Compliance News | April 2024

Posted by

Lynne Callister

on 30 Apr 2024

This month's key compliance news includes Terraform's expected penalty, an apology from Binance's 'CZ', Taylor Swift ticket scam, Commerzbank's AML fine, and more.

Compliance News April 2024

Our pick of key compliance stories this month

SEC wants $5.3bn penalty for Terraform & Do Kwon

US regulators are pushing for a fine of $5.3 billion against Terraform Labs and its co-founder Do Kwon after they were found liable for civil fraud earlier this month.

The US Securities and Exchange Commission is pressing for a $4.7 billion penalty in disgorgement and interest for their role in the collapse of the cryptocurrency exchange in 2022. It also demands civil penalties of $420 million for Terraform and $100 million for Do Kwon.

"The Court should send an unequivocal message that this sort of brazen misconduct, and Defendants' misbegotten attempt to excuse their behavior by crafting new rules and standards of behavior for crypto markets in contravention of the federal securities laws […] will not be tolerated,"

- the SEC

Earlier this month, Terraform and Do Kwon were found liable for misleading cryptocurrency investors about the safety of its algorithmic stablecoin Terra USD (UST). Investors were defrauded by the scheme, which was claimed to have triggered losses of $40 billion.

After the verdict, the SEC's Director of Enforcement, Gurbir Grewal, said that Terraform and Do Kwon had "caused devastating losses for investors and wiped out tens of billions of market value nearly overnight."

The SEC described the penalty as "conservative" but "reasonable", given the huge profits netted by Do Kwon, who is currently fighting extradition to the US.
Terraform was said to be "disappointed" and is contesting the size of the penalties. It has faced criticism for allocating $166 million in retainers to its legal team, essentially diverting funds from creditors.

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Binance co-founder says sorry before sentencing

Binance's co-founder Changpeng Zhao ('CZ') faces up to three years in prison and a $50m fine, according to the sentencing memo filed by the US Department of Justice. 

In a letter to the judge, CZ apologised for his "poor decisions" and accepted "full responsibility" for his actions. Zhao said, "There is no excuse for my failure to establish the necessary compliance controls at Binance", promising that this would be his only "encounter with the criminal justice system".

Alongside his letter, there were 161 letters of support from family, friends and others, including from his sister, a former MD of Morgan Stanley, who said her brother had made mistakes but lived to do well for others.

Zhao - who famously said, "Better to ask for forgiveness than permission" regarding Binance's compliance with the law and bragged that Binance would not be "as big as we are today" if it had complied with the law - pleaded guilty to money laundering and breaching international financial sanctions in November last year. 

Key takeaways:

  • Watch out for the key compliance personas (i.e. the habitually compliant, the accidentally non-compliant, and the wilfully or deliberately non-compliant) - remember to respond to each of them differently to reduce the risks.
  • Look out for red flags - signs of dissatisfaction, pressure to meet targets, greed, ignorance of the rules, failure to take compliance seriously, poor or ambiguous "tone from the top", and more, which can all increase the risks to the business.
  • Know the challenges faced by people working in vulnerable areas - for example, those in Account Management may execute client instructions without realising they are laundering money, someone in Sales or Procurement could give or receive bribes to win business or secure contracts, counter staff may allow fraudulent withdrawals, facilitate identity fraud, or account takeover deliberately or inadvertently, and so on.
  • Train your team to spot the risks - encourage them to be vigilant and know the signs.
  • Prepare for the new "failure to prevent fraud" offence - under the Economic Crime and Corporate Transparency Act, businesses will be made liable for fraud committed by associates. Make sure you have the right compliance procedures in place.
  • "If you think compliance is expensive, try non-compliance."

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Addict's £186k theft cost colleagues their jobs

A Wirral man has been jailed for six years after stealing £186,000 from his employer. He used the money to fund his gambling.

Daniel Remmington committed a number of thefts while working as a cashier for Liverpool Motor Auctions. He stole £186,000 between March 2019 and April 2020 to fund his gambling addiction, making substantial payments to his Halifax account. He hid his deficit by misreporting vehicle sales.

His crimes ended when the business stopped operating during the first COVID lockdown. As a result, the business became insolvent, and people lost their jobs.

"This was a lengthy and complex fraud investigation, and I'm thankful that a jury saw through Remmington's lies and found him guilty of the offence," said Detective Inspector Chris Hawitt.

"I hope this case highlights that stealing from a business is not a victimless crime and can impact innocent people. Sadly, a number of people lost their jobs and this would not only have affected them, but also their families who would have been distressed and worried."

"This impact was clearly lost on Remmington, and he will now be left to consider the full consequences of his actions behind bars." Remmington was found guilty of fraud by abuse of position at Liverpool Crown Court.

Key takeaways:

  • Use Cressey's fraud triangle to help understand the risks - the three elements of motivation/pressure, opportunity, and rationalisation (justification) may be present when someone commits fraud.
  • Be vigilant and alert to the potential red flags in someone's behaviour that pose an increased risk - such as living beyond their means, gambling, indebtedness, being overly protective of clients, and so on.
  • Conduct due diligence - check references, and credentials and carry out vetting, especially on those appointed to high-risk roles.
  • Arrange monitoring and oversight - of those working in vulnerable or high-risk roles to ensure they do not put the business at risk.
  • Implement systems to detect and prevent fraud, such as four-eye checks, dual controls, etc.

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Bet365 fined £582k for customer inadequacies

The UK Gambling Commission (UKGC) has fined Bet365, one of the UK's biggest online gambling operators, £582,000 for customer inadequacies. The regulator said it had found weaknesses in Bet365's processes in terms of its anti-money laundering and social responsibility obligations.

Among UKGC's concerns were:

  • Bet365's inadequate customer due diligence, including verifying the source of funds used for gambling
  • Failure to conduct sanctions screening checks on new customers before the first deposits were made
  • An overreliance on customers' self-verification of Know Your Customer (KYC) information (e.g. ID documents)
  • Weak transaction monitoring, with poor systems of identifying suspicious activity, enabling potential laundering
  • Bet365's systems for detecting and preventing problem gambling, including failure to flag concerning patterns of play and not offering support

"We expect high standards from operators in terms of keeping gambling safe, fair and crime-free, and will always take action to correct any failings. This operator is very aware that a repeat of these failings will result in escalating regulatory action,"

- Kay Roberts, the UKGC

All of the £582k will be directed towards socially responsible causes. Bet365's revenue grew to £3.39 billion last year.

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Lloyds warns 'Swifties' after hundreds scammed

Lloyds Bank issued an "urgent warning" to Taylor Swift fans ('Swifties') after over 600 customers lost money to scams.

It said there had been a surge in fraud cases targeting Swifties who were desperate to bag tickets to her sold-out UK shows part of the Eras Tour. UK fans had lost over £1m to fraudsters since tickets went on sale, with an average of £332 lost per customer.

Lloyds said ticket scams flooded social media, 90% of which began on Facebook. And those aged 25-34 years were most likely to be targeted. "With all UK dates now sold out, many more fans are likely to fall victim to ticket scams in the coming weeks and months, both leading up to the tour and once the concerts begin in June," said a Lloyds Bank spokesperson.

Demand for tickets will likely grow following the release of the songwriter's latest album, The Tortured Poets Department (TTPD), which smashed records, debuting at Number 1 on the Billboard 200 charts.

"Buying directly from reputable, authorised platforms is the only way to guarantee you're paying for a genuine ticket … If you're being asked to pay by bank transfer, particularly from a seller you've found on social media, that should immediately set alarm bells ringing,"

- Liz Ziegler, fraud prevention director, Lloyds

Elsewhere, the US Department of Justice plans to sue the concert promoter Live Nation, parent of Ticketmaster, for anti-competitive practices. Its market dominance harms consumers, leaving them vulnerable to exorbitant processing fees, surcharges and ticket touts.

Artists, rival promoters and ticket sellers accuse it of using its monopolistic position to withhold the best shows from those venues that don't use Ticketmaster.

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Watchdog issues Commerzbank a €1.45m AML fine.

According to Germany's financial watchdog, Commerzbank has agreed to pay €1.45 million for failings in its anti-money laundering systems.

In a statement, BaFin said, "Commerzbank AG and the former comdirect Bank AG, of which Commerzbank AG is the universal successor, had breached their supervisory duties."

Namely, it failed to update customer data on time and was unable to implement proper security measures, resulting in insufficient due diligence checks, which violated its anti-money laundering obligations.

The breaches relate to the online bank Comdirect, which Commerzbank took over in 2020. Commerzbank said it had reworked due diligence processes and updated customer data following the acquisition.

"Processes were adjusted accordingly, and the data updates were completed in full in 2022," it confirmed, meeting BaFin's requirements.

In November 2023, Commerzbank received a cryptocurrency custody licence from BaFin, the first to obtain such authorisation. The licence allows them to offer digital asset services, specifically cryptocurrency assets.

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RBC fires finance chief for undisclosed relationship

Royal Bank of Canada (RBC) has fired its Chief Financial Officer (CFO), Nadine Ahn, and an unnamed employee for violating the bank's code of conduct.
Its code of conduct says:

''While we are all held to the high ethical standards set out in our Values and the Code, those of us who are people managers are accountable for leading by example'' by ''being respectful, transparent and fair in all relationships''.

An investigation found that Ahn had an "undisclosed close personal relationship with another employee, which led to preferential treatment of the employee, including promotion and compensation increases".

The Toronto-based bank said that there was no evidence of misconduct relating to RBC's financial statements, strategy, financial or business performance.
Ahn had worked for the bank for two decades. As is standard when executives are terminated, RBC is unlikely to pay severance, and Ahn may now forgo other bonuses.

It's not the first time executives have faced dismissal for undisclosed relationships at work. In September 2023, the Chief Executive of BP, Bernard Looney, stepped down after 'historical relationships'.

Earlier in the year, McDonald's former CEO Steve Easterbrook was fined £400,000 for misleading investors and recklessly failing to disclose improper or inappropriate relationships.

Key takeaways:

  • Promptly disclose conflicts of interest - so they can be managed properly and minimise the risks to our business and reputation.
  • Make it easy for people to review and update their CoI disclosures - the easier it is to do this, the less chance there will be for inadvertent slips.
  • Don't forget about employees in senior positions - their exposure will often be greater, with a potentially bigger impact if things go wrong.
  • Encourage trust, openness and understanding - remember, many people meet their spouses and partners at work. Conflicts of interest aren't wrong, but they must be managed carefully to protect our reputation.

Free Conduct Rules Training Aid

Barclays Capital pays $700k for conflicts of interest

Barclays Capital has agreed to pay $700k to settle claims by the Financial Industry Regulatory Authority (FINRA).

FINRA alleged that research analysts at Barclays Capital violated conflict of interest rules. Under FINRA rules on conflicts of interest, firms must put sufficient policies and procedures in place to prohibit analysts from trading in a security manner that's inconsistent with the analyst's published rating of that security. They are also required to disclose if analysts have a financial interest in a company's securities covered in the report.

Between January 2016 and August 2019, Barclays Capital fails to establish and maintain a supervisory system to comply with the rules.

This resulted in the firm failing to disclose 99 cases where research analysts held stock in companies in which they published a report and three instances where research analysts traded in their brokerage accounts in a manner inconsistent with published recommendations, the regulator alleged.

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Continental fined €100m for supervisory breaches

Continental, the automotive supplier, has been hit with a €100 million fine
Hanover's state prosecutor said the fine had been issued after an investigation into the group as part of the emissions-rigging scandal.

It alleged that Continental had breached its supervisory duties concerning the supply of engine control units and engine control unit software. It relates to the activities of Continental's former powertrain business. The company failed to prevent its staff from participating in the emissions fraud.

The fine comprises a penalty of €5 million and a €95 million levy of economic benefits. In a statement, the company said that the fine took into account its full cooperation and now strengthened compliance, including the expansion of its technical compliance systems. It will not appeal.

"It is important and in our own interests that we draw a line under the fine proceedings. We have made the topic of integrity our top priority, creating a new organizational structure and mandating intensive training for our employees. We are committed to this process and will continue to invest in the integrity of the company,"

- Olaf Schick, Executive Board member, Integrity and Law

Other suppliers have also faced charges for their role, including ZF Friedrichshafen and Bosch.

The Dieselgate scandal was uncovered in 2015 with the discovery that cars were fitted with illegal software designed to cheat the environmental emissions tests. Volkswagen has said the scandal has cost it over €30 billion in fines and damages so far.

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Designer jailed for wildlife smuggling

Nancy Gonzalez, the Colombian fashion designer, has been sentenced to 18 months in prison for wildlife smuggling.

Gonzalez, whose luxury handbags were worn by Britney Spears and Victoria Beckham and exhibited at New York's Metropolitan Museum of Art, pleaded guilty in a Miami court to illegally importing handbags made of caimans and pythons.

Officials claimed the 71-year-old got relatives and couriers to transport her bags on commercial flights to fashion events and showrooms. Those couriers were instructed to pass them off as gifts for relatives if challenged by customs officials.
Prosecutors claimed that Gonzalez's goods fetched up to $2 million.

The hides came from caimans and pythons that were bred in captivity. While not banned, the trade is regulated under CITES (Convention on International Trade in Endangered Species of Wild Fauna and Flora) rules. However, Gonzalez failed to obtain the correct authorisation or permits from the US Fish and Wildlife Service, passing them off as samples or gifts instead. She was previously warned about this by US officials in 2016 and 2017.

"This investigation uncovered a multi-year scheme that involved paid couriers smuggling undeclared handbags made of CITES-protected reptile skins into the US to be sold for thousands of dollars. The Service will continue to seek justice for protected species exploited for profit, and we will hold accountable those who seek to circumvent international controls meant to regulate their sustainable trade."

- Edward Grace, the US Fish and Wildlife Service

Gonzalez apologised, saying, "I never intended to offend a country to which I owe immense gratitude. Under pressure, I made poor decisions."

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