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Enforcement Watch

PRA Imposes Substantial Fines For Failures to Report Matters Arising From US Regulatory Actions
Enforcement Watch

Enforcement WatchIssue 22 | May 2017

Date
09 February 2017

The PRA has imposed a fine of £17.85m on Bank of Tokyo Mitsubishi UFJ Limited (BTMU) and of £8.925m on MUFG Securities EMEA Plc MUS(EMEA) for notification failures arising out of actions concerning the New York Department of Financial Services (DFS).


PRA Imposes Substantial Fines for Failures to Report Matters Arising from US Regulatory Actions

The PRA has imposed a fine of £17.85m on Bank of Tokyo Mitsubishi UFJ Limited (BTMU) and of £8.925m on MUFG Securities EMEA Plc MUS(EMEA) for notification failures arising out of actions concerning the New York Department of Financial Services (DFS). These sums follow a 30% discount for early settlement.

Factual Background

BTMU and MUS (EMEA) are both subsidiaries, either directly or indirectly, of a parent company headquartered in Tokyo.   Both are regulated by the PRA, as well as being regulated elsewhere.

In June 2013, BTMU entered into a settlement with the DFS. This related to the processing by its New York branch of US dollar clearing activity in breach of US sanctions.  BTMU paid $250m by way of settlement.

A subsequent DFS investigation found that PwC had removed key evidence from a report relied on by the parties in that settlement as a result of improper pressure exerted by BTMU and its executives.  PwC agreed to pay the DFS a $25m fine and to certain restrictions on its consulting activities for two years. For its part, in a second settlement, BTMU agreed to pay a $315m penalty and to impose certain employment restrictions in respect of three current or former BTMU employees.  This included in respect of Mr B, an executive that held a controlled function and acted as Chairman of MUS (EMEA) at the time of the DFS investigations into BTMU.  He was previously Managing Executive Officer and Deputy CEO of BTMU's Global Business Unit. The settlement relating to this second matter was published by the DFS on 18 November 2014 at or around 4:12pm (London time).  The PRA was only notified of the settlement by senior individuals of MUS(EMEA) and BTMU at 5pm (London time) that day.

Breaches of Regulatory Fundamental Rules

In its Notice, the PRA considered in detail the events leading up to the settlement of the second DFS matter. In particular, the PRA considered the extent to which relevant executives of both entities had understood the potential financial, reputational and individual consequences of further enforcement by the DFS and elected to report to other regulators, yet failed to report to the PRA.

As a result of the above, the PRA found that BTMU breached Fundamental Rule 6, and that BTMU and MUS (EMEA) both breached Fundamental Rule 7.

As for MUS(EMEA), the PRA considered that it ought to have been notified of the implications of the second DFS matter for Mr B as it concerned his fitness and propriety; failing to report was a breach of Rule 7. Although the PRA noted that MUS(EMEA) had limited information to assess its obligations as a result of BTMU's breach of Rule 6, there were some internal compliance discussions around reporting to the PRA.  Further, a director had expressed concern that obtaining external legal advice on the notification issue may itself impact any obligation to notify the PRA.  Most seriously, the PRA relied in particular on the fact that MUS(EMEA) did not notify the PRA of the issues in the course of a meeting on 21 October 2014, scheduled to update the PRA on existing plans for the succession of the Chair of MUS (EMEA) (that is, the position held by Mr B).

  • Fundamental Rule 6 ("A firm must organise and control its affairs responsibly and effectively"
    During the relevant period, BTMU operated a "hub and spoke" model for the dissemination of information. This provided clear policies and procedures to escalate local incidents to the correct forum in BTMU as a global entity (the Hub) and onwards to other affected jurisdictions, as appropriate, via the Hub.  For the model to be effective, the Hub needed to be aware, or be made aware, of the regulatory responsibilities in relevant jurisdictions.  Crucially, the PRA considered that BTMU Tokyo "did not appear to have had the necessary awareness of the regulatory responsibilities of PRA regulated entitles" which in turn meant that relevant information concerning the second DFS matter was not communicated to the BTMU London Branch or to MUS (EMEA).

    The impact of inadequate procedures, policies, systems and controls for the communication of information was (i) that the BTMU team negotiating with the DFS did not adequately consider the UK regulatory obligations for BTMU and (ii) people responsible for reporting to the PRA within BTMU and MUS (EMEA) did not have the information to consider whether notifications were required. As a result, BTMU was unable to ensure compliance with its obligations under Rule 7 and it provided limited information to MUS(EMEA) to do the same.

  • Fundamental Rule 7 ("A firm must deal with its regulators in an open and co-operative way and must disclose to the PRA appropriately anything relating to the firm of which the PRA would reasonably expect notice.").

    The PRA found that, in breach of Rule 7, from the date of PwC's settlement with the DFS, BTMU failed to consider its regulatory obligations to notify the PRA given the "emerging risk" that its own negotiations with the DFS could result in a material sanction or significant adverse impact on its reputation which could in turn have prudential implications for its global business. Such breach impaired the PRA's ability to supervise BTMU effectively. In making this finding, the PRA relied in particular on the fact that BTMU had requested confidentiality waivers to notify its Japanese regulator, yet failed to do the same for the PRA; it did not consider internally whether to notify the PRA until 2 months after negotiations had started and those discussions focussed on MUS(EMEA)'s obligations rather than its own. It prioritised a settlement over notification to the PRA.

    As for MUS(EMEA), the PRA considered that it ought to have been notified of the implications of the second DFS matter for Mr B as it concerned his fitness and propriety; failing to report was a breach of Rule 7. Although the PRA noted that MUS(EMEA) had limited information to assess its obligations as a result of BTMU's breach of Rule 6, there were some internal compliance discussions around reporting to the PRA. Further, a director had expressed concern that obtaining external legal advice on the notification issue may itself impact any obligation to notify the PRA. Most seriously, the PRA relied in particular on the fact that MUS(EMEA) did not notify the PRA of the issues in the course of a meeting on 21 October 2014, scheduled to update the PRA on existing plans for the succession of the Chair of MUS (EMEA) (that is, the position held by Mr B).

Comment

The PRA considered the failures to be significant. This was both because the PRA considered that they affected its ability to supervise effectively and because the systemic importance of the entities had implications for the UK financial system as a whole.  It was accepted that the BTMU breaches were not deliberate or intentional and in both cases that there had been co-operation with the PRA during its investigation and that there had been prompt remedial action.

An interesting aspect to this enforcement action for multi-national corporations is the reporting obligations in the UK of conduct and regulatory breaches in a different jurisdiction.  The Notice is a clear statement that the PRA expects a firm operating across multiple jurisdictions to ensure that it is organised in a way that, when issues arise concerning its operations in one jurisdiction which may impact other jurisdictions, the regulatory responsibilities of the firm as a whole are appropriately considered.  Further, where individuals have roles across entitles, they should ensure that they consider the regulatory responsibilities of each firm and their own responsibilities to the PRA.