Market Abuse global review
Two weeks ago NYT titled: ” Too rich to jail” and The Times UK a few months ago: “less than 10 prosecutions in the past 5 years”. How do we detect Market Abuse fraud and why is it so hard to deal with?
Market Abuse is a critical issue for regulators worldwide and they really struggle today to completely deal with. It can be very hard to detect so financial regulators, certainly in the UK, have invested heavily in systems and improved technology to identify market manipulation, insider dealing and suspicious transactions. Inevitably, they get judged on their success rate, meaning the number of prosecutions and convictions they get, but the difficulty for them is that these are very time consuming and expensive cases which use up a lot of resources. In one case, for example, the FCA (Financial Conduct Authority) prosecuted five people which took eight years from inception to trial, thousands of hours of work to piece together the evidence and bring those people to court. Criminals in that area are often sophisticated and they don’t make it easy for investigators to detect theses frauds so it takes a huge amount of effort. So this is the main reason why you don’t see so many cases being brought. It’s not because there is a lack of will or appetite on the part of regulators, but it’s just very time consuming and expensive to prosecute these types of cases.
What are the means used by the authority to track it and treat it?
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Anybody who trades on markets has to file information on a real time basis, so the authorities have huge data feeds coming in on trades which they analyze to identify manipulation and abuse and which is very helpful. Still the biggest challenge for the regulators is to find the adequate resources. Consequently, the regulators quite often will decide not to bring a criminal case but will rather treat it as a civil matter. It’s a decision they have to take in each case, whether to treat it as criminal matter or as a regulatory/civil case which is much easier because you can negotiate the fine and get to a quicker settlement. It’s not easy but it’s often a lot quicker for the regulator to treat it as civil case.
So the idea is to sap the criminal’s motivation at all levels?
Correct. A criminal trial is incredibly expensive because they have to brief barristers, bring specialists to present the evidence to the court, all this typically takes weeks in court with a jury, with very high costs, and even if at the end of the day they succeed and the defendant is ordered to pay costs, it’s still very expensive. So it’s much better to go to for some settlement and get the message out to the market much more quickly saying “If you do this, we’ll punish you”.
In Israel, the Dankner case show you can get big fish, is it a choice of strategy?
In the UK for example, the Financial Conduct Authority has investigated one or two senior traders in large investment banks but, generally speaking, the people they have prosecuted have not been big players. In the US on the other hand, they like to get “big scalps” of famous names, so yes it’s a success for the Israeli authorities from that point of view.
Nevertheless, there is a new approach towards regulatory enforcement today led by the Director of Enforcement of the Financial Conduct Authority in the UK which is to investigate many more firms and individuals, but not necessarily to bring cases at the end of it. The number of investigations has increased quite significantly but they are not always finding a way through to public outcomes. Many cases have been discontinued, sometimes at early stage. But the idea is to go out wider, investigate more people and recognize that in some cases that’s not going to lead to anything and they say: “We are fine about that, it doesn’t mean we were wrong to investigate, sometimes we’ll find evidence, sometimes we won’t.” Whereas previously they were setting the bar very high in terms of starting an investigation and they would not start to investigate unless they would be very certain that there had been a breach. But the law says you can investigate if you suspect there might be a breach so there is a difference between saying “I am 99% certain you are guilty so I am investigating” as opposed to “Well, there is 60% chance , not sure, but there are some grounds you are guilty so let’s take a look into it”. So they are taking a broader approach. And remember that nobody likes to be under investigation so this approach has a very effective impact on anyone who would think twice before he violates the law.
Whistleblowing: Internet is a way of spreading fake news and rumors. Does it enhance the extent of the problem of market manipulation? What can be done?
I think that’s probably an emerging trend and challenge for the regulators, and I’m not sure they are know how to address that. Technological change, use of internet and data is a massive challenge for the regulators, so that’s one example of emerging challenges. I have not yet seen that in practice but I suspect that’s could be the next wave.
Looking back and with hindsight, why did it actually happen?
Brexit is probably the most contentious and divisive political issue I can recall in my lifetime. I can’t think of anything else in the UK where the country has been as divided as with Brexit. It’s an earthquake which divides families and friends. It’s almost like a civil war. So yes, it’s difficult to overstate, but having said that, I think people are now fed up and really want it to be finished and get done. Last week’s delay in the Brexit vote in Parliament, which was so crucial, has added more to the uncertainty. This is a terrible political failure and a major concern for the future. Everybody recognizes that “no deal” is extremely bad for the UK and for the EU. So If we don’t accept this deal, can we get a better one? Probably not, leaving us with more uncertainty, more pressure for a second referendum. This is definitely one of the most uncertain times that the UK has gone through in modern times.
How did Brexit affect London as the heart of financial activity at least in Europe?
I think the problem is that Brexit hasn’t actually happened yet and we still don’t know exactly how it’s going to manifest itself. It’s only quite recently that we have been able to see the terms of the deal the Government has struck with the EU. In terms of financial markets and the financial services industry, clearly a lot of them have been making contingency plans for some time and they are having to implement them now. We haven’t yet seen some of the worse effects in terms of firms leaving the UK or transferring their operations to Paris or elsewhere. But having said that, some big firms like Goldman Sachs have moved parts of their business to countries in the EU, some people have been moved to Frankfurt, other companies have moved people to Dublin, to the Netherlands, to Paris. But if you look at the Bank of England’s latest predictions for the worst case scenario of a “No Deal”, that’s really scary, we are talking of unemployment going up to 7%, inflation to 6.5%, property prices collapsing by 30%, GDP shrinking. Some people think they are scaremongering, I don’t believe that I don’t think the Bank of England – which is an independent institution – would be that irresponsible, and what they say is quite scary. But I don’t think we’ll end up with “No Deal” despite the political crisis we are going through now. It’s been an extraordinary couple of years with parallels drawn with the financial crisis ten years ago.
Do you see any impact out of the UK? In particular, could Brexit weaken European stability?
It’s a major crisis, the EU knows that and they don’t want the UK to leave. Last week we had the decision of the European Court of Justice, saying that it is possible for a country to revoke Article 50. That reflects the feeling in Europe that the EU will be significantly weakened by the UK leaving. They are worried by the precedent that it sets and that if another significant country would follow Britain’s leave, that would be “Game Over” for the EU. The EU will do what they can to keep the Union together. So the EU is in a bind because if they give the UK too good a deal, that will encourage other countries to do so too. If they give the UK a really bad deal, then the UK will reject it and that would lead to a chaotic situation for everyone. So there has to be a compromise and I suppose that’s what we’ve got in a way. But the problem is that many people think that the deal the PM has negotiated is in some way the worst, worse than being in the EU because it still ties us to the rules without having any say on what the rules are. In addition, you got this huge problem with Northern Ireland and the border and until that can be solved, it’s very difficult to see how all this will be resolved.
Despite that, we see quite a lot of investors, Israelis among them, showing interest in the British market, especially Real Estate. Is the UK still worthy to invest in?
The UK still has a lot of going for it, no question about it. Actually, at the moment unemployment and inflation are not too high, a weak pound, on the other hand, is good for foreign investors, and there is a feeling that a lot of money is coming in the UK, although it is bad for British citizens traveling abroad. Of course, that raises questions about the risk of money laundering as some people fear. But besides that, Britain has been a good place for people to invest for many years and that will continue because the fundamentals are still strong.
The financial data security breach, A global threat:
Nearly half of all UK businesses have reported one attack or attempt of attack in the last year. What about financial institutions?
There is no doubt that Cybercrime is one of the greatest risks to the financial system that we face. I know that this is something the Bank of England and the FCA are both very concerned about. It is one of the highest priorities, obviously banks are a target because as people say “why bother robbing banks when you can just hack them through their computer system from the other side of the world, it’s a lot safer…” So no doubt that the pressure on the banks to maintain defenses against cybercrime will continue to increase. At the same time, it’s linked to another broader computer related problem where banks IT system crash, preventing people from accessing their accounts. In those cases too, banks are heavily punished by the regulators when a major IT failure occurs so IT security and system stability are absolutely top priorities for the banks Also, these problems often happen when firms merge and they try to integrate multiple computer systems; that can be a nightmare and frequently leads to significant problems.
Like for almost anything, money fuels terrorism, that’s why CFT (Combatting Financial Terrorism) addresses the problem from the money side by detecting suspicious financial transactions and tracking down all parties involved in the transactions.
What are the ways to fight Financial Terrorism:
More generally, the fight against money laundering has been the subject of specific legislation in the UK for over 15 years. Addressing financing crime like money laundering and terrorism financing, is causing a lot of banks to close accounts – even though that can create difficulties for innocent people as well unfortunately – and taking a much tougher line on money laundering and terrorist financing. It’s interesting that one of the trends today is that the authorities use their powers to investigate suspected breaches of the Money Laundering Regulations more and more as criminal cases. This is a relatively new phenomenon. Previously such breaches would not have been treated as a criminal matter, only as a regulatory infrigement with fines, but today the authorities are undertaking a number of criminal investigations in cases involving the Money Laundering Regulations. In recent years a number of banks have been heavily fined for having inadequate anti-money laundering systes and controls. So Terrorism Financing, Money Laundering and Cybercrime continue to be a very high priority for the authorities.
What about the means, do they go through specific training programs?
Yes, in the UK there is now for banks a new accountability regime called the Senior Manager Regime with much clearer and sharper responsibilities on senior individuals in banks. A part of that regime means that the firms have to train all their relevant staff on the new conduct rules. Money laundering training and awareness are certainly very much part of that. So I can see situations where firms may well end up getting fined for not properly training people. Quite often the cases brought by the regulator in the UK highlight the fact that the firm did not provide adequate training. Not that there was no training, but it was too generic. A high-level computer-based training program is not likely to be enough, it needs to be specifically tailored to the business and to individual areas of the business. If you are doing Trade Finance, you need to understand what the risks are in that area, the same for asset financing or retail banking. You can’t just buy an off-the-shelf product and tell the regulator that you are providing training, that’s rarely going to be sufficient.
It looks like banks take much more proactive measures today, do you see a change in their mindset?
They have to. In the UK during the last 12 years there has been a number of laws passed, starting with the Bribery Act in 2006 and, more recently, the Criminal Finances Act which is aimed at making sure that banks, in particular, are not facilitating tax evasion and this has been identified by the G20 as a key target area. So we now have really tough laws which mean that you could be guilty of an offense unless you can show that you took adequate measures to prevent bribery or tax evasion, and the obligation is on the bank to establish that it has taken adequate measures which obviously means training, monitoring, but also knowing their customers and understanding what could be suspicious and having a much better understanding as to the rationale for transactions. Banks can’t shut their eyes to what their customers are doing and say “we don’t know about that…”, that wouldn’t be an adequate answer. I think proactive measures are absolutely vital in today’s environment.
How critical is International cooperation?
Clearly, the world today is far more interconnected, as are financial systems, and criminals, as we said, can sit on one side of the world and hack systems on the other side, moving money at the press of a few buttons. So more than ever it is vital that the authorities do collaborate and cooperate with each other and they do so, I am seeing this. If I think back to the early cross-border regulatory investigations I have been involved in, there was definitely more sense of competition between the authorities and they didn’t necessarily cooperate very well. I think that it is changing in many ways. For example, the new Director of the UK Serious Frauds Office, Lisa Osofsky, is a dual UK and US citizen, formerly a prosecutor in the US, Deputy General Counsel at the FBI and then Money Laundering Reporting Officer at Goldman Sachs in London. Given her background with an international mindset, I do expect we’ll see greater cooperation and an international approach between authorities worldwide. 2008 – 2018 crisis:
2018 is the tenth sad anniversary of the 2008 big subprime crisis which occurred 10 years after a very similar credit crisis in Japan. It looks like bank memory doesn’t exceed 10 years. What did we learn since then? Can it happen again?
There has been lot of change in the last 10 years and the authorities are taking lot of steps to try make sure that if it did happen again the outcome wouldn’t be so devastating. So, for example, banks have to hold much higher capital than they did and the stress tests that bank carry out in the UK are really designed to ensure that banks could withstand much higher shocks than previously.
The other thing that has changed of course in the UK in the process known as ring-fencing between retail banking operations and investment banking operations so that retail customers are ring-fenced and protected if the investment banking arm of an institution gets into difficulty as happened before. That was a fairly radical intervention to make banks set up separate legal entities with separate boards. It’s been a major exercise for the banks in the UK even though it only affects the largest but it’s been huge for them. The cost for a single bank is as high as 100 million Pounds to implement these reforms. So yes it’s very costly for the banks, and steps like that were clearly designed to ensure that if there were another crisis it wouldn’t have the same impact.
What about non-bank institutions like insurance companies?
Insurance companies have their own solvency requirements and regulations and there too the regulators are working at better defining what each individual responsibilities are. One of the problems under the old regime was that it was often difficult for the regulators to find who was responsible for what because it was blurred. Now they have to have a formal statement of responsibilities which they have to sign, each one in his area of responsibility. It’s still early days but the intention is to make sure people take their responsibilities, whether at the top of a bank or insurance company, very seriously.
crypto money has raised much criticism and skepticism worldwide since it has appeared. Today the Israel Tax Authority announced it has detected and warned hundreds of citizens having revenues in virtual money and for which they didn’t report.
In what extent crypto money is used as tax evasion and other illegal activities?
I am certainly aware that crypto currencies can be used by criminals as a way of hiding the proceeds of crime and that’s probably the aspect that most worries the authorities and how they can regulate that whole developing area of the financial markets. But I don’t think anyone has got the answers yet, it’s a work in progress, it’s evolving, we will probably see a lot of change in the next two or three years.
Maybe the answer is in the graph as we see a major crash of bitcoin value these days?
(laughs)… There is indeed skepticism, but there are many people still thinking this is the future so we’ll have to wait and see.
Why did Sidney Myers decide to join a firm like Asserson?
First of all, Trevor [Asserson, the firm’s founder] and I, have been friends for over 40 years since university and I have a very high regard for what he has achieved here. He made Aliyah 13 years ago and set up a firm which has grown to 40 lawyers today in TLV and London. What he has achieved is quite extraordinary. It is a fully developed, full-service English law firm in the heart of TLV targeting global clients, it’s really quite amazing the way he brought London to TLV, so it gives me the opportunity to work in London, in TLV and elsewhere around the world. I have always had a very international practice, I’ve worked all over the world, in Europe, the US, and Asia (including two years in Hong Kong) so I see it as a further development and it’s a really exciting one.
On a more personal basis, I have a non-professional link with Israel. I am a trustee and the incoming Chairman of the British Friends of Boys Town Jerusalem, an amazing school for 950 boys coming from very disadvantaged backgrounds who need care and help. This school provides the boys with a first-class education, and the results are really fantastic. I am very proud to be associated with such a wonderful institution.