September 09, 2010

Today, the U.K.'s Financial Services Authority fined Goldman Sachs $27.1 million for "failure to ensure that it had in place adequate systems and controls to enable it to comply with its U.K. regulatory reporting obligations." Essentially, no one told the compliance department of Goldman's U.K. arm, GSI, about the SEC's investigation of Goldman's Abacus 2007-AC1 synthetic collateralized debt obligation, and therefore the compliance department did not notify the FSA, its regulator.

A key architect of the Abacus deal, Fabrice Tourre, transferred to the London office of GSI in November 2008, three months after the SEC's investigation began. And although the Abacus product was structured by Goldman Sachs in the U.S. (by a team that included Tourre), it was marketed in part from the U.K. to institutional investors. As an FSA authorized firm, GSI was obligated to disclose information about the SEC investigation to the FSA, the agency contends. "GSI’s systems for compliance with those obligations were inadequate to ensure that other group members would bring to its attention relevant matters which might have an impact on GSI in the U.K.," the FSA said today in a statement.

This is a warning to global banks to make sure their risk management works across country boundaries. "Compliance teams cannot afford to be geographically siloed anymore, especially if your firm is wading in international waters," says Cubillas Ding, research director at Celent. "Consequential linkages can sometimes go above and beyond what seems like domestic affair." But in spite of the FSA's characterization of this as a "systems and controls" issue, there's only so much that software can do in such cases, Ding says. "Systems and controls can handle a proportion of 'business-as-usual' type regulatory obligations, but in certain exceptional scenarios, human judgment and responsibility in both assessing and communicating the broader ramifications for the firm are essential," he says. "This is especially pertinent when staff is internationally mobile and products globally distributed."

There are software products that could do the kind of monitoring that would be necessary to alert a compliance department to a regulatory investigation at another location. According to Ding, these fall under the general category of "Enterprise Operational Risk and Compliance" and vendors include OpenPages, Oracle Mantas / Reveleus and SAS. "However, whether firms actually put such surveillance activities and technologies in place is another matter," Ding says.