By Zahn Alimbay in Regulatory Insights — Mar 23, 2024

Enforcement trends 2024

Following the “quieter” 2023, enforcement agencies are scaling up their activities. What do their actions tell us about the direction?

Let’s focus on three areas dominating the enforcement agenda: bribery, sanctions, and record-keeping violations (off-channel communication) in the financial sector.

Broadening the pipeline

Historically, in case of repeated violations, the US DOJ would either extend the existing DPA (Ericsson) or enter another DPA/NPA with higher fines and stricter terms (ABB) when dealing with repeated offenders. While signalling a change of approach and promising harsher punishment for corporations and involved individuals (an approach echoed by the SEC and CFTC), enforcers are calling for companies to self-disclose violations.

Considering this, together with the US DOJ’s newly announced whistleblower program, expected to be similar to the programs run by the SEC and CFTC, we can see the intent to broaden the pipeline of cases getting the DOJ’s attention in a mid- and long-term perspective. But also cross-agency alignment in approaches and policies.

The UK follows suit. Director Ephgrave announced his intent to introduce the SFO’s own whistleblower program, modelled on the one in the US, in his attempt to revive the troubled prosecutor.

With the recent appointment of new co-directors of its Enforcement and Market Oversight Division and the publication of a consultation on Enforcement (“CP24/2: Our Enforcement Guide and publicising enforcement investigations–a new approach”), the UK’s Financial Conduct Authority promises a new approach to improving the deterrence of serious misconduct. The recent insider-trading conviction of a former Goldman Sachs analyst sends a clear message: FCA is ready to sharpen its teeth.

On both sides of the Atlantic, tone-setting enforcement agencies are shaking up their enforcement toolbox, effectively aligning their practices by borrowing tactics and tools from each other. The era of heightened enforcement is here to stay.

Bribery and Corruption

In the past few years, the battleground has moved from the world of big corporates to the trading houses. But the underlying issue remains the same: bribery of foreign public officials.

Some of the recent biggest ABC fines came from the trading:

Vitol - $164M settlement in 2020 in relation to bribery in Brazil, Ecuador and Mexico.
Glencore - $1.5BN settlement for bribery and market manipulation in 2022
Freepoint - $98M settlement (bribery in Brazil) in December 2023
And now Gunvor, the latest trader, agreed to pay $662 Million to end US and Swiss bribery probes (Energy trader Gunvor to pay $662 mln to end US, Swiss bribery cases | Reuters).

But do not worry. According to FT (Commodity traders sitting on up to $120bn in cash after years of record profits), commodity traders are sitting on a $120BN cash pile after years of record profits. These fines will hardly be noticeable on their P/L.

Of course, we may ask, how come these firms continued doing business as they did after decades of big fines, public scrutiny of bribery and corruption, and a focus on ethical business practices? What about Board oversight? General Counsels? Internal Auditors? External Auditors? And all their flashy annual reports talking about ethical commitments?

In the murky world of commodity trading, bribery was seen as a cost of doing business for too long. A “competitive advantage”.

There are different views on whether hefty fines can change market behaviours or are just a “get out of jail” free card, but these fines send a clear message to market participants—you are being watched. This is why Enforcement agencies on both sides of the Atlantic are trying to broaden the pipeline of new cases.

Sanctions

As before, the US leads the way.

On the one hand, the US wants to send a strong message reminding international markets not to be complacent (especially when Congress curtails their ability to dispatch further military aid to Ukraine); on the other hand, it’s not the time to agitate their partners, especially in the Middle East. Treasury has to navigate a fine line.

Can they achieve both? US knows how to and has the tools they need to apply pressure on foreign governments. They have done it before.

Some might recall the autumn of 2019, when the Treasury designated two subsidiaries of China COSCO Shipping Corporation (one of the most prominent players in the tanker market) for violating the US sanctions against Iran. This effectively put over 60 vessels under sanctions and shocked the petroleum shipping market. Prices skyrocketed overnight. Markets adjusted. Once they got China moving in the desired direction, COSCO shipping was removed from the OFAC sanctions list (Jan 2020).

This shows that the US Government has the means to compel compliance even when there is no US nexus and would not hesitate to apply those.

Not surprisingly, financial Institutions, shipping and oil are on their list. This time around, they first started by enforcing a $60-a-barrel oil cap, then turned their focus to shipping, and finally, it’s time for the financial industry (Russia’s Backdoor to the Global Banking System Is Slamming Shut - WSJ). December Executive Order 14114 targeting non-US financial institutions with secondary sanctions was a warning shot, and many, as we can see, got the message.

This is just another reminder to traders and foreign governments who believed the US would not enforce the sanctions. It was never a question of if but when.

Off-Channel Communication

On February 9, 2024, the US SEC fined another batch of Wall Street firms $81 million. This is just the latest episode in the multi-year quest by the SEC and other regulators to eradicate off-channel communication. Since December 2021, the SEC has charged 40+ firms and imposed more than $1.5 billion in fines for record-keeping failures. The CFTC has also been quite active.

But what’s behind the firms' struggle to manage their record-keeping practices?

Fundamentally, there are two issues: first, firms' abilities to meet regulatory expectations in terms of controlling off-channel communication, and second, rogue employees’ use of those means of communication to engage in prohibited activities, such as market manipulation and insider trading.

The problem with detection is that it’s reactive. Technology evolves fast, and detection tools will always play catch-up. The problem of off-channel communication is not going away anytime soon. The use of messages that disappear upon receipt and coded language for prohibited communication is just the latest frontier. Many of those methods, like coded language, are not new and have been seen in other fields, too. Go no further than sanctions and export control evasion.

Additional guidelines are also needed. At the moment, firms need to boil an ocean to meet all possible scenarios, which is not viable.

Prevention of misconduct is a more complex task, though. Nowadays, almost all firms have adequate policy prohibitions, communication, and discipline for misconduct, but of course, there is more to it. The objective here is to create a corporate environment that is non-conducive to misconduct.

Firms must focus on intelligent prevention strategies and tools, going beyond policies and not just communicating but embedding the message, influencing team dynamics and individual behaviours. The “right” corporate culture is also crucial. By changing behaviours, firms can achieve what their surveillance and monitoring systems can’t.

It's a race. Firms need to step up their effort if they want to get ahead, and technology is only part of the solution. Like everything else, it’s about people, the drivers of their behaviours, and creating the “right” corporate environment that will not tolerate misconduct. This is especially critical as Gen Z enters the workforce—their use of communication technology is on a different level altogether.

See you next time!

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