Scotiabank to pay $127.4M for commodities scheme, compliance failures

Under the terms of a deferred prosecution agreement (DPA) reached with the DOJ and announced Wednesday, the Canada-based global banking and financial services firm will pay $60.4 million in criminal penalties and has agreed to the imposition of an independent compliance monitor for three years. Part of the criminal monetary penalty will be credited against payments made to the CFTC under a separate settlement agreement.

Chief Robert Zink of the Criminal Division’s Fraud Section said the criminal penalty, which hovers at the top of the U.S. Sentencing Guidelines range, “reflects the seriousness of the offense and the state of Scotiabank’s compliance program.” Nor did Scotiabank fully and voluntarily self-disclose the conduct and, thus, did not receive voluntary disclosure credit, the Justice Department said.

The scheme

According to admissions and court documents, between January 2008 and July 2016, four Scotiabank precious-metal traders—located in New York, London, and Hong Kong—engaged in fraudulent and manipulative trading practices in the markets for gold, silver, platinum, and palladium futures contracts. They did so by placing thousands of orders to buy and sell these precious metals futures contracts with the intent to cancel those orders before execution.

“By placing these orders, the traders intended to artificially move the prices of precious metals futures contracts in a direction that was favorable to them and to inject false and misleading information into the precious metals futures markets in order to deceive other market participants into believing something untrue—namely, that the market reflected legitimate supply and demand,” the Justice Department said.

Scotiabank’s compliance function more than failed to detect or prevent the traders’ unlawful trading practices—it ignored it altogether. Between August 2013 and February 2016, three Scotiabank compliance officers possessed information regarding unlawful trading by one of the traders but failed to prevent further unlawful conduct by this same trader.

Work in progress

According to the Justice Department, since the misconduct took place, Scotiabank has made “significant investments to improve its compliance technology and trade surveillance tools; has nearly doubled its annual compliance operating budget; has added more than 200 full-time equivalent compliance positions; and is in the process of winding down its precious metals business.”

Nonetheless, the DOJ said it “ultimately determined, however, that an independent compliance monitor was necessary, because Scotiabank’s remedial improvements to its compliance and ethics program have yet not been fully implemented and tested to demonstrate that they would be effective in detecting and preventing similar misconduct in the future.”

Scotiabank had little to say about the settlements, other than issuing this cookie-cutter response: “At Scotiabank, we understand that in order to maintain the trust of our stakeholders, we must adhere to trading-related regulatory requirements and compliance policies. We are committed to adhering to these standards.”

Three CFTC orders

In related, parallel proceedings with the CFTC, the bank will pay a total of $77.4 million in the first two settlements. In 2016, after one of its futures commission merchants flagged trading by one of its traders for possible spoofing, Scotiabank made a voluntary disclosure to the CFTC, but record-keeping failures ultimately rendered Scotiabank’s disclosure to the CFTC “materially incomplete.” This impaired the CFTC’s ability to fully investigate the unlawful trading and discover the true extent of the misconduct.

Relying on Scotiabank’s incomplete and, ultimately, inaccurate disclosure, the CFTC in a 2018 settlement graced Scotiabank with a substantially reduced penalty—$800,000—in part for its purported self-reporting. Under the terms of the new agreement between Scotiabank and the CFTC, also announced Wednesday, Scotiabank will pay approximately $60.4 million.

According to the CFTC, the charges “address those false statements … and the true scope and nature of [Scotiabank’s] wrongdoing that those false statements concealed.” This includes a record-setting $17 million penalty for making false and misleading statements to CFTC staff during the CFTC’s initial spoofing investigation and a record-setting penalty of $42 million for spoofing and attempted manipulation. The bank must also pay $6.6 million in restitution, $11.8 million in disgorgement, and retain an independent monitor.

In a third CFTC order, the bank must pay a $50 million civil monetary penalty to settle a separate enforcement action related to swap-dealer compliance and supervision failures and for making false or misleading statements. According to that order, for tens of thousands of swaps over a seven-year period, Scotiabank:

• Failed to provide timely and accurate pre-trade mid-market marks, which had the effect of concealing Scotiabank’s full markup from counterparties;
• Violated various requirements relating to Scotiabank’s counterparty onboarding process, recordkeeping, chief compliance officer reporting, and supervision; and
• Made false or misleading statements to CFTC staff concerning its audio retention and supervision.

Again, the CFTC’s orders provide for offsets for certain payments made pursuant to the DOJ’s related criminal action.

Broader warning

“These record-setting penalties reflect not only our commitment to being tough on those who break the rules, but also the tremendous strides the agency has made in data analytics,” said CFTC Chairman Heath Tarbert. “Our ability to go through the electronic order book and look across markets has enabled the CFTC to not only spot misconduct, but also to uncover false and misleading statements.”

“Over the last year, we have ushered in a new era of enforcement at the CFTC,” Tarbert added. “Wrongdoers now have increasingly fewer ways to conceal their misconduct and face an even more unified front from civil and criminal authorities.”

“Entities seeking to cooperate with the CFTC, like all others that interact with the Commission, must tell the truth,” added Division of Enforcement Director James McDonald. “We now have the tools, including through the development of our data-analytics program, to better test and verify the information we receive. When entities are not completely truthful, they will be penalized.”

Division of Swap Dealer and Intermediary Oversight Director Joshua Sterling added that Scotiabank’s compliance and supervision violations “highlight the need for all swap dealers to have the right tone at the top—plus appropriate programs and incentives in place—to instill a meaningful culture of compliance among their personnel.”