Bloomberg News

ING Code-Strip Probe, FDIC Basel Vote, Gupta: Compliance

June 13, 2012

ING Bank NV agreed to pay $619 million to settle a probe into how financial institutions bypass sanctions on countries including Cuba and Iran, Manhattan District Attorney Cyrus Vance Jr. said.

ING admitted violating New York law by falsifying financial records of banks in the state, Vance and Ronald C. Machen, U.S. Attorney for the District of Columbia, said in a statement. Amsterdam-based ING moved billions of dollars through the financial system on behalf of Cuban and Iranian clients, violating U.S. sanctions by “concealing the illegal nature of these transactions and deceiving U.S. banks into processing illegal wire payments,” Vance said.

The announcement is part of a four-year investigation of “stripping,” in which codes indicating the source of wire transfers are removed.

“The violations that took place until 2007 are serious and unacceptable,” Jan Hommen, chief executive officer of ING Group, said in a statement. “Since starting the investigations in 2006, ING Bank has taken decisive actions to strengthen compliance throughout the organisation and heighten employee awareness of compliance risks.”

Half of the $619 million will be paid to the Manhattan District Attorney’s Office and the other half will be paid to the U.S., Vance said in the statement.

The case is People of the State of New York v. Islamic Republic of Iran Shipping Lines, 11-02924, Supreme Court of the State of New York (Manhattan).

Compliance Policy

FDIC Joins Fed in Backing Rules to Implement Basel III Standards

The Federal Deposit Insurance Corp. is seeking comment on capital rules designed to align standards for U.S. banks with those governing foreign competitors as part of a global effort to reduce risk in the financial system.

The FDIC board voted 5-0 yesterday at a Washington meeting to propose three measures for implementing parts of the Basel III accords, developed by a panel of international regulators to bolster banks’ ability to withstand economic stress, boost risk management, and strengthen transparency and disclosure. The Federal Reserve approved the same set of measures June 7.

The new capital standards, designed to be phased in by 2019, will affect all U.S. banks. U.S. banks would need to have about $60 billion above the capital they now hold to meet the standards, according to Fed estimates.

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In a separate vote yesterday, the FDIC approved a final rule increasing capital requirements for the trading books of about 25 banks to limit risks observed during the 2008 credit crisis.

The U.S. rules, which the Office of the Comptroller of the Currency was also scheduled to approve yesterday, closely track the agreement crafted by the 27-nation Basel Committee on Banking Supervision.

Merkel Financial Tax Talks, EU Talks Move Ahead in Nine States

German Chancellor Angela Merkel and leaders from the opposition parties in parliament are unlikely to find common ground today on the introduction of a financial market tax, said Norbert Barthle, the budget spokesman in Merkel’s party caucus.

Barthle made the remarks yesterday on Deutschlandfunk radio. “Another round of talks” will be needed before the parliamentary summer break to win the opposition’s support for the European Stability Mechanism and the fiscal accord for more budgetary discipline in Europe, he said.

Merkel’s government needs a two-thirds majority in parliament to ratify the fiscal agreement, forcing her to court the support of the opposition Social Democrats and Greens.

Separately, the European Commission thinks that a financial transaction tax could be passed in nine states of the European Union this year if that number of governments agrees to it by July, Sueddeutsche Zeitung reported.

Nine states are the minimum for a common initiative in a smaller group in case not all 27 members agree on an issue, the newspaper said yesterday in a preview of an article for today’s edition, citing unidentified people close to EU commissioner Algirdas Semeta.

Compliance Action

Libor Traders Said to Avoid Criminal Charges in British Probe

Traders being investigated by U.K. regulators for the suspected rigging of global interest rates are unlikely to face criminal charges while their firms may suffer record fines, people with knowledge of the probe said.

Britain’s Financial Services Authority is scrutinizing evidence of attempted market abuse as well as failures in banks’ systems and controls, which carry civil penalties, said the people, who declined to be identified because the inquiry is private. To file criminal charges in England, the regulator would need to show traders successfully manipulated the rate.

The FSA is among regulators looking into whether banks tried to manipulate the London interbank offered rate, the benchmark rate for $360 trillion of securities, to hide their true cost of borrowing, and whether traders colluded to rig the benchmark to profit from interest-rate derivatives.

Royal Bank of Scotland Group Plc, Citigroup Inc. (C:US), UBS AG (UBSN), ICAP Plc (IAP), Lloyds Banking Group Plc and Deutsche Bank AG (DBK) are among firms that are being probed by regulators worldwide. Spokesmen for UBS, RBS, ICAP, Deutsche Bank and Lloyds declined to comment, while those for Citigroup didn’t immediately return calls. Joseph Eyre, an FSA spokesman, declined to comment.

The European Union, Canadian and U.S. antitrust regulators as well as the Swiss Competition Commission are probing whether firms acted anti-competitively. The U.S. Department of Justice is running a criminal investigation, according to court documents. Alisa Finelli, a Justice Department spokeswoman, declined to comment on the status of its probe.

The FSA expects to levy record fines on some of the 12 banks under investigation by the year-end, one of the people said.

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Cable Companies Led by Comcast Get Relief From Signal-Carry Rule

Regulators will let a rule lapse that allows more than 12 million U.S. cable subscribers with analog television sets to receive signals from broadcast stations without having digital converter boxes.

The Federal Communications Commission in an order distributed by e-mail yesterday said it would let the rule expire at midnight. The National Cable & Telecommunications Association wanted an end to the rule, which requires cable systems to offer analog and digital streams of TV broadcasts.

Since 2007 the share of U.S. households dependent on analog equipment has dropped from 45 percent to just over 20 percent, the Washington-based trade group said in a June 8 FCC filing.

Cable operators will provide low-cost converter boxes that let customers view digital broadcast streams on analog sets, according to the filing.

The National Association of Broadcasters in a March 12 FCC filing said the rule should be extended for three years so viewers don’t lose access to programming. Members of the Washington-based trade group include Walt Disney Co. (DIS:US)’s ABC, News Corp. (NWSA:US)’s Fox, Comcast Corp. (CMCSA:US)’s NBC and CBS Corp. (CBS:US)

Spanish Bank Rescue Unlikely to Trip Debt Swaps, ISDA Says

The 100 billion-euro ($125 billion) bailout of Spain’s banks is unlikely to trigger payouts on credit-default swaps insuring the nation’s debt, according to the International Swaps & Derivatives Association.

There’s speculation investors holding bonds issued by Spain and its banks will rank behind official creditors in the queue for payment after the nation asked for a bailout. The rescue is a response to a build-up of bad loans at the nation’s lenders and makes Spain the fourth euro-area nation to seek help since the crisis started almost three years ago.

ISDA’s 15-member determinations committee decides whether credit events occur to trigger default swaps and no question has been submitted to the group of dealers and traders. The votes of 12 members are needed to determine a credit event without the decision being subject to external legal review, ISDA said.

Concern about the impact on swaps stems from speculation the rescue package may be issued by the European Stability Mechanism, which says its loans “will enjoy preferred creditor status in a similar fashion” to those of the International Monetary Fund.

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Courts

Rajat Gupta Defense Rests in U.S. Insider-Trading Trial

Former Goldman Sachs Group Inc. (GS:US) director Rajat Gupta rested his defense to federal insider-trading charges without testifying or being allowed to play wiretapped recordings that his lawyer called “substantial” to his case.

Defense attorney Gary Naftalis told U.S. District Judge Jed Rakoff yesterday that Gupta, 63, who ran McKinsey & Co. from 1994 to 2003, had finished offering evidence. The trial began May 21.

Summations are set to begin this morning, and Rakoff said the jury may begin its deliberations late this afternoon.

Gupta is accused of leaking inside information to Galleon Group LLC hedge fund co-founder Raj Rajaratnam about Goldman Sachs and Procter & Gamble Co. (PG:US), where Gupta was also a director. He’s charged with one count of conspiracy and five counts of securities fraud, which carries a maximum term of 20 years in prison.

The defense, which began June 8, was based in part on a claim that another Goldman Sachs executive, David Loeb, passed the tips that prosecutors say came from Gupta. Rakoff barred the defense from playing wiretapped recordings from August 2008 that the defense claims show Loeb tipping Rajaratnam, calling the recordings inadmissible “hearsay.” Loeb hasn’t been accused of wrongdoing.

Michael DuVally, a spokesman for New York-based Goldman Sachs, declined to comment on the decision about the wiretaps.

The defense has argued that Gupta parted ways with Rajaratnam after he discovered the fund manager had withdrawn money without his knowledge from the Voyager Fund, an investment they had created together.

The case is U.S. v. Gupta, 11-cr-00907, U.S. District Court, Southern District of New York (Manhattan).

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Ex-Hedge Fund Manager Claims Loss on RBS Ignoring Ponzi Warnings

A former hedge-fund manager sued Royal Bank of Scotland Group Plc (RBS)’s NatWest unit claiming the bank ignored evidence its accounts were used to conduct what may be one of Britain’s biggest Ponzi schemes, in which he lost about 19.3 million pounds ($30 million).

He and the firm he founded, Jeremy D. Stone Consultants Ltd., sued NatWest and one of its managers, Paul Aplin, for negligence, dishonest assistance, deceit and conspiracy, seeking about 24 million pounds. The complaint was filed in London in April and made available by the court last week.

The U.K. Serious Fraud Office said in an e-mail it was investigating a suspected Ponzi scheme and made five arrests in 2010. No one has been charged and the agency refused to say who had been arrested.

“These claims have been thoroughly investigated and we believe they have no merit,” RBS spokesman David Gaffney said in an e-mail. “The bank will defend itself vigorously.”

Aplin declined to comment via Gaffney.

Investors may have lost a total of 40 million pounds, according to a person familiar with the SFO probe who declined to be identified because the person wasn’t authorized to speak.

The case is Jeremy D. Stone Consultants Ltd., Jeremy Stone v. National Westminster Bank Plc, Paul Aplin; High Court of Justice, Chancery Division; HC11C00276.

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Interviews/Speeches/Hearings

Fed’s Tarullo Calls for Tougher Supervision of Shadow Banking

Federal Reserve Governor Daniel Tarullo called on regulators to curb risks in lightly regulated nonbank funding and credit markets that he said may grow as supervisors strengthen bank oversight.

So-called shadow banking, in which nonbank institutions create loans or raise funds, “has been only obliquely addressed,” Tarullo said yesterday in remarks prepared for a San Francisco Fed conference on global finance. “As the oversight of regulated institutions is strengthened, opportunities for arbitrage in the shadow banking system may increase.”

Shadow banks typically lack deposit insurance and don’t have access to the Fed’s discount window. Consequently, the firms can be subject to runs if investors refuse to roll over commercial paper or to buy assets held by a shadow bank. During the financial crisis, the Fed created emergency programs to save some lightly supervised parts of finance from collapse. The Primary Dealer Credit Facility, for example, financed Wall Street bond brokers after funding in repo markets broke down.

Tarullo called for more transparency in repo markets, and for reforms to address “structural vulnerabilities” in money market mutual funds. “A third short-term priority is to address the settlement process for tri-party repurchase agreements,” he said.

U.S. central bankers plan to meet June 19-20 amid signs of sputtering economic growth.

JPMorgan Traders Took Risks They Didn’t Understand, Dimon Says

JPMorgan Chase & Co. (JPM:US) Chief Executive Officer Jamie Dimon told Congress the bank let traders take risks they didn’t understand while he didn’t answer key questions about more than $2 billion in trading losses.

In testimony prepared for a hearing yesterday, Dimon expressed regret over losses in the bank’s chief investment office, saying that its trading strategy was “poorly conceived and vetted” by senior managers who were “in transition” and not paying adequate attention.

“This portfolio morphed into something that, rather than protect the firm, created new and potentially larger risks,” Dimon said in the remarks ahead of his appearance yesterday before the Senate Banking Committee. “We have let a lot of people down, and we are sorry for it.”

Dimon, 56, was scheduled to make the first of two appearances on Capitol Hill to face lawmakers probing how the largest and most profitable U.S. bank, often praised for its “fortress” balance sheet, could have taken such risks after coming through the 2008 financial crisis largely unscathed. His remarks left unanswered what he knew when about the trading strategy and losses that accelerated in March and April.

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Darda Says ECB ‘Failed’ to Offset Major Monetary Shock

Michael Darda, chief economist and chief market strategist at MKM Partners LP, talked about the European Central Bank’s handling of the debt crisis in the euro zone.

Darda spoke with Scarlet Fu on Bloomberg Television’s “InBusiness.”

For the video, click here.

U.K.’s Sants Says New BOE Powers May Make Governor Role Too Big

Hector Sants, chief executive officer of the U.K. Financial Services Authority, said moving financial regulation powers to the Bank of England may make the job of governor too big for one person to manage.

Sants, who made the remarks in a BBC interview today, will step down from his post at the end of this month after leading the regulator through much of the global financial crisis. He also said the run on Northern Rock Plc in 2007 could have been prevented if the government and the Bank of England had taken his advice to provide liquidity support to Lloyds Banking Group Plc (LLOY) to buy the lender.

“I think that would have made a difference, it would have avoided the queues at Northern Rock and would have changed the general climate in relation to the old building society sector that had moved into the banking sector,” he told the BBC.

Comings and Goings

Lloyds Head of Strategic Transactions Group Murphy Said to Leave

Tom Murphy, the banker who helped Lloyds Banking Group Plc to avoid ceding greater control to the British government in 2009 and oversaw the lender’s asset sales, will step down, said a person with knowledge of his decision.

Peter Woodbury, another managing director in the division, is also leaving, said the person, who declined to be identified because the talks are private. The person declined to say why both men are leaving the bank, which was bailed out following its acquisition of mortgage lender HBOS Plc in 2008.

Murphy ran the strategic transactions group that raised 22.5 billion pounds ($35 billion) of capital for the bank the following year. The fundraising, which included a record 13.5 billion-pound rights offering as well as a debt swap, allowed Lloyds to avoid seeking additional aid that would have given the government a majority stake in the bank.

A spokesman declined to comment on individual employees. Murphy and Woodbury didn’t return telephone messages seeking comment.

Spain’s Fernando Vargas to Join EBA’s Management Board

Fernando Vargas Bahamonde, deputy director general of supervision at the Bank of Spain, was chosen as a member of the European Banking Authority’s management board, the Spanish central bank said.

The management board is made up of the chairman and six other board members, the Bank of Spain said in an e-mailed statement from Madrid yesterday.

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

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


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