued Client Alert.

Despite First Administrative Appeal, CFPB Seeks Out Courts

On June 4, 2015, Consumer Financial Protection Bureau Director Richard Cordray issued a decision in the first appeal of a CFPB administrative proceeding. The appeal to Director Cordray followed the CFPB’s first administrative trial before an administrative law judge. The defendant, a mortgage lender, has vowed to appeal it further to the circuit court. But despite the recent spotlight this matter has brought on the CFPB’s administrative process, the bureau has recently been filing more of its cases in federal court than ever before. This has important implications for the institutions under the CFPB’s jurisdiction, and it may limit the impact of Director Cordray’s decision on the statute of limitations in the recent appeal.

Click here to view the full issued Client Alert.


Small Local Bank Agrees to $4.5 Million Penalty for Ineffective Anti-Money Laundering Program and Structured Transactions

On June 15, multiple federal agencies issued a $4.5 million penalty against a local bank that admitted to failing to maintain an effective anti-money laundering program. The coordinated enforcement action by multiple agencies and substantial monetary penalty illustrates the significant risks for anti-money laundering compliance for local financial institutions. The coordinated action was announced by the U.S. Attorney’s Office for the Southern District of West Virginia, the Federal Deposit Insurance Corporation (FDIC), and the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN).

The Bank of Mingo of Williamson, West Virginia (Mingo), accepted the penalty as part of a deferred prosecution agreement, in which it acknowledged that one of its branch managers failed to file currency transaction reports (CTRs) for $9 million in structured transactions for one corporate customer. According to a stipulation of facts filed by the U.S. Attorney’s Office and Mingo, the structured transactions stemmed from accounts held by two business partners who operated companies that provided contract labor to coal operations in southern West Virginia. Notably, Mingo had an anti-money laundering (AML) program in place and required its employees to receive annual training on the program. Moreover, this program included a “Know Your Customer” program that required bank employees to gather information about new employees or accounts, and included specific rules for aggregating multiple withdrawals from a single account.

The Bank Secrecy Act (BSA) requires U.S. financial institutions to file reports of cash transactions exceeding a daily aggregate amount of $10,000. The Mingo branch manager in 2005 conducted a “Know Your Customer” investigation to learn the business partners’ purpose in routinely withdrawing amounts of less than $10,000. The Mingo branch manager accepted the partners’ rationale that multiple withdrawals were needed for their contract labor businesses in different geographic areas.

The partners later formed another contracting company, Aracoma Contracting, LLC (Aracoma), under the name of a nominee owner. Aracoma transmitted requests for advances from a line of credit it held with Mingo. Mingo paid out these advances, in pre-counted cash, directly to identified Aracoma employees. In a cash log, the teller entered the name of the employee – not of Aracoma itself – when withdrawals were made. As a result, Mingo did not aggregate the transactions and did not file CTRs. According to FinCEN, the partners conducted more than $9 million in structured transactions through the bank.

The structured transactions continued even after an FDIC audit raised concerns about Aracoma’s transactions. Following the FDIC audit, Mingo’s BSA officer circulated a memo September 10, 2008, stating that Aracoma should “have cashier’s checks issued and then deposited into a checking owned by them at [Mingo],” and that Aracoma should then “write checks on this account to get the cash out of [Mingo] for payroll purposes.” According to the parties’ stipulation of facts, Mingo acknowledges that “it was on notice no later than September 10, 2008” that Aracoma’s withdrawals were against Mingo policy and should not have been allowed.

Mingo’s penalty includes a civil forfeiture and civil monetary penalties. The agreement noted that Mingo had appointed a new BSA officer, reviewed its accounts for BSA compliance, and established a new BSA training program.

The branch manager who failed to file the CTRs also previously served as the mayor of Williamson, West Virginia, and pleaded guilty in 2014 to conspiracy to structure currency transactions.

This action serves as a reminder that financial institutions, regardless of size or location, remain under intense scrutiny. It also serves as a reminder of the importance of regularly testing an institution’s AML program and implementing remedial measures when lapses are identified.



FinCEN Imposes Largest-Ever Penalty Against a Casino

On June 3, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a $75 million penalty against a Northern Mariana Islands casino for Bank Secrecy Act violations – the largest-ever FinCEN penalty assessed against a casino. FinCEN’s announcement follows an investigation of the casino, Hong Kong Entertainment (Overseas) Investments, Ltd., d/b/a Tinian Dynasty Hotel & Casino (Tinian Dynasty), in which the casino was found to lack an anti-money laundering program altogether.

FinCEN has regulatory authority to investigate casinos for Bank Secrecy Act (BSA) compliance, and casinos must, in turn, develop anti-money laundering (AML) programs to ensure that certain transactions and activities are reported to the government. Under U.S. law, AML programs developed by casinos must include a system of internal controls, independent testing for compliance, training of casino personnel in the identification of unusual or suspicious transactions, and designation of an individual or individuals to assure day-to-day compliance. Moreover, a casino’s program must include procedures designed to detect suspicious transactions – i.e., transactions intended to disguise funds derived from illegal activity or to evade the requirements of the BSA.

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