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Market abuse risk rises due to 'relaxed' teleworking, monitoring hitches

As suits are replaced by sweatpants and client meetings are moved into the living room or garden, the coronavirus crisis has led to a more relaxed work environment for many investment bankers. But for compliance departments, it is causing new headaches.

The combination of volatile markets, margin pressures and teleworking bankers is creating an environment ripe for market abuse, including insider trading and unlawful disclosures, experts warn.

There have been behavioral changes since the pandemic outbreak that could have legal and reputational repercussions, Behavox, a New York-headquartered artificial intelligence company that helps money managers monitor staff communication, has found.

Its technology has tracked an 8% increase in client confidentiality breaches across some global institutions, with front office employees disclosing information including names of clients or prices "casually in conversation," said Nabeel Ebrahim, chief revenue officer of Behavox.

"Stylistically, there's a lot more informal communication. That's just how people are speaking normally when they're at home, as opposed to surrounded by colleagues," said Ebrahim, who himself had swapped the usual attire for a hoodie as he spoke to S&P Global Market Intelligence over Zoom.

Intentional abuse

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Following the global financial crisis, the U.S. Securities and Exchange Commission charged hundreds of entities and individuals with market abuse offenses related to mortgage bonds.
Source: S&P Global Market Intelligence

Banks and investment firms are also increasingly exposed to intentionally bad actors as some individuals may exploit lockdown hiccups, said Nicolette Kost de Sevres, who leads law firm Mayer Brown's compliance, regulatory and investigations practice in Paris. Traders, for example, could use the lack of tools or hampered verification processes as an excuse to execute trades that would normally be prohibited.

Household members trading on insider information they may overhear is another risk, she said.

The U.S. Justice Department is already investigating alleged insider trading by lawmakers who reportedly sold stocks just before the coronavirus pandemic sparked a major market downturn.

"Particularly when you start to see firms failing and a lot of volatility in the market, there is a very big opportunity for this sort of insider trading," said Julian Hui, a senior associate in the financial services regulatory practice at law firm Baker McKenzie.

Monitoring challenges

The growing risk is putting pressure on banks and investment firms to implement new surveillance systems. Behavox customers are accelerating their adoption of the technology across communication channels such as Slack, Teams and Zoom, Ebrahim said. Demand from new customers has also increased, particularly in recent weeks as companies' IT teams got fully back online after an initial lockdown setback.

With employees away from the confines of the office and formal forms of communication, it will be harder for compliance departments to monitor staff, said Joydeep Sengupta, also of Mayer Brown Paris.

"Most of our clients record Bloomberg terminals, chats and electronic communication. But when traders are working from home, you can't monitor their personal phone or personal Skype, or what they are telling spouses or friends," he said.

Behavox has seen a growth in instances of what it labels "change of venue," when employees suggest moving conversations to unauthorized channels of communication.

"That means people who write things like 'call me,' 'text me,' 'let's take this offline,'" Ebrahim said.

While not necessarily driven by bad intentions, and not by definition a compliance breach, these moves are a leading indicator for potential misconduct, he said. Regardless of intention, it is creating added workload and stress for the compliance units that must investigate the interaction, he added.

READ MORE: Sign up for our weekly coronavirus newsletter here, and read our latest coverage on the crisis here.

Legal repercussions

Market abuse offenses have historically meant hefty fines for banks around the globe. Deutsche Bank AG, for one, paid $2.5 billion to authorities in the U.S. and U.K. in 2015 for its involvement in the so-called Libor scandal, where bankers colluded to rig the benchmark interest rate, a case that also led to financial penalties for large institutions such as UBS Group AG, HSBC Holdings PLC, Barclays PLC and Citigroup Inc.

During the coronavirus crisis, regulators have so far been flexible, for example by giving extensions to certain timelines, "but they're not giving a free pass" on compliance breaches, said Sengupta of Mayer Brown.

Sven Bates, a senior trade and sanctions associate at Baker McKenzie, said there is "a good possibility" that banks at a later stage will face enforcement action related to conduct during the coronavirus crisis as happened following the global financial crisis in 2008.

"There was quite a number of high-profile banking enforcement actions, where the conduct that occurred during that period was related to some of the emergency actions that were being taken at that time," he said.

The U.S. Securities and Exchange Commission charged hundreds of entities and individuals, including large investment banks such as Bank of America Corp. and JPMorgan Chase & Co., with market abuse offenses related to mortgage bonds during the housing bubble.

But Angela Gallo, a lecturer in finance at Cass Business School, said banks, especially large financial institutions, are better placed to avoid a repetition of the large-scale misconduct seen during the last crisis.

"Over the last four to five years, there's been a lot of investment in the idea of culture, not only compliance. There is now a lot of discussion inside banks about how to reach better organizational behavior, better culture and so on. So hopefully this will help," she said.