European banks at mercy of US regulators

European banks are under disproportional enforcement pressure from US regulators. Since 2012, of the $38.4bn levied in economic crime fines worldwide, 97 percent of all fines have come from US regulators. With the average fine for European banks being ten times the amount US banks have been served.

Top 10 EU banks: Enforcement from US regulators

european banks us regulators

The Corlytics Barometer, which this issue focuses on economic crime globally, reveals that enforcement action for sanctions and tax evasion are exclusively handed out by US regulators, whereas bribery and anti-money laundering AML are higher up the watch list for European and Asian regulators.

Although the number of fines have increased over the last 12 months, the average value of each fine has decreased. This is due in some part to a few very large fines issued by the US regulators (predominantly the Office of Foreign Assets Control) in 2014. These were mainly for sanctions and Anti-Money Laundering and Banking Secrecy Act (AML/BSA) breaches.

US regulators getting tough with non-US banks

Corlytics uncovered a significant finding for banks operating outside of their originating jurisdiction. UK, French, German and Swiss banks with branches in the US have paid almost 40 percent of the fines related to economic crime in the US.

It’s getting personal

Economic crime involves serious criminal acts committed both by senior individuals at institutions and the institutions themselves. Many regulators have focused on infringements by regulated individuals at firms, rather than just the firms themselves. This is especially true of European and Asian regulators. Enforcement involving criminal convictions, and imprisonment for individuals is very much on the increase in the UK, Hong Kong and Australia.

Criminal cost

There is an emerging hierarchy of financial penalties for firms by regulatory category. Globally, crimes involving sanctions accounted for more than USD $1.77 in every USD $5 fined. This equated to over USD $13.5 billion for the period. It’s notable that this has decreased from USD $2 in every USD $5 from examined data since 2009, indicating that sanctions violations may be beginning to come under control.

Sanctions was followed by AML/BSA at USD $8 billion, bribery at USD $7.7 billion, fraud at USD $4.4 billion, tax evasion at USD $2.8 billion, and misappropriation at USD $1.8 billion.

Cyber indications

While cyber fraud has been an important part of economic crime, and there are several pending cases with regulators, there have been few associated fines in this period. However, this trend is expected to change for two reasons: firstly, the introduction of the cybersecurity regulations by the New York Department of Financial Services (NYDFS) which came into effect in March of this year, and secondly, the introduction of the GDPR which comes into effect in May 2018.

Penalties for individuals

Sticking with US regulators, the Commodity Futures Trading Commission (CFTC) has the highest fines levied against individuals globally. Accounting for over USD $422 million over the period. Interestingly, for fines against individuals, the average size of a fine for an individual is over USD $6 million.

In the UK, regulators prefer a different tack. Frequently demanding lengthy prison sentences for fraud that have associated confiscation orders. In the US, for senior individuals, settlements for economic crime frequently involve disgorgements (confiscation of assets gained) together with life-time bans from the industry.

The Australian Securities and Investments Commission (ASIC) levies more individual fines than any other regulator globally, but the amount of these fines at an average of just over USD $15,000 pales into insignificance when compared to the CFTC fines. The Securities and Futures Commission of Hong Kong (HK SFC) is also beginning to sharpen its claws with two huge fines against individuals in the past 10 months, one with a value of over USD $10 million and another with a value of over USD $11 million.

Penalties by jurisdiction

Corlytics has picked up different geographic behaviours from the regulators. In Australia, the UK and Hong Kong the enforcement activity is more focused on individuals. There have been 228 individual cases in total in these territories, versus 29 cases against firms.

Although the US has brought the most cases against individuals to date – in the period, there were 110 individual cases – the focus remains on fining firms, with 444 actions brought during the same period.

The average fine level for firms were higher than individuals, with every regulator, except in Australia.

The United States is at the fore of punishing economic crime with fines. Responsible for almost 97 percent of total fines by value over the period.

The most frequent violations were in Anti-Money Laundering or Bank Secrecy Act rules, with cases in all jurisdictions, except Australia. Australian regulators covered mostly fraud. The UK mainly covered fraud and bribery.

The United States covered all six financial crime types, with sanctions violations accounting for 40 percent, followed by fraud at 36 percent, and both Anti-Money Laundering or Bank Secrecy Act and tax evasion at roughly 10 percent each by value.

Penalties by bank origin

The top 10 European banks have paid USD $13.25 billion in fines to US regulators since 2012. This means that since 2012, 10 European banks have paid 35 percent of all fines to US regulators.

The average value of each fine is approaching USD $0.5 billion per fine; over 10 times the average that US firms pay to US regulators.

Large fines have been decreasing, but that could all change

John Byrne, CEO at Corlytics said, “What’s most noticeable across all regulatory categories is the extent to which large fines have decreased. Regulators are beginning to indicate that they are satisfied that financial institutions seem to be addressing economic crime and may have moved their focus to other regulatory categories for the time being.”

However, this does not mean that regulatory scrutiny won’t return to this area in the future. Large European financial institutions with a presence in North America need to be extremely careful to ensure that they comply in the area of economic crime. There is clear evidence to suggest that they will be treated harshly if they do not.

It looks like regulators are beginning to take a closer look at the senior managers who preside over compliance issues. Byrne continues, “Our data suggests the increased penalties, both financial and non-financial, ensure that senior managers of large financial institutions need to be in full control of the institution’s compliance posture. In relation to financial crime, the future area that organisations need to be most aware of is cybersecurity.

“The NYDFS regulations have come into effect and this regulator, even though it’s a state regulator rather than a federal one, has been known to penalise heavily when its regulations are breached. Financial institutions need to ensure that they fully understand their risk exposures in this area.”

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