Financial and other industry regulators most often have a prospective, public protecting jurisdiction, in contrast to criminal courts, which generally guide toward imposing penal sanctions against a wrong-doer. Regulators need to be satisfied that regulated enterprises will support and satisfactorily administer proactive policies, programs and internal controls to best ensure compliance with their regulatory and other legal obligations. In approaching settlements to resolve dispute with their regulated entities, a paramount consideration for regulators in Canada and the United States will always be the entities’ resolve to enhance their compliance regime on a going forward basis. And while businesses should strive to avoid regulatory scrutiny altogether through clearly articulated and effective internal controls, those companies who strike deals with regulators are well advised to follow through and live up to their end of the bargain.
The New York Department of Financial Services’ recent $300-million fine against London-based bank Standard Chartered PLC is an example of a regulator sending a clear message to companies who have entered into settlements with regulatory agencies: comply with commitments to improve compliance or pay a very steep price for failing to keep your promises.
Standard Chartered Fined $300-million for Not Following Through
In September 2012, Standard Chartered reached a $340-million settlement with DFS relating to allegations that the bank had breached certain anti-money laundering laws and regulations by dealing with financial institutions connected with the government of Iran in thousands of transactions totaling billions of dollars. Standard Chartered also paid a further $327-million to settle a similar claim by the U.S. Department of Justice. As a part of its settlement with DFS, Standard Chartered agreed to beef up its internal compliance processes in order to ensure that he bank did not engage in future illegal transactions.
DFS’ monitor reviewed and tested the efficacy of the bank’s new control mechanisms and found them wanting. In particular, the DFS order stated that Standard Chartered’s new system failed to detect “a significant number of potentially high-risk transactions for further review” and “failed to detect errors within the detection scenarios because of a lack of adequate testing and analysis both pre- and post-implementation of the transaction monitoring system”.
As a result, in addition to the $300-million fine (which was itself added to the original $340-million that Standard Chartered was required to pay DFS in 2012), DFS ordered that Standard Chartered is suspended from opening new U.S. dollar denominated accounts without prior approval and is barred from certain dollar-clearing activities out of its Hong Kong office. These suspensions will continue until DFS is satisfied that Standard Chartered has implemented an appropriate and effective anti-money laundering control system.
Canadian Regulators Require Remediation and Follow-Up
As in the U.S., Canadian regulators frequently require companies to take remedial measures as a part of a settlement agreement or order, in addition to imposing fines and other penalties. Often connected to these remedial orders are a requirement that the company report to the regulator at some future date about the administration and effectiveness of the new policies and procedures in place. This was the case, for example, with the agreement reached in April, 2014 between the OSC and Children’s Education Funds Inc., an education savings plan administrator. In that case, the OSC identified numerous compliance deficiencies and required Children’s Education Funds to establish revised policies and procedures and report on the effectiveness of these new internal controls in April 2015. Such provisions are common to settlements of this kind.
With the advent of the OSC’s recent Staff Notice 15-702 – under which market participants are afforded “credit for cooperation” in settlements with the regulator – the OSC has emphasised the significance of remedial measures designed to ensure that misconduct is not repeated. Companies who enter into such agreements with the OSC (or with regulators in other sectors across the country) should be mindful that they may face stiff U.S.-style penalties for dropping the ball a second time.