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What were the top 10 operational risk losses of 2017?

16 / 03 / 2018

The dust finally appears to be settling for financial institutions (FIs) following the global economic crisis, at least in terms of the large fines and settlements that regulators have handed down in recent years.

Operational risk losses for 2017 were less than half those meted out in the previous year, according to Risk.net research. Regulators demanded $49.8 billion (£39.5 billion) from FIs in 2016, but this figure slumped to $23.1 billion last year.

Nevertheless, there were still a number of sizeable penalties. The top ten operational risk losses in 2017 represented nearly half of the global total.

So what were the biggest fines, settlements and losses last year? And why were companies penalised? Risk.net analysis provided these answers. For convenience, we have converted all foreign currency payments into British pounds in the headings. 

1. The Brazilian Development Bank (£1.8 billion)

The bank, often referred to as BNDES, had the dubious honour of ranking first in the list, after police uncovered evidence of improper transactions totalling 8.1 billion Brazilian real.

The dealings, which lacked due diligence and failed to follow contractual requirements, occurred between a BNDES subsidiary and a meat processing firm.

2. Shoko Chukin Bank (£1.75 billion)

In events reminiscent of the Wells Fargo incident, Shoko Chukin Bank employees were found to have falsified approval documents for small business loans in order to meet unrealistic sales targets.

The bank will pay back 265 billion yen to the Japanese government, with 97 of the FI's 100 branches embroiled in the scandal.

3. Woodbridge Group of Companies (£880 million)

A long-running US Securities and Exchange Commission (SEC) investigation into an alleged Ponzi scheme at Woodbridge Group of Companies eventually brought charges last year.

The SEC claims the asset manager conned 8,400 investors into keeping the facade afloat between 2012 and 2017.

4. Societe Generale (£856 million)

An out-of-court settlement saw Societe Generale pay €963 million to the Libyan Investment Authority (LIA), a sovereign wealth fund, due to trades conducted between the two organisations from 2007 to 2009.

According to LIA, the trades were secured through a "fraudulent and corrupt scheme".

5. Thema International Fund (£764 million)

Investment manager and fraudster Bernie Madoff may have been imprisoned nearly a decade ago, but the shockwaves of his estimated $65 billion Ponzi scheme are still being felt today.

Thema International Fund was a feeder fund for Madoff's firm, allowing him access to European investors. The Irish firm and other affiliates agreed to pay $1.06 billion to Irving H Picard, the Ponzi scheme's liquidation trustee.

6. Catalunya Caixa (£641 million)

Irregular transactions over a 13-year period were at the heart of an investigation into 15 Catalunya Caixa executives, causing €720 million of losses for the Spanish bank.

The real estate trades, which started in 2000, showed signs of insider trading and other conflicts of interest.

7. State Bank of India et al (£552 million)

Kingfisher Airlines founder Vijay Mallya allegedly defrauded eight Indian banks of a combined 49.3 billion rupees through commercial loans.

State Bank of India, Punjab National Bank, UCO Bank, Bank of Baroda, Bank of India, Corporation Bank, Indian Overseas Bank and Central Bank of India are all thought to have fallen victim to the supposed scam.

8. Western Union (£422 million)

The clearing firm agreed to pay various US federal and state organisations a total of $586 million for breaches of anti-money laundering legislation, as well as accusations of aiding wire fraud.

Western Union agents allegedly sent hundreds of millions of dollars generated from illegal activities to China between 2004 and 2012. The payments were all below $10,000 to avoid SEC reporting requirements.

9. Deutsche Bank (£396 million)

The German banking giant settled a $550 million payment for suspect investment advice provided to Icelandic bank Kaupthing during the global financial crisis.
Regulators claimed Deutsche Bank recommended that Kaupthing loaned funds to investors so they could buy credit-linked notes that would lower the struggling Icelandic firm's credit default swap spread.

10. Agricultural Bank of China (£367 million)

Three employees at Beijing Pangu Investment, a company owned by Chinese billionaire Guo Wengui, admitted to defrauding the Agricultural Bank of China out of 3.2 billion yuan.

The scam involved the production of fake documents to illegally obtain the funds.

What were the UK's biggest fines?

The UK was absent from the top ten, but the Financial Conduct Authority (FCA) still handed down nearly £230 million worth of fines in 2017.

It was a bad year for Deutsche Bank, with the German firm hit with a record fine in Britain of £163 million for PRIN 3 and Senior Management Arrangements, Systems and Controls breaches.

Meanwhile, Merrill Lynch International and Rio Tinto were forced to pay £34.5 million and £27.3 million, respectively.

The wealth management firm breached Article 9 of the European Market Infrastructure Regulation, as well as failing to report 68.5 million derivative transactions. Rio Tinto's multi-million pound penalty was for non-compliance with International Accounting Standards and other reporting indiscretions.

Will 2018 continue the downward trend of losses?

The number of loss events and money paid out in fines and settlements has been on the decline since 2014, Risk.net figures show.

However, with a slew of new regulations introduced in 2018, such as MiFID II and the GDPR, there is an air of uncertainty with regards to how strict enforcement methods will be.

Regulators are likely to offer some leeway this year, provided organisations show they have made significant effort to comply with regulations. But this leniency is unlikely to last after an initial bedding-in period.

As the regulatory burden increases, organisations will have to examine their corporate governance teams and processes to ensure they possess the necessary resources.

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