Friday, 29 March 2019

Scandinavian Banks’ New Era of Scandal

On the back of revelations regarding Danske Bank and its connection to money laundering last year, it was revealed in the news yesterday that Birgitte Bonnesen, the CEO of Swedbank, had been relieved of her duties just minutes into the Bank’s AGM in relation to the organisation’s connection to dirty money. In this post we shall examine these connected cases further and learn more about the anti-money laundering issues facing banking organisations.

The incredibly reputable Danske Bank, Denmark’s largest lender, became embroiled in a money laundering scandal last year when it was revealed they had helped launder almost €200 billion in Russian and Baltic money since 2007. The case of Danske Bank revolves around the purchasing of an Estonian Bank that would become the vessel for money laundering from neighbouring States like Russia and the Baltic States. The leadership of Danske Bank were not only made aware of the issues as early as 2010, but actively promoted the increasing of ‘non-resident business’ i.e. money from non-Estonian Nationals up to a point when, in 2011, the Estonian Bank generated 11% of Danske’s total profits, despite only accounting for 0.5% of the bank’s total assets. There were a number of associated issues, like the bank having nobody in place as a compliance officer for anti-money laundering (flouting specific Danish laws in the process) and in 2014 a whistleblower brought to the attention of the Estonian bank’s leadership the fact that British LLPs (Limited Liability Partnerships) were being used to funnel money from people closely linked to Vladimir Putin and the Russian Intelligence Services. In 2015 the Bank closed its non-resident business in Estonia but they had not gotten away with their crimes, with Estonian prosecutors arresting 10 people in connection with the investigation and with Deutsche Bank’s American subsidiary being dragged into the mire for good measure.

The once reputable Scandinavian sector took a massive hit over Danske and today Swedbank looks set to add to this degeneration in standards. The bank was raided this week by Swedish authorities looking for evidence of fraud and insider trading, whilst the US is currently probing Swedbank for its role in the Danske Bank scandal. The rumour is that Swedbank handled more than €135 billion in assets from ‘high risk clients’ and that the bank’s connection to Danske, and interesting Mossack Fonseca, is the cause for the probe. The Swedish Prime Minister – Stefan Lofven – stated that ‘this is absolutely unacceptable’ because scandals such as these ‘destroys confidence in the financial system which is important for society’. It is interesting to note that, even in Scandinavia where societal issues are, by and large, given much more reverence than in Europe and the US, the plague of transgressive finance has still managed to take a foothold. With Swedbank being potentially implicated in the Donald Trump affair – there is a suggestion that the bank handled payments from Ukraine to Trump’s campaign manager Paul Monafort – it is likely that this is just the start of a very long and very painful road for the bank, and most likely the Swedish financial system.


Keywords – Banking, Swedbank, Danske Bank, Money Laundering, @finregmatters

The Case of Purdue Pharma, the Sackler Family, and the Opioid Crisis

In the first of two short posts today, we will look at the case of the billionaire Sackler Family and their remarkable effect upon American society. The family, who own Purdue Pharma amongst a list of other ventures, have this week seen a massive legal action taken against them by the State of New York who argue that the company is ‘responsible for the opioid epidemic’ sweeping through the United States.

The attorney-general for New York has called the lawsuit the ‘nation’s most extensive’ with respect to the pharmaceutical industry and comes right on the heels of a $270 million suit that was settled in the State of Oklahoma on exactly the same grounds. Whilst the company and the billionaire family who own it did not admit guilt (settling parties rarely do, hence why they settle outside of court) it has potentially opened the trapdoors for litigation. It comes as no surprise then that the company is reportedly considering bankruptcy proceedings in the face of such an onslaught.

The company, which began life as the Purdue Frederick Company in Manhattan in 1892, was bought by the Sackler family in 1952 by Dr Raymond and Dr Mortimer Sackler. In the 1980s the company began manufacturing products that were derivatives of opioids, like morphine. In 1996, this programme is extended and the company develops ‘OxyContin’, or ‘oxycodene’ in an ‘extended release’ format. In 2005 the company begins developing increased security around OxyContin which is demonstrative of their understanding of the market for these drugs, and in 2010 OxyContin is redeveloped to include extra warnings over its usage. Nevertheless, the sale of what has been called ‘heroin in a pill’, has become a societal ill unlike many others (at least one that is officially sold to the public). The National Institute of Drug Abuse states that more than 130 people die every day after overdosing on opioids, whilst the Department of Health and Human Services declared a public health emergency in 2017 and themselves estimate that more than 11 million people misused prescription opioids in 2017 alone.

The scale of the disaster is tremendous and the opening of extensive lawsuits will likely see the end of Purdue Pharma and its competition. However, that is probably wishful thinking. The reality is that the people behind the company will not suffer or be penalised, the systems they developed where salespeople were paid six-figure bonuses for misleading Doctors will not be regulated, and moreover there is scope for the companies to make even more money. Rather remarkably, it has been revealed that not only do Purdue have massive stakes in other more generalised opioid products, they are now busy marketing and aggressively pushing the cure to the social problem they themselves exacerbated! It is all rather remarkable but not in the least bit surprising – that big business is encouraged to act in this manner at the cost of the public is a systemic norm that has been accepted. One would like to think the New York lawsuit would cause damage to the operations of the firm and the family, but considering the fact the cure is raking in billions of dollars, it is very unlikely.


Keywords – Pharmaceuticals, US, Opioid crisis, business, law, @finregmatters

Thursday, 28 March 2019

Ernst & Young in Trouble in Japan… Again

In this second post, we will look at the news that Ernst & Young (E&Y) are facing a massive and highly unusual (for Japan) $9 billion lawsuit for its audit failings that led to investors in Toshiba losing out significantly. As E&Y have already had issues with Toshiba, it is worth examining this current instance to see whether this is a continuation of auditing failings across the globe.

As part of one of Japan’s worst accounting scandals for some time, E&Y were fined $17.4 million in 2015 for ‘failing to spot irregularities’ in its audit of Toshiba’s accounts. The firm were banned from taking on new business contracts in the country for 3 months, and at the end of 2015 the firm’s regional Head resigned. Yet, this week the firm is once again making headlines in Japan for its performance, or lack thereof. The firm is facing a shareholder lawsuit for $9 billion and is accused of being partly responsible for Toshiba’s failure to ‘disclose losses at Westinghouse’ during 2012-13. Westinghouse is an American supplier of nuclear technology, but in 2012-13 was suffering losses that Toshiba was exposed to on account of its investment in the company. The individual investors bringing this claim against E&Y argue that had the losses on Toshiba’s books been made public sooner, then shareholders would have been more knowledgeable and would have been able to prevent Westinghouse from purchasing CB&I Stone and Webber in 2015, a move which compounded the financial distress of the companies involved.

As the case is ongoing it is difficult to suggest what will eventually happen. The case was originally much smaller and related to a separate accounting failure in Toshiba, but the investors have decided to add Westinghouse to the claim. It has been noted that the claim is unusually large for Japan and, as such, there may be a question to be raised as to whether E&Y will ultimately be forced to pay such a fee. Perhaps it hinges on the actions of the auditing firm and its connection to Toshiba; how has the firm performed since 2015? Have the firm been lenient or softer with their audits to repair the damage caused by the scandal in 2015? Have the usual conflicts of interest inherent within the modern auditing business model raised their ugly heads again? The case will either be struck out or settled privately so we may never know, but this represents just the latest in a very long line of supposed scandals that continuously revolve around this industry.


Keywords – Ernst & Young, audit, Toshiba, Japan, @finregmatters

Goldman Sachs Handed Record Fine by the FCA

In the first of a series of shorter posts today, we will react to the news that Goldman Sachs has been handed a financial penalty by the FCA for misrepresenting a vast number of transactions over the past decade.

In the largest fine of its kind ever given out by the regulator, the FCA has fined Goldman’s London Unit £34.4 million for ‘failing to provide accurate and timely reporting relating to 220.2 million transaction reports between November 2007 and March 2017’. Because Goldman agreed to resolve a proportion of the issue – issues relating to the firm’s change management processes and its maintenance of counterparty reference data – the figure of £43.4 million is actually a reduction on what should have been a £49 million fine. The firm is guilty of not complying with the rules of the Markets in Financial Instruments Directive, or MiFID, and is the second such action taken against a bank by the FCA in less than a month after UBS was fined £28 million for the same thing. In total, the regulator has now taken action against 13 organisations for this breach, including Merrill Lynch, Deutsche Bank, Société Générale, and Barclays amongst others.

The regulator is rightfully cracking down on these breaches because the data it would obtain from efficient record keeping is used to identify market abuses and financial crime. Such a widespread and historic flouting of these regulations fundamentally affects the capability of the regulator to efficiently monitor the marketplace, which is why the FCA were clear in their press release that ‘these were very serious and prolonged failures… accurate and complete transaction reporting helps underwrite market integrity and supervise firms and markets’. There is a focus on financial crime across the globe (perhaps in name mostly, but there is a focus) and this news must be attached to the continuing developments in Malaysia where Goldman is being sued over its role in the 1MDB scandal. However, perhaps it is too much of a reach to combine these issues and suggest that the banks do not take tackling financial crime seriously enough. Maybe. Yet, one angle that must be rejected is the notion put forward by Goldman that ‘we are pleased to have resolved this legacy matter’ – this is not a legacy matter. Furthermore, it would be preferable to remove this term and concept from the wider conversation because it is particularly unhelpful. Failings from 2007 to 2017 do not constitute legacy issues, and the composition of these large organisations and, crucially, their behaviour, show that very little has changed. The protection afforded by attempting to designate something as being part of the past ought to be removed if real and affectual change is to take place in the culture of financial services across the globe.


Keywords – Goldman Sachs, FCA, Compliance, MiFID, Europe, Financial Regulation, @finregmatters

Monday, 11 March 2019

The End of the Line for the Financial Reporting Council

In this very short post we will react to the news that broke today regarding the future of the Financial Reporting Council. We have covered the FRC on a number of occasions here in Financial Regulation Matters and the posts have been highly critical of what was a feeble regulator. We had only looked previously at the regulator and the fact that it was under review, but today the final decision was made on the future of the FRC.

Founded in 1990, the Financial Reporting Council was today confirmed by the Government as being no more. In its official press release, the Government stated that, after considering the Kingsman Review, the FRC would be replaced with a new regulator. That regulator will be called the Audit, Reporting and Governance Authority. The business media are reporting that the new regulator ‘will have stronger statutory powers, including the ability to make direct changes to accounts and powers to require rapid explanations from companies and publish reports about their conduct in the event of a corporate failure’. Sir John Kingsman, the author of the report that has underpinned this shakeup of the regulatory arena, probably set the process in motion when he labelled the regulator a ‘ramshackle house’ when the official report was published. In establishing the new regulator, the Government has been noted as stating that it was ‘strong’ leadership that will ‘change the culture’ within the accounting sector. However, it is worth noting that altering the culture in this particular field will be no easy task and, in truth, it is difficult to see how a different regulator will achieve this. The first indication of whether there is change on the horizon or whether it is business as usual will likely be the new regulator’s take on the Big Four’s claim that they will separate the consultancy arms from the audit arms themselves – if this is allowed, on the auditor’s terms, then it is business as usual. Another question is whether the audit industry can indeed undergo any major change in respect to the tumultuous period awaiting the UK once the country leaves the European Union – do the Government really have the capital to take on such a corporate behemoth?

Ultimately, the FRC pushed its luck. Clear conflicts of interest and token gestures to eradicate such conflicts were a step too far in the wake of Carillion and BHS – now the regulator has to stop accepting all of its dinner invitations from those it was supposed to protect the public from.


Keywords – FRC, Audit, Regulators, Financial Regulation, Business, UK, @finregmatters

Monday, 4 March 2019

Technology Companies and Competition: Are There Lessons to be Learned from Banking?

In this post, we will examine the calls made today by a US Senator in relation to the leading technology companies. We covered the issue of oligopolies and market dominance in a recent post, and the issues are the same within the technology sector. However, a legislative approach that was taken in the 1930s is being cited as a good approach to take now, which is line with the common mantra in the modern day where everything was better and more effectual ‘in the past’. In this post we will take a step back to examine whether that past approach really was effectual, and discuss whether it really is applicable to the modern marketplace.

David Cicilline, a Democratic Head of the House antitrust subcommittee in the US, said today that imposing a system akin to the Glass-Steagall Act upon the technology industry would potentially serve to restrain the size of the largest technology companies and bring them in line with a more consumer-based purpose. Speaking to the Financial Times, Cicilline said that ‘one of the things that we did in the financial services space is Glass-Steagall, where you separate out functions… it’s an interesting idea whether there would be a way to think about separating what platforms do versus people who are selling products and information – a Glass-Steagall for the international [technology companies]’. The call essentially relates to the proposed separation of social media companies from the elements within them that sell customer data. There is a growing sentiment within the media that companies such as Facebook, Google, Apple, and a few others are growing far too large and, with the development of a new task force within the Federal Trade Commission, there are now developments in place to actively constrain the growth of these all-enveloping tech giants. However, Cicilline, who is regarded as a leading authority on tech-regulation within the legislative/regulatory arena (in terms of his political authority), concludes his interview with a review of the Glass-Steagall Act: ‘what we did in the financial services sector, that seemed to work pretty well for a long time… we then repealed it and had a big problem’. The question is whether this nostalgic view of the legislation is an accurate representation of the application of it.

The Glass-Steagall Act, otherwise known as the Banking Act of 1933 (the ‘Glass-Steagall Act’ actually refers to four specific provisions within the Act), was a piece of legislation enacted in 1933 to combat the size and development of what is often referred to as ‘universal banking’. The Act sought to separate commercial and investment banking arms, and thus prevented the investment banking arms from taking deposits, and the commercial banking arms from dealing in non-governmental securities (including underwriting such securities) amongst other aspects. The literature is awash with a number of reasons for the enactment of the Act, and also differing explanations of the process of the Act coming to be. The ‘official’ story, for want of a better term, suggests that on the back of a number of securities-related scandals in the 1910s and 1920s, there was a political movement to take regulatory and legislative action within the finance sector. One of the scandals was that of the so-called ‘Match King’ Ivar Kreuger (analysed in this brilliant book by Professor Frank Partnoy) which saw the Swedish businessman develop an array of exotic financial products (many of which went on to play a major part in the Financial Crisis) that enthralled and eventually entrapped Wall Street and the public. However, it is widely accepted that it was National City Bank (the ancestor to today’s Citibank) and its charismatic leader Charles E. Mitchell that lay at the heart of the reason for the Act’s enactment. Mitchell was quoted in the mid-1920s as stating that he wanted the bank to sell securities to the public ‘just as United Cigar Stores sold cigars’. The amount of securities on offer to the public duly increased, with it being noted that between 1922 and 1931, securities departments within federally recognised banks went from 62 to 123, and separate securities affiliates increased from 10 to 114. The effect was an inevitable one, with massive losses incurred by those who had invested in the securities despite not knowing the true strength of them – although they were supported and validated by third-parties (a familiar story). So, in light of this, an investigation was set up and led by Ferdinand Pecora – what would come to be known as the ‘Pecora Hearings’ – and the Committee found, after investigation, that a separation of commercial and investment banking would serve to offer protection to the wider system (amongst other things). Bankers were blamed for selling ‘unsound and speculative securities’, commercial banks were accused of converting bad loans into security issues, and security affiliates conducted pool operations with the stocks of parent banks; all of this was the evidence needed to push ahead with the enactment of the legislation.

However, the vast majority of research into this process since has found that there was no such evidence. Kroszner and Rajan suggest that, when one considers the delinquency rate from the period, Universal banks were much stronger as a result of the combination and did not present an excessive risk. In addition, the quality of the bonds that the large banks offered defaulted less frequently than purely investment bank-developed bonds did, according to Puri. One of the major proponents of this view is George J. Benston, and more specifically in his 1990 book The Separation of Commercial and Investment Banking. Benston suggests that as the data from the time does not point towards a flaw in the Universal Banking model, ‘financial stability is more likely under universal banking than specially banking, principally because universal banks are more diversified…’ Benston goes on to make a number of other points regarding the superiority of universal banking as a model, one being that as long as antitrust laws do their job there will be no cartelisation as a result of universal banking, although some of these suggestions are hard to swallow. We will return to that in a moment, but this concept of cartelisation is important. Benston notes that the enactment of the Glass-Steagall Act actually precipitated cartelisation, in that the commercial banks were aided in removing unprofitable securities arms, and then their competition for customers’ deposits was immediately eliminated by the Act. This is interesting, and is potentially supported by the fact that after just two years, Senator Glass recognised that the law ‘was an overreaction to an extreme situation’. Yet, we must take great care with this viewpoint. It is offered by those on the economic right, and comes from a school that was instrumental in deregulating the sector prior to the Financial Crisis (proponents such as Professor Charles Calomiris will argue that Universal Banking was not at fault for the Financial Crisis, with his and many of his supporters arguing that federally-backed mortgage institutions Fannie Mae and Freddie Mac were actually at fault).

Another viewpoint into the reasoning behind the Glass-Steagall Act is in relation to the ‘House of Morgan’. The banking empire established by the legendary J.P. Morgan forms one half of an epic battle that saw the US legislative arena caught in the middle. According to Rothbard, Morgan and the Rockefeller Family, led by John D., would grow within their respective fields but the families would come to blows as the competition heated up within the all-important banking sector. Rothbard suggests that the Rockefellers sought to lobby and secure the loyalty of certain politicians in order to dismantle the House of Morgan once and for all and, with the Morgan’s decision to opt for commercial banking rather than its stalwart investment banking arm, Rothbard suggests that aim was finally achieved. The entire story, which revolves around the development of the Federal Reserve and the sheer dominance of the Morgan empire, is worth studying but it all leads us back to the Glass-Steagall Act. It is apparent, for whatever reason, that the Act was a coerced movement based upon political and environment-altering manoeuvrings. If we accept that to be true, then it calls into question the legislative process of the time and, one may reasonably argue, the legislative process in general. It also casts a shadow on the reverence paid to the Act by Cicilline. It will be best left for another post, but the deregulation of the Act and its provisions in the 1990s is not so straightforward either (we should not be surprised), so the reality is that it is extremely dangerous to use something which has not been analysed properly as the basis for a future legislative or regulatory agenda.

The Glass-Steagall Act did, on the face of it at least, work. However, there are so many elements to consider a. in its construction and b. in its effect, that it becomes very difficult to say whether it can be heralded in the way that Cicilline speaks of the Act. For the technology industry, and the social importance of its leaders, it is vital that some control is exerted over their operations. In that sense, Cicilline is absolutely right. However, the arguable effect of the Glass-Steagall was to cartelise the banking industry which, if we connect history lineally, is a direct cause of the concentrated banking arena we witness today in the US (and this then has a global effect). There needs to be impartial studies undertaken on the potential effect of separation within the technology industry because the penalty for not doing so, if we use the banking industry as the example, would be massive for society. A technology industry that is more cartelised than it is now is not beneficial for society at all – the legislative body must take great care in this particular arena, and now is not the time for romanticising the past.


Keywords – Technology, Legislation, Banking, Finance, U.S., @finregmatters