UK's FSA levies UK's biggest ever regulatory fine

The FSA has levied its second major fine in a week as it charged CSFBi(formerly CS Financial Products) GBP4 million for attempting to mislead the Japanese regulators and tax authorities.

CSFBi admitted the following:

1995-6
Until April 1997 CSFP marketed derivative products in Japan via another company within the Credit Suisse group called CS First Boston Japan Limited (CSFB JL). CSFB JL"s licence only allowed it to undertake securities, not banking, business on behalf of CSFP. Over time, CSFP became concerned that the Japanese regulator might consider some of the transactions undertaken by CSFB JL on behalf of CSFP to be banking business.

As a result, in preparation for a regulatory inspection, CSFP arranged to stop sending reports that it normally sent to CSFB JL. These reports included monthly management accounts and estimates of trading revenue. CSFP also knew of suggestions made by CSFB JL staff to:

conceal documents; and
tell the regulator that CSFB JL staff only monitored CSFP"s trading positions when in fact they had an active role in arranging CSFP"s transactions.

1996-7
CSFP also thought there was a definite risk that it might have to pay tax in Japan on its Japanese activities. So, before and during the 1996/7 audit of CSFB JL by the Japanese tax authority, staff:

removed documents offsite so that they would not be seen; and
bought a shredder to destroy documents that should not be seen by the tax authority. In the event, there is no evidence that it was used.

They also planned to tell the tax authority falsely that:

CSFB JL staff only had an administrative and liaison function when they in fact they were actively involved in making deals for CSFP; there were no records of deals done for CSFP.

Furthermore they arranged to:

remove information about trades from lists to be given to the tax authority; and
deny that some CSFB JL staff reported to CSFP.

1997-8
From 15 April 1997 CSFP had a branch with a banking licence in Japan which was not allowed to do securities business. CSFP thought that a significant part of its business was securities business and was told that this business had to be done via a licenced securities company, like CSFB JL. However, CSFP knew that its Tokyo branch was actively involved in this business but was trying to conceal this by:

sending faxes in CSFB JL"s name although CSFB JL staff were not involved; and
filing the documents related to this business in a separate room where it was believed inspectors would not find them.

In addition, the branch instructed staff to keep separately and then shred duplicate documents showing the branch"s involvement in this business.

The investigator was begun in 1999 by the Securities and Futures Authority which was the UK for CSFBi in London, where the company was headquartered. The SFA was later subsumed with in the Financial Services Authority.

CSFP was part of Credit Suisse group and specialised in derivatives products within the group. It did not have its own presence in Japan between 1990 and 14 April 1997. During that period the Structured Products Group of CS First Boston Japan Limited which had a securities licence acted on behalf of CSFP. From 15 April 1997 CSFP had a banking licence. However, it is not part of the FSA"s findings in this case that CSFP was conducting business in Japan for which it did not have the necessary licence.

In January 1999, CSFP"s Tokyo branch concealed documents from the Japanese regulator and misled it. This triggered the investigation by the Securities and Futures Authority. CSFP subsequently had its licence to do business in Japan revoked. The UK investigation has been continued by the FSA following the transfer of the SFA"s regulatory responsibilities to the FSA on 1 December 2001. The January 1999 events are not part of the FSA"s case.