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EU Bank Resolution Powers Open to Abuse



EU Bank Resolution Powers Open to Abuse

By Robert Lyddon

Oppression is the exercise of authority in a burdensome, cruel, or unjust manner. The EU Bank Recovery and Resolution Directive 2014/59 and its predecessors fit that bill, as they have enabled authority to expropriate private assets (holdings of Tier 1 and Tier 2 capital instruments in banks), applying powers electively, inconsistently without demonstrating due cause, and in a framework where the subject is denied access to full rights of redress.

A law, to be a proper law, needs to state who or what it applies to, the preconditions for its being brought to bear, and clear outcomes as to what actions can be taken and what cannot. The target of the application must have rights of redress, enabling them to continue as if the authorities had not intervened. The Directive fails on all counts, with political expediency and national interest playing as large a role as any higher objectives. The result is burdensome and unjust.

The Directive’s aim is to harmonise the way in which failing banks are dealt with in the EU, and, with the Single Supervisory Mechanism, to be a further step on the road to banking union. The Directive was enacted after the main Eurozone banking crisis of 2011-2013 and built on pre-existing legislation in some, but not all, Member States.

Pre-existing UK legislation was used to deal with Northern Rock in 2007, resulting in public ownership. Emergency legislation was needed in Cyprus in 2013 for the resolution of Bank of Cyprus and Laiki Bank, resulting in majority ownership by the Russian oligarchs who had been the largest depositors with amounts over €100,000, the excess being “bailed in” and converted to capital instruments.

The Directive is clear as to who or what it applies to: the bank must be “systemically-important”. It must be a major supplier of the payment and day-to-day banking services in the country concerned.

In mid-2017 Veneto Banca and Banca Popolare di Vicenza were resolved by their being “sold” to Intesa SanPaolo with state support of €5 billion in cash and €12 billion of guarantees. Both banks had been deemed systemically important as they were supervised within the EU Single Supervisory Mechanism. But this was reversed by the Single Supervisory Board, allowing the matter to be dealt with under local Italian legislation.

Monti dei Paschi di Siena is systemically-important but has not been resolved, despite its demonstrated insolvency. Retail investors hold shares in this bank, which would be expunged under resolution, a politically unacceptable outcome. Instead, securitisation and other, state-backed measures are used to ensure the bank stays alive.

In the case of all three of these Italian banks the retail depositors with more than €100,000 in their accounts have been spared a bail-in, and there has been no claim on the Italian deposit compensation scheme, saving the Republic of Italy from a cash pay-out it can ill afford.

On the other hand in Cyprus a small branch of a foreign bank – FBME – was resolved in 2014 by the Central Bank of Cyprus (“CBC”), using the law specifically passed to resolve Bank of Cyprus and Laiki Bank, even though it was not systemically-important on any objective standard.

Authorities thus flex the definition of “systemically-important” to suit themselves, and diverge from the Directive as to who it can be applied to.

The second point is the preconditions to be met for the Directive to be brought to bear. The Directive is absolutely clear that a bank needs to satisfy three criteria cumulatively in order for the authorities to be entitled to apply the Directive to it:

  • It must be systemically-important to begin with; and
  • It must be insolvent in the sense of having negative Shareholders’ Funds; and
  • It must have a current or prospective shortage of liquidity.

These calculations need to be the result of a proper study which concludes that the liquidation of the subject bank will either fail to cover its liabilities or will cause disruption to local banking services.The liquidation option must be studied, and well-founded conclusions drawn that resolution is a better economic outcome for stakeholders than liquidation.

FBME was resolved without any such study. FBME was solvent, liquid and non-systemic. CBC resolved it from one day to the next on the pretext of allegations made against FBME for alleged failings in Anti-Money Laundering processes and controls.

“These allegations were not even made by CBC itself, but by the Finance Crime Enforcement Network section of the US Treasury.”

AML failings – let alone unproven allegations of them – are not a resolution-triggering event under the Directive, and nor were they under the pre-existing local legislation.

In another case of the large Spanish bank Banco Popular Espanol (“BPE”), the authorities noted an outflow of funds in mid-2017 and intervened to force BPE’s sale to Santander for €1, with Santander taking over all the assets and senior liabilities of BPE. BPE was a bank that was Basel III-compliant and had passed all its stress tests as dictated by the European Banking Authority.

In the case of BPE there was no time to carry out a study, neither for the authorities nor for Banco Santander. This contrasts with the Monti dei Paschi di Siena case where the bank has been studied ad infinitum, there are clear grounds for resolution, but the authorities have exercised a forbearance that should not be within their gift.

The determination of the fulfilment of the preconditions for the Directive to be brought to bear are thus at the whim of the authorities.

The third issue is what should happen in case the preconditions for resolution are met. The resolution should be based on two main operations:

  • the holders of share capital, subordinated and mezzanine debt (also known as holders of Tier 1 and Tier 2 capital) have their investments expunged;
  • depositors with over €100,000 in their accounts are bailed-in, with the excess amount converted into capital instruments. These depositors become the new owners, replacing the ones who had their investments expunged.

The first operation has occurred in all the cases where resolution has been implemented

The second one only occurred towards Bank of Cyprus and Laiki Bank.Instead, in the cases of BPE, Veneto Banca and Banca Popolare di Vicenza, a “white knight” was induced to step in, and in the case of FBME the Central Bank of Cyprus attempted but failed to bring in Bank of Cyprus as a “white knight” and ended up taking over FBME’s assets and liabilities itself.

The Directive itself is oppressive If it gives the authorities such flexibility over which parts to implement in any one case. If it doesn’t, the authorities have acted ultra vires. There is no mention of a “white knight” being the first option to be attempted, or of state support. Indeed, the target institution – by passing stress tests and being Basel III-compliant – should be proven to have the resources to tide it through the resolution process without either state support or a “white knight”.

In practice all of this has gone out of the window.

Lastly, regarding rights of redress for the target institution, these do not exist in practice because the actions of the authorities put the target institution out of business as an independent organisation. The authorities bring about a fait accompli, and the losers cannot cause a return to the status quo ante. They may be able to obtain financial compensation through an extensive legal process, which is what the losers out of Banco Popular Espanol and FBME are attempting now, but this is not the same as enjoying protection in law from unjust actions of authorities.

The authorities have variously acted against a bank that was not systemically-important (FBME) and decided not to act against one that was (Monti dei Paschi di Siena), and also, when convenient, to carve out institutions from the definition (Veneto Banca and Banca Popolare di Vicenza).

The authorities have acted against banks that do not meet the preconditions (FBME), against banks that may or may not meet them (BPE), and not against banks that do (Monti dei Paschi di Siena).

Then the authorities operate the bail-in in one scenario (Bank of Cyprus and Laiki), and mostly not (BPE, Veneto Banca, Banca Popolare di Vicenza), but expunge in all cases the investments of holders of Tier 1 and Tier 2 equity.

The EU Bank Recovery and Resolution Directive has proven unusable in whole, for political reasons, even though all elements are clear: who it should be applied to, when what preconditions are met, and what should be done as a result.

Instead the authorities make up their own mind behind closed doors as to which banks to apply it to and when, and which remedies to apply to a given situation. That is then not a proper law within a proper legal system, but an oppressive one giving the authority extra-judicial powers and denying the subject adequate forewarning, protection and right of redress.


Bank fraud prevention in a post-COVID-19 world



Bank fraud prevention in a post-COVID-19 world 1

By Pierre-Antoine Dusoulier, Founder and CEO, iBanFirst

Fraud on the rise

According to recent research from a leading UK retail bank, there was a 66 per cent increase in reported scams in the first six months of 2020 compared with the last six months of 2019 – due to the COVID-19 pandemic.

Across the summer months, Action Fraud UK reported a total financial loss of £11,316,266 by 2,866 victims of coronavirus-related scams.

The rise in fraud rates is a warning that banks, building societies and other financial providers need to be as alert as ever in identifying fraud.

So, what do banks need to do to ensure their customers are protected from fraud in a post-COVID-19 world?

Educate your customers to safeguard against fraud

On the customer level, banks need to be informing their customers on the types of common fraud to ensure that they are protected for all eventualities.

Authorised push payment scams are one of the fastest growing types of fraud. According to the FT, £354 million pounds was stolen this way last year. It is where a company or individual is tricked into paying money into a criminal’s account. Emails come from a genuine email address but are then intercepted by a criminal, so it’s imperative that businesses have end-to-end email encryption, and the customer double-checks the account details with the supplier on the phone prior to making a payment.

At the same time, scammers can also exploit the company’s invoicing process, where criminals create a bogus invoice for a small amount and send it to a company’s accounting department. If the finance team does not identify this as fraudulent, it can result in the business losing a considerable amount of revenue over a long period of time.

Supplier fraud is also a widespread scam. This involves the fraudster taking on the appearance of a supplier that has changed their bank details. The fraudster will have collected information on the suppliers of the targeted company, in order to pose as an official supplier. This can be prevented by ensuring that the supplier is contacted to confirm the legitimacy of the communication. It’s important not to call or email the supplier using the details provided on the suspected fraudulent correspondence. Instead they must check the original details of the supplier and speak to them on their official telephone number or email on file.

Banking malware is the least commonly cited type of fraud but has a greater financial risk attached to it. Malware is sent by email redirecting the recipients of the message to a fake banking interface, as a way of transferring funds to offshore accounts.

Remodel processes post-COVID-19 to keep customer data safe

To fight cyber fraud and scams, banks must also play their part. In a world where entire workforces are working from home banks must remain vigilant with customer data. COVID-19 has created a change in working habits and banks need to carry out the right level of training for its employees to protect customer data. Virtual team meetings and remote data sharing poses a threat to exposing sensitive information to malicious actors, and banks need to put the necessary safeguards in place.

All virtual meetings should use the banks’ private company network, and file sharing should be carried out through secure, encrypted company drives. Meanwhile, banks need to provision for all employees to receive regular software updates that will keep customer data safe, and ensure that they are aligned with new and existing data processing regulations.

Monitoring suspicious payments

A vital element to fraud detection is through monitoring customer transactions in real time, and harnessing emerging technologies such as artificial intelligence and machine learning to spot the signs of a scam or fraud before it is too late.

One way that banks protect businesses from fraud is through keeping a log and examining regular transactional history. Any transactions which appear suspicious based on location, amount, the beneficiary, and the method will be alerted to the business customer, to mitigate the immediate and future financial risk to the business.

Know your transaction

To understand financial flows better, every bank has a Know Your Customer (KYC) engine. This is a payment infrastructure that supports onboarding processes and risk-based transaction monitoring. This system is already well known and we don’t need to elaborate on this further, as it is the fundamental building block to ensure the highest level of traceability across all transactions – including remittances and receipts of funds and foreign exchange transactions internationally.

However, KYC is limited and doesn’t include real-time analysis. What can be overlooked is a KYT engine – Know your Transaction. The aim of KYT (Know Your Transactions) is to identify potentially risky transactions and their underlying unusual behaviour for detecting money laundering, fraud or corruption. An automated concentration of transactions with accurate and relevant information directly from the original data sources is essential.

Finally, banks and payment companies need to implement anti-fraud modules to defend against cyberattacks, based on the latest algorithms capable of analysing transactions issued in real time and detecting anomalies or suspicious behaviour upstream, strengthening the security and transparency of payments and building a network of trust between issuers and recipients of payments.

In a post-COVID-19 world it’s clear that scams will become more common place. Within this environment there is a shared responsibility when mitigating the risk of financial fraud. The bank must educate and inform customers to enable them to protect themselves, while ensuring a robust technological infrastructure and ways of working are in place that protects customer data; their finances, and fundamentally their business and livelihood.

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How One Bank Successfully Responds to Sophisticated Threat Actors



How One Bank Successfully Responds to Sophisticated Threat Actors 2

By Robert Golladay, Strategic Accounts Director, Illusive Networks

Cybercriminals and hacktivists have a special fondness for financial institutions. Continuous business innovation, complex ecosystems, merger and acquisition activity, fintech, cloud adoption and a growing consumer-driven attack surface multiply the problem for financial organizations. Despite the vast resources financial institutions devote to cybersecurity, one challenge has been especially difficult to solve – that of detecting and stopping APTs before real damage is done.

Securing cloud-based banking

An active lender in the UK sought a new way to protect its customers and the valuable assets it holds. The bank needed to:

  • Defend customer and employee information from compromise
  • Detect and thwart sophisticated attacks
  • Effectively defend cloud-based operations across accounts and instances

As a cloud-first company, the bank’s preference is to always invest in next-generation technology for operations and security infrastructure. In May 2016, with the help of Amazon Web Services (AWS), it became the first bank in the UK to be fully cloud hosted. The bank also uses AWS to deliver a financial technology service that helps lenders make informed decisions through data and automation.

Security is always a priority, which is one of the reasons the company chose AWS, conducts regular penetration testing, and performs advanced attack simulations. To maximize effectiveness of its layered security infrastructure, the company continually trains its employees and reinforces data security best practices.

In particular, the bank sought additional safeguards from sophisticated threats that evade other security measures, such as advanced persistent threats, as well as gain insight into attacker tactics and techniques. The new layer needed to be cloud-based for high scalability and flexibility, and it had to defend the company without time-wasting false positive alerts. The security team looked at deception technology and chose a solution that allowed them to gain real-time verification of anomalies and lateral movement in the network.

Choosing deception

The deception solution enabled the bank to focus on attackers’ behaviour and perspective. The solution’s expertise in attacker methodology augmented the bank’s internal capability to detect novel attacks, while enabling rapid and adaptable coverage in its cloud-based environment.

The bank’s deception solution uses agentless, intelligence-driven technology that creates a dense web of deceptions and effortlessly scales across the infrastructure. Featherweight deceptions on every endpoint look exactly like the bank’s real data, access credentials and connections. When an attacker is confronted with deceptions, this deceptive view of reality makes it impossible to choose a real path forward. One wrong step triggers an alert to the bank’s security team.

The bank’s CISO found it invaluable to be able to deploy a solution that creates doubt and confusion in an intruder’s mind. When attackers can’t distinguish between real and deceptive assets, the security team can collect information and apply intelligence to patterns that it has observed during that time period of activity. The solution simultaneously sharpens the bank’s investigative process and constrain the attacker.

The lender easily deployed deception technology across its complex environment, scaling it across AWS instances and accounts. The IT security team now has continuous visibility and confidence that these defences enable them to thwart sophisticated threat actors.

Deceptively secure

The bank gained proactive threat response and the assurance that an alert represents a real issue. These alerts are only triggered when an attacker engages with a deceptive asset. At that point, the deception technology immediately begins capturing forensic data from the system where the attacker is operating, presenting real-time forensics and a quantifiable measure of potential business risk. It uncovered, for example, malicious processes trying to operate on an endpoint.

The deception solution enables the lender to be much more proactive. It detects and analyses attacks in real time to produce actionable alerts, directing the security team to relevant and valuable conclusions. The technology provides exceptional, innovative coverage for malicious pivoting and lateral movement. It uncovers the in-depth, sophisticated actors who evade other countermeasures and gives security analysts direct visibility into targeted attacks, which they find invaluable.

A laser-focused approach

The financial sector remains a perennial favourite of the cybercriminal crowd. As networks become more complex, their perimeters all but disappear, creating the need for stronger and more comprehensive security than ever previously imagined. Advanced persistent threats are a particular concern, as they are notoriously difficult to detect before significant damage is done. For financial institutions, the reputation damage alone may be insurmountable.

Banks and other financial services organizations pour resources into cybersecurity, but one option that needs further exploration is deception technology. This method of security monitors for lateral movements toward critical assets and thus provides a powerful alternative or enhancement to traditional monitoring approaches. Security teams can see attackers’ proximity to those crown jewels early in the attack cycle, buying time for careful response. As the lender above learned, deception technology cuts through the noise of alerts to deliver the intel financial institutions need to act quickly and safeguard their high-value data.

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Why banking and finance need to move qualifications online



Why banking and finance need to move qualifications online 3

By Rory McCorkle, Senior Vice President, PSI Certification and Education Services

The global banking and finance sector often presents a strange contradiction when it comes to technology. On one hand, the sector is leading the way in blockchain technology, big data and Artificial Intelligence. On the other hand, many large financial institutions are falling behind in their digital transformation efforts, with internal processes as well as the moving the customer experience online. Particularly when compared to fintech and new challenger banks.

A report last year by Accenture found that just 12% of large traditional banks surveyed have fully committed to digital transformation and 50% of banks made little progress. The remaining 38% are in the midst of their transformations, but their digital strategies lack coherence.[i]

One area of digital transformation that has been particularly slow is access to qualifications and certifications. Many exams in the banking and finance sector continue to use Paper Based Testing (PBT). However, COVID-19 has accelerated the transition from PBT to Computer Based Testing (CBT), proving irrevocably that change is possible – regardless of the size of your organisation, number of candidates or security requirements.

Stay current

In a heavily regulated environment that is undergoing increased scrutiny, a high level of certification and compliance is a necessity for many working in the industry. And credentials that hold such significance need to be securely and fairly assessed. This is where CBT offers numerous benefits. For organisations there is security, integrity, flexible capacity, increased reach and a streamlined exam administration process. And for candidates, CBT provides flexibility, convenience, accessibility and increased choice.

Despite these benefits, some organisations still have reservations and have been slower to make the move to CBT. In more traditional professions, such as finance, there can be a greater reticence. This is likely to be based on the historic prestige of PBT, as well as a desire to stick to more traditional methods. However, with more learning completed online, and educational resources shifting to digital from primary education to CPD, expectations around assessments are changing.

Up-and-coming candidates in all professions, particularly those who are digital natives, are starting to question outdated methods. Organizations will need to adapt to stay current and relevant with their market. What’s more, technological advances have now combined with the coronavirus pandemic to increase the demand for remote business services. Meaning that a growing number of organisations in the banking and finance sector are moving to CBT.

Increased security

Technology offers burgeoning options to increase test security with CBT. Linear-on-the-fly testing (LOFT) for example allows you to easily change items for each candidate, while maintaining the fairness of the exam – rather than the fixed forms used in PBT.

With LOFT, every candidate is given a unique set of items, making cheating a lot more difficult. And with no need to ship test papers around the country, there’s significantly less risk of physical security breaches with CBT than with PBT.

With the movement away from paper and pencil testing, advances in online proctoring have also dramatically increased the ability to deliver secure online assessments. Using a webcam and microphone, online proctoring provides test security for exams, while offering candidates additional flexibility and convenient scheduling.

Even before COVID-19, online proctoring was becoming far more commonplace. In 2018, there was a 10% increase in organisations using online proctoring with video/sound recording and identity authentication as part of the exam process compared to 2017.[ii] And COVID-19 has reinforced the fact that it is possible to effectively move to CBT side by side with online proctoring – and move quickly.

Future possibilities

Testing has changed a lot during its history but the reasons for adopting CBT have remained the same for decades – fair and reliable testing delivered at scale. Nearly all tests that are completed with a paper and pencil can be adapted for CBT.

For organisations in the banking and finance sector, recent technological advances have provided many more options to reach candidates. At the same time, technology has significantly increased the security for important online assessments that will not only affect a candidate’s future, but might also impact the future and reputation of their profession.

As with any change, the move from PBT to CBT must be managed carefully and communicated clearly. And with best practice in place, it is possible for any organization, regardless of size and number of candidates, to make the move to CBT.

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