12.05.2014
By Terry Flanagan

Compliance Risk Escalates

In ordering Bank of Tokyo-Mitsubishi to pay $315 million for misleading regulators over transactions with Iran, Sudan and Myanmar that violated US sanctions law, Ben Lawsky, New York State’s superintendent of financial services, also demanded that Bank of Tokyo fire a compliance officer and ban two other employees from working with New York banks.

It’s part of a trend whereby regulators have moved beyond levying fines and penalties to using a wider range of measures to ensure compliant behavior.

Some observers say monetary fines are not effective punitive measures. Many firms just accept the fine and move on, not necessarily changing their underlying behavior that led to the fine, according to a recent Thomson Reuters report.

“When they started out with the big fines, the regulators thought they were going to solve the problem, but the issue has become that even in the era of billion-dollar fines, they have all too quickly simply become another cost of doing business,” Susannah Hammond, senior regulatory intelligence expert at Thomson Reuters and author of the report, told Markets Media. “They probably started out with the best of intentions, but it seems to have become apparent rather quickly that in an era of super-sized fines, the bad behavior is still continuing.”

As the financial crisis recedes into history, regulators view the power to sanction individuals is because they see it as really the very best way they can get firms to actually change their behavior.

“One of the reasons why we’re seeing such super-sized fines is because regulators are disappointed that the firms have not fixed themselves in the wake of the crisis,” Hammond said. “The FX and Libor stuff occurred either during or after the crisis. This isn’t some long, hidden heinous crime that’s only now coming out of the woodwork.”

Total fines levied by the UK Financial Services Authority jumped to £474 million in 2013, up from £26 million in 2008, the report said. Academic research by the London School of Economics found that in the last five years fines and damages paid and estimated for misconduct in 10 leading banks amounted to £157 billion worldwide.

Since the report was last conducted in 2008, regulation and the financial landscape has undergone a complete transformation, according to Andrew Neblett, senior vice president and managing director, enterprise risk management at Thomson Reuters.

“Regulators are under intense pressure and are coming up with more creative ways to enforce and promote compliance,” Neblett said in a release. “The new challenges that firms face go way beyond just a fine, and companies and individuals need to be aware of the wider implications that non-compliance can have throughout an entire organization starting from the bottom-up.”

Banks have begun to beef up their compliance departments, in part to avoid heavy fines and in part to allay regulatory concerns about the tone at the top. “There are indications that it’s started to move in the right direction,” said Hammond. “JP Morgan, HSBC and others are hiring everybody who has compliance even slightly on their CV. That is the big regulatory focus going forward, that firms don’t only have to do the right thing but do the right thing in the right way, and that to me is one of the big indicators of change.”

Featured image via goranga/Dollar Photo Club

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