How Companies Can Avoid FINRA and FCPA Violations
If you watch the financial news, then you’ve seen a lot about Venezuelan bonds recently. That’s because more than a few firms suspended trading on these bonds, Morgan Stanley included. There was a particularly prevalent case in the media, that of ex-trader John Batista Bocchino, that gained attention because he managed to violate both FINRA and FCPA rules. While he was employed by Morgan Stanley, the company avoided guilt by association by having strong procedures in place.
Most employees behave ethically but that doesn’t protect you from the risk that there’s one unethical one in the mix. That unethical employee can cost a firm millions. In the Bocchino case, $190 million in bad bond trades was at stake. Luckily, by keeping proper checks and balances in place, Morgan Stanley escaped culpability.
How Morgan Stanley Kept Their Hands Clean with Venezuelan Bonds
No one is arguing that in the case of the Venezuelan bonds, many of which are being sold at a significant discount, these aren’t likely to make holders wealthier. The issue is where that wealth is coming from. These Venezuelan Government Bonds, sometimes called “Hunger Bonds” have raised a lot of controversy over the past few years, due to a number of different factors, including:
- Oil dependency – About 95% of Venezuelan funding comes from oil revenue and it’s one of the largest oil producing countries in the world. While oil can be a strong commodity to invest in, it’s also one that’s known to be unstable. The Venezuelan government has, in the past, manipulated oil prices simply by releasing more oil than normal. Combine that with the fact that the US populace is increasingly demanding that companies invest in greener fuels, and you have a recipe for controversy.
- Political structure – Much of Venezuela’s largest industries are government-owned and the government also controls foreign aid. Consequently, there’s a concern that a conflict of interest exists, as aid could be redirected to private industries rather than citizens.
- Cost of bond repayment – The price that these bonds are being bought at is extremely discounted, at some points as low as 30 cents on the dollar. However, to make the bond payments on time, the government must cut back somewhere, and the area it cuts back on is likely to be services to citizens.
- FCPA issues – Venezuela’s government owns the major industries, which allows them to set their price. That means traders must work closely with foreign officials to buy and sell these bonds, and some of those conversations could come very close to bribery. The government being involved in a business is always sticky because there’s no oversight.
- Ownership issues – Much of the collateral for the bonds is tied up in public property. Venezuelan officials could be mortgaging items they do not own, like land that belongs to the citizens and not just the government.
While Venezuelan bonds have been purchased by many firms, after some controversy, Morgan Stanley elected to suspend purchases of these bonds entirely. They did this to avoid issues with both FCPA and FINRA agencies, who are watching these bonds closely. They also did this for ethical reasons. So, when they caught John Batista Bocchino making bond sales by using dummy accounts, they didn’t just terminate him. They turned him in.
Weighing the Decision to Self-Disclose
Many firms struggle with the decision of whether to self-disclose in relation to FCPA and FINRA compliance; however, in this case, it was easy for Morgan Stanley. That was because they followed the right compliance steps which allowed them to proactively separate themselves from the employee’s behavior. Specifically, they:
- Proactively assessed the risk – The compliance department at Morgan Stanley reviewed Venezuelan bond trading in 2010 and decided it was too much of a risk, which led them to the decision to restrict trading.
- Had a company policy: Morgan Stanley’s policy was clear; no direct trading with Venezuela. As such, Bocchino had no opportunity to trade in their name.
- Responded quickly – After receiving customer complaints, Morgan Stanley promptly investigated Bocchino and terminated him from his position in 2012. They also disclosed all of this to federal regulatory agencies voluntarily.
- Cooperated fully – Following their termination of Bocchino, they cooperated with the investigators, giving them full access to their policies and procedures and worked to expose Mr. Bocchino’s dealings.
Morgan Stanley held no culpability in Bocchino’s dealings and could escape a hit to their reputation as well as to their legal costs by being proactive. They kept policies in place that alerted them when a rogue trader stepped out of line and started violating policies. They took immediate action and mitigated their risk.
Clearspeed believes that kind of proactivity is the key to saving a firm millions when it comes to FCPA and FINRA compliance. Using our Remote Risk Assessment (RRA) software, many firms have been able to mitigate risk and eliminate unethical behavior like Mr. Bocchino’s. For more information on implementing RRA in your business, get in touch.
Image Source | Unsplash user Piotr Chrobot