Financial Integrity

Treasury Under Pressure to Probe Derivatives Mis-selling Scandal
Europe, Middle East and Africa

The Telegraph reports that the UK Treasury is under pressure to investigate the alleged “mis-selling scandal”, which has seen “hundreds of small businesses … buying complex and costly financial derivatives”. According to The Telegraph, the UK’s major banks, including Barclays, HSBC, Lloyds Banking Group and the Royal Bank of Scotland have sold highly complex interest rate derivatives to small businesses, including a fish and chip shop, care homes, garden centres, farms and hotels, many of whom do not understand these instruments. Reportedly, many businesses owners were liable to pay bills that worth “hundreds of thousands of pounds” when interest rates were cut to a historic low in 2009. An estimated £1.9 billion has reportedly already been paid to affected customers.

Reportedly, the UK Financial Ombudsman Service stated that it has received regular customer complaints regarding derivatives in recent months, with the Financial Services Authority stating it was aware of the issue. According to The Telegraph, in one case, a businessman who took out a £5 million five-year loan was left with a £4.1 million cost of terminating the 30-year swap that was sold alongside it. Treasury has asked the Federation of Small Businesses to survey its members with a view to finding out if the practice is widespread, and has also begun gathering evidence itself, reports The Telegraph.
The Telegraph: Call for inquiry into bank mis-selling scandal (11 March 2012)
(Source: The Telegraph)

Ponzi Scammer Convicted on 13 of 14 Counts

R. Allen Stanford, the chairman of Stanford Financial Group, was convicted on 13 counts of money laundering and fraud earlier this week. According to prosecutors, Stanford operated a Ponzi scheme where he sold investors certificates of deposit from an Antiguan bank he controlled and then used the profits from those sales to fund his extravagant lifestyle. Defense lawyers claimed the company’s chief financial officer often acted without Stanford’s knowledge, which the chief financial officer denied. They also claimed that there was no fraud and that Stanford was meeting its obligations to investors until the government intervened. The prosecution lasted three years and had blocked attempts from investors to reclaim their money and a civil lawsuit filed against Stanford by the Securities and Exchange Commission.

Wall Street Journal: Stanford Guilty On 13 Of 14 Counts (6 March 2012)
(Source: Wall Street Journal)

Treasury Accuses Barclays Bank of Tax Avoidance
Europe, Middle East and Africa

BBC News reports that Her Majesty’s Revenue and Customs (HMRC) has ordered Barclays Bank to pay £500 million in avoided tax. According to BBC News, HMRC claims the bank tried to avoid paying  tax, “by designing and using two schemes”. The UK Government has reportedly decided to introduce “retrospective legislation to end such ‘aggressive tax avoidance’ by financial institutions”. Reportedly, Barclays Bank has expressed surprise at the HMRC’s reaction, as the schemes were “in line with those used by other banks”.
BBC News: Barclays Bank told by Treasury to pay £500m avoided tax (28 February 2012)
(Source: BBC News)

Citigroup Whistleblower to Collect US$31 Million for Reporting Mortgage Loan Fraud

As part of the quality control team at Citigroup Inc., Sherry Hunt continued to find problems with new loans several years after Citigroup was bailed out by the federal government and U.S. taxpayers. Rather than report the defects in the faulty loans to the Federal Housing Administration, the bank declared them fit for a federal insurance program, transferring the losses from the loans to the agency in the process. Knowing the truth, Sherry Hunt filed a federal lawsuit against Citigroup under the False Claims Act in August 2011. She reported that some of her colleagues at the bank had incentives tied to reducing the number of reported problems and that quality control managers were pressured to downplay the defects. The federal government joined the suit and has settled with Citigroup agreeing to pay a $158.3 million fine. As a whistleblower, Sherry Hunt will now personally collect US$31 million of the fine. Citicorp faces other litigation over mortgage-related securities.

Bloomberg: Citigroup Whistle-Blower Says Bank’s ‘Brute Force’ Hid Bad Loans From U.S. (16 February 2012)
(Source: Bloomberg)

OFAC Fines Firm for Violating Liberian Sanctions Regulations

The US Office of Foreign Assets Control (OFAC) has announced that it has fined Richland Trace Homeowners Association Inc (Richland Trace) US$9,000 for violating the Former Liberian Regime of Charles Taylor Sanctions Regulations. According to OFAC, Richland Trace reimbursed itself using US$9,500 from the proceeds of a property sale in which a designated person had an interest. OFAC said that Richland Trace did not voluntarily self disclose the violation to OFAC and “displayed reckless disregard for US sanctions by failing to comply with the conditions of its OFAC license”.
Further information from OFAC
OFAC’s penalty notice (undated)
(Source: OFAC)