The ISC’s objective is to strengthen the cohesion between federal, state, and local agencies, enhance opportunities to collaborate on cases to protect investors, provide insight and guidance across the ecosystem to those who may not frequently operate in this space, and create an outlet to combat financial fraud.

The ISC launched with representatives from more than 100 departments and agencies, including federal agencies, state offices of attorneys general and state police, and local police departments and sheriff’s offices.

“The Interagency Securities Council will help front line investigators stay abreast of emerging threats and fact patterns to protect their communities from securities fraud, while supporting the efforts of federal, state, and local law enforcement partners across the country,” said Gurbir Grewal, Chair of the ISC and Director of the SEC’s Division of Enforcement.

“As financial frauds become more complex, investors benefit from the government – at all levels – working together and sharing information to protect and inform the public,” said Cristina Martin Firvida, the SEC’s Investor Advocate.

About the Interagency Securities Council

The ISC is open to law enforcement and regulatory agencies, and members participate in discussions with experts on emerging threats, hear from investigators conducting and supervising investigations, and explore case study examples of agencies employing innovative approaches to combat financial fraud. The ISC also serves as an opportunity to connect and share information with the larger law enforcement community that less frequently deals with securities law violations, such as police/sheriff departments and tribal- and military-community law enforcement.  

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According to the SEC’s complaint, Silvergate, Lane, and Fraher misled investors in stating that Silvergate had an effective BSA/AML compliance program and conducted ongoing monitoring of its high-risk crypto customers, including FTX, in part to deny public rumors that FTX had used its accounts at Silvergate to enable FTX’s misconduct. In reality, Silvergate’s automated transaction monitoring system failed to monitor more than $1 trillion of transactions by its customers on the bank’s payments platform, the Silvergate Exchange Network.

“At all times, but especially during moments of crises, public companies and their officers must speak truthfully to the investing public. Here, we allege that Silvergate, Lane and Fraher fell not only woefully, but also fraudulently, short in that regard,” said Gurbir Grewal, Director of the SEC’s Division of Enforcement. “Rather than coming clean to investors about serious deficiencies in its compliance programs in the wake of the collapse of FTX, one of Silvergate’s largest banking customers, they doubled down in a way that misled investors about the soundness of the programs. In fact, because of those deficiencies, Silvergate allegedly failed to detect nearly $9 billion in suspicious transfers among FTX and its related entities. Silvergate’s stock eventually cratered, wiping out billions in market value for investors.”

SEC Alleges Silvergate Misrepresented Its Financial Condition

The SEC’s complaint also alleges that Silvergate and Martino misrepresented the company’s bleak financial condition during a liquidity crisis and bank run following FTX’s collapse. The complaint alleges that Silvergate and Martino, in an earnings release and earnings call, understated Silvergate’s losses from expected security sales and misrepresented that it remained well-capitalized as of December 31, 2022. In March 2023, Silvergate announced it would wind down its banking operations, and its stock eventually plummeted to near $0.

The SEC charged Martino with violating certain of the antifraud and books-and-records provisions of the federal securities laws, and with aiding and abetting certain of Silvergate’s violations. The complaint also charges Silvergate, Lane, and Fraher with fraud and charges Silvergate with violating certain reporting, internal accounting controls, and books-and-records provisions.

Without admitting or denying the allegations, Silvergate agreed to a settlement ordering it to pay a $50 million civil penalty and imposing a permanent injunction to settle the charges. Lane and Fraher also settled the charges without admitting or denying the allegations, agreeing to permanent injunctions, five-year officer-and-director bars, and fines of $1 million and $250,000 respectively.

All the settlements require court approval, and Silvergate’s payment may be offset by penalties paid to the Board of Governors of the Federal Reserve System (FRB) and/or the California Department of Financial Protection and Innovation (DFPI). In parallel actions, FRB and DFPI today announced settled charges against Silvergate.  

Jacob Horowitz is a contributing editor at Compliance Chief 360° 

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In 2019, Humana brought a lawsuit against Walgreens arguing that the company had overcharged its customers by inflating medication prices for over ten years. Humana alleged that the pharmacy chain made that lower pricing available without accounting for it in its customary prices, which led to higher claims payouts. In 2021, an arbitrator awarded Humana a $642 million settlement which Walgreens contested, describing the ruling as a “miscarriage of justice.” The companies have now settled on a $360 million payout, $150 million of which was paid off last month.

Humana specifically claimed that Walgreens provided substantial discounts on its drugs to customers through its Pharmacy Savings Club but didn’t include those sales in its regular prices reported to insurers, causing an increase in claims. Walgreens has explicitly denied these claims and argues that their deals with Humana only require them to report regular retail prices, not the special rates for club members. The pharmaceutical company claims that the arbitrator deciding the case didn’t understand their agreements correctly and was partially biased due to his financial ties with Humana’s legal team.

While securing this settlement with Humana, Walgreens continues to face legal actions, including a lawsuit from Blue Cross Blue Shield alleging the inflation of prescription drug claims. The pharmaceutical giant has completed a large number of expensive legal settlements over the past years, including some that result from Walgreens’ involvement in the opioid epidemic.  

Jacob Horowitz is a contributing editor at Compliance Chief 360°

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Simon Chu, 68, of Chino Hills, California, and Charley Loh, 65, of Arcadia, California, were convicted of conspiracy to defraud the U.S. Consumer Product Safety Commission (CPSC) and failure to furnish information as required by the Consumer Product Safety Act (CPSA).

The defective dehumidifiers sold by Chu and Loh’s two corporations were included in multiple recalls of a larger number of defective dehumidifiers manufactured by Gree Electric Appliances Inc. of Zhuhai (Gree Zhuhai) in China. According to the recall notices, more than 450 reported fires and millions of dollars in property damage have been linked to the recalled Gree Zhuhai dehumidifiers.

Gree USA was sentenced in April to pay a $500,000 criminal fine after pleading guilty to failing to notify the CPSC about the problems with the dehumidifiers. The fine, along with provisions to pay restitution to victims, was part of a $91 million criminal resolution with Gree USA, Gree Zhuhai and another related Gree company, Hong Kong Gree Electric Appliances Sales Co. Ltd. This resolution is the first corporate criminal enforcement action ever brought under the Consumer Product Safety Act.

Requirement to Report Dangerous Defects

According to the indictment of Chu and Loh, Chu was part owner and chief administrative officer of Gree USA Inc. and another corporation in City of Industry, California, that distributed and sold to retailers for consumer purchase dehumidifiers that were made by Gree Zhuhai in China. Loh was part owner and chief executive officer of the same two corporations.

The Consumer Product Safety Act requires manufacturers, importers, and distributors of consumer products to report “immediately” to the CPSC information that reasonably supports the conclusion that a product contains a defect that could create a substantial product hazard or creates an unreasonable risk of serious injury or death. This duty also applies to the individual directors, officers, and agents of those companies.

The indictment alleged that as early as September 2012, Chu, Loh and their companies received multiple reports that their Chinese dehumidifiers were defective, dangerous, and could catch fire. They also allegedly knew that they were required to report this product safety information to the CPSC immediately. Despite their knowledge of consumer complaints of dehumidifier fires and test results showing defects in the dehumidifiers, the indictment alleged that Chu and Loh failed to disclose their dehumidifiers’ defects and hazards for at least six months while they continued to sell their products to retailers, for resale to consumers.

“Companies and their employees should immediately report known dangerous consumer products to the Consumer Product Safety Commission so the products can be recalled as soon as possible,” said Principal Deputy Assistant Attorney General Brian M. Boynton, head of the Justice Department’s Civil Division. “The Justice Department will prosecute companies and their employees when they willfully put the public in harm’s way by failing to report known dangerous products.”

“It is critical to hold corporate executives accountable for misconduct,” said U.S. Attorney Martin Estrada for the Central District of California. “The importation and sale of defective consumer products can lead to injury and death, and this verdict sends a clear message that putting profits over safety will not be tolerated.”

“The safety of the American public is the top priority for HSI, and products like these can turn an ordinary purchase into deadly consequences.” said Special Agent in Charge Eddy Wang for Homeland Security Investigations (HSI) Los Angeles. “HSI Los Angeles will continue to work diligently to ensure our supply chain is safe from products that can harm consumers.”

The jury acquitted both defendants on one count of wire fraud.  

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Sometimes the violations are fairly technical in nature and sometimes they are brazen frauds. Regardless, the fines and penalties can run into the billions of dollars. These examples remind us that compliance failures can be massively expensive, and its worth investing in the lines of defense that can help keep them from occuring, such as the compliance department, risk management, legal, and, of course, internal audit.

In just the last ten years alone, the number of fines has reached some staggering levels. From time to time, some banks get a little too zealous about padding their accounting sheets. When this happens, it can fall under the category of a bank scheme. From outright fraud to behaviors that are far from transparent or ethical, these are some of the biggest compliance fines in recent history that have been levied against financial institutions domestic and foreign. Let’s dive into the biggest compliance violations and penalties in the past decade.

14) HSBC — The AML Program that Wasn’t — $1.256 Billion

AML is short for anti-money laundering program. In short, banks are expected to uphold business practices and regulations that don’t support financial crimes. However, in 2012, the U.S. Department of Justice (DoJ) found that HSBC Bank USA had an AML program that wasn’t much more than for show.

Instead, the bank tended to look the other way regarding its foreign account holders and associated activities. HSBC was found in violation of the Banking Secrecy Act, Trading with the Enemy Act (TWEA), and the International Emergency Economic Powers Act (IEEPA) after evidence was uncovered of questionable transactions for clients in sanctioned nations like Iran, Cuba, Libya, Sudan, and Burma.

HSBC was found liable for aiding in the laundering of at least $881 million in drug-related finances over several years, leading to the $1.256 billion fine.

13) The MAN Group — Poor Trading Oversight — $1.312 Billion

Hedge funds aren’t immune to oversight from financial regulators either. The MAN Group is a storied hedge fund with a history that began in 1783 and is one of the largest publicly traded funds in the world. The brokerage division emerged as a separate entity known as MF Global in 2007, and that’s when the problems began.

To summarize, the firm was constantly found in violation of trading regulations, poor debt provisions, and even difficulty with maintaining liquidity to cover bad calls. While the company went bankrupt in 2011, the investigations continued into the company and its core directors — including the CEO John Corzine.

The Commodity Futures Trading Commission (CFTC) was the investigating party. While the company was ordered to pay $1.212 billion to customers from the Federal Court in New York, and a $100 million penalty with the CFTC, individual directors also paid heavy fines. Corzine himself settled with the CFTC for $5 million and agreed to a lifetime ban from CFTC markets.

12) JPMorgan Chase — The Worst Banking Client Ever — $1.7 Billion

You can’t have a “best of the worst” financial fines list without including Bernie Madoff. He’s known for having pulled off the largest Ponzi scheme in history — defrauding his customers while grossing an estimated $65 billion over several decades. In 2009, when the markets were still reeling from the bursting housing bubble, Madoff was found guilty of fraud and sentenced to 150 years in prison.

Meanwhile, contributing banking institutions like JPMorgan Chase were also found liable because of poor oversight that allowed Madoff to swindle his victims with impunity. To avoid prosecution, the multinational bank agreed to pay $1.7 billion in restitution to Madoff’s victims.

11) SAC Capital Advisors — An Inside Job — $1.8 Billion

Yet another hedge fund makes the list with one of the more considerable fines levied for insider trading. Insider trading is when an individual or institution gets advanced non-public information about a publicly traded stock, thereby giving them an unfair advantage over other consumer or commercial traders. SAC Capital Advisors had been under investigation by the Securities and Exchange Commission (SEC) for years but things came to a head in 2013.

The New York firm was found guilty of not just insider trading, but wire fraud and securities fraud. Along with a hefty $1.8 billion fine, several individual traders found themselves headed to jail. To date, this is the largest fine for insider trading in U.S. history. Of that amount, half was set aside for criminal fines and the other half for civil fines related to money laundering and forfeiture actions. Another result was the company and its subsidiaries being barred from ever taking any future outside investor funds.

10) Credit Suisse — Facilitating the Tax Dodge — $2.5 Billion

The desire to reduce your tax liability is normal. Engaging in deceit to do so is a great way to either see the inside of a jail cell or pay hefty fines. Credit Suisse was under investigation for years because of allegations regarding unscrupulous accounting to aid U.S. customers in falsifying income tax returns and accompanying documents that were submitted to the IRS.

However, the bank’s questionable arithmetic wasn’t just limited to the U.S. customers. Taxation agencies in other countries including Brazil and Germany also had their eyes on Credit Suisse. In the U.S., the bank was ordered to pay $1.8 billion. However, along with additional fines, the total amounts to $2.5 billion.

9) ‘The Cartel’ — The LIBOR Price-Fixing Scandal — $2.5 Billion

Price fixing is never a good idea, but sometimes even banks need to be reminded that monopolies are illegal. The LIBOR scandal involves criminal charges regarding a foreign currency exchange that involves several major multinational banks between 2007 and 2013. Citicorp, Barclays PLC, JPMorgan Chase & Co, The Royal Bank of Scotland plc, and UBS AG all pled guilty to felony charges for each member’s involvement in the scheme.

Simply put, forex (foreign exchange) traders at the banks worked in tandem to manipulate currency values between the U.S. dollar and the European euro for financial gain. As if this isn’t enough, the traders called themselves “The Cartel” and even initiated private chat rooms and codes to influence exchange rates.

Typically, the exchange rates were edited twice daily, at 1:15 PM for the European Central Bank fix, and at 4:00 PM for the World Markets/Reuters fix. The traders would agree to only buy and sell at specific times, ensuring minimal losses for participating member banks. As with many other entries on this list, that $2.5 billion fine isn’t the final word for the exposed institutions.

8) Wells Fargo — The Phony Accounts Scandal — $3 Billion

One of the most recent offenders hits close to home with the American banking giant, Wells Fargo. Unlike many of the other entries on this list, Wells Fargo gets a mention because the firm repeatedly engaged in illegal activity that’s alleged to have harmed over 16 million consumer accounts.

Highlights from the financial company’s misdeeds include opening up phantom banking and credit accounts and banking services under real customer names without consent. The reason for such misdeeds? The bank demanded high sales quotas from its employees. As a mea culpa, the bank agreed to a $3 billion settlement to the DoJ. However, the Consumer Financial Protection Bureau (CFPB) is still investigating other allegations against Wells Fargo so that figure could still increase.

7) Wells Fargo (Again) — Rampant Mismanagement — $3.7 Billion

As you can see, several banks on this list don’t ever seem to learn a lesson, becoming repeat offenders. This time, Wells Fargo returns over additional claims of mismanagement and consumer abuses. The CFPB settled with the bank for $3.7 billion dollars. Allegations included that customer payments were misapplied for mortgages and auto loans.

Meanwhile, other consumers were hit with incorrect interest charges. In severe cases, people lost their homes or cars as a result of the banks errors. Note that this settlement includes a $1.7 billion civil penalty and over $2 billion that will be given directly to customers affected by the bank’s misdeeds.

6) Credit Suisse (Again) — Front-Running the Financial Crisis — $5.3 Billion

Balancing your books is one thing. But knowing that your business practices are going to contribute to a massive economic crisis — and using underhanded tactics to stave off the damage before it happens by selling assets you know are worth far less — is criminal. Several banks found themselves on the wrong side of the law after the subprime mortgage crisis, including Credit Suisse.

Institutions determined to significantly influence activities that ushered in the Financial Crisis—what some call the “Great Recession”—later learned in the following decade that those behaviors wouldn’t go unpunished. Credit Suisse was ordered to settle in the amount of $5.3 billion for selling toxic debts before the financial crisis took hold. Roughly $2.48 billion of this figure was paid as a civil penalty with $2.1 billion used for consumer relief.

However, this is just one part of the fallout from the subprime mortgage crisis as almost every major bank across the U.S. and many multinationals also faced steep fines for poor oversight and intentionally providing loans to unsuitable customers.

5) Goldman Sachs —Banking the Malaysian Thieves — $5.4 Billion

No one likes a thief. But if you steal from government funds, don’t be surprised when the long arm of the law finds you. Goldman Sachs found itself in hot water in 2020 for participating in the Malaysian 1MDB scandal. The event refers to millions that were stolen from the state investment fund.

While the masterminds behind the scandal were local Malaysian government officials and accomplices, Goldman Sachs was accused of facilitating money laundering to divert money from the state fund. To avoid further investigation and legal action, the bank agreed to pay a total of $5.4 billion to multiple global regulators including the DoJ in the United States. Additionally, the bank paid another $1.4 billion to Malaysia as part of a restitution settlement.

4) Deutsche Bank — Front-Running the Financial Crisis, Part II — $7.2 Billion 

Shoddy business practices that prioritize profit over sound actions will always catch up with you in the end. Deutsche Bank, a massive multinational bank headquartered in Germany, can attest to this as the financial institution was slapped with a $7.2 billion fine in 2016 for attempting to offload toxic assets ahead of the housing crash. Of that figure, roughly $4.1 billion is being set aside for consumer relief and loan modifications that will be spread out over the next five years.

3) BNP Paribas — Banking the Bad Guys — $8.973 Billion

Smart individuals and businesses know that trying to scheme around anti-terrorism laws is a bad idea. However, BNP Paribas, a French-based bank, apparently failed to get the memo. The bank was found in violation of both the IEEPA and TWEA in 2015 for processing billions of transactions through the U.S. financial system on behalf of sanctioned nations.

BNP Paribas was accused of “deliberately disregarding the law” according to the DoJ, working to cover its tracks in the process, while helping to support terrorism in countries such as Sudan, Iran, and Cuba. The bank was required to fork over $8.833 billion to the U.S. government as well as pay $140 million in fines, which gets you the $8.973 billion total.

2) JPMorgan Chase (Again) — Contributing to a Global Financial Meltdown ­— $13 Billion

The subprime mortgage crisis had a lot of dirty banking hands in the cookie jar. So, while many banks faced big fines, some were slapped with significantly higher ones. JPMorgan Chase found itself in the hot seat both for federal and civil claims because it participated in passing out poorly vetted mortgages to consumers. The bank agreed to settle for $13 billion in 2013 with the DoJ.

However, this bank wasn’t alone. You may remember that JPMorgan faced its day of reckoning along with the investment bank Bear Stearns and Washington Mutual. However, the two latter firms no longer exist. Both went defunct in 2008, with JPMorgan Chase opting to purchase them — which raised several red flags. Washington Mutual was absorbed into the Chase Bank brand while Bear Stearns was acquired under the investments division.

1) Bank of America — Contributing to a Global Financial Meltdown, Part II — $30.6 Billion

If there’s a biggest loser for “most fines paid” from the SMC scandal, it’s Bank of America. Yes, several banks paid a lot of money for their involvement in activities that destabilized the global economy. But, BofA has faced the most fines during this period. The big bank found itself agreeing to multiple settlements over the past decade to atone for its questionable practices.

The bank paid $11 billion as part of the $25 billion agreement with the five largest mortgage servicers in the United States. This was meant to address previous foreclosure and loan servicing abuses. But then, the bank paid $10.3 billion to Fannie Mae as part of a settlement in 2013. Again, in 2014, BofA paid $9.3 billion in a settlement with the Federal Housing Finance Agency.

Compliance is Crucial

This “best of the worst” list of compliance failures highlights a critical reality: non-compliance can cost you bigtime. Likewise, just because you get away with questionable behavior initially, doesn’t mean that regulators or government agencies won’t eventually come knocking on your door. In most of the cases we highlighted above, financial institutions were engaged in clearly criminal or at least unethical activities that they knew were problematic.

A program of solid internal controls and good oversight by compliance, risk management, and internal audit can go a long way to avoiding such massive fines and penalties.   

Osman Husain is the content lead at Enzuzo. He has a background in data privacy management via a two-year role at ExpressVPN and extensive freelance work with cybersecurity and blockchain companies. Osman also holds an MBA from the Toronto Metropolitan University.

Editor’s Note: This article was originally posted at Enzuzo and has been republished with permission.

The post The Most Expensive Financial Compliance Failures of the Last Decade appeared first on Compliance Chief 360.

Unethical sales tactics, in part, resulted in the CFPB enforcement action. For example, OneMain’s “written training materials directed employees to attempt to sell optional add-on products to consumers even when the employees [thought] the consumer [would] not want them, or the consumer previously declined optional add-on products when obtaining a prior loan,” the consent order stated.

Additionally, individual sales employees’ performance reviews were based, in part, on their coverages-per-loan (CPL) rate. According to some of OneMain’s former employees, “low CPL rates could lead to adverse employment consequences, including termination,” the order stated.

Deceitful Sales Tactics

According to the CFPB order, some of OneMain’s former employees explained that “a common method of selling optional add-on products was adding them onto a loan before showing the paperwork to the consumer (referred to by some former employees as “pre-packing”) and without verbally informing the consumer that the products were included or optional.”

“If the consumer identified the products and asked for their removal, employees were expected to make it seem difficult to remove the products,” the order stated. In other instances, “employees obscured written disclosures from consumers’ view or verbally contradicted them,” according to the order.

Fraudulent Refund Policy

The CFPB also found that OneMain “kept $10 million in interest charges despite its ‘full refund’ policy.” OneMain told borrowers they would receive a “full refund” on add-on purchases if they cancelled within a certain period, between 30 and 45 days.

“However, OneMain unfairly failed to refund interest charges for about 25,000 borrowers who signed up for add-ons—such as roadside assistance benefits, identity theft protection, or entertainment discounts,” the CFPB said. “Because of how OneMain precomputed interest on some loans, customers had already been charged significant amounts of interest that the company did not refund.”

Over the past four years, OneMain kept approximately $10 million in interest charges attributable to add-ons cancelled within its purported full refund period. Moreover, these practices violated the Consumer Financial Protection Act’s prohibition on unfair practices and amounted to a fraudulent refund policy, the CFPB said.

Settlement Details

OneMain will pay $10 million in consumer redress and an additional $10 million penalty to the CFPB’s victims’ relief fund. “We are ordering OneMain to refund borrowers it cheated and to clean up its business practices,” said CFPB Director Rohit Chopra.

In addition to the $20 million in redress and penalties, the CFPB also ordered OneMain to take measures to ensure future compliance. Specifically, OneMain must “stop its unlawful activities, adjust its policies to make cancellation of add-on products easier, double the period in which a consumer can cancel an unused add-on product without cost from 30 to 60 days, and include interest in refunds after add-on product cancellations at any time,” according to the CFPB’s order. 

PHOTO: BY TONY WEBSTER, USED UNDER LICENSE, CC-BY-2.0

Jaclyn Jaeger is a contributing editor at Compliance Chief 360° and a freelance business writer based in Manchester, New Hampshire.

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According to the allegations in the complaint, from its formation around late 2015 until in or about July 2020, Dominion Bank and Trust Company operated as a purported financial institution, which claimed it could extend or facilitate financing for small businesses in exchange for an advanced fee or deposit. In fact, this was a fraud scheme, the DoJ alleged.

From at least in or about October 2016 through in or about April 2020, Gerald Shaw served as the purported “chief compliance officer.” In that role, Shaw’s responsibilities included drafting various financial instruments sent to victims in exchange for payments.

The scheme worked like this: Victims were instructed to “wire tens or hundreds of thousands of dollars to Dominion Bank as a deposit or servicing fee for future financing or credit based on representations that Dominion Bank could provide such services. Those representations were false,” the DoJ stated. “In fact, no financing existed. The victims did not receive the promised credit. And the victims were generally unable to get their money back, as Dominion Bank typically did not return funds to victims.”

Instead, the purported bank “kept victims’ money and, in some instances, even responded to refund requests by sending invoices for additional amounts,” the DoJ stated. In total, approximately 60 individual and corporate victims were schemed out of more than $4 million.

In June 2018, Shaw wrote in an email directed to two Dominion Bank officers that the bank was “20 weeks behind” in paying his “$500 a week salary.” He added, “‘On several occasions, I have indicated to you that I know Dominion does not have the money to pay my $500 a week [salary].’ Nonetheless, Shaw continued his involvement in the scheme,” the DoJ stated.

Shaw is being charged with one count of conspiracy to commit wire fraud and one count of wire fraud, each of which carry a maximum potential prison sentence of 20 years. 

Jaclyn Jaeger is a contributing editor at Compliance Chief 360° and a freelance business writer based in Manchester, New Hampshire.

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The 2022 Corruption Perceptions Index (CPI), released this month by bribery watchdog Transparency International, shows that most of the world continues to fail to fight corruption. It finds that 95 percent of countries have made little to no progress on fighting corruption since 2017.

Indeed, several have declined on TI’s corruption scale. Since 2017, ten countries significantly declined on their CPI scores. The significant decliners are: Luxembourg (77), Canada (74), the United Kingdom (73), Austria (71), Malaysia (47), Mongolia (33), Pakistan (27), Honduras (23), Nicaragua (19) and Haiti (17). Canada has declined eight points on the index since 2017, while the United Kingdom has fallen nine points. Both are among the biggest decliners during the last five years.

Governments hampered by corruption lack the capacity to protect the people, while public discontent is more likely to turn into violence, said TI in its report. This vicious cycle is impacting countries everywhere from South Sudan (13) to Brazil (38).

“Corruption has made our world a more dangerous place, says Delia Ferreira Rubio, Chair of Transparency International. “As governments have collectively failed to make progress against it, they fuel the current rise in violence and conflict—and endanger people everywhere. The only way out is for states to do the hard work, rooting out corruption at all levels to ensure governments work for all people, not just an elite few.”

Not Much Rotten in Denmark

The CPI ranks 180 countries and territories by their perceived levels of public sector corruption on a scale of zero (highly corrupt) to 100 (very clean). The United States was ranked as the 24th least corrupt country with a 69 on the scale, up 2 clicks from its score in 2021.

The CPI global average remains unchanged at 43 for the eleventh year in a row, and more than two-thirds of countries have a serious problem with corruption, scoring below 50.

• Denmark (90) tops the index this year, with Finland and New Zealand following closely, both at 87. Strong democratic institutions and regard for human rights also make these countries some of the most peaceful in the world according to the Global Peace Index.
• South Sudan (13), Syria (13) and Somalia (12), all of which are embroiled in protracted conflict, remain at the bottom of the CPI.
• 26 countries—among them the United Kingdom (73), Qatar (58) and Guatemala (24)—are all at historic lows this year.
• Eight countries improved on the CPI during that same period: Ireland (77), South Korea (63), Armenia (46), Vietnam (42), the Maldives (40), Moldova (39), Angola (33) and Uzbekistan (31).

Russian Corruption

Corruption, conflict, and security are profoundly intertwined, says Transparency International.  The misuse, embezzlement or theft of public funds can deprive the very institutions in charge of protecting citizens, enforcing the rule of law and guarding the peace of the resources they need to fulfill that mandate, it says. Criminal and terrorist groups are often aided by the complicity of corrupt public officials, law enforcement authorities, judges and politicians, which allows them to thrive and operate with impunity.

The Russian invasion of Ukraine in February 2022 was a stark reminder of the threat that corruption and the absence of government accountability pose for global peace and security: kleptocrats in Russia (28) have amassed great fortunes by pledging loyalty to President Vladimir Putin in exchange for profitable government contracts and protection of their economic interests. The absence of any checks on Putin’s power allowed him to pursue his geopolitical ambitions with impunity. According to TI, this attack destabilized the European continent, threatening democracy and killing tens of thousands.

After decades of conflict, South Sudan (13) is in a major humanitarian crisis with more than half of the population facing acute food insecurity—and corruption is exacerbating the situation, notes the bribery watchdog. A Sentry report from last year revealed that a massive fraud scheme by a network of corrupt politicians with ties to the president’s family siphoned off aid for food, fuel and medicine.

“The good news is that leaders can fight corruption and promote peace all at once,” says Daniel Eriksson, Chief Executive Officer of Transparency International. “Governments must open up space to include the public in decision-making – from activists and business owners to marginalized communities and young people. In democratic societies, the people can raise their voices to help root out corruption and demand a safer world for us all.” 

Joseph McCafferty is editor & publisher of Compliance Chief 360°

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On Dec. 11, Bankman-Fried was arrested in the Bahamas on federal criminal charges at the direction of the U.S. Attorney for the Southern District of New York, just one day before preparing to testify before the House Committee on Financial Services about why FTX, once valued at $32 billion, collapsed and filed for Chapter 11 bankruptcy protection in November.

In testimony at that same hearing, John Ray, FTX’s new chief executive who was brought in to clean up the mess, commented, “I don’t trust a single piece of paper in this organization.” He went on to say the case isn’t as complex as some are making out, but rather, “old-fashioned embezzlement.”

“This is just taking money from customers and using it for your own purpose,” Ray said. “Not sophisticated at all,” he continued, explaining that what might have been sophisticated about the scheme was hiding it in plain sight.

Ray has been tasked with implementing a restructuring plan that will serve as the roadmap for navigating the FTX debtor entities through Chapter 11 and to a final resolution with its customers and creditors. He previously served as chairman of Enron Creditors Recovery Corp., a company tasked with recovering creditor funds from Enron in the wake of its accounting scandal and subsequent collapse.

In his testimony, Ray described a long list of what he called “unacceptable management practices” at the FTX Group, including the following:

• The use of computer infrastructure that gave individuals in senior management access to systems that stored customer assets, without security controls to prevent them from redirecting those assets;
• The storing of certain private keys to access hundreds of millions of dollars in crypto assets without effective security controls or encryption;
• The ability of Bankman-Freid controlled hedge fund Alameda to borrow funds held at FTX.com to be utilized for its own trading or investments without any effective limits;
• The commingling of assets;
• The lack of complete documentation for transactions involving nearly 500 investments made with FTX Group funds and assets;
• The absence of audited or reliable financial statements;
• The lack of personnel in financial and risk management functions; and
• The absence of independent governance throughout the FTX Group.

Details of the Fraud

In an eight-count indictment, unsealed Dec. 13, the Department of Justice charged Bankman-Fried with wire fraud, commodities fraud, securities fraud, money laundering, and a scheme to defraud the Federal Election Commission and commit campaign finance violations. The DoJ did not go into any further detail in its indictment. Five of the charges each carry a maximum sentence of 20 years in prison; three others carry a maximum sentence of five years each.

The Securities and Exchange Commission Dec. 12 separately filed securities fraud charges in the Southern District of New York against Bankman-Fried. According to the SEC’s complaint, since at least May 2019, Bahamas-based FTX raised more than $1.8 billion from equity investors, including approximately $1.1 billion from 90 U.S.-based investors.

“In his representations to investors, Bankman-Fried promoted FTX as a safe, responsible crypto asset trading platform, specifically touting FTX’s sophisticated, automated risk measures to protect customer assets,” the SEC said. In reality, according to the SEC complaint, Bankman-Fried orchestrated a years-long fraud to conceal from FTX’s investors:

• The undisclosed diversion of FTX customers’ funds to Alameda Research, Bankman-Fried’s privately held crypto hedge fund;
• The undisclosed special treatment afforded to Alameda on the FTX platform, including providing Alameda with a virtually unlimited “line of credit” funded by the platform’s customers and exempting Alameda from certain key FTX risk mitigation measures; and
• The undisclosed risk stemming from FTX’s exposure to Alameda’s significant holdings of overvalued, illiquid assets such as FTX-affiliated tokens.

The SEC complaint further alleged Bankman-Fried “used commingled FTX customers’ funds at Alameda to make undisclosed venture investments, lavish real estate purchases, and large political donations.”

“We allege that Sam Bankman-Fried built a house of cards on a foundation of deception while telling investors that it was one of the safest buildings in crypto,” said SEC Chair Gary Gensler. “The alleged fraud committed by Mr. Bankman-Fried is a clarion call to crypto platforms that they need to come into compliance with our laws.”

“Compliance protects both those who invest on and those who invest in crypto platforms with time-tested safeguards, such as properly protecting customer funds and separating conflicting lines of business,” Gensler added. “It also shines a light into trading platform conduct for both investors through disclosure and regulators through examination authority. To those platforms that don’t comply with our securities laws, the SEC’s Enforcement Division is ready to take action.”

“FTX operated behind a veneer of legitimacy Mr. Bankman-Fried created by, among other things, touting its best-in-class controls, including a proprietary ‘risk engine,’ and FTX’s adherence to specific investor protection principles and detailed terms of service—but as we allege in our complaint, that veneer wasn’t just thin, it was fraudulent,” said Gurbir Grewal, Director of the SEC’s Division of Enforcement. “FTX’s collapse highlights the very real risks that unregistered crypto asset trading platforms can pose for investors and customers alike.”

The SEC’s complaint charges Bankman-Fried with violating the anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934. It seeks injunctions against future securities law violations; an injunction that prohibits Bankman-Fried from participating in the issuance, purchase, offer, or sale of any securities, except for his own personal account; disgorgement of his ill-gotten gains; a civil penalty; and an officer and director bar. Investigations into other securities law violations and into other entities and individuals relating to the alleged misconduct are ongoing, the SEC said.

CFTC Action

In a third parallel enforcement action, the Commodity Futures Trading Commission (CFTC) filed a complaint in the U.S. District Court for the Southern District of New York against Bankman-Fried, FTX Trading, and Alameda. All three were charged with fraud and material misrepresentations in connection with the sale of digital commodities in interstate commerce. The CFTC complaint further asserts that the scheme resulted in the loss of over $8 billion in FTX customer deposits.

According to the CFTC complaint, from at least May 2019 through Nov. 11, 2022, Bankman-Fried controlled both FTX.com and Alameda. As charged, FTX held itself out as “the safest and easiest way to buy and sell crypto” and represented that customers’ assets, including both fiat and digital assets including bitcoin and ether, were held in “custody” by FTX and segregated from FTX’s own assets.

“To the contrary, FTX customer assets were routinely accepted and held by Alameda and commingled with Alameda’s funds,” the CFTC said. “Alameda, Bankman-Fried, and others also appropriated customer funds for their own operations and activities, including luxury real estate purchases, political contributions, and high-risk, illiquid digital asset industry investments.”

The CFTC complaint further alleges that, at Bankman-Fried’s direction, FTX employees created features in the FTX code that favored Alameda and allowed it to execute transactions even when it did not have sufficient funds available, including an “allow negative flag” and effectively limitless line of credit that allowed Alameda to withdraw billions of dollars in customer assets from FTX.  These features were not disclosed to the public.

In its continuing litigation, the CFTC seeks restitution, disgorgement, civil monetary penalties, permanent trading and registration bans, and a permanent injunction against further violations of the Commodity Exchange Act and CFTC regulations.

Compliance Overhaul

Ray described the restructuring plan for FTX as having five core objectives, as described below:

Implementation of risk management, compliance, and security controls: This objective, which he said is already underway, “involves building accounting, audit, cash management, cybersecurity, human resources, risk management and other systems that did not exist, or did not exist to an appropriate degree, prior to my appointment.”

As part of this objective, a new management team will be brought on board. Among the company’s new appointments include the hiring of a new chief financial officer; a new head of human resources and administration; and a new head of information-technology, “all of whom have deep experience in their areas of core competency and have also managed other, large-scale corporate failures,” Ray said.

A team of independent third-party professionals has also been engaged in the “necessary areas of restructuring, forensic accounting, tax disciplines, and cybersecurity, including Alvarez & Marsal, Alix Partners, Ernst & Young, respectively, along with a cybersecurity firm,” he said.

Asset protection and recovery: We are working around the clock to locate and secure the property of the estate, a substantial portion of which may be missing, misappropriated, or not readily traceable due to the lack of proper record keeping. “We are working with Nardello & Company, Chainalysis, BitGo, Alvarez & Marsal and our cybersecurity firm on these recovery efforts,” Ray said. Thus far, more than $1 billion of digital assets to protect against the risk of theft or unauthorized transfers have been secured.

Transparency and investigation: Our investigative and cyber security teams, led by the law firm Sullivan & Cromwell, are already well into the process of gathering the evidence that will provide us with an understanding of what led to this collapse. They are working in close coordination with U.S. and foreign regulatory and law enforcement authorities. In addition, the entire process is being overseen by a newly appointed independent board of directors, chaired by former U.S. Attorney and Chief Judge for the U.S. District Court for the District of Delaware, the Honorable Joseph Farnan.

Efficiency and coordination: This objective requires cooperation and coordination with insolvency proceedings of subsidiary companies in other jurisdictions.

Maximization of value for stakeholders: “A fundamental, overarching challenge with each of these objectives is that we are, in many respects, starting from near-zero in terms of the corporate infrastructure and record-keeping that one would expect to find in a multi-billion-dollar international business,” Ray said. “Still, in just over four weeks since assuming control of FTX, we have instituted meaningful steps to gain command and control and are well on our way to achieve the goals outlined above.”

The scope of the investigation is “enormous,” Ray said, and involves “detailed tracing of money flows and asset transfers from the time of FTX’s founding and highly complex technological efforts to identify and trace crypto assets.” Currently, “dozens of terabytes of documents and data, including records of billions of individual transactions,” are being collected and reviewed, he added, “and we are leveraging sophisticated technology and expertise to identify and trace additional transactions and assets.”

All information gained will be summarized in a manner useful not only to the bankruptcy estate, but also to governmental and regulatory stakeholders, Ray said. “We know that our investigative record will be the foundation for work done by many others, and we are committed to building a reliable foundation.” 

Jaclyn Jaeger is a contributing editor at Compliance Chief 360° and a freelance business writer based in Manchester, New Hampshire.

The post Many Compliance Lessons from the Massive FTX Fraud Case appeared first on Compliance Chief 360.

These companies further admitted to negotiating with and paying armed groups and terrorists, negotiating revenue-sharing agreements with ISIS to seek economic advantage, and concealing their payments, falsified records, and backdated contracts. Under the terms of the resolution with the Department of Justice, Lafarge and LCS will pay a financial penalty, including criminal fines and forfeiture, of $777.78 million.

In remarks announcing the guilty plea, DoJ authorities said the historic resolution marks the first time ever the United States has charged a company with providing material support and resources to terrorist organizations. It also marks the first time ever a company has pleaded guilty to supporting terrorist organizations.

“Never before has a corporation been charged with providing material support and resources to foreign terrorist organizations,” said U.S. Attorney Breon Peace for the Eastern District of New York. “This unprecedented charge and resolution reflect the extraordinary crimes committed and demonstrates that corporations that take actions in contravention of our national security interests in violation of the law will be held to account.”

The scheme
According to court documents, from approximately May 2010 to September 2014, Lafarge, through LCS, constructed and operated a cement plant in the Jalabiyeh region of Northern Syria (the Jalabiyeh Cement Plant).

After the Syrian Civil War began in 2011, LCS executives purchased raw materials needed to manufacture cement from ISIS-controlled suppliers and paid monthly “donations” to armed groups, including ISIS and ANF, so that employees, customers, and suppliers could traverse checkpoints controlled by the armed groups on roads around the Jalabiyeh Cement Plant.

Lafarge and LCS executives “intentionally structured their agreements with ISIS to compensate the terrorist organization based on the amount of cement that LCS was able to sell—effectively, a revenue-sharing agreement—to incentivize the terrorist group to act in LCS’s economic interest,” the DoJ said.

As a condition of entering into this revenue-sharing agreement, Lafarge and LCS executives conspired with ISIS to act against its competitors, “either by stopping the sale of competing imported Turkish cement in the areas under ISIS’s control or by imposing taxes on competing cement that would allow LCS to raise the prices at which it sold cement,” the DoJ said.

From August 2013 through October 2014, Lafarge and LCS paid ISIS and ANF, through intermediaries, approximately $5.92 million in fixed monthly “donation” payments to ISIS and ANF, payments to ISIS-controlled suppliers to purchase raw materials, and variable payments based on the amount of cement LCS sold. The third-party intermediaries who negotiated with and made payments to ISIS and ANF on Lafarge’s and LCS’s behalf were paid approximately $1.11 million.

Moreover, in furtherance of the conspiracy, when LCS evacuated the Jalabiyeh Cement Plant in September 2014, ISIS took the cement LCS had produced and sold it, yielding ISIS approximately $3.21 million.

Over this period, from August 2013 through 2014, LCS obtained approximately $70.30 million in total sales revenue. Total gains to LCS, the intermediaries, and the terrorist groups, was approximately $80.54 million.

Concealing the scheme
Lafarge and LCS executives actively concealed their scheme in the following ways:

• Required intermediaries to create business entities with names not obviously linked to the intermediaries and created invoices with false descriptions of services rendered for an intermediary to submit to LCS;
• Structured the revenue-sharing payments to ISIS so that LCS’s customers would pay ISIS the amounts owed under LCS’s agreement with ISIS, while LCS discounted the prices it charged to the customers to reimburse them;
• Required ISIS not to include the name “Lafarge” on the documents memorializing and implementing their agreements; and
• Used personal email addresses, rather than their corporate email addresses, to carry out of the conspiracy.

In October 2014, as a condition of paying an intermediary for having negotiated with ISIS and other armed groups, Lafarge and LCS executives required the intermediary to sign an agreement terminating his agreement to provide services to LCS.

“Critically, the Lafarge and LCS executives backdated the termination agreement to Aug. 18, 2014, a date shortly after the United Nations Security Council had issued a resolution calling on member states to prohibit doing business with ISIS and ANF, to falsely suggest that he had not been negotiating with ISIS on behalf of LCS after the U.N. resolution,” the DoJ said.

Compliance lessons
In July 2015, Holcim acquired Lafarge. However, Lafarge executives did not disclose LCS’s payments to ISIS and ANF to this successor company during pre-acquisition diligence meetings. Nor did Holcim conduct pre- or post-acquisition due diligence of LCS’s Syrian operation, the DoJ said.

“Here, [Holcim] did not perform due diligence of Lafarge’s operations in Syria, despite the clear compliance risks posed by operations in the region, and it did nothing to investigate or address Lafarge’s illegal activities until they were publicly exposed,” Deputy Attorney General Lisa Monaco said in her remarks announcing the guilty plea.

Lafarge, LCS, and the successor company also did not self-report the conduct or fully cooperate in the investigation, she noted.

“This case sends the clear message to all companies, but especially those operating in high-risk environments, to invest in robust compliance programs, pay vigilant attention to national security compliance risks, and conduct careful due diligence in mergers and acquisitions,” Monaco said.

Lafarge and Holcim respond
In a statement, Lafarge said it now has effective compliance and risk management controls and functions in place to detect and prevent any similar potential misconduct and, thus, “the DoJ determined that the appointment of an independent compliance monitor is not necessary,” the company said.

“None of the conduct involved Lafarge operations or employees in the United States, and none of the executives who were involved in the conduct are with Lafarge or any affiliated entities today,” the company added.

Lafarge said it is cooperating with French authorities in their investigation of the misconduct.

Holcim also issued a statement: “None of the conduct involved Holcim, which has never operated in Syria, or any Lafarge operations or employees in the United States, and it is in stark contrast with everything that Holcim stands for.” 

Jaclyn Jaeger is a contributing editor at Compliance Chief 360° and a freelance business writer based in Manchester, New Hampshire.

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