Practical insights for compliance and ethics professionals and commentary on the intersection of compliance and culture.

Round-up on anti-money laundering compliance

The practice of money laundering takes on many forms, all with the objective of transferring money earned from illegal activities into the legal financial system for further use.  These various strategies for transferring profits from theft, drug sales, bribery, or other illicit activities are all targeted for the criminals to gain access to legitimate banking and from there use the money for mainstream activities such as investing, shopping, or buying property.


MiFID II conduct principles and markets integrity

MiFID II – the second Markets in Financial Instruments Directive – became law across the European Union on January 3, 2018.  It’s intended to overhaul the entire supervisory framework for financial sector organizations who are in the EU, have clients in the EU, or wish to have access to or establish equivalency for the markets there.  Its predecessor law, MiFID I, became law in 2004 and was judged to have not stood the test of time in the aftermath of the global financial crisis.  Therefore the seven year drafting process – from 2010 to 2007 – that culminates in MiFID II implementation this year is aimed to set a higher regulatory standard for investment banks, broker-dealers, and other institutional market participants and their employees.

Much of the attention about MiFID II implementation has focused on the burden to organizations from financial costs, human capital and efforts, and changes in commercial strategy that will be required for firms to work toward compliance with the new laws.  The laws are thousands of pages long and touch nearly every area of the financial services markets.  Some of the major areas of focus in MiFID II are investment research, transaction reporting, and brokerage compensation arrangements.  However, the far reach of banking and securities markets activities into the economy means that laws intended to govern this sector have a broad and dramatic scope as well.


Round-up on SEC compliance

This is the third in a series of seven posts about regulatory compliance priorities and enforcement trends.  The first post was about the Commodity Futures Trading Commission (CFTC).  Last week’s post was about the Federal Trade Commission (FTC).  Today’s post will be about the Securities & Exchange Commission (SEC).  On Thursday January 11, the post will be about the Food & Drug Administration (FDA).  On Thursday January 18, the post will be about the U.S. Department of Agriculture (USDA).  On Thursday January 25, the post will be about the Environmental Protection Agency (EPA).  Finally, on Thursday February 1, the post will be about the Federal Communications Commission (FCC).

The Securities & Exchange Commission (SEC) is the US regulator charged with enforcing federal securities laws and supervising the securities industry, including the market exchanges.  The SEC was created in 1934 by the Securities Exchange Act, which is one of the bodies of federal securities law it is now responsible for enforcing.  Other significant statutes within the purview of the SEC include the Investment Company Act of 1940 (regulating registration and conduct of investment companies), the Investment Advisers Act of 1940 (regulating registration and conduct of investment advisory organizations), and the Sarbanes-Oxley Act of 2002 (regulating accounting practices of public companies and ensuring investor protection).

As indicated by this last piece of legislation, which was introduced into law in the aftermath of a series of corporate scandals such as the Enron bankruptcy, the regulatory scope of the SEC has grown in both breadth and depth as a reaction to financial frauds and crises of the last two decades.  This increased emphasis on the role of the SEC in reaction to these events aligns with the SEC’s mandate, which is three-pronged: investor protection, maintenance of fair, orderly, and efficient markets, and facilitation of capital formation. Ensuring that investors can retrieve and rely on information provided by public companies and in the markets in order to make their investment decisions is a major priority for the SEC.  Maintaining a level playing field in the markets is therefore the SEC’s objective, and preventing or eliminating market abuse and unfair corporate practices contributes to achieving this goal.

From both its Washington, D.C. headquarters and its regional office, the SEC offers education programs, promulgates rules and guidelines, conducts investigations, supervises self-regulatory organizations in the trading and markets industries, oversees disclosures by public companies, and brings enforcement actions in light of suspected violations of federal securities laws and regulations.  Based on this diverse range of activities, the SEC is responsible for exacting competent authority over a wide variety of issues and interests that comprise its regulatory agenda and rule-enforcement practices.

  • Cryptocurrencies: The hot topic of 2017, digital currencies derived from blockchain technology such as bitcoin and Ethereum will likely endure in the public attention in 2018 as well.  Regulators worldwide have sounded a cautious note about the potential risks of the cryptocurrency markets, and widespread legitimate use of the payment service technology as a disruptor to the banking sector is still in its infancy.  There is no unitary approach to protection of users who transact in cryptocurrencies on platforms that do not treat them as customers and supervision of markets where companies use initial coin offerings (ICOs) to offer their tokens without the rigors of securities registration to the public.   Innovation has been prioritized over strict supervision; some balance between the two, rather than supremacy of one over the other, needs to be struck.  The SEC has issued a concise and clear statement on its preliminary opinion of cryptocurrencies, stopping short of bringing them all into their regulatory scope as securities but providing definitive guidance on its views and a clear indication of the direction its future treatment could take:  The SEC Chair’s Cryptocurrency Warning: 5 Things to Know
  • Whistleblowers in Silicon Valley: As discussed in this previous post about the CFTC, the SEC has a powerhouse whistleblower program.  This has enabled the SEC to encourage individuals to step forward to anonymously report misconduct, corruption, and fraud in exchange for employment protections and compensation.  Due to the concentration of the SEC on the securities industry, traditionally these whistleblowers have come from the financial services industry (for an overview of some significant whistleblowers in recent history from this sector, check out this post).  However, there’s a new proving ground for whistleblowers who may stand to take advantage of the SEC’s program: Silicon Valley.  Venture capital firms and huge private companies which take funds from investment companies or individuals – including Uber, Airbnb, and many other digital giants – are all subject to the rule-making and enforcement authority of the SEC:  Silicon Valley could be the next hotspot for SEC whistleblowers
  • Cybersecurity as facilitation of market abuse: 2017 was the year of several very public and damaging scandals involving cybersecurity lapses and data breaches.  It remains to be seen in 2018 how the disclosure and reporting expectations and requirements for companies suffering hacks and intrusions may be refined or expanded in the wake of public outrage.  One concerning theme which emerged in a number of the cases was the perception of or possibility for insider dealing.  This was either due to material knowledge of company executives about the breaches before they were publicized or the theft of financial data by hackers.  The SEC’s Market Abuse Unit’s Analysis and Detection Center will probably keep busy identifying and analysing patterns in trades that could be suspicious due to their connection or temporal proximity to cyberattacks:  SEC, DOJ charge seven with insider trading off stolen bank data
  • Prioritizing investor protection amid regulatory rollback: Ponzi schemes, misrepresentations to investors, and fraudulent corporate practices are not going to vanish from the markets any time soon.  In fact, as business becomes increasingly global and complex in nature, the risks of these events only grows.  At the same time, the overall trend in the United States is toward a regulatory ebb.  The emphasis is on leaner and more targeted regulatory action rather than an expanded or wide-ranging supervisory framework.  The question remains how major cases such as the SEC’s recent suit against Woodbridge Group over a massive Ponzi scheme will be handled amid this regulatory relaxation:  SEC sues bankrupt Woodbridge Group over $1.2 billion Ponzi scheme
  • Enforcement decline: Finally, and on a related note, many recent commentators have pointed to a decline in SEC enforcement actions as evidence that the agency’s regulatory touch will be diminished in the near term.  However, these numbers may be deceptive; indeed, it could be true instead that this perceived decline is not due to regulatory inaction but quite the contrary.  Instead, it could be because of pipeline efficiency in clearing investigation and enforcement actions in the recent period:  Has The SEC Gone Soft Under Trump? Enforcement Actions Are Down, But That’s Deceptive

Be sure to check back next week for a round-up on FDA regulatory compliance.


Round-up on compliance issues with blockchain technology

One of the hottest topics of 2017 is blockchain. This advancing technology is seemingly the possible solution to every business problem conceivable. Companies across all industries – as diverse as banking to food production and seemingly everywhere in between – are experimenting with how they might be able to use blockchain to make their reporting and related processes more reliable or efficient. Many are even contemplating how they may take advantage of blockchain to market software applications to other companies, hoping to enter the profitable fintech (financial technology), regtech (regulatory technology), or suptech (supervisory technology) markets.

But what is blockchain? Most famously, it is the core technological component of the well-known cryptocurrencies, such as Bitcoin or Ethereum. Simply put, blockchain is an open list of records (which comprise the “blocks”) which are securely linked together with cryptography. As the blocks are all linked together and independently identified with references to their linked blocks, the data contained therein is extra safe from individual manipulation or alteration. This is a decentralized computing system which is incredibly useful for recordkeeping and records management activities, especially those where security is especially important such as identity management and medical records.

Due to the broad desirability of a secure and adaptable record maintenance technology, blockchain, which was initially developed only less than a decade ago, has been a disruptive influence in many industries already. Across all business areas, companies are looking to blockchain for possible benefits, all relevant to compliance, to their reporting processes.

  • Transparency for pension fund reporting is one major potential use of blockchain. Following the Madoff scandal and other highly-publicized frauds in the investment management industry, there has been more pressure than ever in expectations for investor protection and reporting disclosures. Many pension funds have balked at public and supervisory demands for increased transparency due to the cost concerns for implementing additional reporting mechanisms in balance with very low profit margins. This reaction does not help to enhance trust between investor clients and this fraud-vulnerable industry. Therefore the decentralized, secure nature of blockchain offers appealing opportunities for filling this confidence vacuum. Blockchain-based platforms can get investors access to their own pension information without fears of data manipulation or increased cost burden on firms: How Blockchain is revolutionizing fraud prone industries
  • On a related note, banks and other financial institutions have borne much of the competitive pressure blockchain has created with the advent of cryptocurrencies – but they also stand to benefit from this, if they can make the best of it. Cryptocurrencies such as Bitcoin are a compelling alternative to the centralized, traditional banking system for customers who desire extra security or anonymity. While cryptocurrencies have been traditionally depicted as a safe haven for illegitimate or even illegal payment activities, the mainstream attention on them has created a broader appeal and audience for them. As a response to the interest their customers have shown in cryptocurrencies, banks have started to delve into the potential for the blockchain technology. Some has invested in tech start-up companies concentrating on various blockchain applications while others have delved more deeply into relationships with fintech partners. At this point banks’ proprietary efforts have mostly been restricted to in-house research on potential use of blockchain, but inevitably competitive momentum will start to drive larger institutions toward developing their own projects in this space. These developments are likely to encourage efficiency, inspire leaner and more innovative business models, and serve the regtech and suptech goals of increasing cooperation with regulatory authorities. Ultimately this could help to modernize and improve the persistently staid and legacy-driven banking industry into a bolder and more transparent business model:  How banks and financial institutions are implementing blockchain technology
  • The advertising industry is newly subject to regulatory scrutiny with the upcoming EU privacy directive, the General Data Protection Regulation (GDPR). This law will apply to any organization doing business in, using technology in, or targeting the citizens of, any EU country, so it has a broad global reach. The GDPR will impose new requirements for handling and controlling private data, including protective and disclosure obligations. Therefore blockchain-based solutions, which can be both secure against manipulation or leakage, and distributed with open access so that users making disclosure requests can see the information directly for themselves. This will help to reduce the burden of this reporting as well as improve cost margins rather than coming up with expensive and vulnerable in-house solutions or outsourcing the reporting to third-parties with their own attendant risks: How Blockchains Can Help the Ad Industry Comply With the GDPR
  • Commercial aviation is another industry looking to blockchain systems to help with its risks – this time in cybersecurity management. Airlines and support companies rely a lot on IT systems to do everything from fly and direct aircraft to book and manage passenger travel. These systems are highly imperfect, as system outages and computer crashes that lead to flight cancellations and stranded passengers show in the news each year. They are also vulnerable to cybersecurity risks where intruders could breach personal data, disrupt airline operations, or corrupt and steal client and aircraft information. Storing and protecting this data within vulnerable or old/legacy systems poses many cybersecurity challenges. The concept of tamper-proof blockchain technology is therefore compelling to the aviation industry for these obvious reasons. Blockchain could help to keep operational data safe and protect companies from cyberattacks. More importantly, pressure to adopt it could drive aviation companies to make the difficult yet very important technological updates and improvements to their systems which will serve safety and regulatory concerns alike: How Blockchain, Cloud Can Reinforce Cybersecurity in Commercial Aviation
  • The pharmaceutical industry has long been vexed by inaccurate and unreliable supply chain tracking. It is especially vulnerable to stolen and counterfeit medication entering the supply chain untracked and finding its way to patients, putting their safety at risk. Tracking medicine with blockchain could change all this. A consortium of pharmaceutical companies, including major firms Genentech and Pfizer, are already collaborating together on a tool called the MediLedger Project, which seeks to manage the pharmaceutical supply chain and track medicines within it to ensure that drug deliveries are recorded accurately and transparently. This would take the current complicated and inefficient network of software management in the supply chain to the next level, securing the supply chain with an integrated and decentralized blockchain system. It could also enable sharing of essential information from companies to partners and customers without exposing sensitive business information, a challenge in the industry so far: Big Pharma Turns to Blockchain to Track Meds

There are many potential advantages from a compliance perspective to blockchain, which has the potential to enhance transparency, protect privacy, address various process-driven risks, and strengthen cybersecurity controls, among other benefits. As the technology advances time will tell how broad the applications of blockchain may be across these diverse industries with similar needs for compliance risk management.


Round-up on evolving role of central banks

Central banks may have once been quite remote in their workings to the average person, relegated to seemingly academic and technical tasks of interest rate management and currency market machinations. Perhaps many people had only ever heard of the Federal Reserve and had no perspective on the worldwide system of international and supranational central banking.

The 2008 global financial crisis, however, thrust central banks worldwide into the spotlight. Economic news since that time garnered a lot of attention in the media as countries attempted to recover from the economic crisis and re-defined their financial systems to be more resilient and guided by a more effective controls framework. This effort has been one that started with a focus on free-wheeling rescue and stimulus and subsequently has morphed to still include those objectives, with somewhat more restraint when possible, but now also to visibly impact many other areas of the financial system and markets.

In this process, central banks around the world have found themselves in a bit of an existential quest to determine what their engagement level and scope will be. Technological advancements and changes in post-crisis regulatory and legislative priorities have pressured central banks to decide whether they will contribute to certain markets and identify the extent of their own autonomy within their national systems.

  • Bank of Russia is facing a possible national banking crisis, as two major banks have needed rescue due to liquidity problems in just a month’s time. In August, there was a run on deposits at Bank Otkritie FC. In September, B&N Bank asked for a bailout to increase liquidity. The current problem could stem from the central bank’s efforts to rejuvenate Russia’s banking industry in 2014 on the heels of financial troubles in the industry from falling oil prices and international sanctions. At that time, Bank of Russia offered inexpensive loans to major banks to encourage them to take over smaller ones that were not doing well.   This consolidation caused the large banks to take on the troubled assets of the small banks, which are now creating the current liquidity pressure. Otkritie even has alleged that the assets it acquired were fraudulently represented in the purchases. This suggests issues with Bank of Russia’s supervision of those entities. If these early bailouts cannot contain the problems then a privatization trend could take hold:  Russia to Bail Out Second Major Bank in Month as Troubles Spread
  • The Swiss National Bank is publicly listed on the Swiss stock exchange, with 48 percent of its shares privately owned. Some other countries do have central banks with private shareholders, but this year, the share price of the Swiss National Bank has almost doubled. This trading activity is an interesting anomaly, as shareholders do not stand to benefit from the Swiss National Bank’s interventions in the foreign currency markets to keep the value of franc down. It’s possible that some investors are speculating on this thinly-traded stock in order to profit from price volatility that is not hard to generate with fairly moderate-sized transactions. Other motivations could be shareholders hoping for a public-to-private buyout by the bank or a flight to quality:  The mysterious rise in shares of the Swiss National Bank 
  • South Africa’s central bank Reserve Bank claims its independence is under attack as the South African government has been encouraging lawmakers to redefine the mission of the bank from inflation management to promoting socioeconomic benefits for South Africans. The Reserve Bank has been targeted by the Public Protector who is charged with investigating a bailout by the central bank from 1992. Far from a neutral process, this investigation has been controversial and politically-charged, and it has been seen as seeking to undermine the independence and reputability of the central bank. This very public reputational dispute begs the question of how central banks worldwide may be blamed disproportionately for their country’s economic problems or pressured politically to adopt agendas contrary to their essential purpose:  South Africa Central Bank Says Anti-Graft Head Met Zuma Team
  • The hot market this year has definitely been in cryptocurrencies, and questions have abounded about how national supervisors would react to a proliferation of trading exchanges and market offerings in Bitcoin, Ethereum, and others. The People’s Bank of China (PBoC), China’s central bank, has issued probably the strongest regulatory challenge to the market for cryptocurrencies so far. The PBoC first banned initial coin offerings (ICOs), the IPOs of the cryptocurrencies market, and then ordered all trading exchanges in Beijing to cease trading cryptocurrencies and quit allowing new users to register. China’s relevant industry regulator, the National Internet Finance Association of China, fell in step with the PBoC to condemn cryptocurrencies as illegal, linked to illicit activities, and too risky for market stability and investor protection interests:  China Is Shutting Down All of Beijing’s Bitcoin and Cryptocurrency Exchanges
  • However, not all central banks have had such an allergic reaction to bitcoin and other cryptocurrencies. Taking in stride the possible risks and undesirable associations, others are contemplating whether the way to manage speculative trading in their own currency markets might be to join in issuing cryptocurrencies as well. This “if you can’t beat them, join them” approach has been suggested by the Bank for International Settlements, a consortium of national central banks based in Switzerland. Some central banks, including the Bank of England and the Bank of Canada, are already experimenting with blockchain technology for interbank payment systems. The Reserve Bank of India is also looking into blockchain and even considering issuing its own cryptocurrency, as is the Estonian Ministry of Finance (to the disapproval of the European Central Bank). The overall verdict is that central banks need to take more time to consider their own interests before becoming enthusiastic cryptocurrency offerors, but the enticement of participating in the market in hopes of stemming potential risks to the financial system and their own monetary policy may prove too much to resist:  The Bitcoin Bandwagon: Central Banks Consider Their Own Cryptocurrencies

As the global economy continues to deepen in complexity and interconnectedness, inevitably bouncing between financial recovery and relapse, the role of central banks in this worldwide system will also keep evolving. Systemic changes in the market and transformative advancements in technology both represent threats to, but also opportunities for, the traditional central banking system.


Whistleblowers from significant scandals in financial services

This is the first of a three-part series profiling whistleblowers in different industries. This starts with today’s post, focused on the financial services industry, describing events where whistleblowers came forward to expose misconduct in investment banking, wealth management, and accounting. Tuesday November 7th’s post will cover the pharmaceutical industry, including AstraZeneca, Pfizer, and more. The post for Tuesday November 14 will be about whistleblowers who exposed high-profile corporate fraud in diverse companies such as WorldCom and Archer Daniels Midland.

Whistleblowers in the financial services industry have sparked reform for investor protection and shed light on the often secretive or mysterious culture within banking organizations, where trouble can be hidden from competitors and the public alike, as cultural problems deepen inside the organization completely unchecked by controls or encouraged by business strategy.

  • Bradley Birkenfeld, UBS: Brad Birkenfeld is an American banker. His disclosures regarding actions by UBS Group AG that enabled US tax evasion led to a $780 million fine from the US Department of Justice against UBS and publication of information that exposed the previously mysterious world of Swiss private banking. Indeed, Switzerland amended its federal banking law in 2009 and over the years subsequent made significant contributions to cooperation with other countries regarding reporting of tax data of their citizens. In 2013, Switzerland signed the Convention on Mutual Administrative Assistance in Tax Matters, cementing this obligation to roll back banking secrecy in this treaty which over 60 countries signed. For more on Brad Birkenfeld, who both did jail time and received a $104 million reward for his disclosure, check out this Bloomberg profile of him.
  • Rudolf Elmer, Julius Baer: Rudolf Elmer worked for the Swiss private bank Julius Baer for almost twenty years. In his last role, he was the head of the bank’s Caribbean operations for eight years. In 2002, the bank discovered that internal data had been stolen and subjected all employees to a lie detector test. Elmer declined the test once and then took it and failed, leading to this termination. Following this Elmer spent several years trying to share the information he had taken, culminating in releasing a cache of documents to WikiLeaks in 2008 and again in 2011. These documents provided evidence supporting allegations that Julius Baer had facilitated clients’ tax evasion through banking practices in the Cayman Islands. Elmer was tried several times in court for breach of banking and business secrecy laws, which historically have been notoriously tough in Switzerland, but have begun to be rolled back or scrutinized in the wake of cases such as Julius Baer’s.   Elmer also faced charges of harassment and other nuisance offenses for public disputes he got into with the bank and its employees, which demonstrates the complex and sometimes problematic emotional impact whistleblowing can have on people and their relationships with their ex-employers and ex-colleagues. In 2016, Julius Baer settled a deferred prosecution agreement, related to aiding US citizens in the commission of tax evasion, with the US Department of Justice for $547 million. For more information on this, check out this Forbes article from 2016.
  • Everett Stern, HSBC: Everett Stern worked for HSBC Holdings PLC in their Delaware office. He was a compliance officer focusing on monitoring HSBC’s transactions in the Middle East for anti-money laundering purposes. In 2010 and 2011, Stern flagged many transactions he believed could be related to terrorist financing, but his supervisors did not take action on his reporting. He then disclosed his evidence to the FBI and the CIA, kicking off an investigation that uncovered further issues in the bank’s operations in Mexico, Iran, and North Korea also. This culminated in a December 2012 deferred prosecution agreement where HSBC paid a $1.92 billion fine for its insufficient anti-money laundering controls. Stern left HSBC in 2011 and now runs his own private intelligence firm. For more on the money laundering and sanctions accusations against HSBC, read this 2012 article in The Guardian:
  • Richard Bowen, Citigroup: Richard Bowen was a senior executive at Citigroup in the period leading up to the 2008 global financial crisis. He was the chief underwriter of the Consumer Lending Group unit, and in this capacity he was responsible for evaluating and maintaining the creditworthiness of the unit. From June 2006 on, Bowen warned the board of directors of Citigroup about major issues in the risky mortgages being bought and sold by the unit. Bowen reported evidence to the board that many of these mortgages were defective, fraudulent, or both. Despite Bowen’s weekly warnings via required reporting throughout 2006 and 2007, the board did not take action. Bowen requested outside investigations of the Consumer Lending Group unit which substantiated his reports and showed that the unit had been operating with insufficient controls against these risks since 2005. This information should have been provided to shareholders per the Sarbanes-Oxley Act, but it was not, despite the fact that the bank claimed compliance with the Sarbanes-Oxley Act during this period. In exchange for his whistleblowing, Citigroup took away most of Bowen’s responsibilities and eventually fired him. Bowen offered crucial testimony to the Financial Crisis Inquiry Commission in 2010. He is now a motivational speaker on ethical leadership and corporate culture within the banking industry. For a look at what happened to Richard Bowen after he blew the whistle on Citigroup, check out this New York times article from 2013.
  • Antoine Deltour, PricewaterhouseCoopers: Antoine Deltour was a French employee of PricewaterhouseCoopers who was involved in providing information to the press related to tax rulings in Luxembourg for multinational companies. The documents became known as the Luxembourg Leaks and were the focus of a global investigation conducted and published by the International Consortium of Investigative Journalists. The investigation showed that PwC and other major accounting firms were facilitating registration in Luxembourg by multinational companies in order to benefit from advantageous tax rulings for revene reallocation. The legality of these practices is questionable on a number of grounds, including anti-trust, market abuse, and tax deals as illegal state aid. As a result of the disclosures, Deltour and his fellow PwC employee who also released documents, Raphael Halet, received prison sentences (later changed to suspended or overturned) and fines, but have also received a lot of credit for helping to shed light on the secretive practices surrounding these Luxembourg tax rulings and brought greater attention to the need to identify and prevent state-sponsored tax avoidance and evasion. In this sense, like the Julius Baer case, the whistleblower helped to ignite an open dialog about whether banking secrecy laws serve the public interest. For more on this sentiment, check out this piece about the role of citizens in holding the EU accountable.

Individuals like the above speaking up about misconduct they suspect or observe in the financial services industry have brought much-needed exposure and change to business practices. They have also often been punished, fired, criticized, or doubted for their bold decision to expose wrongdoing by their employer and/or colleagues. The 2009 US Dodd-Frank Wall Street Reform and Consumer Protection Act, which was intended to promote transparency and prevent fraud in the financial services industry, now prohibits retaliation against whistleblowers and expands the powers of the Securities and Exchange Commission in order to provide for other protections and rewards for whistleblowers who speak up about corporate malfeasance. Nonetheless, whistleblowers in the US continue to face retribution for their actions, and in Europe they remain open to legal liability in addition, as their disclosures break laws that some may say are designed to enable the concealment of other fraudulent or illegal practices.

Check back in two weeks, on Tuesday November 7, for the second post in this series of three about whistleblowers in historical events. Next Tuesday’s post will discuss individuals who exposed fraudulent business practices in the pharmaceutical industry.


The Madoff Ponzi scheme scandal

For more than 40 years, Bernie Madoff was one of the most prominent figures in the US financial services industry.   His trading firm, Madoff Securities, was founded in 1960 and due to its early adoption of then cutting-edge technology quickly became one of the major market makers in the business. The firm’s technology that it participated in creating later became the NASDAQ trading exchange. Apart from its brokerage business, Madoff Securities also offered investment management and advisory services to many prominent clients. These included banks such as Banco Santander, HSBC, RBS, and BNP Paribas; hedge funds; university endowments; charitable organizations; and famous individuals such as Steven Spielberg, Zsa Zsa Gabor, Sandy Koufax, and Elie Wiesel.

Madoff himself was very well-known in the securities industry. He was on the board of directors of the Securities Industry Association (SIA), the predecessor to the Securities Industry and Financial Markets Association (SIFMA), and served as chairman of SIA’s trading committee. He was also active in the National Association of Securities Dealers (NASD), the self-regulatory organization (SRO) for brokerage firms and exchange markets that predated the Financial Industry Regulatory Authority (FINRA), and served on the board of directors of the SRO, for a period even as its chairman

This last professional designation for Madoff seems ironic now. In reality, Madoff’s investment management business was revealed in December 2008 as a $65 billion Ponzi scheme, the largest financial fraud in US history. This massive fraud was carried out by Madoff and a close group of associates right alongside his legitimate brokerage business and taking full advantage of his huge network of investors and prominent reputation in the industry. In the scheme, trades and returns were completely fabricated and investor redemptions were funded by new infusions from individuals that Madoff aggressively pursued, touting his performance.

Despite numerous SEC investigations of various areas of Madoff’s business, and several outside analysts publicizing urgent and detailed concerns about the business and its purported performance claims which could not be replicated for authentication purposes, this scheme continued unmitigated for at least 15 years, per Madoff’s admission. It may have gone on for as long as 30 years, back to the very beginning of the investment advisory arm of Madoff Securities.

Madoff struggled to keep the fraud going as the global financial crisis caused the markets to contract throughout the fall of 2008, and investors sought redemption. Still, he managed to stay afloat until December 2008, when his sons, Mark and Andrew, confronted him about bonuses he wished to pay amid the mounting investor redemptions. Madoff confessed to his sons that the investment management business was a fraud, and his sons then reported him to law enforcement. In the subsequent months the shocking scale of his fraud and the losses it caused became the subject of public fascination.

For interesting insights on the fraud and scandal surrounding Bernie Madoff’s Ponzi scheme to defraud investors, check out these videos:

  • The Madoff Affair – An episode of the PBS documentary program Frontline from May 2009, when the complete scope of the scandal was still being discovered, which aims to tell the story of the fraud from the beginning and question how it was able to go on for so long.


  • The Man Who Knew – This March 2009 60 Minutes segment features Steve Kroft interviewing Harry Markopolos of Rampart Investment Management. Markopolos was a vocal critic and doubter of Madoff’s claimed investment returns. He attempted to alert the SEC on a number of occasions to the fraudulent practices he believed he had discovered in his study of the alleged performance of Madoff Securities, but he was ignored or his claims were not thoroughly investigated.


  • Ripped Off: Madoff and the Scamming of America – This is an April 2009 which looks at Bernie Madoff’s fraud in comparison with other Ponzi Schemes of the prior hundred years. With this study, the investigation assesses the magnitude of the damage Madoff’s scheme caused and places it in context of the global financial crisis which was beginning to deepen at the end of 2008.


  • The Hunt for Madoff’s Money– This February 2009 segment from the ABC news program 20/20 asks where the money that Madoff defrauded from his investors went, other than fund withdrawals by others’ withdrawals. The investigation looks at the luxury lifestyle and properties of Madoff and his family members and associates that were enriched by his fraudulent investment management scheme.



  • Madoff Victims on Guilty Plea – In this March 2009 report from CBS News, nine people who lost their investments in Madoff’s Ponzi scheme speak to Katie Couric about their reactions to the exposure of the massive fraud and his guilty plea that resulted in him being sentenced to 150 years in prison without standing trial.


The bankruptcy of Lehman Brothers

For over 150 years, Lehman Brothers Holdings Inc. was one of the largest financial services organizations in the world. In the United States it had far-reaching business operations in investment banking, securities sales and trading, research and analysis, asset and wealth management, and private equity investments.

Despite this long history, in the early 2000s Lehman Brothers was deeply impaired by the firm’s involvement in the subprime mortgage market, the impending bursting bubble of which precipitated the 2008 global financial crisis. Losing clients, market value, and rating status rapidly, Lehman Brothers filed for bankruptcy on September 16, 2008. This date is often seen as the impetus of the subsequent financial crisis, when widespread, sustained market collapse commenced.

The Lehman Brothers businesses were almost immediately taken over by Barclays in North America and Nomura Holdings elsewhere in the world. However, the impact of the bankruptcy was seismic. It had a strong effect both in concrete terms of losses in the financial markets and stress to the economy as well as a symbolic effect in representing the “too big to fail” categorization that troubled the global financial system and the many large firms within in that suffered great losses during the ensuing crisis.

  • A Colossal Failure of Common Sense – Also a best-selling book by Lawrence G. McDonald with Patrick Robinson, this lecture goes into great detail of the events leading up to, during, and following the Lehman Brothers bankruptcy during the years 2007-2010. The study goes even further back as well, to unpack the changes in financial regulation and banking industry laws from the 1990s which allowed the business conditions under which products like the subprime mortages and resulting securities were created and sold.
  • The Last Days of Lehman Brothers: Moral Hazard – This film dramatizes the events of the weekend leading up to, and in hopes of preventing, the eventual bankruptcy of Lehman Brothers. The subtitle “moral hazard” refers to the situation in which precarious risk calculations are made by individuals who do not face the liability and/or loss if the decision was the wrong one.   This sort of risk-taking was prevalent during the lead-up to the financial crisis and in the subprime mortgage securitization market. The bankruptcy of Lehman Brothers served as both a reminder that the risk could come home to roost after all, as well as a cautionary tale for financial firms and governments in the future to continue to try to mitigate this exposure.
  • Wall Street Crash of 2008 – This is the real-time video from CNBC on the evening of September 14, 2008 which reports the unfolding story that Lehman Brothers was going to collapse and file for Chapter 11 bankruptcy protection the next day (followed by a bankruptcy filing the day after that).
  • Did Lehman Brothers Cause the Financial Crisis & Stock Market Crash on Wall Street? – This interview between Maria Bartiromo and Yves Smith analyses the effects of the Lehman Brothers bankruptcy to ask whether the firm’s collapse contributed to the causes of the global financial crisis or simply signalled the beginning of a trend.
  • Five Years After Lehman Brothers – This discussion on The Agenda with Steve Paikin from 2013 looks into what has changed, or not, in the global economy and financial services sector since Lehman Brothers went bankrupt in 2008 and the markets and industry began their prolonged collapse.


The story of the rapid decline and fall of Lehman Brothers, and the collapse of the global economy and markets that followed, is one that will remain captivating to students of the 2008 financial crisis for years to come. Furthermore, the events of that weekend in September 2008, and their causes and effects, serve as an interesting and important measure against which compliance professionals and decision-makers in the business should judge their assumptions of risk and expectations for liability.


Selected documentaries on the 2008 global financial crisis

The Great Recession, which began in 2007-2008 with the collapse of the subprime mortgage market and led to an international banking crisis, offers many lessons for compliance practitioners and enthusiasts alike. Many documentaries have been produced in the ensuing years to offer new insights on the crisis and its causes.

  • American Casino and the origins of the subprime collapse – The filmmakers of American Casino started their work in 2008 with a theory that the housing market was in trouble. Over the year that they filmed, this idea took root in reality and unfolded before them. The 2009 documentary that resulted offers a vivid explanation of how the subprime mortgage market evolved and then fell apart. The stories of average Americans who held the mortgages that were underlying the bonds created by big investment firms humanize the origins of the crisis and help to ground the actions in the financial markets by connecting them to the many people that were affected.

  • Inside Job and non-disclosure of conflicts of interest – This 2010 documentary reaches back into the international origins of the financial crisis, to begin with an look at the collapse of the Icelandic banking system. One of the movie’s principal assertions is that academics and scholars who are professors at many of the prominent educational institutions have conflicts of interest due to their financial ties to firms such as Goldman Sachs and other large market makers. The film’s argument suggests that these conflicts of interest are not subject to mandatory disclosure and so the economists express opinions about investments and financial systems which cannot be transparently evaluated.

  • Capitalism: A Love Story and the dangers of deregulatory trends – Michael Moore’s 2009 documentary takes a wide view on general contemporary economic conditions in the United States, ethically questionable practices of major corporations, and the status of the American worker in modern capitalism. Germane to the subject of the 2008 global financial crisis, Moore takes a look at the lending practices of Countrywide, one of the main players in the subprime lending practices that led to the market collapse and ensuing crisis. Countrywide operated in an generation of regulatory relaxation, leading to unduly risky practices of giving loans to people who could not reasonably afford them as well as giving discounts and special deals to politicians and regulators in hopes of keeping the good times rolling.

  • The Flaw and the evolving state of modern American capitalism – A good companion movie to Capitalism: A Love Story, this 2011 documentary focuses on explaining how the consumer society in the United States has a symbiotic relationship with the markets, at the expense of the American citizen whose main value in society becomes determined by spending power.   In this dynamic, the rich get richer while the poor stay poor and the middle class drifts ever downward, with interventions such as the easier extension of lending in the pre-2008 years only seem to present a possibility for upward mobility for them, but rather just create financial crises where they bear the brunt of the losses.

  • Money for Nothing: Inside the Federal Reserve and the cyclicality of major financial crises – The ebb and flow of regulatory pressures in the United States are enabled by the lack of understanding most Americans have about what the Federal Reserve System is and how its policies impact the economy and the markets. This 2013 documentary suggests that these policies had a major role in the 2008 financial crisis and will continue to contribute to the creation of bubbles that culminate in future crises. The firm suggests that awareness of the public and citizens’ engagement in activism for more accountability and greater transparency by the Federal Reserve System are critical for protecting society from ever-greater financial crisis in the future.

These are just a few examples of documentaries which can provide an informative and compelling view into the events of the 2008 global financial crisis. For years to come there will surely be many more such documentaries to add further insights to the historical record on the Great Recession.


Margin Call and unethical crisis management in the financial services industry

The 2011 movie Margin Call focuses on the conduct of the employees of an investment bank in disaster mode. The movie takes place in the prelude to the 2008 global financial crisis. During a reduction in workforce, an analyst reveals that the firm’s predictive models are showing that its portfolio of mortgage-backed securities will soon experience losses which will exceed the highly-leveraged value of the firm and lead to its bankruptcy.

The rest of the movie centers on the behavior of the firm’s employees and senior management and the choices they make in handling this discovery. Unsurprisingly, many of them model unethical decision-making and provide cautionary examples from which governance and compliance structures can take advice for what to prevent.

  • Key man dependency and lack of transparency – The entire movie revolves around the too-late discovery of the projected losses by an analyst. His boss was working on a project to try to figure out what was wrong with the firm’s models, but he was laid off before he finished his analysis. This scenario suggests the conclusion that if the boss had not been working alone or had been sharing his work in progress sufficiently, then the problems could have been discovered earlier and the entire dilemma could have been avoided or at least mitigated. An insecure overdependence on the work of one vulnerable man and a lack of honest disclosure led to this firm’s undoing from the very start.

  • Corporate code of ethics and culture drivers – A firm’s compliance program sets a tone and provides a rules-based structure for employees. Ultimately each individual still has the freedom to make unethical or inappropriate decision for his or herself, but the choice architecture provided by a firm’s governance controls matters for setting expectations. Corporate enablement of immoral or ethical behavior starts at its simplest practices, such as reimbursement of expenses, especially in a business where the financial upside for compensation is immense. In a firm where an anything goes culture reigns, the downside of this culture is also immense.

  • Tone at the top and unethical executive decision-making – In a series of overnight meetings, the firm’s senior management decides to hold a “fire sale” and dump their toxic assets to limit their own exposure by dispersing the risk through the markets and ripping off their counterparty broker-dealers. They also know that their customers will quickly realize what they are doing and be disenchanted by the deceptive sale of only their troubled mortgage-backed securities holdings. Senior management justifies and solidifies their choice to destabilize the entire market and subject counterparties and clients to losses to avoid their own bankruptcy.

  • Lack of business sustainability due to dishonest practices – By selling the toxic mortgage-backed securities to the counterparty firms which should be their trusted partners, the traders end their careers, as no one will do business with them again in the future. They are compensated handsomely with promised bonus pay-outs, but there is another large reduction in workforce once their dirty work is done. The principals of the firm plan to profit from the coming financial crisis, but their business as it was, as an investment bank, is over.

  • “It’s just money” – moral relativism as justification of unethical behavior – The CEO and chairman of the board takes an apparent long view on the actions of his firm, seeing their choice to deceptively unload toxic assets on the market in order to stem their own losses by kicking off systemic disorder, as a mere reaction. “It’s just money” is a wilful disconnection from the human and integrity costs; believing that the entire economic system is a historic construct makes wrongdoing within it blameless. However, this is not reality; financial crises have real impacts and victims, and money is not just “pieces of paper with pictures on it.”

At every turn, Margin Call exemplifies bad corporate conduct, insufficient compliance and governance controls, and unethical decision-making. This movie provides a primer as to the devolving organizational accountability that set the stage for the 2008 financial crisis.