Spicing Up the 10-K

On August 5th, SEC will vote on a rule that would publish the ratio of CEO compensation to the typical worker of their own firm. This disclosure is required by Dodd-Frank, but, as with many laws, the details and implementation makes all of the difference in the world. SEC has delayed the implementation of this requirement, but I don’t really know why, other than CEO’s don’t like the idea.

I don’t like the idea because it unnecessarily target the CEO over other top executives. The likely comparison will be made between the CEO and an average of some pool of individuals, which is unfair. The better comparisons are with individuals against individuals or pools against pools.

full-trailer-for-50-shades-of-grI’m in favor of pools. The pools should be large and the distinction should be simple and indicative of something important. If the pay disparity is what the SEC wants to highlight because it feels that bigger disparities lead to more compliance issues, then they need to identify what is driving the disparities within the organization. Across the board, the biggest portion of disparity is equity compensation. The two pools should something quite simple. My suggestions: compare average total compensations where more than 50% of the total compensation is equity versus less.

Here’s the other problem with this disclosure: what is defined as the organization. I’m assuming Goldman Sachs does not hire any janitors. Janitors are employees of an outside firm. But Goldman Sachs wouldn’t exist without working in buildings of some sort. So, in terms of running the company called Goldman Sachs, some manager has to decide what janitorial company will be responsible cleaning their offices. As long as having offices is part of Goldman Sach business model, office cleaning services are part of its business. But legally, those janitors don’t work for Goldman Sachs. These types of outsourcing is usually on the low end of the payscale, unnaturally raising the average of the lower pool.

Similar pool problem are labor market disparities. A company whose employees are primarily in Bangladesh will be paying their lower pool significantly less than the upper pool. At the same time, the disclosure is actually made worse but hiding the disparity it is actually trying to reveal: American disparity. So, does one exclude foreign employees?

Still, the greatest benefit to my proposal is getting an understanding about how what the pay disparity is between those who are working to pump up the value of their stock and those who are trying to increase their cash compensation. This will also require the firm to put everyone in two buckets, forcing them to make a decision about what roles should be trying to pump up the stock and what roles are to be productive.

But these are implementation problems. Politicians and interested parties are still arguing over whether such information in important to shareholders. Republicans are saying that the purpose of the rule is to produce societal pressures on corporations, not actually add informational value to shareholders. I don’t have a problem with putting societal pressures on corporations, but I do wonder if this really should be the role of the SEC or if it should be the role of the DOL. Democrats and Labor are saying that  the information is going to be important for shareholders because they will be given another key piece of information about how to pay their executives, which shareholders do in a vote each year.


Should corporations be required to disclose the pay ratio between its top executive and the average worker in the firm?


About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.


btn_donateCC_LG


Greece’s story includes tax compliance

World Bank data to the end of 2013 shows Greece has only 29 per cent of its GDP as tax receipts; the EU average is 37 per cent. – Breitbart

Navagio beach, Zakynthos, Greece

There are three major factors in Greece’s success in the future:

  1. Government expenses (primarily employee compensation and pensions)
  2. Youth unemployment (which is at about 55%)
  3. Tax Compliance

The first two are discussed a lot because of the dramatic human toll newspapers can interest readers in. Decreasing government pay could look like the government is gouging its employees when they could be raising taxes on wealthier people who can afford to pay, but Greece is also notorious for high pay and early retirement, some as early at 50 years old, which makes employees look like they are milking the system. Youth unemployment is a particularly difficult topic of people because many older Greeks do not make much money but then they must also support their grown children (18 to 24 year old) who cannot get career jobs and are employed part time for part of the year. There is a generational battle here. Older people can command higher wages with their knowledge and experience, but younger people are cheaper.

Tax collection has its human aspects as well. In this day and age, there is really no tax collector. It is all done through administratively by filing papers or filing online. The human aspect of the tax collection story is on the issue of tax evasion. In greece, such a small percentage of people actually pay taxes when they owe taxes that the tax rate really doesn’t matter. If tax rates were raised in order to close the deficit (government funding gap), then more people will evade taxes. If taxes were lowered, the government would just reduce revenues because people had evades taxes for so long that they would not want to reveal how they have been making a living to begin with. Tax avoidance isn’t much of an issue since Greek tax structure is simpler than in the United States. When so few people pay taxes, making it more difficult to figure out how much one is supposed to pay only increases the likelihood of evasion. (Tax avoidance is the act of avoiding taxes in ways the law allows, like a deduction. Tax evasion is to not pay taxes in part or in whole.)

It is hard to blame Greeks for not paying taxes. First, non-government employees get very little for the Euros paid. It isn’t like Greek infrastructure is among the best in the world. It isn’t like Greece is a leader in an industry. Greece’s biggest attraction is tourism. Just look at the picture of the beach. Beautiful sand, clean blue water, happy people sunbathing; it’s the type of place people imagine when they imagine paradise.

But even if Greece paid its taxes, it has a long way from being financially healthy. Let me bring the financial aspect of this discussion down to ground level. Each of Greece’s 11 million people owe about $23,000 and they earn about $22,000 per year. That actually isn’t too bad except each Greek owns only about $18,545. Compare that to the United States. Each American owes about $55,000 and earns about $53,000. Per cent, it is almost exactly the same as Greece. But each American owns about $257,232. These are all averages, of course, and it does not address distribution. The point is that on average a Greek person can’t give up all of his wealth to pay of the debt and start outright, while an American could pay off the debt with about 80% of their wealth intact.

Greece now has a little bit of a surplus, meaning they are making a little more than they are paying to live. If this continues, with some adjustments in the way it collects taxes, it could work its way toward financial solvancy. But at this point, it looks like it is just too difficult people for Greeks to do, at least not while the sun continues to shine on their beaches.

Bibliography


What do you think about Chris Evans becoming a new Top Gear host?


About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.


btn_donateCC_LG


OFAC Compliance of Sanctioned Individuals

from CiCiBeBeler
Natalia Poklonskaya, Prosecutor General of Crimea

On the surface, sanctions on individuals seem easy. Your bank is given a list, your bank looks through information about clients and stops all business with those who are on the list.

Hahaha, yeah, right. Then there are their related parties, some of whom you need to sanction as well because they can be intermediaries. Others you need to monitor because they are legitimate businesses but the individual has access to making transactions. Oh, and there are subsidiaries and parent companies of the monitored company. And then there are possible new agents for the individual, like an assistant. Then there are all of the accounts that have in some form or another put money into or taken money out of all of the related accounts. And then there are your bank’s vendors and suppliers, who all need to comb through their accounts so that they don’t do transaction through your bank. Correspondent account for foreign banks will also need to clamp down on transactions of suspiciously-related accounts. And then there are new accounts being created by any number of parties who might be providing transaction services for the sanctioned individual. And then there are those accounts that come from jurisdictions that do not enforce sanctions from other jurisdictions, from markets that do not allow reporting on account information, from banks with no physical presence…

You get the idea. The web of research required to identify all of the entities that require a decision on grows rapidly. Imagine doing this for a nation. To make this easier, Thomson Reuters has created a Russian Sanctions Tracking Service. This is supposed to help identify all related parties. Reuters is leveraging its own massage database.

This is good but no compliance department should rely on this. There is no way such information could be updated quickly. Hours, even minutes, matter. In today’s world where an account could be setup remotely online, an account could be created and start making transactions through it, completing all of the necessary transactions for the sanctioned individual before an update of the list is published.

Sanctions programs should have to work closely with the bank’s Fraud Investigation Units and Suspicious Activity Reporting groups to stay on top of the ever changing sanctions environment.

from CiCiBeBeler
Natalia Polanskaya, Prosecutor General of Crimea

About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses. He is the author of the forthcoming book Money Laundering: How criminals got paid and got away.


btn_donateCC_LG

BitCoin Enthusiasts Celebrate Regulation

from Bloomberg
Benjamin Lawsky, Superintendent of New York Financial Services

Last month, New York Department of Financial Services announced that it will start regulating digital currencies.

Normally, people groan at the news of more regulation. However, digital currencies are on the fringe and seek legitimization. Being regulated is a clear sign of impact.

BitCoin enthusiasts mostly cheered on the news, even though for many, mainstream regulation and economy is something they oppose.

Wall Street is on the fence about this. The banks are given another product they can trade, but at the cost of possible loss of control in that market. Banks sit as members of the Federal Reserve Banks, making them part of the money supply. Digital currencies are decentralized and if there is a center of power for them, it would be Silicon Valley.


About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses. He is the author of the forthcoming book Money Laundering: How criminals got paid and got away.


btn_donateCC_LG

$2.3 Billion blocked by OFAC

Office of Foreign Assets Control has been highly effective. It has blocked $2.3 Billion worth of cash and property in the US, much of it Iranian.

https://www.ropesgray.com/practices/~/media/Images/Other/ExperienceCountryMap.ashx
credit Ropes & Gray

OFAC published its annual Terrorist Assets Report for 2014 and there are some interesting things in there. For example, it lists the top eight terrorists funds that were blocked. Al-Qaida is at the top. Because this report focuses on sanctions on terrorism and not other types of sanctions, Russia is not at the top.



About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses. He is the author of the forthcoming book History of Money Laundering: How criminals got paid and got away.


btn_donateCC_LG

Many Banks Cut Clients Over Money Laundering Fears

http://robertkaplinsky.com/work/drug-money/
(credit: Robert Kaplinsky)

Many banks have cut clients over money laundering fears. With fewer clients, low interest rates and low volatility, there are less ways for financial institutions with multiple lines of businesses can earn money. Bank of America, Citigroup and JPMorgan Chase combined cut 50,000 jobs in 2014. Industry wide, some have reported 80,000 cuts. Profits are up at banks because of the job cuts, not because of improving economy.

One area that hasn’t seen a decline in headcount is Compliance. All compliance-related areas of the bank (Compliance, Legal, Risk, Controls, Audit) have all seen headcount increases. For many of the areas, skills from other areas of the bank is quite transferable. Knowledge as well.

But knowledge of AML is particularly lax. And, sadly, many of the top decision makers are not versed enough in AML issues to figure out a way to restructure the organization to keep clients. So, the only thing they can do is to cut clients.

While this might be good for the domestic banking industry, on the long run, this will be bad when these firms are trying to compete with their large Chinese competitors. The five largest Chinese banks have an edge on AML programs, should they choose to implement it: government support.

Because Chinese banks are essentially government owned, AML programs in these institutions can implement government level standards even with bank secrecy laws. This integrated approach is at the risk of bank secrecy laws, but it also means that even without knowledge of AML, top decision makers can decide to keep all clients and adjust AML programs as the government sees fit.

This issue has been playing out the last few years because the US has been seeking ways to punish Chinese bank clients through their correspondent accounts for revenue from counterfeit products they sell. The measure should really be tied to counterfeit products that are made, not those that are sold, but that’s especially difficult since the US government has no jurisdiction in production abroad. But US laws allow extra-jurisdictional reach on banking when correspondent bank accounts are in the US. But, of course, Chinese banks are against this. So is the Chinese government. On the other hand, the Chinese government doesn’t want their economy to be so heavily depended on counterfeit products. So, the conundrum is for the Chinese government. The US is enforcing the type of laws they would like to implement, but the punishment will be doled out in the US. If the Chinese government also pursues this, the punishment will be on both sides. And the Chinese government also has to look out for the short term economy, which is heavily depended on counterfeits.

So, at least US and European banks can breath one sigh a relief: the clients they are dropping must find banks within the western government jurisdictions because shifting the economics of counterfeit financing and transactions would provide more leverage to implement more stringent AML programs on the institutions that currently do not have such programs.


About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.


btn_donateCC_LG

OFAC Resolve Clash With First Amendment

Akamai Traffic to Syria
Akamai Traffic to Syria

In may of 2014, Office of Foreign Assets Control (OFAC) imposed sanctions on trade with Syria, including books and other works by Syrian authors. The sanction on Syrian authors include Syrian nationals in the United States. Pen American Center and other publishers and author groups opposed this move as an infringement on the First Amendment. Last week, OFAC amended the sanction to excluding trade involving publishing. This was a similar move made a decade ago when OFAC amended sanctions on Cuban, Iranian and Sudanese transactions “necessary and ordinarily incidental” to publishing and marketing written works from those regions.

Rosie Malek-Yonan, Assyrian Authoer
Rosie Malek-Yonan, Assyrian Authoer

While OFAC’s amendment makes obvious sense, so does its pre-amended sanction. Trade involves money and the transactions of money in exchange for expression could lead to funding terrorism because “expression” could mean a whole lot of things. Even if trade didn’t involve money or things of monetary value, publishing could be a method of providing communication for terrorists. Of course, providing communication paths is not unique to publishing. Messages could be attached to invoices as well. And then there are the great number of communications devices and software available for free.


About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses. He is the author of the forthcoming book History of Money Laundering: How criminals got paid and got away.


btn_donateCC_LG

Healthcare Compliance

This is not about health insurance fraud. There are plenty of articles about that. Healthcare compliance is compliance with law, regulations and policies of running healthcare institutions.

New York City Sanitary Inspection Grades
New York City Sanitary Inspection Grades

Compliance in healthcare has always been driven by regulation. When it concerns life, people are not too afraid of having more regulation. Unlike business professionals, who are always concerned about the happiness of their customers/clients, doctors are more concerned with health, even if the patient is not happy with the care provided. That is to say, most doctors will do what s/he can to keep a patient alive and well even at the cost of the patient’s happiness. This is where regulation does not contribute well. And the solution isn’t to add more regulation.

Corporate policies about how to handle scenarios with patients and the public is best served by taking a page from business professionals. Keeping patients happy can contribute to patients being more compliant with drug regiment, faster payment and less time in the exam room discussing not healthcare-related matters, like the annoyance of the drug regiment and dislike for paying of invoices. While the following policy suggestions mostly lack enforceability, simply having them will require a discussion of them at implementation, training and performance evaluations. That is good enough to start affecting change in the institution’s culture. After all, compliance is only effective if it is embedded to the culture.

  1. Eye contact when answers to questions are being provided,
  2. Physical touch to show connection, a handshake will do,
  3. Patient speaks first, do not cut off a patient mid-sentence,
  4. Thank the patient for something, anything,
  5. Apologize to the patient for even the slightest delay or interruption,
  6. Spend the full appointment time with the patient, if exam is completed early, complete notes in the room – patients often forget something,
  7. Ask about other people in their lives – sometimes the medical solution is addressing the environment, not the body,
  8. Always use medical terminology to explain or prescribe, but also use vernacular – use of vernacular terms sometimes cause liabilities but if used to clarify or emphasize medical terminology, the liability is gone,
  9. Inquire about what activities the patient enjoys for no other reason than to get an idea about the patients inclinations when given a choice,
  10. Share something personal so that the healthcare provider is human to them, you are human, after all.

About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses. He is the author of the forthcoming book History of Money Laundering: How criminals got paid and got away.


btn_donateCC_LG

Greek Tax Evasion Is Money Laundering?

Yanis Varoufakis, Finance Minister of Greece
Yanis Varoufakis, Finance Minister of Greece

Tax evasion in Greece reached 49% in 2005. Has come down since but still above 40%.

Fakelaki means “little envelope”, the term being used as the bribes made to public servants to expedite certain services or look the other way on certain infractions.

Forokarta means “tax card”, the term being used as the failed proposal to give everyone in Greece a spending card to track how much each person is spending. If the spending be beyond the income, wealth and other financial resources available, then that person is a likely tax evader.

Tax evasion is a predicate crime to money laundering. Tax evasion is, in essence, skimping out on one’s debt to society. Many wealthy tax evaders hide their funds in tax havens with lax AML programs and loose incorporation standards. These are the same jurisdictions that tend to allow shell banks – banks that do not have a physical presence anywhere, just a bank on paper. If only half of Greece’s taxable income earners are paying taxes, that means the nation is half populated by money launderers. The reason Greece doesn’t consider them money launderers is because they are voters. Plus, Greece isn’t the only country with high tax evasion rates. It has been reported that about 20% of taxable income is never reported in Italy.

Tax collection is important for two main reasons:

  1. the need to pay government employees, and
  2. the need to show creditors that they have the ability to pay back its loan.

This second reason is often overlooked by people who are not involved in sovereign debt markets. Simply put, if the borrower shows that it should be able to bring in a certain amount of money each year but its history shows that it always brings in less, then the stated projection is not to be trusted. Once trust is gone, it is very difficult to get it back. While Italy might be able to win trust back quickly if it gets its act in order because it is such a large economy, Greece is not in such a recoverable state at the moment. Not only does it have among the lowest tax collection rates in the Eurozone, but it is also a very small economy in it as well. Greece makes up about 2% of the Eurozone GDP. The only importance Greece has is a symbolic one: the Euro currency stand to lose trust in the world markets if Euro economies can leave the currency zone.

This is a long way of saying that Greece’s economic problem might start to get solve simply by reclassifying tax evasion, a minor offense, to money laundering, a major offense. This reclassification does not take any change in laws because Greece already has laws that state that tax evasion is money laundering. It had to write such laws to join the Financial Action Task Force, the world’s leader in the promotion of anti-money laundering.

Note: While all of the figures are correct, they might be a little outdated. The difference with updated data should not material change the issues.


About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses. He is the author of the forthcoming book History of Money Laundering: How Criminals Got Paid and Got Away.


btn_donateCC_LG

FDIC Chief Reveals Global Capital Index

To illustrate this point, a colleague and I at the FDIC have constructed the Global Capital Index, which shows the tangible capital levels for each of the largest global banking firms and the average levels for different size groups of US banks. – Thomas M. Hoenig, Vice Chairman of FDIC, from A Conversation about Regulatory Relief and the Community Bank

Thomas Hoenig from Gannett
Thomas Hoenig from Gannett

On April 15th Hoenig revealed that the Dodd-Frank Act is a burden that might not be necessary for banks that did not and cannot cause a crash like that of 2008 Financial Crisis. He’s leading FDIC’s effort to propose regulatory relief to banks that:

  1. banks that hold, effectively, zero trading assets or liabilities;
  2. banks that hold no derivative positions other than interest rate swaps and foreign exchange derivatives; and
  3. banks whose total notional value of all their derivatives exposures – including cleared and non-cleared derivatives – is less than $3 billion.

Effectively, community banks are the only institutions that apply. (Credit Unions are not insured by the FDIC and are insured by the National Credit Union Administration (NCUS)).

For the whole text of the Hoenig’s speech outlining the regulatory relief proposal, go to this link.


About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses. He is the author of the forthcoming book History of Money Laundering: How Criminals Got Paid And Got Away.


btn_donateCC_LG