EU Stress Tests, IRS Reporting Rules, Body Scans: Compliance

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Eight banks failed the European Union stress tests after regulators said July 15 they had a combined capital shortfall of 2.5 billion euros ($3.5 billion), less than predicted by analysts and investors.

Greece’s EFG Eurobank Ergasias SA and Agricultural Bank of Greece SA, Austria’s Oesterreichische Volksbanken AG and Spain’s Banco Pastor SA, Caja de Ahorros del Mediterraneo, Banco Grupo Caja3, CatalunyaCaixa and Unnim failed. As many as 16 more lenders will need to bolster capital after scraping through, the European Banking Authority said. All banks examined in Italy, Germany, France, the U.K. and Ireland passed.

Analysts have criticized the EBA’s attempt to bolster confidence in the industry by excluding a Greek default. Last year’s tests by the EBA’s predecessor were also attacked for not being tough enough: banks then were shown to need only 3.5 billion euros more capital, a 10th of the lowest analyst estimate. Investors expected as many as 15 banks to fail and raise 29 billion euros after the latest assessments, according to a survey by Goldman Sachs Group Inc. last month.

“It feels the same as last year,” said Richard Barfield, a director at accounting firm PwC in London. Investors “are more interested in the disclosure of the sovereign exposures in the detailed analysis.”

The criteria include a review of how the 90 lenders tested would handle a 0.5 percent economic contraction in the euro area in 2011, a 15 percent drop in European equity markets and trading losses on sovereign debt not held to maturity.

“We’re aware the treatment of sovereign exposures is very contentious,” Andrea Enria, EBA chairman, told reporters July 15 at a press conference in London.

The failures were found to have insufficient reserves to maintain a core Tier 1 capital ratio of 5 percent in the event of an economic slowdown, the European Banking Authority said.

A further 16 banks, including seven in Spain, barely passed with a core Tier capital 1 ratio of between 5 percent and 6 percent. Those lenders included Banco Comercial Portugues SA, Espirito Santo Financial Group SA, Germany’s HSH Nordbank AG and Norddeutsche Landesbank.

About 20 banks would have failed had they not raised capital through April, the EBA said. The capital shortfall would have totaled 26.8 billion euros without the additional money, the regulator said. In all, European lenders raised 50 billion euros of capital from January to April, according to Enria.

“For those banks that have not met the threshold, and for those that have but still demonstrate substantial weaknesses, we expect them to take all the necessary steps to reinforce their capital positions,” Michel Barnier, the EU’s financial services commissioner, and Olli Rehn, the economic and monetary affairs commissioner, said in an e-mailed statement July 15.

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Compliance Action

Ex-Trader Extradited From Peru on Fraud Charges, U.S. Says

A former foreign-exchange trader, Jeffery Lowrance, was extradited from Peru on charges he swindled about 400 U.S. investors, leading to losses of at least $5 million, according to federal prosecutors in Chicago.

“Lowrance and others at his direction fraudulently solicited investments by making material misrepresentations,” including the profitability of foreign exchange trading by one of his businesses, First Capital Savings & Loan Ltd., according to a statement July 15 by U.S. Attorney Patrick Fitzgerald in Chicago citing an August 2010 indictment.

A U.S. citizen, Lowrence, 50, allegedly obtained $25 million from about 400 American investors, losing at least $5 million of their money, Fitzgerald said.

He pleaded not guilty July 15 to charges of mail fraud, wire fraud and money laundering before U.S. Magistrate Judge Michael T. Mason in Chicago, answering charges first filed by prosecutors in 2009.

Arrested earlier this year in Lima, he is being held in U.S. custody pending the outcome of a detention hearing set for July 25, Fitzgerald said. He had been living in Peru intermittently since 2004 and continuously since 2009, the prosecutor said.

Mary Higgins Judge of the Federal Public Defender’s office in Chicago is representing Lowrance. She declined to discuss the matter, saying she was still familiarizing herself with the case.

The criminal case is U.S. v. Lowrance, 09cr578, U.S. District Court, Northern District of Illinois (Chicago).

Indian Point Must Review Response Plans, Regulators Say

The Indian Point nuclear reactor cannot be relicensed without completing an analysis of its accident mitigation measures, regulators said.

The Nuclear Regulatory Commission must require Entergy Corp., the Buchanan, New York-based power plant’s owner, to adopt cost-effective upgrades to improve its responses to a severe accident or provide a good reason why it won’t, New York State Attorney General Eric Schneiderman said July 15 in an statement. The ruling was issued by the Atomic Safety and Licensing Board, agreeing with Schneiderman that Indian Point must comply with the NRC’s environmental review procedures.

CEZ Czech Power Utility Faces Formal EU Antitrust Probe

CEZ AS, the Czech Republic’s largest power producer, faces a formal investigation by European Union antitrust regulators for hindering rivals.

The European Commission said CEZ may have abused its dominant position on the Czech electricity market to prevent competitors from entering the market after liberalization.

“The commission has concerns that CEZ’s behavior, in particular the hoarding of capacity in the transmission network, may have resulted in preventing the entry of competitors into the Czech wholesale electricity market,” it said in a statement July 15.

Regulators are trying to make it easier for European gas and power companies without their own transmission networks to compete in the EU’s energy market. Earlier EU probes led RWE AG to sell its gas-transmission network and E.ON AG to shed its power grid in Germany.

CEZ is convinced the EU investigation won’t find any wrongdoing, Eva Novakova, a company spokeswoman, said in an e-mailed statement. She said CEZ is cooperating with regulators and will supply further evidence to exonerate itself.

State-run CEZ and its coal-mining subsidiary Severoceske Doly AS were among companies raided by EU officials in November 2009, the companies said at the time.

Regulators alleged CEZ tried to influence wholesale electricity prices in the Czech Republic and may have blocked rivals from building power plants and securing supplies of lignite, a fuel used to generate power, the company said.

Under EU rules, companies can be fined as much as 10 percent of annual sales for antitrust violations.

Ameris Bancorp Buys Georgia Lenders as Failures Climb to 55

Ameris Bancorp, the Moultrie, Georgia-based lender with $2.97 billion in assets, bought two banks seized by regulators in its home state as this year’s tally of U.S. failures climbed to 55.

Ameris purchased the deposits and operations of High Trust Bank and One Georgia Bank, the Federal Deposit Insurance Corp. said July 15 on its website. Florida officials also closed First Peoples Bank of Port Saint Lucie and an Arizona regulator seized Summit Bank in Prescott. The four failures drained about $129 million from the FDIC deposit-insurance fund.

Regulators have shuttered more than 370 lenders since the start of 2008 as commercial and residential real estate loans soured, putting pressure on banks.

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Compliance Policy

IRS Delays Offshore Reporting Rule Without Touching Policy

The Internal Revenue Service is giving more time to Toronto-Dominion Bank, Aegon NV and other banks based outside of the U.S. to implement a controversial tax reporting rule.

In guidance issued July 14 on the Foreign Account Tax Compliance Act, the IRS didn’t address some of the central questions that have caused financial institutions to fight the proposal. For instance, one of the rule’s most complex provisions -- a requirement to withhold 30 percent from payments that might have indirectly originated in the U.S. -- remains in the proposal.

The later timeline for implementing the rule is helpful, said Ellen McCarthy, a managing director of government affairs at the Securities Industry and Financial Markets Association, a Washington trade group of banks and securities firms. The industry is still anxious to resolve some of the proposal’s thorniest issues, she said.

“This gives us the sense that Treasury and the IRS have taken into account comments that the industry has given,” she said. “There are still things to work out.”

The IRS is expected to address policy specifics in additional guidance that will be released by the end of the year.

The agency is finalizing the rule to comply with a law Congress adopted last year. Last week’s delay reflects the difficult position the IRS finds itself in as it implements a law that Congress enacted to hunt down tax cheats while acknowledging opposition from overseas banks and governments.

The “notice is a reflection of our serious commitment to implementation of the statute, but also a serious commitment to listen to the implementation challenges of affected foreign financial institutions,” IRS Commissioner Doug Shulman said in a statement.

The new timeline gives offshore banks until June 30, 2013, to enter into an agreement with the IRS that would shield them from some withholding requirements. Institutions won’t have to report on their efforts to track down their U.S. clients until 2014.

Banks won’t be required to make 30 percent withholdings on non-compliant U.S. customers until Jan. 1, 2014. Other withholdings on gross proceeds and income that might be indirectly sourced to the U.S. won’t start until Jan. 1, 2015.

Financial institutions have balked at the proposal, telling the IRS it’s too difficult to siphon their U.S. customers from their other clients. Konrad Hummler, the managing partner of Wegelin & Co., Switzerland’s oldest bank, said in January the law would turn U.S. citizens into “pariahs” once the regulations take effect.

Last week’s decision “relieves some of the time pressure associated with implementing the most difficult parts” of the legislation by 2013, Terry Campbell, president of the Canadian Bankers Association said in a statement. “But the overall legislation is still highly problematic and places a significant burden on banks and their customers around the world. ‘’

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FSA Rejects Delaying Overhaul of Financial-Advice Industry

Britain’s financial regulator said it will press ahead with an overhaul of the investment-advice industry, rejecting calls from lawmakers who say the plans will cost jobs.

The industry has already begun the changes and 82 percent of advisers will stay in the trade, the Financial Services Authority said in an e-mailed statement.

In a report published July 15, Parliament’s Treasury Committee urged the regulator to delay implementing the retail distribution review until 2014 to allow financial advisers more time to comply with the new rules.

The FSA said it needed to overhaul the sector after mis-selling of financial products eroded consumer trust and “damaged the reputation of the retail investment market.” Mis-sold personal pension and endowment policies alone have led to almost 15 billion pounds ($24 billion) having been paid in compensation, the FSA said.

Dodd-Frank Panel’s Delays Create Financial ‘Guessing Game’

A team of regulators charged with preventing another financial crisis meets today amid criticism it’s moving too slowly to identify the firms whose failure may pose a threat to the economy.

The year-old Financial Stability Oversight Council planned to start designating systemically important non-bank financial companies, such as insurers, as early as the middle of this year. The council has yet to set the criteria it will use to decide which firms could threaten to bring down the financial system, as American International Group Inc. almost did in 2008.

The delays make it harder for financial firms to plan, fueling complaints that the industry is being hamstrung by regulatory uncertainty. The council, which includes Federal Reserve Chairman Ben S. Bernanke and is led by Treasury Secretary Timothy F. Geithner, was created by the Dodd-Frank financial overhaul law.

Under Dodd-Frank, bank-holding companies with more than $50 billion in assets, which include JPMorgan Chase & Co., Citigroup Inc. and Goldman Sachs Group Inc., are automatically considered systemically important. One of the tasks of the oversight council, known as FSOC, is to determine which non-banks, such as private-equity firms, money managers, hedge funds or insurers, need the same designation and will be subject to additional oversight by the Fed.

The FSOC is also working without a full lineup of 10 voting members because Obama administration nominees haven’t been confirmed by the Senate.

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UBS Data Disclosure on 255 U.S. Clients Was Legal, Court Says

UBS AG’s disclosure of account data on 255 clients to the U.S. authorities, ordered by the Swiss financial regulator in 2009, was “lawful,” the Swiss Federal Supreme Court ruled.

The Swiss Financial Market Supervisory Authority, or Finma, “proceeded on the assumption that if this data hadn’t been disclosed, the U.S. Department of Justice would have filed an indictment against UBS, which would arguably have caused the bank’s ruin and consequently have had serious repercussions for the Swiss economy,” the Lausanne-based court said July 15 in an e-mailed statement.

The court reversed a ruling in January 2010 by the Federal Administrative Court, which handled a complaint from UBS clients. The administrative court ruled that the regulator exceeded its authority in telling UBS, Switzerland’s biggest bank, to hand over data to the U.S. as part of a deferred prosecution agreement. The Department of Justice accused UBS of conspiring to defraud the U.S. by helping Americans hide accounts from the Internal Revenue Service.

While the emergency-action provisions in the Swiss Banking Act don’t provide “sufficient legal grounds for encroaching on banking secrecy,” government authorities, including Finma, may take steps to “avert serious imminent risks” even in the absence of a specific legal foundation, the court said.

“Since Finma had compelling reasons to believe that not relinquishing the customer data to the U.S. Department of Justice would have seriously impaired Switzerland’s financial markets and have led to serious repercussions for the Swiss economy, the action taken by it was shown to be lawful,” the court’s statement said.

Fund Manager Can’t Argue Regulator Corruption at Threat Trial

A former hedge-fund manager charged with threatening to kill U.S. regulators can’t argue that his prosecution stems from alleged corruption at the agencies during his trial set to begin next week, a judge ruled.

Vincent P. McCrudden, 50, is accused of threatening the lives of 47 current and former officials, including Securities and Exchange Commission Chairwoman Mary L. Schapiro and Commodity Futures Trading Commission Chairman Gary Gensler.

McCrudden, who was also a commodities trader, has been held without bail since he was arrested Jan. 13 returning from Singapore. He is charged with threatening the regulators, including those at the National Futures Association and the Financial Industry Regulatory Authority Inc., in profanity-filled e-mails and, after the CFTC sued him in December, in Web postings.

His trial is set to begin today.

The criminal case is U.S. v. McCrudden, 11-cr-61, U.S. District Court, Eastern District of New York (Central Islip).

WaMu Fight Over Bankruptcy Exit, Insider Trading Extended

Washington Mutual Inc., former owner of the biggest U.S. bank to fail, may need four more days of testimony before a judge can rule on claims of insider trading that threaten to disrupt the company’s plan to exit bankruptcy, lawyers said.

U.S. Bankruptcy Judge Mary Walrath agreed to end court early in the day on July 15 before starting again today so the lead lawyer defending hedge fund Aurelius Capital Management LP from the insider trading allegations can attend. That delay and the slow pace of questioning witnesses means the hearing may stretch into July 21, WaMu bankruptcy attorney Brian Rosen said in court on July 15.

Walrath had originally scheduled three days this week for WaMu’s bankruptcy-exit hearing, the second time she has held a trial on the proposal, with multiple witnesses, dozens of lawyers and thousands of pages of evidence.

In that first trial last year, Walrath approved the main settlement that the bankruptcy exit plan is based on. She is now being asked to approve the plan itself, which would distribute more than $7 billion to WaMu’s creditors.

The current court fight involves the value of the reinsurance company that will be the only part of WaMu to survive bankruptcy, and whether Aurelius and three other hedge funds used confidential information to trade in the company’s debt.

Shareholders would get nothing under a reorganization plan that was negotiated with JPMorgan Chase & Co., the four hedge funds and the Federal Deposit Insurance Corp. The shareholders have asked Walrath to again reject the reorganization plan, arguing it is tainted by the allegations of insider trading.

Aurelius and the other hedge funds, Centerbridge Partners LP, Appaloosa Management LP and Owl Creek Asset Management LP, all deny that they engaged in insider trading. They have argued in court papers and in hearings that the information they used to buy and sell WaMu’s debt was either publicly available or wasn’t “material,” and therefore its use was legal.

The dispute over the insider-trading allegations will be the final issue in the hearing.

The case is In re Washington Mutual Inc., 08-12229, U.S. Bankruptcy Court, District of Delaware (Wilmington).

Airport Body Scans Can Continue While U.S. Seeks Comments

The United States improperly adopted the use of airport body scanners as a primary screening tool a federal appeals court ruled. In the ruling released July 15, a three-judge panel in Washington also allowed their use to continue.

In his opinion, U.S. Circuit Judge Douglas Ginsburg said the U.S. Transportation Security Administration should have sought public comment before deciding that the scanners, first deployed in 2007, would be used “everywhere for primary screening.”

The devices were developed at the direction of Congress, which in 2004 ordered the TSA to give “high priority” to finding new technology for airport screening that could detect chemical, biological and radiological weapons. Privacy advocates objected to the scanners as excessively intrusive and said the TSA failed to follow correct procedure in implementing their widespread use.

“Due to the obvious need for the TSA to continue its airport security operations without interruption, we remand the rule to the TSA but do not vacate it,” Ginsburg wrote. The court said that passengers who don’t want a body scan will receive a “patdown” from security agents.

Greg Soule, a TSA spokesman, said the agency is reviewing the opinion.

The case is Electronic Privacy Information Center v. U.S. Department of Homeland Security, 10-1157, U.S. Court of Appeals for the District of Columbia (Washington).

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Comings and Goings

Obama to Pick Former Ohio Attorney General for Consumer Post

President Barack Obama said he will nominate former Ohio Attorney General Richard Cordray to lead the Consumer Financial Protection Bureau, which opens this week amid continuing political fights about its scope.

Cordray, currently the assistant director for enforcement at the bureau, will be introduced at the presidential residence today as Obama’s choice, the White House said in a statement.

After losing his bid for re-election in November, Cordray was recruited by Elizabeth Warren, the Harvard University professor who developed the idea for the new agency and was appointed by Obama last fall to set it up.

Warren’s prospects for becoming director of the bureau suffered a setback last year when Christopher Dodd, the Connecticut Democrat then in charge of the Senate Banking Committee, said she couldn’t win confirmation.

Instead, Obama named Warren assistant to the president and special adviser to the Treasury secretary. Warren, who is currently on leave, will return to Harvard in the fall, according to a person briefed on her plans.

Cordray previously served as Ohio’s treasurer and a state representative. He was a law clerk to the U.S. Supreme Court Justices Byron White and Anthony Kennedy.

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