United Kingdom Financial Conduct Authority Fines Goldman Sachs £34.3 Million for Transaction Reporting Failures

On March 28, the United Kingdom Financial Conduct Authority (FSA) announced that it had fined Goldman Sachs International (Goldman Sachs or GSI) £34,344,700 for failure to provide accurate and timely reporting relating to 220.2 million transaction reports between November 2007 and March 2017.

The FSA requires that financial institutions submit to it transaction reports – i.e., data sets

that relat[e] to an individual financial market transaction which includes, but is not limited to, details of the product traded, the firm that undertook the trade, the trade counterparty, the client (where applicable) and the trade characteristics, price, quantity and venue.

The FSA’s rules on transaction reporting are based on the European Union’s Markets in Financial Instruments Directive (2004/39/EC) (MiFID) (until January 2, 2018) and MiFID II (thereafter).

According to the FSA, Goldman Sachs

failed to ensure it provided complete, accurate and timely information in relation to approximately 213.6m reportable transactions. It also erroneously reported 6.6m transactions to the FCA, which were not, in fact, reportable. Altogether, over a period of 9 and a half years, GSI made 220.2m errors in its transaction reporting, breaching FCA rules.

The FCA also found that Goldman Sachs

failed to take reasonable care to organise and control its affairs responsibly and effectively in respect of its transaction reporting.  These failings related to aspects of GSI’s change management processes, its maintenance of the counterparty reference data used in its reporting and how it tested whether all the transactions it reported to the FCA were accurate and complete.

Because Goldman Sachs agreed to resolve the case with the FSA, it qualified for a 30 percent discount in the fine amount, resulting in a final amount of £34,344,700.

Note:  This resolution with Goldman Sachs — the latest in a series of 14 fines that the FSA has imposed on financial firms for transaction reporting violations — is noteworthy in two respects.  First, the number of transactions associated with Goldman Sachs’s reporting failures is the highest of any of the MiFID resolutions, and 62 percent higher than the next-highest total in the UBS resolution.  As the FSA’s March 27 Final Notice in the case makes clear, the 220.2 million challenged transactions represented approximately 15 percent of the total of 1.5 billion transactions that Goldman Sachs submitted during the relevant reporting period.  Second, the £34,344,700 fine is the highest of any of the 14 fines.

This resolution provides yet another indication that financial entities subject to MiFID reporting requirements need to see that their MiFID compliance programs are operating consistently and effectively.  While the FSA credited Goldman Sachs with devoting “significant resources . . . to ensuring accurate transaction reporting and to remediating the causes of the failings,” providing full co-operation before and during the course of the FSA’s investigation, and self-identifying the majority of the errors to which the FSA’s Notice referred, those conclusions did not prevent the FSA from meting out a record fine for MiFID violations.

U.S. Court of Appeals Affirms 25-Year Sentence for Leader of $179 Million Fraud Scheme

On April 16, a panel of the United States Court of Appeals for the Seventh Circuit affirmed the sentence of Nikesh Patel, an Orlando businessman who had pleaded guilty to five counts of wire fraud for his role for his role in selling $179 million in fraudulent loans to an investment advisor, Pennant Management.  Patel and Timothy Fisher, the co-founders of First Farmers Financial LLC (“First Farmers”) in 2011, had obtained certification for First Farmers as a nontraditional lender engaged in United States Department of Agriculture (USDA) government‐guaranteed lending programs.  Patel and Fisher, however, obtained that certification by creating and submitting documents to the USDA that falsely represented First Farmers’ financial condition.

Thereafter,

Patel induced Pennant to acquire First Farmers loans by falsely representing that the company had millions of dollars in assets, cash on hand, and profits. None of this was true, but Patel and Fisher created false financial statements and balance sheets and provided these documents to Pennant. Based on these false documents, Pennant began investing with First Farmers.

Because the kinds of USDA-related loans that First Farmers purported to be originating and funding were eligible to have the USDA‐guaranteed portion of its loans resold to investors, and the underlying obligations of those loans were guaranteed by the United States, they were seen to be fairly risk‐free investments.

Over a 17-month period in 2013-2014, Patel sold 26 loan packages to Pennant for $179 million, for loans that First Farmers had purportedly issued.  In fact,

all twenty‐six loans were completely falsified—there was no borrower, no USDA guarantee, and no loan. Patel had forged USDA employee signatures on the loan packages, made up fake businesses as the borrowers, and created fake USDA loan identification numbers for these loan packages.

After receiving the funds, Patel and Fisher “used some of the proceeds to make ‘principal and interest’ payments back to the Pennant investors who had invested in the fund. These purportedly represented payments from real borrowers, but those real borrowers did not actually exist.”  Other uses of the $179 million included Patel’s buyback of approximately $26 million of three other fictitious USDA loans that Patel had sold to another investment advisor; and Patel’s spending of another $130 million “to purchase, renovate, and operate hotels,” and of further proceeds on other business ventures, personal travel and expenses, homes, cars, a boat, and gifts for friends and family.”

In September 2014, after “Pennant employees became aware of inconsistencies relating to the First Farmers loans and were unable to verify the existence or location of certain purported borrowers,” Patel was indicted and arrested on wire fraud charges in 2014, and pleaded guilty to a wire-fraud indictment in December 2016.  For most of the next year, Patel requested and was granted continuances of his sentencing date.  During that time, Patel represented, among other things, that he  was assisting the court-appointed receiver in obtaining additional funds to be repaid to victims.

In fact, instead of earning money to pay back his victims, “Patel and another associate used fictitious identities and entities to defraud an Iowa lender out of millions of dollars. Approximately $2.2 million of the money Patel had ostensibly earned to pay back the Pennant fraud victims was newly‐stolen money.”  In addition, Patel had made plans to abscond to Ecuador prior to his sentencing.  On January 6, 2018 – only three days before his rescheduled sentencing —

government agents arrested Patel at an airport in Kissimmee, Florida, as he attempted to board a chartered plane to Ecuador. In his possession, Patel had an Indian passport in his name, United States currency, documents relating to his attempt to obtain asylum in Ecuador, financial documents indicating access to accounts holding millions of dollars, and detailed checklists for tasks relating to obtaining asylum in Ecuador and setting up a new life there for himself and his family. . . . The documents in Patel’s possession indicated that Patel had planned his flight for months: he rented a house in Ecuador, opened bank accounts and transferred funds there, obtained a lawyer to help him through the extradition process, and purchased tickets for his wife and family to travel and meet him in the coming days.

Even after his arrest, “while in custody awaiting transfer to Chicago, Patel continued to direct his  associate on how to complete this pending fraud.”  The United States District Court then sentenced Patel on March 6, 2018, to 215 years’ imprisonment and  $174,791,812.50 restitution.

On appeal, the Court of Appeals considered and rejected arguments by Patel that the sentence was procedurally and substantively unreasonable.  On the first argument, the Court rejected Patel’s contention (among others) that his sentence was procedurally unreasonable because his codefendant Fisher had previously pleaded guilty to money-laundering charges and received only a 10-year prison sentence.  It took particular note of the fact that the sentencing judge “observed several times that it viewed Patel as more culpable, calling him the ‘most significant player’ of the two and noting Patel was ‘in the cat bird’s seat of impropriety’ with respect to Pennant.”

On the second argument, the Court acknowledged that “there is certainly a stark disparity between the sentence of 25 years Patel received and the statutory maximum of 10 years that Fisher faced (a sentence he ultimately received),” but added that Fisher’s much lower sentence did not negate the reasonableness of Patel’s sentence.  It pointedly commented that the record on appeal

reveals several major differences between Patel’s and Fisher’s conduct that warrants a disparity between their respective sentences.  Most notably, as far as the record reflects, Fisher did not engage in an entirely new fraudulent scheme while on bond, attempt to pass off the money received from that fraud as legitimate recovery for Pennant victims, and try to flee the country and seek asylum elsewhere.

The Court concluded that Patel’s sentence was not substantively unreasonable because of the disparity between his and Fisher’s sentences, and that Patel had offered no other reason to question its substantive reasonableness.

Note:  This decision does not break any new ground in reviewing the reasonableness of a white-collar defendant’s sentence under the federal sentencing guidelines.  It does, however, provide a reminder of the need for investment advisors to conduct appropriate due diligence with their counterparties – not only at the beginning of a relationship but throughout that relationship as well.  Even if the general type of financial products that an investment advisor is considering is considered fairly low-risk, as was the case with the USDA loans that Patel purported to originate and fund, investment advisors need to scrutinize with care any newly established firm that lacks an established track record of success in such products.  Failure to do so  could lead in some cases, as did Patel’s scheme, to severe, even ruinous, losses for individual, corporate, and governmental investors.

TSB Offers First-Ever Guarantee to Bank Customers Victimized by Fraud

On April 14, United Kingdom bank TSB announced the launch of what it termed its “Fraud Refund Guarantee.”  The Guarantee – which TSB characterized as a first in United Kingdom banking — “means that if you’re clearly an innocent victim of fraud on your TSB account, we will refund the money you lost from your account.”

TSB explained the scope of its Guarantee as follows:

All too often people who have money taken out of their account by fraudsters have to fight to get their money back. Even though this is the last thing you feel like doing if you’re the victim of crime.

Our Fraud Refund Guarantee means that you will get a refund even if you make an honest mistake. Whether you accidentally click on something you shouldn’t, or you share some sensitive information without thinking. As long as you’re an innocent victim, we’ll refund you.

TSB also stated two circumstances in which it would not refund money to a customer: (1) if a customer is “involved in committing the fraud”; and (2) if a customer “has been repeatedly affected by fraud, because they didn’t follow the advice we gave them to keep their account safe.”

TSB’s announcement stems directly from the catastrophic April 2018 information-technology migration at TSB that resulted in some TSB customers going weeks without banking services, 200,000 customer complaints, a loss of 80,000 customers, and some 1,300 customers being defrauded.  Then-Chief Executive Officer of TSB Paul Pester stated that the levels of fraudulent attacks had increased 70 times, as scammers conducted phishing calls, emails, and texts “purporting to be TSB and asking them to verify their bank details.”  In addition, United Kingdom Financial Conduct Authority (FSA) head Andrew Bailey reported that there had been approximately 10,600 fraudulent attempts relating to TSB’s IT catastrophe, and informed the United Kingdom Parliament that the FSA, jointly with the United Kingdom Prudential Regulation Authority, would investigate the TSB IT migration.

Note: Regardless of the circumstances prompting its announcement of the Fraud Refund Guarantee, TSB deserves credit for taking the lead in adopting a progressive approach to refunding its customers who are victimized by fraud.  While banks should be vigorously competitive in the products and services they offer, the concept that “fraud is not a competitive issue” should remain a vital component of any bank’s culture of compliance – particularly as cybercriminals have become increasingly sophisticated in their exploits and techniques and target banks and bank customers for massive frauds.  Adoption of a similar fraud-guarantee policy by other United Kingdom banks would not only serve to present a united front on fraud remediation, but also help to alleviate British bank customers’ widespread mistrust in their banks.

Libyan Government Seeks South Africa’s Assistance in Recovering $23 Million of Gaddafi Money

On April 6, The Telegraph reported that the Libyan government has asked the assistance of South African President Cyril Ramaphosa in recovering millions of dollars that the late Libyan ruler Muammar Gaddafi smuggled out of Libya and handed personally to former South African President Jacob Zuma before Gaddafi’s death.

In 2011, at the time of the NATO  intervention in Libya, Zuma, who was then South Africa’s President, reportedly “had disagreed with international military intervention in Libya and had offered Gaddafi asylum in South Africa as his regime crumbled.”  Although Gaddafi declined Zuma’s offer, he allegedly handed Zuma approximately $23 million, saying that “he will die in his own country” and adding, “’Please use this if I’m captured and taken to the International Criminal Court, find a good lawyer for me’. He said, “If I’m killed, please give it to my family”, a source told South Africa’s Sunday Times.”

Zuma then reportedly held the $23 million “for several years in an underground vault at his luxurious home in rural Kwazulu Natal, according to government sources,” but in February 2019 gave it to King Mswati of Eswatini (formerly Swaziland) “after fearing he would face charges over corruption allegations.”

The Sunday Times also reported “that the cash is now held by a relative of King Mswati’s who is employed by Eswatini’s central bank,” and that the King ”initially denied he had the Gaddafi money but reportedly admitted to knowing of its whereabouts when he met Mr Ramaphosa for the second time last week.”

Note: Even though the $23 million is only a fraction of the $20 billion in missing Libyan money that found its way to South Africa, this report is of interest in two respects.  First, it provides yet another example (as if one were needed) of Zuma’s pervasive condonation of corruption by others in high places. Although Zuma apparently deserves some modest credit for not pocketing Gaddafi’s funds upon Gaddafi’s death, and setting them aside for some future disposition, his hasty transfer of those funds to King Mswati suggests some degree of consciousness of guilt for retaining them for eight years rather than repatriating them to the Libyan government.

Second, it provides an additional perspective on the complexity of identifying and repatriating kleptocrats’ assets.  When heads of state facilitate the export and transfer of other heads of states’ stolen funds, it further complicates the process of tracing and recovering those funds.  If President Ramaphosa can obtain control over and repatriate the Gaddafi funds in Eswatini in the near future, it can set an example for other heads of state in demonstrating their countries’ active commitment to combating kleptocracy.

European Banking Authority Closes Investigation into Danish and Estonian Bank Regulators Over Danske Bank Oversight

On April 17, the European Banking Authority (EBA) announced that it had closed “its formal investigation into a possible breach of Union law by the Estonian Financial Services Authority (FSA)  (Finantsinspektsioon) and the Danish Financial Services Authority (Finanstilsynet) in connection with money laundering activities linked to Danske Bank and its Estonian branch in particular.”  The EBA’s terse release added only that the EBA’s Board of Supervisors had voted the day before to reject a proposal for a breach of European Union law recommendation.

Previously, the EBA had announced on February 19 that it had opened an investigation of the Danish and Estonian FSAs  under Article 17 of the EBA’s founding Regulation.  The abrupt end of the EBA’s investigation, however, sent vague and ambiguous signals about the basis and significance of that decision.

One report by EU Observer took the view that the Board of Supervisors’ action had “cleared Danish and Estonian financial regulators of breaking any EU laws in their handling of” the Danske Bank situation.  Reuters reported, however, that “[n]ational banking supervisors who control the [EBA} effectively forced it to clear” the Estonian and Danish FSAs.  All but one of the 28 national supervisors on the Board reportedly rejected the EBA’s recommendation.  That rejection, according to Reuters, “blocked any further legal action by the EBA against the Estonian and Danish supervisors and signaled EU states’ reluctance to let the bloc’s authorities investigate the exposure of their banking systems to financial crime.”

Note: The lack of transparency in this action by the EBA should satisfy no one.  Given the already white-hot glare of publicity over the Danske Bank scandal since last fall, and calls by the European Commission and European Parliament members for further inquiry into the FSAs’ oversight of Danske Bank, the EBA must have known, at the time it opened the investigation of the Danish and Estonian FSAs, that even that initial step would create a particularly dark cloud of suspicion over those FSAs.

For its part, the Board of Supervisors’ decision, while entirely within its authority, does nothing to dispel doubts about the capacity of the EBA to play any meaningful role in ensuring effective AML oversight within the Union.   If it truly concluded, on the basis of available evidence, that there is no basis to pursue the inquiry further against either FSA, the Board owes it to the Commission – and to the FSAs whose conduct was called into question – to say so in specific terms.