Money Laundering, Bail-in Powers, German Pay: Compliance

Feb. 6 (Bloomberg) -- The European Union may target banks with fines as high as 10 percent of their annual revenue if they fail to combat money laundering and terrorist financing.

Bank staff may also face penalties as high as 5 million euros ($6.8 million) under proposals adopted yesterday by the European Commission. The rules would extend requirements for businesses to check the identity of clients and monitor their transactions, according to an e-mailed copy of the measures. They would also apply to lawyers, accountants, dealers in precious stones and gambling firms.

Current EU rules suffer from “inadequacies and loopholes,” according to the draft law. The commission warned last year that the EU faces “evolving threats” that required an upgrading of its rules against financial crime. The Financial Action Task Force, an international organization tasked with co-ordinating the fight against money laundering, has also called on governments to toughen their laws.

The draft EU rules would force companies such as banks and law firms to carry out checks on their customers if they carry out transactions worth at least 7,500 euros, compared with a 15,000-euro threshold under existing EU law.

The commission plans must be approved by national governments and by lawmakers in the European Parliament before they can take effect.

Compliance Policy

German Push to Speed Bank Bondholder-Loss Plan Gains Support

Germany, the Netherlands and Finland want to speed up European Union plans to force losses on senior bondholders of failing banks, three European government officials said.

The three AAA rated euro-area states last week called for regulators across the EU to gain so-called bail-in powers as soon as 2015, rather than in 2018 as currently proposed, said the officials, who declined to be identified because the talks are private. The European Central Bank has warned that 2018 is “far too far away” for the new rules, which seek to insulate taxpayers and the euro area’s firewall fund from rescue costs.

The bail-in push from the Germans, Dutch and Finns was made during Jan. 29-30 technical meetings in Brussels, the same week that the Dutch government shielded senior bondholders of nationalized lender SNS Reaal NV. Dutch Finance Minister Jeroen Dijsselbloem said that step was needed to prevent a spike in funding costs for SNS Reaal and other lenders in the country.

Accelerating the loss-sharing rules would give the euro zone more tools to avoid taxpayer rescues like those provided to Greece, Ireland, Portugal and Spain and sought by Cyprus. It also could ease concerns about financial liability within the euro zone once the ECB takes over financial supervision within the 17-nation currency bloc.

Senior bank bondholders so far have mostly avoided losses, while European governments and the International Monetary Fund have committed to 486 billion euros of aid since 2010.

Under the EU plans, drawn up by the European Commission, regulators would be given the power to impose losses on holders of senior unsecured debt, as well as derivatives counterparties, once a lender’s capital and subordinated debt are wiped out. Regulators could also force debt to convert into common shares, so shoring up a struggling bank’s equity.

For more, click here.

German Banking Bill May Affect Up to 12 Lenders, Schaeuble Says

As many as 12 banks based in Germany will be affected by government legislation to force some large retail banks to spin off proprietary trading, Finance Minister Wolfgang Schaeuble said.

Chancellor Angela Merkel’s Cabinet approved a draft bill today that would force deposit banks to separate proprietary trading, lending and guarantees to hedge funds as well as high-frequency trading when associated activities exceed 100 billion euros ($136 billion), or 20 percent of the balance sheet. The BaFin financial regulator would get discretionary powers that affect lenders not covered by the limits.

The bill is the latest measure taken by Merkel to regulate financial markets after curbing manager pay, banning some short-selling and making banks pay into a resolution fund. Banking legislation is at the forefront of policy making as lawmakers prepare to contest federal elections slated for Sept. 22.

Under the bill, top managers at banks face prison sentences of as long as five years or a penalty of as much as 11 million euros if they intentionally violate rules and the banks that employ them get into trouble as a result.

There is no evidence that a split of trading business from other parts of banks improves stability on financial markets, according to the BdB Association of German Banks.

Andreas Schmitz, BdB president, said in an e-mailed statement that the package on financial market regulation “follows the wrong path” and “is primarily the product of electioneering.”

The government aims to pass the draft in the lower house of parliament and gain upper-house approval before the summer.

S&P Lawsuit Undermined by SEC Rules That Impede Competition

The U.S. lawsuit against Standard & Poor’s raises pressure to accelerate competition in the ratings industry while the government itself has adopted rules that left the business dominated by the same companies whose flawed grades sparked the worst financial crisis since the Great Depression.

The Justice Department accuses McGraw-Hill Cos. and its S&P unit of deliberately understating the risk of bonds backed by mortgages made to the riskiest borrowers to win business from Wall Street banks. S&P, Moody’s Investors Service and Fitch Ratings provided 96 percent of all ratings for governments and companies in the $42 trillion debt market in 2011, versus 97 percent in 2008.

The lawsuit is unlikely to change the relationship because a 2006 law intended to open the field to new entrants has instead insulated the top three. Startups have struggled to obtain the designation that lets them sell rankings because of everything from a missing recommendation letter to prohibitive compliance costs to being able to provide years of ratings performance.

Judith Burns, a spokeswoman in Washington for the Securities and Exchange Commission, which oversees applications for ratings firms, declined to comment on the process.

Lawmakers targeted the credit-grading business in the 2010 Dodd-Frank Act after the collapse of top-ranked mortgage-backed securities contributed to $2.1 trillion in losses at the world’s largest banks. Reports from the U.S. Senate Permanent Subcommittee on Investigations and the Financial Crisis Inquiry Commission cited failures by the companies as a cause of the financial crisis, which began in August 2007.

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Compliance Action

RBS Fined $612 Million by Regulators for Manipulating Libor

Royal Bank of Scotland Group Plc, Britain’s biggest publicly owned lender, will pay about $612 million in fines for manipulating interest rates, the second-largest penalty imposed in a global regulatory probe.

The lender will pay $325 million to the U.S. Commodity Futures Trading Commission, $150 million to the Department of Justice and 87.5 million pounds ($137 million) to the U.K.’s Financial Services Authority, the CFTC said in a statement today. RBS’s Japanese unit agreed to plead guilty to wire fraud as part of a deal with the Justice Department, the CFTC said.

“The public is deprived of an honest benchmark interest rate when a group of traders sits around a desk for years falsely spinning their bank’s Libor submissions, trying to manufacture winning trades,” said David Meister, the CFTC’s Director of Enforcement. “That’s what happened at RBS.”

The penalty is the biggest blow to Chief Executive Officer Stephen Hester’s attempt to overhaul the lender after it took 45.5 billion pounds from taxpayers in the largest bank bailout in history in 2008. The fine, the third to result from the global probe so far, exceeds the 290 million pounds Barclays Plc paid in June, and is second only to the $1.5 billion Switzerland’s UBS AG paid in December.

From at least 2006, more than a dozen RBS traders made “hundreds” of attempts to rig yen and Swiss franc Libor to benefit their positions, the regulator said. At times, the RBS employees succeeded in rigging the benchmark, the CFTC said.

Britain’s largest publicly owned bank rose 0.4 percent to 338.8 pence as of 1:09 p.m. in London. The shares have gained 17 percent over the past year. The U.K. paid the equivalent of 502 pence for the shares as part of the government rescue and British taxpayers own about 81 percent of the firm.

MF Global Customer Funds Rules Will Get Another Hearing at CFTC

The top U.S. derivatives regulator will discuss with futures industry participants a proposal to bolster protections for customer funds following the collapse of MF Global Holdings Ltd. and Peregrine Financial Group Inc.

The Commodity Futures Trading Commission held a roundtable meeting in Washington yesterday following a proposal to increase auditing standards and disclosure. The roundtable was expected to discuss efforts to oversee self-regulatory organizations, including CME Group Inc., and their duties to monitor futures brokers.

The meeting, the third roundtable in the past year on the topic, was scheduled 15 months after MF Global filed for bankruptcy and reported a $1.6 billion shortfall in customer funds. The shortfall and the collapse of Peregrine less than a year later prompted scrutiny of the CFTC and self-regulatory organizations in Congress and the futures industry.

The CFTC on Oct. 23 proposed a series of disclosure requirements for futures brokers to give customers greater accounting of their funds. The proposals also would require heightened disclosure by brokers about how client collateral is held at custodial banks such as JPMorgan Chase & Co., State Street Corp. and Bank of New York Mellon Corp. Standards for auditors of brokerages would also be increased under the rule.

James W. Giddens, the trustee overseeing the bankruptcy of the brokerage subsidiary of MF Global, has been working to narrow the shortfall in customer funds.

MF Global Inc., the U.S. brokerage subsidiary, won approval from a bankruptcy judge on Jan. 31 for a settlement with U.K. affiliate MF Global UK Ltd. Including a settlement with the broker’s parent, MF Global Holdings Ltd., domestic futures customers can expect a 93 percent recovery of funds, Giddens said in a court filing.

States Lose $39.8 Billion to Offshore Tax Games, Study Says

State governments in the U.S. lost $39.8 billion in 2011 because of offshore tax avoidance, according to a study released yesterday.

About two-thirds of the lost revenue is from corporations, which can shift profits to low-tax jurisdictions outside the U.S. and avoid paying taxes until they bring the money home. The report was issued by the U.S. Public Interest Research Group, a Washington-based consumer group that often opposes banks and insurance companies.

California, New York and New Jersey, all of which have income taxes, lost a combined $15 billion, the report said. The report suggested that states “decouple” from the federal tax system so corporate maneuvers to reduce U.S. taxable income don’t automatically affect states.

President Barack Obama has called for limits on companies’ ability to defer U.S. taxes on profits they earn outside the country. Those proposals haven’t advanced in Congress.

Brazil May Cut Taxes for Small-Cap Stock Buyers, CVM Says

Brazil may cut taxes for buyers of so-called small-cap stocks, the regulator known as CVM said in an e-mailed statement.

The nation is also studying tax cuts for small- and mid-sized companies that decide to do an IPO, CVM said in the statement.

Initiatives are being discussed by a task force that includes CVM, BMF & Bovespa, capital markets association Anbima, Brazil’s Finance Ministry, national development bank BNDES and some brokerages.


Maughan Says RBS Fine May Hurt Ability to Retain Talent

Simon Maughan, a financial industry strategist at Olivetree Securities, discussed banker remuneration and Royal Bank of Scotland Group Plc’s pending fine for manipulating interest rates.

He talked with Francine Lacqua on Bloomberg Television’s “On the Move.”

For the video, click here.

Barofsky Calls Ratings Firms’ Business Model ‘Corrupt’

Neil Barofsky, former special inspector for the U.S. Treasury’s Troubled Asset Relief Program and a Bloomberg Television contributing editor, talked about the U.S. Justice Department lawsuit against McGraw-Hill Cos. and its Standard & Poor’s unit over claims S&P knowingly understated the credit risks of bonds and derivatives that were central to the worst financial crisis since the Great Depression.

Barofsky spoke with Erik Schatzker and Stephanie Ruhle on Bloomberg Television’s “Market Makers.”

For the video, click here.

Comings and Goings/Executive Pay

German-Listed Companies Should Cap Executive Payouts, Panel Says

German-listed companies should limit pay and bonuses for top executives, according to a panel set up by the government in 2001 to promote transparency for investors.

“The recommendations are primarily intended to increase transparency and to make the information already available today easier to compare, without impacting on the systems of management-board remuneration,” the Corporate Governance Code Commission said in a statement yesterday on how its rules for corporations should be amended.

When defining compensation structures, supervisory boards should take into account the relationship between what executive board members and senior managers make, as well as the pay of the company’s staff, the commission said. The panel didn’t say it would set a limit on what executives should be allowed to earn, leaving that to company boards.

The panel also proposed amending rules regarding extraordinary shareholder meetings and acquisition bids.

The panel will take comments to yesterday’s proposals until mid-March and deliberate on how to change the current code at a meeting in May.

Goldman Republican Lobbyist Malan Departing for Rio Tinto Job

A senior Republican lobbyist at Goldman Sachs Group Inc. is leaving the bank for a job with Rio Tinto Group, the world’s second-biggest mining company.

Todd Malan, 46, will be vice president of external affairs for the U.S. and South America at the mining company. He will handle regulatory and legislative issues, and work with institutions like the World Bank and the International Finance Corp.

Malan joined Goldman Sachs in 2008 and was part of a new lobbying team brought in to deal with the fallout from the financial crisis. Along with running Goldman Sachs’s Political Action Committee, Malan lobbied on the 2010 Dodd-Frank Act that overhauled U.S. financial regulation. He also worked on the bank’s defense of subprime loan investigations by the Senate Permanent Subcommittee on Investigations and the Securities and Exchange Commission. Goldman Sachs settled the SEC case in July 2010 for $550 million.

To contact the reporter on this story: Carla Main in New York at

To contact the editor responsible for this story: Michael Hytha at

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