Volume 4 (2020-21)

Each volume of Journal of Financial Compliance consists of four 100-page issues published in both print and online. Articles scheduled for Volume 4 are available to view on the 'Forthcoming content' page. The articles and case studies confirmed for Volume 4 are listed below:

Volume 4 Number 2

  • Editorial
    Mario J. DiFiore, Editor, Journal of Financial Compliance
  • Practice papers
    An oversight framework to keep senior executives in control
    Richard Pike, Founder and CEO, Governor Software

    Given the current regulatory focus on senior management responsibility and the resultant requirement for high-quality oversight of processes and controls, this paper sets out an approach to instantiating such an oversight process in the 1st line of defence. As most financial firms are subject to huge change, the paper then goes on to show how such an oversight process might dovetail with a regulatory change process. In order to more clearly explain the approach, the paper then describes a short case study from a large US bank who successfully ran such a project in 2019. Finally, the paper will set out the benefits to be accrued from taking this path to high-quality oversight.
    Keywords: oversight, 1.5 line of defence, regulatory change, knowledge graph

  • Cross-border crosswalk: An overview of Canadian and US banking and consumer financial services regulators
    Suhuyini Abudulai, Partner, Cassels Brock & Blackwell, Xiaoling Ang, Associate Director, NERA Economic Consulting, Eric Goldberg, Partner and Thomas Kearney, Partner, Akerman

    Canada and the United States are neighbours, each with its own ‘alphabet soup’ of banking and consumer financial services regulators. Many institutions in each country are under the purview of both federal and state/provincial regulators, and some institutions may be supervised by multiple financial regulators. For businesses engaged in financial services on either side of the border, it is important to understand which agencies regulate the products and services they offer and how agencies policies change over time. Understanding how local regulatory environments differ should inform business decisions. For example: (a) There may be costs associated with expanding to a new jurisdiction as there are likely different compliance requirements. (b) A product that is viable in one area may be untenable in another due to differing regulations (eg varying usury limits). (c) Litigation risk may differ between jurisdictions: various US regulators can file lawsuits in federal court whereas Canadian regulators often have supervisory and regulatory powers that do not include prosecution. US companies are also often able to insulate themselves from class action liability through the operation of arbitration clauses and class action waivers. (d) Companies seeking to do business in both the United States and Canada should consider engaging legal and expert teams during product development to harmonise where possible. Additionally, when facing regulatory scrutiny or litigation, similar harmonisation may be beneficial as well. Navigating the oversight of each agency is nuanced within each country, and one’s knowledge, experience and jargon are often specific to their area of expertise. Regulated entities’ incentives may differ due to differences in regulation or licensing requirements. Engaging with and retaining expertise (eg staff, counsel or external experts) in one country who have the tools and language to work with people in another can be valuable. To help with that, this paper provides an overview of the legal framework, financial services landscape and key regulators in Canada and the United States.
    Keywords: Canada, United States, regulation, banking, consumer finance, consumer protection, FinTech, compliance

  • Increasing cybersecurity awareness and fluency for compliance risk management
    E.J. Yerzak, Director, Cyber IT Group and Michael Farrell, Cybersecurity Consultant, Ascendant Compliance Services

    This paper aims to explain the fundamental cybersecurity concepts that financial compliance professionals should know as well as shed some light on certain advanced cybersecurity concepts that are meaningful to understand. Knowledge of such technical terminology can enable effective communication between the compliance function, the information technology department, other members of senior management, third-party vendors, and inevitably, regulators.
    Keywords: cybersecurity, privacy, encryption, access control, data breach, risk management

  • Applications of machine learning in the identification, measurement and mitigation of money laundering
    Nikhil Aggarwal, Managing Director and Sean Wareham, Associate, Promontory Financial Group, an IBM Company and Rasmus Lehmann, Data Scientist, IBM Client Innovation Center

    The cost of financial crimes compliance continues to grow, locked in step with increasing regulatory expectations and volumes of low-productivity work items. Financial institutions cannot afford to wait for entirely new paradigms and instead are investing in solutions that provide near-term relief and can orient institutions towards the future. Technologies like artificial intelligence and machine learning (ML) — well entrenched in applications like credit risk modelling and fraud detection — are gaining traction within the broader financial crimes domain, and anti-money laundering (AML) in particular. To obtain the business value of these ML and other technologies, financial institution managers need the toolset to succinctly understand these methods and assess what approaches are appropriate and effective for their institutions. The twofold goals of this paper to equip institutional stakeholders with this information are: 1. Describe the high-level applicability of ML to AML, with a focus on transaction monitoring. 2. Provide an overview of the AML ML practices that are already in place within the industry; are on the immediate horizon; or are promising opportunities actively being investigated for the future.
    Keywords: anti-money laundering, financial crimes, analytics, machine learning, artificial intelligence, algorithms, models, RegTech

  • The account review
    Duane E. Lee, Executive Vice President, Cannon Financial Institute and Michael Daly, Director of Risk Management and Operations, Pohl Consulting and Training

    The account review is a fundamental component of modern business. They are a strategic and detective tool to assess both performance and satisfaction. Successful account reviews provide an opportunity to grow relationships and reaffirm commitment to an account’s success, whether the account under review is a client, or a vendor. For a fiduciary, organised under US law, the account review represents not only an industry best practice, but a regulatory requirement. A successful fiduciary account review is not an assessment of risk alone. It also validates expectations. Expectations about quality of performance, and validation that all contractual obligations are being met. The account review can corroborate achievements and identify gaps in compliance. It is also a tool to identify and address unnecessary exposure to risk. For trust companies, the fiduciary standard binds a trustee to always act in the client’s interests above their own. The account review ensures adherence to requirements of the contract, and to the mandates of law. A fiduciary is an ethical custodian who must adhere to both the letter of law, but also the spirit of law, while always being obedient to the duties of loyalty and impartiality. The account review provides governance and oversight and helps senior management and the Board of Directors to measure potential exposure to client dissatisfaction, or even litigation. This paper explores six separate and distinct account reviews required during the life of a trust account, which provides a comparative roadmap that could be aligned to any number of other business disciplines.
    Keywords: account review, preacceptance review, postinitial acceptance review and/or postacceptance review, administrative review, investment review and/or Reg. 9 review and/or Regulation 9 review, account closing review, watchlist

  • The legal and economic implications from recent UK spoofing cases
    Greg Leonard, Vice President, Yan Cao, Vice President and Marlene Haas, Manager, Cornerstone Research and Gregory Mocek, Partner, Allen & Overy

    UK and US financial market regulators have intensified their efforts in securities and commodities markets to detect and pursue the type of disruptive trading behaviour referred to as ‘layering or spoofing’. Surveying the legal landscape of spoofing prosecutions and actions across the Atlantic, the authors note the UK’s fewer publicly announced enforcement actions relative to the USA. The UK has, however, taken a number of actions in recent years that signal its commitment to enforcing laws against market manipulation in general, and spoofing in particular. The authors discuss legal and economic implications of two prominent examples of UK spoofing cases: the Financial Conduct Authority’s (FCA) investigation of Michael Coscia and FCA vs DaVinci. The authors find that although the trading strategies employed by Coscia and DaVinci were different in some aspects, the two cases share important common characteristics that regulators appeared to have relied on to determine whether the conduct constituted ‘spoofing’.
    Keywords: market abuse regulation, enforcement, disruptive trading, order book manipulation, spoofing

Volume 4 Number 1

  • Editorial
    Mario J. DiFiore, Editor, Journal of Financial Compliance
  • Managing material information around equity accelerated bookbuilding offering
    Lorena Bernardi, Senior Officer, Market Abuse Investigation Unit, Consob

    This paper examines the informational aspects connected to the accelerated bookbuilding offering (ABO) concerning listed shares, highlighting the critical issues about the relationships between the various subjects involved — such as the seller, the financial intermediary, ie the bookrunner, the potential investors contacted to assess their interest in the transaction (procedures of wallcrossing), the investors participating in the sounding and placement — as well as the critical issues related to the announcement of the transaction and its effects on the price discovery process. In particular, the risk of disclosing inside information and insider trading are examined, using the experience of Italian markets as a case study. In this context, the relevance of taking into account the reasons behind the transaction, both for the market and for the bookrunner, is highlighted, as these reasons could constitute autonomous inside information with respect to information related to the placement, ie price and size of the transaction. Based on ABOs carried out on the Italian market between January 2010 and February 2020, the preceding reasons and the seller’s type (whether a controlling shareholder, a minority shareholder or an issuer) seem to be relevant in defining the discount associated with the ABO and, therefore, its price impact. In conclusion, hints are sketched for a possible internal procedure the bookrunner could consider to optimise its activities related to the detection of market abuse.
    Keywords: accelerated bookbuilding offering, market sounding, market abuse, insider dealing, discount, placement

  • Benefits of aligning AML and ABC compliance
    Michelle Goodsir, Managing Director, K2 Intelligence FIN

    Antimoney laundering (AML) and antibribery and corruption (ABC) programmes, by themselves, are important tools in addressing problems that are global in scope. While AML and ABC programmes are distinct, they also entail complementary skills, which reflect the nature of the financial crimes they are designed to prevent. Although AML and ABC programmes have historically operated independently, it no longer makes sense to perpetuate that separation. AML and ABC can, and should, collaborate to enhance their effectiveness. The challenges facing AML and ABC programmes are numerous and sizable. Many financial institutions, particularly domestic regional or community banks, must manage the expense of compliance and limited resources, in terms of skilled staff as well as budgets. Nevertheless, they must recognise an immutable fact: the cost to prevent financial crimes is a fraction of the cost to remediate them. The stakes in AML and ABC have never been higher, but there are ways to mitigate the risks of both today and tomorrow. Institutions can strengthen their compliance programmes by aligning their AML and ABC teams. This paper will discuss the challenges ABC and AML programmes have historically faced, and provide tangible solutions for bringing the two verticals together to create efficiencies and enhance the efficacy of entities’ financial crimes compliance programmes.
    Keywords: financial crimes compliance, anti-money laundering, antibribery and corruption, ABC, AML, compliance

  • Conduct risks and their mitigation in algorithmic trading firms: A systematic literature review
    Alexander Culley, Chartered Fellow of the Chartered Institute of Securities and Investments

    Trading floors are evolving. While popular culture still reveres antiheroes, such as Nick Leeson, Jordan Belfort and Gordon Gekko, dealing rooms have been gradually falling silent in our Digital Age. Increasingly intelligent algorithms are supplanting human traders and brokers, replacing emotion with the raw power of calculation. What implications does this have for the behaviour of firms active in the financial markets in the 21st century? How should firms and their regulators adapt to mitigate the conduct risks inherent in fully automated and hybrid business models? This systematic literature review adopts an interdisciplinary approach to examine how far research has answered these questions in the context of the British and European fixed income, commodities and currency (FICC) markets. Widely regarded as one of the ‘final frontiers’ for full automation, the FICC markets are currently characterised by a mixture of traditional (eg voice brokerage), ‘hybrid’ (machine–human) and challenger (eg highly automated trading utilising sponsored access) techniques. Accordingly, they represent fertile ground to: (a) gauge the tension that exists between these methods of trading and (b) test potential solutions to mitigate new forms of conduct risk.
    Keywords: algorithmic trading, artificial intelligence, conduct risk, high-frequency trading, machine ethics, machine learning

  • Target quality review of internal risk models and how to inspect them
    Jörg Orgeldinger, Economist and Data Scientist

    The European Central Bank performs a targeted review of internal models with the objective of reducing the variability in risk-weighted assets (RWAs). This will be accomplished by harmonising practices and checking the compliance of Pillar 1 internal models of credit risk (CR), market risk (MR) and counterparty credit risk (CCR) with regular requirements. The paper will help assessment teams with guidance on which situations should trigger findings, covering a selection of mandatory key variables and allowing for additional tests to be performed. Specific attention will be paid to the different core banking systems and data sources that are used through to the (historical) risk database identified in the inspection. Although the fact that the information technology architecture and infrastructure for the credit rating systems are mode-specific, a simplified process will be outlined throughout the paper to illustrate the main process steps, systems and datasets. Targets are the retail and corporate small medium enterprises (SMEs) portfolios, including information based on personal experiences of the author. For the future, more sophisticated methods like artificial intelligence and machine learning, as described in literature, need to be found and applied.
    Keywords: risk models, data quality, PD and LGD tests, market risk, collateral value

  • Anti-bribery and corruption compliance in Nigeria
    Austin Mbadugha, Partner, NICCOM

    Compliance has received increased attention since the late 1990s. Countries have either enacted new and stronger laws and/or increased enforcement of existing laws to address specific areas, especially in the areas of bribery and corruption, money laundering, labour and data privacy. As will be seen, the laws of certain countries have extraterritorial impact, and are able to sanction crimes committed outside the shores of such countries. What is the status of the law in Nigeria in relation to anti-bribery and corruption (ABAC)? This paper seeks to offer a broad definition as to the meaning of bribery and corruption, as well as highlight the regulatory framework for ABAC compliance in Nigeria. It also provides guidance for businesses in Nigeria as to the leading practices to prevent, detect and respond to incidences of bribery and corruption.
    Keywords: anti-bribery and corruption, compliance, adequate procedures, failure to prevent bribery, FCPA, UKBA, official bribery

  • Evolving regulation and the role of compliance since the 2008 financial crisis
    Kami Niebank, Deputy Chief Compliance Officer and Justin Walker, Assistant Division Chief, CalPERS

    This paper examines the root causes of the 2008 global financial crisis, key regulatory changes in response to the crisis, and the evolving role of the chief compliance officer as a result. Key regulatory changes examined include: the Dodd–Frank Wall Street Reform and Consumer Protection Act, US Basel III and recent guidance around cyber risk management and virtual currencies. In addition, the paper explores the changing role of both the chief compliance officer and compliance programmes. Prior to the 2008 financial crisis, compliance was often seen as a support function and after-thought in decision-making. The compliance pressures and expectations this past decade have, however, caused many organisations to place a greater emphasis and higher demands on their compliance teams.
    Keywords: financial crisis, regulatory reform, role of compliance, compliance review