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Pakistan Hounding, SEC Sanctions, Basel, ECB: Compliance

Three million of Pakistan’s richest income tax evaders will get 90 days to take up a government amnesty offer after which they will be hounded by inspectors under the nation’s most ambitious plan to improve its finances.

The cabinet has approved an amnesty proposal targeting 3.1 million people officials identified as having avoided paying income tax in a country that has one of the lowest collection rates in the world. Under the plan, each will be able to pay a one-time 40,000 rupee ($413) penalty on undeclared income and assets of as much as 5 million rupees, according to Asrar Raouf, a senior official and spokesman at Pakistan’s tax collection body, the Federal Board of Revenue.

Raouf said in a Dec. 7 interview at his office in Islamabad that the collection effort will be the “most dramatic step” to widen the tax net and the government will pursue tax evaders if they don’t respond “and cripple their lives.”

The government says the proposals will help Pakistan repair its finances after recording the highest budget deficit in two decades in the fiscal year that ended June as it missed its tax collection target and international assistance plunged. Critics including rival politicians and former advisers to the finance ministry say the primary aim is to protect the illegally stashed wealth of government supporters.

The South Asian nation has to repay about $7.5 billion to the Washington-based International Monetary Fund by 2015. Only 856,000 people pay income taxes in the country of about 200 million people.

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Compliance Policy

EU Lawmakers Threaten to Reject Basel Law Deal Without Bonus Cap

European Union lawmakers are threatening to reject any deal on a bank capital law without a cap on banker bonuses that exceed fixed pay, days before a scheduled meeting with EU officials.

The Parliament has rejected proposals from governments that would have allowed awards of as much as five times a banker’s basic salary, Sharon Bowles, chairwoman of the European Parliament’s economic and monetary affairs committee, said in an e-mail. The lawmakers are “taking a firm line” on the ban as part of negotiations on the Capital Requirements Directive, Bowles said.

The bonus debate has hampered the EU’s efforts to agree on the bank capital law, which would implement on overhaul of the international rulebook for lenders drawn up by the Basel Committee on Banking Supervision. Legislators are scheduled to meet with officials from Cyprus, which holds the EU’s rotating presidency, today and on Dec. 13 in a last-ditch attempt to reach a deal by the end of the year.

Bankers are facing a backlash from EU lawmakers determined to cut variable pay as part of a quest to reshape lenders as utilities rather than money-making machines. Public outrage and shareholder rebellions have already led some banks to limit payouts.

The measures, known as Basel III, more than triple the core capital that lenders must hold compared with the last round of international rules.

Europe Set for EU Bank Supervisor Deal This Week, Vestager Says

European Union finance ministers will probably agree to give the European Central Bank supervisory powers over euro-area banks at a Brussels meeting this week, Denmark’s Economy Minister Margrethe Vestager said.

Vestager said talks last week laid the groundwork for the Dec. 12 meeting of EU finance chiefs. Stumbling blocks include how many banks should automatically face direct ECB oversight, how to give a voice to non-euro area nations that choose to participate, as well as voting rules at the European Banking Authority. Denmark backs a current proposal to have finance ministers select the head of the ECB supervisory board.

The new supervisory system should be fully up and running by Jan. 1, 2014, according to a document obtained by Bloomberg News, though this deadline could be delayed if the ECB decides it’s not ready. The ECB would have until July 2013 to publish a detailed plan for how it will work with national regulators, under the latest proposal.

The current proposal includes an option for participating non-euro area nations to reject decisions by the ECB Governing Council that overrule the institution’s bank oversight board.

Separately, Europe’s banks are calling for a review of tougher financial regulations on the eve of their adoption as the region sinks into a recession, dimming prospects of raising $621 billion in capital needed to meet the rules.

Christian Clausen, president of the European Banking Federation, said the cumulative impact on lenders and the economy of new rules is unknown because of their piecemeal creation during the global financial crisis. After correctly anticipating Europe won’t be ready to implement tougher standards on schedule, Clausen now wants politicians to allow an impact study to measure the economic cost of all the requirements due to be enforced.

The European Union aims to implement collateral and liquidity recommendations by the Basel Committee on Banking Supervision during 2013, after a Jan. 1 deadline was pushed back.

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Compliance Action

HSBC to Pay $1.92 Billion to Settle Money-Laundering Probes

HSBC Holdings Plc (HSBA), Europe’s largest bank, agreed to pay $1.92 billion to settle U.S. probes of money laundering in the largest such accord ever.

The settlement includes a deferred prosecution agreement with the U.S. Department of Justice, the London-based bank said in an e-mailed statement today. HSBC also said it expects to complete an undertaking with the U.K. Financial Services Authority soon, without giving details.

Chief Executive Officer Stuart Gulliver’s attempts to reduce costs and improve profitability have been hurt by the U.S. probes and by compensation claims from U.K. clients. A Senate committee said in July that lax oversight by top HSBC executives gave terrorists and drug cartels access to the U.S. financial system. The settlement is the biggest reached in the U.S. over such allegations, topping the $619 million in penalties paid in June by the Netherlands’ ING Groep NV.

HSBC has been in talks with U.S. regulators over allegations it laundered funds of sanctioned nations including Iran and Sudan, prompting Standard & Poor’s to question whether the lender is too big to be managed effectively.

In a deferred prosecution agreement, the government allows a target to avoid charges by meeting certain conditions -- including the payment of fines or penalties -- and by committing to specific reforms, either under the guidance of a monitor, or the creation of an internal compliance panel.

“We accept responsibility for our past mistakes,” Gulliver said in the statement. “We have said we are profoundly sorry for them, and we do so again. The HSBC of today is a fundamentally different organization from the one that made those mistakes.”

HSBC made an $800 million provision in the third quarter to cover a potential settlement, adding to $700 million it had already earmarked.

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Eight Ex-Morgan Keegan Mutual Fund Directors Sanctioned by SEC

Eight former directors overseeing mutual funds for Morgan Keegan & Co. were sanctioned by U.S. regulators for allowing assets backed by subprime mortgages to be overvalued as the housing market collapsed in 2007.

The action, filed in administrative court by the Securities and Exchange Commission yesterday, follows a related $200 million settlement with Morgan Keegan, a subsidiary of Raymond James Financial Inc., last year and sanctions against two employees in 2010. The securities at issue made up the majority of five funds’ net asset values, in most cases more than 60 percent, the SEC said.

The eight directors, who were responsible for determining the fair value of fund securities that lacked readily available market quotations, delegated valuation tasks to a committee without providing meaningful guidance on how the assets should be priced, the SEC said.

The directors named in the order were J. Kenneth Alderman, Jack R. Blair, Albert C. Johnson, James Stillman R. McFadden, Allen B. Morgan Jr., W. Randall Pittman, Mary S. Stone and Archie W. Willis III.

Blair, Johnson, McFadden, Pittman, Stone and Willis acted “diligently and in good faith” and intend to contest the SEC’s allegations, which they “emphatically deny,” according to a statement from their attorney, Stephen Crimmins of K&L Gates in Washington. An e-mail seeking comment to Peter Anderson, an attorney for Alderman and Morgan, wasn’t immediately answered.

Raymond James, based in St. Petersburg, Florida, acquired Morgan Keegan from Regions Financial Corp. in April for about $1.2 billion. The five funds at issue in the SEC’s order are RMK High Income Fund, RMK Multi-Sector High Income Fund, RMK Strategic Income Fund, RMK Advantage Income Fund and Morgan Keegan Select Fund.

Steve Hollister, a spokesman for Raymond James, didn’t immediately comment.

Canada Banking Regulator Releases Basel III Capital Rules

Canada’s banking regulator released final Basel III capital adequacy rules that aim to bring the country’s lenders into line with new global standards beginning next year.

The rules would require Canadian banks to hold a minimum buffer of 7 percent common equity by the first quarter of next year, the Ottawa-based Office of the Superintendent of Financial Institutions said in a release yesterday. Provisions related to add-on charges for counterparty risk on over-the-counter derivatives will be implemented by the first quarter of 2014 in order not to disadvantage Canadian banks.

Some nations are struggling to meet a Jan. 1, 2013, deadline for starting to apply the revised Basel rules, which were drawn up by global regulators to prevent a repeat of the financial crisis that followed the collapse of Lehman Brothers Holdings Inc. Countries have six years to phase in the changes.

In addition to the common equity targets, the bank watchdog said it expects all banks to hold a minimum 8.5 percent “all- in” total Tier 1 capital and 10.5 percent total capital by 2014.

U.K. Fraud Prosecutor Arrests Three Men in Libor-Rigging Probe

The U.K. Serious Fraud Office and City of London Police made the first three arrests in global probes of tampering with benchmark interest rates, such as the London interbank offered rate.

The men, ranging in age from 33 to 47, are all British nationals living in the U.K., the SFO said in an e-mailed statement. The agency and police also searched three homes in Surrey and Essex.

Global authorities are investigating claims that more than a dozen banks altered submissions used to set benchmarks such as Libor to profit from bets on interest-rate derivatives or make the lenders’ finances appear healthier. UBS AG is expected to face a fine as early as this week that may surpass the record 290 million pounds ($466.6 million) Barclays Plc (BARC), the U.K.’s second-biggest bank, paid in June to settle claims it attempted to manipulate Libor.

David Jones, an SFO spokesman, declined to comment beyond the statement. David Green, the director of the SFO, said in an interview last month the agency is considering levying conspiracy-to-defraud charges against individuals.

EU Regulators Examining Competition in Food-Retail Industry

The European Commission said it’s studying competition in the food retail industry and will focus on increased concentration and the use of own-brand products.

The final report is expected by the end of next year, it said in an e-mailed statement from Brussels today.

Courts

Ex-Trader on Trial Over $971 Million Loss at Caisse D’Epargne

Former Caisse d’Epargne trader Bruno Picano-Nacci denied he exceeded his authority when he took positions that led to a 751 million-euro ($971 million) loss, after Paris prosecutors recommended a suspended sentence.

A lawyer for Picano-Nacci, charged with breach of trust, told judges at the close of his trial that his client made risk- management mistakes, while denying he hid those mistakes from superiors or acted outside his mandate.

Caisse d’Epargne, now part of Groupe BPCE, France’s second- largest bank by branches, announced the loss in October 2008. Prosecutor Serge Roques advised the court during closing arguments to find him guilty and give him a two-year suspended jail sentence. Under French law, Picano-Nacci faces as much as three years in jail and a 375,000-euro fine if found guilty. The 37-year-old said at the trial’s opening he’s unemployed, has four children and that his wife earns about 2,000 euros a month.

BPCE successfully fought a 20 million-euro fine by France’s Banking Commission for risk-control failures preceding the trading loss.

The bank’s “serious risk control failures don’t exonerate Mr. Picano-Nacci,” the prosecutor said.

Picano-Nacci joined the bank in 2003 and took on the derivatives portfolio for Caisse d’Epargne’s eight-man proprietary-trading business in 2006. The bank is seeking 315 million euros from the trader, what the bank calculated as the loss from criminally bad investments rather than just poor portfolio management, lawyer Jean Reinhart said.

Russia May Tax Income From Foreign Bank Deposits, Vedomosti Says

The Moscow City Court upheld a ruling of the lower court saying that Russia may tax income from foreign bank deposits, Vedomosti reported, citing an unidentified court official.

According to the Tax Code, Russians are exempt from paying the 13 percent income tax on earnings from deposits paying rates that don’t exceed the country’s refinancing rate plus the 5 percent on ruble accounts and the 9 percent on deposits in foreign currencies. Existing legislation doesn’t make the distinction between foreign and domestic banks, according to Vedomosti.

The court agreed with tax authorities that financial institutions are recognized as banks only if they have an operating license from Russia’s central bank. The income tax should be levied on the entire income earned from deposits at foreign banks, Vedomosti reported

The full text of the court decision isn’t yet complete, according to the newspaper.

Interviews/Conferences

BI Says EU Banks Must Cope With Less Liquidity in 2013

Jonathan Tyce, senior banking analyst at Bloomberg Industries, discusses fines levied on HSBC Holdings Plc and Standard Chartered Plc and the outlook for Europe’s banking industry.

He talks from Hong Kong with Owen Thomas on Bloomberg Television’s “First Look.”

For the video, click here.

Bahrain to Support Mergers of Islamic Banks, Al Maraj Says

Mergers and acquisitions in the Islamic banking industry is “slow and stringent,” Bahrain central bank governor Rasheed Al Maraj said.

Al Maraj made the remark at a conference in Manama on the topic.

Last month, the National Bank of Bahrain and the Social Insurance Organization held talks with Investment Dar, the Kuwait-based majority owner of Aston Martin Lagonda, for a potential acquisition of shares in on Bahrain Islamic Bank. (BISB)

To contact the reporter on this story: Carla Main in New Jersey at cmain2@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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