Bridging the Week by Gary DeWaal: June 30 to July 4 and 7, 2014 (Violating Economic Sanctions, Attorney-Client Privilege, EU Non-Recognition of US CCPs, Spec Limits)

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Published Date : July 06, 2014

It was a short workweek in the United States because of the Independence Day holiday. However, it seemed like a very long week because of the US loss in the World Cup. Despite the shortness of the workweek and the disappointment over the US team’s loss, there were some significant developments impacting the financial services industry, including a long-awaited fine against BNP Paribas for evading US economic sanctions, as well as an important court decision extending the attorney-client privilege in connection with investigations ordered by in-house counsel.

As a result, the following matters are covered in this week’s Bridging the Week:

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BNP Paribas Settles for Payment of Almost US $9 Billion for Processing Transactions Through the US Financial System with Countries Subject to US Sanctions

BNP Paribas agreed last week to settle charges related to its processing of US-dollar transactions on behalf of Sudanese, Iranian and Cuban entities that are subject to US economic sanctions. As part of its settlement with the US Department of Justice and the Manhattan District Attorney’s Office, BNP will pay a penalty of almost US $9 billion.

According to a statement of facts agreed to by the Justice Department and BNP, the bank’s wrongful conduct occurred from 2004 to 2012. During this time, the bank helped process almost US $9 billion through the US financial system on behalf of the prohibited entities. The bank endeavored to hide its conduct from regulators by concealing the names of the prohibited entities and its own role, says the Justice Department and BNP.

BNP was charged by the Justice Department with violating the US economic sanctions, while the bank was charged by the Manhattan District Attorney with falsifying business records.

The government’s case against BNP relied, in part, on internal communications and a whistleblower’s information. Although the statement of facts observed that BNP delayed providing government investigators some materials from its Geneva operations until May 2013, BNP, in general, provided “substantial cooperation” with the government’s investigation and has taken “several corrective measures to enhance its sanctions compliance.”

According to a press statement issued by BNP,

“In advance of the settlement, the bank designed new robust compliance and control procedures. Many of these are already in force and are working effectively, and involve important changes to the [BNP] Group’s procedures.”

Separately, BNP agreed with the Board of Governors of the Federal Reserve System to pay a US $508 million fine and to take certain remedial measures to ensure compliance with US laws for its ongoing operations. In addition, BNP agreed with the New York State Department of Financial Services to pay a fine of almost $2.5 billion and end employment relationships with 13 employees, including the BNP Group’s chief operating officer, as well as to cease US-dollar clearing operations through its NY branch and other affiliates for one year. Finally, the bank agreed to pay a fine of $963 million to the US Treasury Department’s Office of Foreign Assets Control. 

Under the various fine arrangements, however, BNP will be given credit for penalties paid to different regulators, so its total out of pocket expense will be capped at the amount of the sanctions agreed with the US Department of Justice and Manhattan District Attorney.

Compliance Weeds: This case, which, as reported in the media, ultimately involved political as well as legal considerations, provides a reminder that: (1) it is important for financial service firms to maintain and enforce robust anti-money laundering policies and procedures. These policies, among other elements, must not only seek to detect suspicious activities generally, but must also be adapted to ensure compliance with all applicable laws and regulations, including prohibitions against doing business with enumerated persons and entities, and with persons and entities from prohibited countries; and (2) financial service firms should not ignore or prematurely minimize potentially material concerns raised by employees or contractors, particularly by internal control staff (e.g., compliance personnel) and whistleblowers. Firms should have formal policies and procedures that require management to respond to adverse findings by internal control personnel, including to agree (as appropriate) to recommendations and deadlines for implementation (which afterwards should be monitored). Likewise, firms should have formal policies and procedures that require the review and consideration by impartial personnel of all matters raised by whistleblowers; where a whistleblower's claims are determined not to be supported by relevant facts, this conclusion should be documented in writing, and preferably, reviewed by another impartial person. Legitimate concerns should be followed-up promptly. 

And briefly:

Compliance Weeds: This matter, along with prior CME disciplinary actions, establishes that CME position limit violations may occur under three circumstances: (1) an actual violation of stated position limits computed after the end of a trading day, (2) an actual violation of position limits computed during the course of a trading day, and (3) a potential violation of position limits should a bid or offer, if executed, cause a position limit violation -- even if the bid or offer is not executed. (The CFTC and ICE Futures also expressly prohibit end-of-day and intra-day position limit violations; e.g., see a CFTC 2010 Division of Market Oversight advisory by clicking here.) Members and non-members of the CME should adapt their systems accordingly to ensure they do not inadvertenly violate position limits under these three distinct scenarios (keep in mind, that non-members submit themselves to the jurisdiction of the CME solely by trading on CME).

And even more briefly:

Compliance Weeds: Preparing and filing risk management reports are not the only new enhanced customer protection requirements that FCMs must implement by July 14. As of that day, FCMs must (1) use standardized depository acknowledgement letters for all their existing and new customer funds depository relationships -- except with designated clearing organizations (and depositories must be compliant with the CFTC's access and examination requirements); (2) use firm-specific risk disclosures; and (3) enhance their websites to disclose historical segregation and other financial information. Self-regulatory organizations must also file their supervisory programs with the Commission by July 14 too. (For more details on the Commission's new enhanced customer protection requirements, see the October 30, 2013 special article "CFTC Adopts More Stringent Customer Funds Protection Rules" on this website by clicking here.)

For more information, see:

BNP Paribas Settles for Payment of Almost US $9 Billion for Processing Transactions Through the US Financial System with Countries Subject to US Sanctions:

See also:

BNP Statement:
NYS Action (by the Manhattan District Attorney):

CFTC Issues Revised Technical Guidance Re: OCR:

CFTC Extends Time Period of No-Action Relief Related to Certain Valuation Data Reporting Requirements:

CME Group Disciplinary Action: Daniel T. Zagorin:

EC Commissioner Barnier Close to Recommending That CCPs in Five Jurisdictions Are Subject to Equivalent Regulation As in the EU; CCPs in the US Not Included for Now:

ESMA Publishes Retail Guide to MiFID II and MiFIR:

FINRA Begins Dissemination of Transaction Data Related to Resales of Restricted Corporate Debt Securities to Large Institutions:

In re Kellogg Brown & Root, et al:$file/14-5055-1499662.pdf

JAC Reminds FCMs to File Their Risk Management Policies and Procedures With the CFTC and DSRO By July 14:

NFA Reminds Swap Dealers and MSPs That There Are Mandatory Filings for New and Departed CCOs:

SEC Approves FINRA Rule Concerning Self-Trades:

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of July 3, 2014. No representation or warranty is made regarding the accuracy of any statement or information in this article. Also, the information in this article is not intended as a substitute for legal counsel, and is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The impact of the law for any particular situation depends on a variety of factors; therefore, readers of this article should not act upon any information in the article without seeking professional legal counsel. Katten Muchin Rosenman LLP and/or Gary DeWaal may represent one or more entities mentioned in this article. 

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