Tag: FSA

Do Prosecutions Stop Insider Trading?

We generally assume that the prosecution of crime acts as a deterrence to others who may think about committing the crime. One of the key factors in fraud is opportunity. If the wrongdoer thinks they can not get away with the violation, they are less likely to commit the violation.

At least that is the theory. Social scientists have been looking at this strategy for a long time, with sometimes mixed results. My guess is that the deterrent effect will vary from crime to crime and deterrence strategy to deterrence strategy.

What about insider trading?

The UK’s Financial Services Authority has published a metric on insider trading. They look at the level of abnormal pre-announcement price movements (APPMs) in the share price of a company.

“The level of APPMs for the takeover data set has remained stable over the past few years including for 2009. The level of APPMs for the FTSE 350 data set remained at a low level in 2009.”

The data does not show any improvements. The data set is on the small side so it is hard to judge significance. The FSA program is also new. The program begin during a period of great turmoil in the financial markets.

On the other hand, the FSA’s new enforcement activity of criminal prosecutions and large fines did not affect the amount of abnormal pre-announcement price movements. If this robust enforcement activity is supposed to have a deterrent effect, it does not obviously appear in the data.

Perhaps robust enforcement activity catches more bad guys but does not reduce the bad activity.

Sources:

FSA Berates Compliance Officers in Crackdown on Data Security Breaches

Joanne Wallen of  Complinet writes about the reaction of the U.K.’s Financial Service Authority: FSA Berates Compliance Officers in Crackdown on Data Security Breaches (.pdf).

The FSA focused on compliance officers for not putting enough focus on data security.

Examples of good practice at firms that the FSA visited included encrypting laptops and using secure internet links to transfer data to third parties. This was something that HSBC claimed it usually did, but the bank was caught out when its electronic system went down and it instead transferred the records of 370,000 life insurance customers onto a disc that it then sent in the post to its reinsurer at the beginning of February. As of the beginning of April, the disc had not yet turned up. Other examples of best practice include masking customers’ financial details where they are not necessary for staff to do their jobs and appointing a senior manager with overall responsibility for data security.

Money Laundering Reporting Officer Fined

The Financial Servies Authority of the United Kindom fined Sindicatum Holdings Limited £49,000 and its money laundering reporting officer (MLRO), Michael Wheelhouse, £17,500 for not having adequate anti-money laundering systems and controls in place for verifying and recording clients’ identities. [FSA fines firm and MLRO for money laundering controls failings]  Apparently this is the first time the FSA has fined a money laundering reporting officer. The FSA did not find any evidence of money laundering at the firm.

In the final notice for Mr Michael Wheelhouse, the FSA states:

2.1. Throughout the Relevant Period, Mr Wheelhouse was approved by the FSA to perform and performed the controlled function of Money Laundering Reporting Function (CF11). As such, he was the Firm’s money laundering reporting officer. In that role, he had responsibility for oversight of the Firm’s compliance with the FSA’s rules on systems and controls against money laundering.

2.2. However, in performing that role and discharging CF11, Mr Wheelhouse failed to take reasonable steps to ensure that the business of the Firm for which he was responsible in his controlled function complied with the relevant standards and requirements of the regulatory system (as required by Statement of Principle 7 of APER (“Statement of Principle 7”)).

2.3. Mr Wheelhouse breached Statement of Principle 7 by failing to take reasonable steps to implement adequate procedures for verifying the identity of the Firm’s clients; by failing to ensure that the Firm adequately verified the identity of a significant number of its clients; and by failing to ensure that the Firm kept adequate records to demonstrate that it had verified the identity of a significant number of its clients.