The Financial Services Authority (FSA) has fined Credit Suisse First Boston International (CSFBi) 4 million for attempting to mislead the Japanese regulatory and tax authorities. This is the highest fine ever imposed by a UK financial regulator.
Formerly called Credit Suisse Financial Products (CSFP), CSFBi is authorised in the United Kingdom, and therefore subject to the FSA. 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’s UK regulator at the time. 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. However, the FSA says the events of January 1999 are not part of its case.
“The unprecedented size of the fine makes it clear that we consider any attempt to mislead regulators and other authorities whether in the UK or in other countries to be an extremely serious issue,” says Carol Sergeant, Managing Director responsible for Enforcement at the FSA. “Ensuring that firms have organisational cultures that prevent this type of behaviour is essential to maintaining the confidence we all expect to have in our financial markets.”
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. The FSA says that between 1995 and 1998 CSFP attempted to mislead the Japanese authorities by concealing and removing evidence about the extent and type of its business in Japan. In addition, CSFP prepared false explanations about its Japanese business activities. “CSFP feared that the Japanese financial regulator might conclude it was doing business without the necessary Japanese licence,”” explains the FSA. “CSFP also thought that the tax authority might decide that this business should be taxed in Japan.”
The FSA says that 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), when 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.
In 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, says the FSA, there is no evidence that it was used. However, staff also planned to tell the tax authority falsely that CSFB JL staff only had an administrative and liaison function, when 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 to deny that some CSFB JL staff reported to CSFP.
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 licensed 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. For the avoidance of doubt, 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.
The FSA has taken action against CSFBi because it considers CSFBi to have breached former regulatory principles 9 and 10. Former Principle 9 (Internal Organisation) specified that “a firm should organise and control its internal affairs in a responsible manner, keeping proper records, and where the firm employs staff or is responsible for the conduct of investment business by others, should have adequate arrangements to ensure that they are suitable, adequately trained and properly supervised and that it has well-defined compliance procedures.”
Former Principle 10 (“Relations with Regulators”) stipulated that “a firm should deal with its regulator in an open and co-operative manner and keep the regulator promptly informed of anything concerning the firm which might reasonably be expected to be disclosed to it.”
The former principles apply as the events took place before 1 December 2001.
The Japanese regulator in 1995-6 was the Securities and Exchange Surveillance Commission. The Japanese Financial Services Agency has now taken over its responsibilities. The Japanese tax authority is called the Japanese National Tax Administration Agency.