Gary DeWaal and Associates LL

Bridging the Week by Gary DeWaal: June 30 to July 4 and 7, 2014 (Violating Economic Sanctions, Attorney-Client Privilege, EU Non-Recognition of US CCPs, Spec Limits)

Bridging the Week Compliance Weeds

Published Date: July 06, 2014

It was a short workweek in the United States because of the Independence Day holiday. However, it seemed like a very long week because of the US loss in the World Cup. Despite the shortness of the workweek and the disappointment over the US team’s loss, there were some significant developments impacting the financial services industry, including a long-awaited fine against BNP Paribas for evading US economic sanctions, as well as an important court decision extending the attorney-client privilege in connection with investigations ordered by in-house counsel.

As a result, the following matters are covered in this week’s Bridging the Week:

BNP Paribas to Pay Almost US $9 Billion for Processing Prohibited Transactions Through the US Financial System with Countries Subject to US Sanctions (includes Compliance Weeds);
EC Commissioner Barnier Close to Recommending That CCPs in Five Jurisdictions Are Subject to Equivalent Regulation as in the EU; US So Far Not Judged Equivalent;
US Court of Appeals Expands Attorney-Client Privilege for Internal Corporate Investigations;
CME Sanctions Trader for Violating Position Limits Solely for an Offer to Sell (includes Compliance Weeds);
D-Day for Many Customer Protection Requirements Coming Soon; JAC Reminds FCMs to File Their Risk Management Policies and Procedures With the CFTC and DSRO By July 14 (includes Compliance Weeds); and more.

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BNP Paribas Settles for Payment of Almost US $9 Billion for Processing Transactions Through the US Financial System with Countries Subject to US Sanctions

BNP Paribas agreed last week to settle charges related to its processing of US-dollar transactions on behalf of Sudanese, Iranian and Cuban entities that are subject to US economic sanctions. As part of its settlement with the US Department of Justice and the Manhattan District Attorney’s Office, BNP will pay a penalty of almost US $9 billion.

According to a statement of facts agreed to by the Justice Department and BNP, the bank’s wrongful conduct occurred from 2004 to 2012. During this time, the bank helped process almost US $9 billion through the US financial system on behalf of the prohibited entities. The bank endeavored to hide its conduct from regulators by concealing the names of the prohibited entities and its own role, says the Justice Department and BNP.

BNP was charged by the Justice Department with violating the US economic sanctions, while the bank was charged by the Manhattan District Attorney with falsifying business records.

The government’s case against BNP relied, in part, on internal communications and a whistleblower’s information. Although the statement of facts observed that BNP delayed providing government investigators some materials from its Geneva operations until May 2013, BNP, in general, provided “substantial cooperation” with the government’s investigation and has taken “several corrective measures to enhance its sanctions compliance.”

According to a press statement issued by BNP,

“In advance of the settlement, the bank designed new robust compliance and control procedures. Many of these are already in force and are working effectively, and involve important changes to the [BNP] Group’s procedures.”

Separately, BNP agreed with the Board of Governors of the Federal Reserve System to pay a US $508 million fine and to take certain remedial measures to ensure compliance with US laws for its ongoing operations. In addition, BNP agreed with the New York State Department of Financial Services to pay a fine of almost $2.5 billion and end employment relationships with 13 employees, including the BNP Group’s chief operating officer, as well as to cease US-dollar clearing operations through its NY branch and other affiliates for one year. Finally, the bank agreed to pay a fine of $963 million to the US Treasury Department’s Office of Foreign Assets Control.

Under the various fine arrangements, however, BNP will be given credit for penalties paid to different regulators, so its total out of pocket expense will be capped at the amount of the sanctions agreed with the US Department of Justice and Manhattan District Attorney.

Compliance Weeds: This case, which, as reported in the media, ultimately involved political as well as legal considerations, provides a reminder that: (1) it is important for financial service firms to maintain and enforce robust anti-money laundering policies and procedures. These policies, among other elements, must not only seek to detect suspicious activities generally, but must also be adapted to ensure compliance with all applicable laws and regulations, including prohibitions against doing business with enumerated persons and entities, and with persons and entities from prohibited countries; and (2) financial service firms should not ignore or prematurely minimize potentially material concerns raised by employees or contractors, particularly by internal control staff (e.g., compliance personnel) and whistleblowers. Firms should have formal policies and procedures that require management to respond to adverse findings by internal control personnel, including to agree (as appropriate) to recommendations and deadlines for implementation (which afterwards should be monitored). Likewise, firms should have formal policies and procedures that require the review and consideration by impartial personnel of all matters raised by whistleblowers; where a whistleblower's claims are determined not to be supported by relevant facts, this conclusion should be documented in writing, and preferably, reviewed by another impartial person. Legitimate concerns should be followed-up promptly.

And briefly:

EC Commissioner Barnier Close to Recommending That CCPs in Five Jurisdictions Are Subject to Equivalent Regulation as in the EU; CCPs in the US Not Included for Now: Michel Barnier, European Commissioner for Internal Market and Services, said in a statement on June 27 that he is close to recommending to the European Commission that central clearinghouses (CCPs) located in five countries outside the European Union should receive equivalence decisions. Such a decision would permit continued access to these CCPs by EU persons on current terms. The relevant jurisdictions are Australia, Hong Kong, India, Japan, and Singapore. The US was not mentioned, although Mr. Barnier indicated that he was “confident” that, ultimately, the US would be included. However, the decision process seems to be as much political as substantive. According to Mr. Barnier, “[o]ur technical talks with the [Commodity Futures Trading Commission] are progressing well… If the CFTC also gives equivalence to third country CCPs, deferring to strong and rigorous rules in jurisdictions such as the EU, we will be able to adopt equivalence decisions very soon.”
US Court of Appeals Expands Attorney-Client Privilege for Internal Corporate Investigations: The US Court of Appeals for the District of Columbia Circuit broadly extended the attorney-client privilege to internal corporate investigations conducted at the request of company counsel, even when the investigation was not conducted solely for the purposes of rendering legal advice, but for other purposes too. In the case, In re Kellogg Brown & Root, decided on June 27, the company’s law department had commissioned an internal inquiry following an employee complaint. As a defense contractor, KBR was obligated to investigate allegations of potential wrongdoing by applicable US Department of Defense regulations. The lower court had ruled that the attorney-client privilege did not apply to the investigation because it was not conducted “but for” the purpose of giving legal advice; it was undertaken also to apply with the company’s regulatory obligation. The court of appeals rejected this approach, writing “[s]o long as obtaining or providing legal advice was one of the significant purposes of the internal investigation, the attorney-client privilege applies, even if there were also other purposes for the investigation and even if the investigation was mandated by regulation rather than simply an exercise of company discretion.”
CME Sanctions Trader for Violating Position Limits Solely for an Offer to Sell: The CME Group brought a disciplinary against an individual member solely for offering to sell futures contracts that, if successfully executed, would have caused the trader to hold positions in excess of applicable speculative position limits. The trades were not executed, however. On July 24, 2013, Daniel Zagorin placed an offer to sell 12,000 contracts of August 13 soybean meal futures at a time when he was long 610 contracts. Had his offer been consummated, he would have exceeded the relevant position limit — 6,500 contracts — by 4,890 contracts. The relevant rule (CBOT Rule 562) states that “[a]ny positions in excess of those permitted under the rules of the Exchange shall be deemed position limit violations. Additionally, any person making a bid or offer that would, if accepted, cause such person to exceed the applicable position limits shall be in violation of this rule.” Mr. Zagorin agreed to settle this matter by payment of a fine of US $100,000 and to be denied access to CME Group trading for 30 days. Previously Mr. Zagorin previously was sanctioned for speculative position limit violations on four prior occasions from 2006 through 2011.

Compliance Weeds: This matter, along with prior CME disciplinary actions, establishes that CME position limit violations may occur under three circumstances: (1) an actual violation of stated position limits computed after the end of a trading day, (2) an actual violation of position limits computed during the course of a trading day, and (3) a potential violation of position limits should a bid or offer, if executed, cause a position limit violation -- even if the bid or offer is not executed. (The CFTC and ICE Futures also expressly prohibit end-of-day and intra-day position limit violations; e.g., see a CFTC 2010 Division of Market Oversight advisory by clicking here.) Members and non-members of the CME should adapt their systems accordingly to ensure they do not inadvertenly violate position limits under these three distinct scenarios (keep in mind, that non-members submit themselves to the jurisdiction of the CME solely by trading on CME).

And even more briefly:

CFTC Issues Revised Technical Guidance Re: OCR: In connection with new rules issued during November 2013 to enhance its identification of market participants who hold or trade large quantities of futures and swaps, the CFTC has been working with the industry to develop new forms — ownership and control reports — for market participants to report relevant information (for details of the CFTC’s new requirements, click here). Last week, the Commission issued the latest in a series of technical documents to outline specifications for transmitting the relevant forms.
CFTC Extends Time Period of No-Action Relief Related to Certain Valuation Data Reporting Requirements: The CFTC’s Division of Market Oversight previously granted no-action relief to swap dealers and major swap participants regarding their obligation to report to a swap data repository certain valuation data in connection with cleared swaps. This relief was most recently scheduled to expire on June 30, 2014, but this deadline was extended last week to June 30, 2015.
D-Day for Many Customer Protection Requirements Coming Soonl; JAC Reminds FCMs to File Their Risk Management Policies and Procedures With the CFTC and DSRO By July 14: The Joint Audit Committee reminded future commission merchants last week that they were obligated to file their risk management policies and procedures with the CFTC and their designated self regulatory organization by July 14, 2014. The filing is to be made through the WinJammer™ Online Filing System.

Compliance Weeds: Preparing and filing risk management reports are not the only new enhanced customer protection requirements that FCMs must implement by July 14. As of that day, FCMs must (1) use standardized depository acknowledgement letters for all their existing and new customer funds depository relationships -- except with designated clearing organizations (and depositories must be compliant with the CFTC's access and examination requirements); (2) use firm-specific risk disclosures; and (3) enhance their websites to disclose historical segregation and other financial information. Self-regulatory organizations must also file their supervisory programs with the Commission by July 14 too. (For more details on the Commission's new enhanced customer protection requirements, see the October 30, 2013 special article "CFTC Adopts More Stringent Customer Funds Protection Rules" on this website by clicking here.)

ESMA Publishes Retail Guide to MiFID II and MiFIR: The European Securities and Markets Authority issued a guide for retail investors regarding the recently adopted Markets in Financial Instruments Directive II and the Markets in Financial Instruments Regulation. Among areas highlighted for retail clients by this publication include the types of payments an investment firm can receive from third parties; the nature of investment advice; product governance; and safeguarding client assets.
NFA Reminds Swap Dealers and MSPs That There Are Mandatory Filings for New and Departed CCOs: The National Futures Association reminded swap dealers and major swap participants that they must designate any new chief compliance officer as a principal by filing with it a Form 8-R (including fingerprint cards and the relevant fee). They must also terminate a former CCO as a principal by submitting a Form 8-T to NFA within 30 days of the CCO’s departure.
SEC Approves FINRA Rule Concerning Self-Trades: The SEC approved a new rule of the Financial Industry Regulatory Authority that requires firms to have policies and procedures that are reasonably designed to review trading activity and prevent repetitive self-trades arising from a single algorithm or trade desk or related algorithms or trading desks. FINRA presumes that algorithms or trading strategies “…within the most discrete unit of an effective system of internal controls at a firm are presumed to be ‘related’ for purposes of the rule.”
FINRA Begins Dissemination of Transaction Data Related to Resales of Restricted Corporate Debt Securities to Large Institutions: On June 30, the Financial Industry Regulatory Authority began publicly disseminating transaction data regarding resales of corporate debt securities to large institutions known as “qualified institutional buyers.” Market professionals can obtain this information through market vendors, while retail investors can access this information through FINRA’s website (click here to access the relevant FINRA portal).

For more information, see:

BNP Paribas Settles for Payment of Almost US $9 Billion for Processing Transactions Through the US Financial System with Countries Subject to US Sanctions:
http://www.justice.gov/usao/nys/pressreleases/June14/bnppsupportingdocs/BNP%20Paribas%20Information.pdf
http://www.justice.gov/usao/nys/pressreleases/June14/bnppsupportingdocs/BNP%20Paribas%20Statement%20of%20Facts.pdf

CFTC Issues Revised Technical Guidance Re: OCR:
http://www.cftc.gov/ucm/groups/public/@forms/documents/generic/ocrtechguidejul012014.pdf

CFTC Extends Time Period of No-Action Relief Related to Certain Valuation Data Reporting Requirements:
http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/14-90.pdf

CME Group Disciplinary Action: Daniel T. Zagorin:
http://www.cmegroup.com/tools-information/lookups/advisories/disciplinary/CME-13-9547-BC-DANIEL-T-ZAGORIN.html

EC Commissioner Barnier Close to Recommending That CCPs in Five Jurisdictions Are Subject to Equivalent Regulation As in the EU; CCPs in the US Not Included for Now:
http://europa.eu/rapid/press-release_STATEMENT-14-211_en.htm?locale=en

ESMA Publishes Retail Guide to MiFID II and MiFIR:
http://www.esma.europa.eu/system/files/2014-726_enhanced_protection_for_retail_investors_-_mifid_ii_and_mifir.pdf

FINRA Begins Dissemination of Transaction Data Related to Resales of Restricted Corporate Debt Securities to Large Institutions:
http://www.finra.org/Newsroom/NewsReleases/2014/P539860?utm_source=MM&utm_medium=email&utm_campaign=Weekly%5FUpdate%5F070214%5FFINALpublic.

In re Kellogg Brown & Root, et al:
http://www.cadc.uscourts.gov/internet/opinions.nsf/701A3512988256CD85257D04004F78AA/$file/14-5055-1499662.pdf

JAC Reminds FCMs to File Their Risk Management Policies and Procedures With the CFTC and DSRO By July 14:
http://www.wjammer.com/jac/jacupdates/2014/jac1405.pdf

NFA Reminds Swap Dealers and MSPs That There Are Mandatory Filings for New and Departed CCOs:
http://www.nfa.futures.org/news/newsNotice.asp?ArticleID=4436

SEC Approves FINRA Rule Concerning Self-Trades:
http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p540972.pdf

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of July 3, 2014. No representation or warranty is made regarding the accuracy of any statement or information in this article. Also, the information in this article is not intended as a substitute for legal counsel, and is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The impact of the law for any particular situation depends on a variety of factors; therefore, readers of this article should not act upon any information in the article without seeking professional legal counsel. Katten Muchin Rosenman LLP and/or Gary DeWaal may represent one or more entities mentioned in this article.

Gary DeWaal and Associates LLC

Bridging the Week by Gary DeWaal: June 30 to July 4 and 7, 2014 (Violating Economic Sanctions, Attorney-Client Privilege, EU Non-Recognition of US CCPs, Spec Limits)