Category Archives: Corruption

SEC Goes After Financial News Hackers

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The Securities and Exchange Commission announced that Ukrainian-based Jaspen Capital Partners Limited and CEO Andriy Supranonok have agreed to pay $30 million to settle allegations they profited from trading on non-public corporate information hacked from newswire services.

The SEC announced charges in August against 34 defendants who allegedly took part in a scheme in which two of the defendants surreptitiously hacked into newswire services and transmitted the stolen data to a web of international traders, including Jaspen and Supranonok. By getting an early look at the information before its public release, the traders allegedly generated more than $100 million of illegal profits over a five-year period. The case was filed in U.S. District Court for the District of New Jersey, which entered an asset freeze and other emergency relief against Jaspen and Supranonok, among others. Said Andrew J. Ceresney, Director of the SEC’s Enforcement Division.

Barely a month after we froze tens of millions of dollars in illegal profits from the defendants’ trading on illegal inside information obtained from hacked news releases, we obtained a settlement with foreign traders that deprives them of their wrongful gains. Today’s settlement demonstrates that even those beyond our borders who trade on stolen nonpublic information and use complex instruments in an attempt to avoid detection will ultimately be caught.

According to the SEC’s complaint, Jaspen and Supranonok made approximately $25 million buying and selling contracts-for-differences on the basis of hacked press releases stolen from two newswire services between 2010 and 2014 and made additional profits trading on press releases stolen from a third newswire service in 2015. CFDs are derivatives that allow traders to place highly leveraged bets on the direction of a stock’s price movement. Without admitting or denying the SEC’s allegations, Jaspen and Supranonok agreed to be enjoined from violating the antifraud provisions of U.S. securities laws and related SEC antifraud rules and to return $30 million of allegedly ill-gotten gains. The settlement offers are subject to approval by the court. Said Michael J. Osnato, Chief of the SEC Enforcement Division’s Complex Financial Instruments Unit:

This case should serve as a shot across the bow of any trader who thinks that CFDs traded outside the United States can be used to mask their unlawful conduct. The SEC’s use of sophisticated analytical tools to identify abusive CFD trading like this demonstrates our ability to police this opaque market.”

The SEC’s litigation continues against the remaining 32 defendants charged in the case.

Jerry-Cartoon-0813-UbuntuForums

Jerry-Cartoon-0813-UbuntuForums

Admati Hammers at Risk-Taking Bankers

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Dean Starkman writes:  Anat R. Admati, a professor of finance and economics at Stanford’s business school, is an unlikely player in Washington’s financial reform scene.

The Israeli-born economist arrived at Stanford in 1983 with an interest in mainstream financial issues and a firm belief that markets—with their unique ability to assign a price to risk and channel capital to its most efficient use—were a powerful force for good.

The 2008 financial crisis upended that faith. She turned her gaze to the industry at the center of the crisis: banking.

Admati made waves on the national financial reform scene in 2013 with the book “The Bankers’ New Clothes: What’s Wrong With Banking and What to Do About It,” co-authored with economist and banking expert Martin Hellwig.

Here’s an excerpt of a discussion with Admati:

Why did you write “The Bankers’ New Clothes,” a book for the general public and not strictly for scholars?

We thought we had to. There was, I thought, a certain lack of engagement on the part of many academics, and it was disturbing to me that there was not enough serious discussion about what was going on.

I was not a banking expert, but after studying it, I found that a lot of policymakers and people commenting on it didn’t actually know what they were saying or were saying wrong things or misleading things.

There seemed to be, to take a charitable interpretation, that there were blind spots or confusion or, the most cynical interpretation, there was sort of willful blindness.

How did you get so involved in Washington financial policy circles?

From the beginning, I tried very hard to engage with anybody in Washington who would engage with me. It started by being appointed by Sheila Bair (then the FDIC chairwoman) to a committee in the spring of 2011, which just allowed me into the room at all.

So, what’s wrong with banking?

What’s wrong with banking is that a lot of people are able to take risks and not be fully responsible and accountable for those actions.

People need to understand that the biggest banks are really, really big, by any measure. Just how much is a trillion? It’s an enormous number. They are larger than just about any corporation, so it’s not just big. It’s really very, very big.

It’s also the complexity and sort of breathless scope of what they do and just how much of it is opaque. It remains incredibly fragile as a system.

Capital requirements, boiled down, amount to a few percentage points of a bank’s total assets. What’s the right ratio?

Current requirements are ridiculous by any normal standards. A supposedly “harsh” regulation would be 5 percent of the total. Corporations just never ever live like that.

I talk about 20 percent-30 percent of assets, but what’s really complicated is how you measure assets. The way assets are measured now pretends to be scientific, but the rules are designed in a flawed way. I want simpler measures and for capital to be 20 percent-30 percent of the total.

Anat Admati

HSBC “Lagarde List” Goes to Cyprus

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Petro Petrides writes:  France has handed to Cypriot authorities a controversial list of Cypriots with deposits at HSBC bank in Switzerland, Finance Minister Harris Georgiades said.Cypriot parliamentarians probing the cause of the near melt-down of the economy in 2013 have repeatedly urged the government to obtain the so-called “Lagarde List” in anticipation that it will provide clues to people who may have sent abroad money obtained illegally.But Georgiades told CyBC radio that foreign deposits are not illegal and details contained in the list cannot be made public unless legislation banning publication of personal data is amended.

“The list is currently being examined by the Chief Taxation Officer to confirm that those appearing on the list as Cypriots or with an address in Cyprus can justify the deposited amount,” Georgiades said.

“It will be processed so as to verify that taxation has been paid for the amounts deposited in the bank,” he added.

Georgiades said he would have no problem disclosing the names of people which will be found to be tax evaders after the examination of the list.

But the list has been forwarded to the speaker of the Cypriot Parliament, Yiannakis Omirou, for examination in the context of an ongoing investigation into the causes of Cyprus’s economic disaster.

Lawmakers are demanding that any names in the list of “politically exposed people” — meaning people holding state, government and party posts or are associated with the the banking system and the media — must be made public.

It is to be expected that it will not be long before the list is leaked to the media as it happened with similar documents in the past.

The “Lagarde List” is part of a wider list, the Falciani list, named after Herve Falciani, an HSBC bank computer technician who stole the data from the computers of his employers from 2006 through 2007 and handed them to then French finance Minister Christine Lagarde.

It is believed the list contains about 80,000 names of people with deposits at the bank.

Georgiades said the list obtained by Cypriot authorities contains only the names of either Cypriot people or foreign physical and legal entities who had given the bank a correspondence address in Cyprus.

The “Lagarde List” became prominent when it was handed to the Greek government in 2012, then negotiating the country’s bailout with international lenders.

It was leaked to a magazine which published it, causing a public outcry as it revealed that the names of some prominent people in the governing party were among depositors.

 Lagarde List

Jail Bankers. Put Muscle in Criminal Pleas

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Is it in the interest of senior bankers to violate the law?  William K. Black writes:  The parent organizations of five of the world’s biggest banks will plead guilty to rigging global currency markets rattled the financial markets. But it also raised concerns about whether fines and settlements are effective deterrents to fraudulent behavior.

The five banks will pay the U.S. Justice Department and the Federal Reserve fines totaling $5.6 billion as they agreed to plead guilty to colluding to manipulate currency and interest rate markets. Yet, they could continue to do business as usual, thanks to settlement terms and waivers against stiffer actions from the Justice Department and the Securities and Exchange Commission (SEC).

At  UBS, the latest case is the third act of rigging it has confessed to in the last five years. “The only thing that could save UBS is to have a crackdown by somebody external that gets rid of this assorted group of managers.”

Here is a snapshot of what the four banks detailed in their plea agreements, according to a U.S. Justice Department press release: “Members of ‘The Cartel’ manipulated the euro-dollar exchange rate by agreeing to withhold bids or offers for euros or dollars to avoid moving the exchange rate in a direction adverse to open positions held by co-conspirators. By agreeing not to buy or sell at certain times, the traders protected each other’s trading positions by withholding supply of or demand for currency and suppressing competition in the FX market.”

The foreign exchange and Libor bid-rigging cases individually are the largest cartels by three orders of magnitude in world financial history.

Here is how the fines add up to $5.6 billion: The banks will pay $2.5 billion in criminal penalties for manipulating currency rates, plus another $1.6 billion in fines payable to the Federal Reserve. The remainder will come from penalties of $1.3 billion that Barclays will pay U.S. and British regulators and $203 million that UBS will pay for manipulating interest rates.

The whiff of big money is a factor to think about for regulators.  said Nichols.  The amount of money that moves through the foreign exchange market in one day is almost twice the value of the economic output of the U.K. in one year.

U.S. regulators protect bankers from winding up in jail.  Banks negotiate in advance that a guilty plea will not be what a guilty plea would normally be.

Was stronger action was warranted in the case of UBS?  Should banks secure waivers against stern action. “The rule with large banks is that the SEC always waives – it doesn’t matter how bad [the violations are],” he said. “This is a serial recidivism.” He noted that one SEC commissioner is working to prevent routine waivers that the SEC grants.

 

Possible remedies:  Put a fraudulently controlled bank in receivership.  Receivership should probably be an option only for banks that seem irredeemable, and it might make more sense for most banks to just create a better internal culture.

Unlike with bribers, bankers do not face the risk of imprisonment. The material rewards for violating the rules and the trust of clients are huge, while the risk is almost nonexistent.

Jail Bankers?

 

Warren and Corruption in US

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  • Pam Martens and Russ Martens write:  The Insurance Industry Pays Incentives Like a Mercedes-Benz Lease to Push Annuity Sales

Increasingly it feels to Americans that the bulk of the news about scams to separate them from their life savings is coming from one Senator from Massachusetts — Elizabeth Warren.

Ripoffs in financial services, insurance, and real estate – known as F.I.R.E. on Wall Street – are being exposed by Warren, typically in bold pronouncements in Senate Banking hearings where Warren has a chair and a respected voice, and are rapidly amplified in the media.

In 2013, it was only because of Senator Warren that we learned that the so-called Independent Foreclosure Reviews to settle the claims of 4 million homeowners who had been illegally foreclosed on by the bailed out Wall Street banks were a sham. The “independent” consultants were hired by the banks, paid by the banks, and the banks themselves were allowed to determine the number of victims.

It was Senator Warren who put the high frequency trading scam described in the Michael Lewis book, “Flash Boys,” into layman’s language.

“High frequency trading reminds me a little of the scam in Office Space. You know, you take just a little bit of money from every trade in the hope that no one will complain. But taking a little bit of money from zillions of trades adds up to billions of dollars in profits for these high frequency traders and billions of dollars in losses for our retirement funds and our mutual funds and everybody else in the market place. It also means a tilt in the playing field for those who don’t have the information or have the access to the speed or big enough to play in this game.”

In 2013, Warren, together with Senators John McCain, Maria Cantwell and Angus King, introduced the “21st Century Glass-Steagall Act.” Warren explained why the legislation is critically needed:

“By separating traditional depository banks from riskier financial institutions,” said Warren, “the 1933 version of Glass-Steagall laid the groundwork for half a century of financial stability. During that time, we built a robust and thriving middle class. But throughout the 1980’s and 1990’s, Congress and regulators chipped away at Glass-Steagall’s protections, encouraging growth of the megabanks and a sharp increase in systemic risk. They finally finished the task in 1999 with the passage of the Gramm-Leach-Bliley Act, which eliminated Glass-Steagall’s protections altogether.”

Nine years later, the financial system crashed, leaving the economy in the worst condition since the Great Depression.  Warren and Wall Street

Elizabeth Warren Against Corruption

Normal Investors in the Art and Real Estate Markets

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On the Rocky Road to Globalization

Kenneth Rogoff writes:  What impact will China’s slowdown have on the red-hot contemporary art market? That might not seem like an obvious question, until one considers that, for emerging-market investors, art has become a critical tool for facilitating capital flight and hiding wealth. These investors have become a major factor in the art market’s spectacular price bubble of the last several years. So, with emerging market economies from Russia to Brazil mired in recession, will the bubble burst?

Just five months ago, Larry Fink, Chairman and CEO of BlackRock, the world’s largest asset manager, said that contemporary art has become one of the two most important stores of wealth internationally, along with apartments in major cities such as New York, London, and Vancouver. Forget gold as an inflation hedge; buy paintings.

Pablo Picasso’s “Women of Algiers” sold for $179 million at a Christie’s auction in New York, up from $32 million in 1997. Okay, it’s a Picasso. Yet it is not even the highest sale price paid this year. A Swiss collector reportedly paid close to $300 million in a private sale for Paul Gauguin’s 1892 “When Will You Marry?”

For economists, the art bubble raises many fascinating questions.  Art is the last great unregulated investment opportunity.

Doesn’t China have a regime of strict capital controls that limits citizens from taking more than $50,000 per year out of the country? Yes, but there are many ways of moving money in and out of China, including the time-honored method of “under and over invoicing.” Many estimates put capital flight from China at about $300 billion annually in recent years.

For example, to get money out of China, a Chinese seller might report a dollar value far below what she was actually paid by a cooperating Western importer, with the difference being deposited into an overseas bank account. It is extremely difficult to estimate capital flight. Identifying capital flight is akin to the old adage about blind men touching an elephant: It is difficult to describe, but you will recognize it when you see it.

The art may well be spirited off to a temperature- and humidity-controlled storage vault in Switzerland or Luxembourg. Reportedly, some art sales today result in paintings merely being moved from one section of a storage vault to another, recalling how the New York Federal Reserve registers gold sales between national central banks.

So how, then, will the emerging-market slowdown radiating from China affect contemporary art prices? In the short run, the answer is ambiguous, because more money is leaking out of the country even as the economy slows. In the long run, the outcome is pretty clear, especially if one throws in the coming Fed interest-rate hikes. With core buyers pulling back, and the opportunity cost rising, the end of the art bubble will not be a pretty picture.

Capital Flight

Corruption Rife in Latin America

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Mac Margolis writes: At the height of the commodities bonanza, Latin Americans seemed willing to shrug at officials with sticky hands. Tolerance is thinking as regional gross domestic product is expected to expand by just 0.4 percent this year, the worst performance since 2009.

Brazilian President Dilma Rousseff is mired in a political payola scheme that has pillaged the state oil company, sent a moguls and politicians to prison and put her own job on the line. Chile’s Michelle Bachelet is in a corner, and Mexico’s Enrique Pena Nietro may already have succumbed to a graft and influence peddling scandal that has tainted the president, his wife, the finance minister and government contractors.

And yet of all the Latin leaders under scrutiny, Perez Molina seems closest to the brink. Five of his cabinet ministers and the ambassador to the United Nations had resigned over the customs scheme, which comptrollers believe defrauded Guatemala of more than $300,000 a month. His vice president is in jail.

A green light from a parliamentary committee, the full congress will weigh stripping Perez Molina of his executive immunity, which could land him in a court of common law.

What happens from there is less certain in Guatemala’s lopsided justice system, where political manipulation and powerful interests often prevail, at times threatening to convert the country into an almost Mafia state.

Consider generalissimo Efrain Rios Montt, the former dictator who was condemned for genocide by a special court in 2013, saw that verdict overturned on a technicality days later.

Perez Molina, a respected former general, made no secret of his distaste for the prosecution of Rios Montt, whom he served during the bloody Guatemalan civil war and credited with rescuing the country from chaos. Still, he had taken care to avoid interfering directly in court decisions.

Faith in his impartiality was shaken last year when the constitutional court ruled abruptly to shorten the mandate of the Attorney General Paz, a combative prosecutor who was key to bringing his former comandante to justice.

Whatever lingering prestige Perez Molina might have enjoyed, it now has evaporated in the heat of the customs scandal.

Cartoon by Fernando Llera

Cartoon by Fernando Llera

Should Bribery be Legalized?

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Should bribery be legalized?   Leonid Bershidsky writes:  The first step toward getting rid of bribery may be to legalize it. Romania could soon try that controversial approach with its underfunded health care system. For the many countries without the money to finance modern public services, or the political will to privatize them, it will be an important case to watch.

Romania is one of the European Union’s most corrupt countries, according to Transparency International. Informal payments seem to be especially widespread in health care, with about a quarter of Romanians reporting that they’ve recently been asked for a bribe by a doctor or nurse. A recent court decision declared gratitude payments to doctors illegal, because the medics are government employees. Subsequent protests by doctors and nurses forced the government to give them a 25 percent raise in salary, but everyone knows that won’t be enough to stop envelopes from changing hands.

That is a common problem for post-Communist countries, which have inherited vast, centralized health care systems that they could only afford when their governments had full control of the economy. Privatization seems an obvious answer, and it has worked in some countries such as Georgia, where most hospitals are now privately owned and the government only subsidizes the treatment of relatively poor citizens. Yet it’s not always politically feasible, and running a private hospital in a poor country isn’t a particularly attractive business proposition, either.

So some reformers have relied on the formalization of informal payments. In Cambodia, out-of-pocket payments made up 82 percent of all health spending in 1999. After the government introduced an official fee schedule, locals soon found medical services were more cheaply available than before. The cost of surgical hospitalization, for example, dropped from a minimum of $40 to $26.70. Doctors welcomed the system because it guaranteed them higher incomes without having to engage in ad hoc negotiations with their patients. In Albania in the early 2000s, the introduction of official price lists quadrupled doctors’ official incomes in some hospitals.

In 2012 Anders Sundell of the University of Gothenburg described how Sweden — now one of the world’s least corrupt countries — went from a system based on bureaucrats’ right to charge direct fees, or sportler, for their services to one that established official schedules for such fees, then one that imposed stamp taxes for specific actions, before arriving at its contemporary system of entirely tax-financed government. Every stage logically followed the previous one, with bureaucrats gradually giving up their freedom to charge as much as they wanted for a slightly smaller but officially mandated income.

 

The radicalism of this idea goes further than Indian economist Kaushik Basu’s 2011 proposal  to decriminalize bribe-giving in order to encourage whistleblowing among people with first-hand knowledge about corrupt officials. Basu, who went on to become chief economist of the World Bank, was still thinking in terms of monitoring and punishment, and his idea, if anyone ever implemented it, would probably have struggled to overcome the long-term relationships between bureaucrats and the business people who enable their corruption.

The biggest problem in taking this approach beyond health care is that it would require a government to inventory its services and decide which ones are unnecessary. Otherwise citizens could be forced to pay one bureaucrat for a certificate required for no good reason by another one or purchase licenses to breathe state-owned air. Health care is a convenient place to start because the list of necessary services is well-known. Even a government that doesn’t really know what it’s doing can work out a reasonable price list. And that’s guaranteed to work better than trying to jail doctors who are simply trying to make ends meet.

Legal Bribery?

 

US Corruption in Afghanistan

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US dealings in Afghanistan fraught with fraud.

Jorge Scientific, now named Imperatis, received a sole source contract last year to help the Office of Personnel Management patch security holes in its network after hackers made off with sensitive government personnel information. The award has raised eyebrows, as the company had been in hot water after ABC released video of the company’s security personnel in Afghanistan, tasked with protecting American officials, incoherently drunk and high on drugs. A subsequent Inspector General investigation also found the company could not account for $135 million spent on a contract for training Afghan security forces.

Corruption in Afghanistan

How Financial Corruption Impacts Foreign Policy

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Eva Fedderly writes: Sarah Chayes has become a key player in the attempt to bring about a sea change in US foreign policy by showing how what some see as an innocuous crime – corruption – is actually a serious threat to international security. She has seen it at work not only in Afghanistan but in other places with violent insurgencies, such as Syria, Nigeria, and Iraq.

Within the past two years, Chayes has influenced a paradigm shift in US foreign policy, Nathaniel Heller, cofounder of Global Integrity, an independent, nonprofit organization tracking governance and corruption trends around the world, told the Monitor. “She singlehandedly got a crucial dialogue going at the highest levels of government on corruption…. She opened up a space in politics for dialogue and debate regarding corruption as a serious threat to international security.”

According to several diplomats, Chayes also has affected the diplomatic rules of engagement.

Sarah Chayes