MAS Publishes Information Paper for Ethical Practices in Implementation of AI in Banking
On 5 December 2024, the Monetary Authority of Singapore (MAS) released an information paper to provide good practices for Artificial Intelligence (AI) and Generative AI risk management in banking. Based on findings from a thematic review conducted in mid-2024, the paper outlines governance frameworks, risk management systems, and development protocols that banks and financial institutions are encouraged to adopt for responsible AI deployment.
- This paper while acknowledging transformative potential of AI in operational efficiency, customer engagement, and risk management addresses associated financial, operational, regulatory, and reputational risks.
- This information paper recommends cross-functional oversight forums to ensure comprehensive risk management and align AI practices with organisational values.
- It recommends creating AI inventories to centralise and monitor AI usage, ensuring models operate within approved scopes.
- This information paper recommends conducting risk materiality assessments to calibrate governance efforts based on AI complexity, impact, and reliance on automation versus human oversight is advised in the
- This information paper stresses data management practices to address biases, ensure fairness, and validate AI models pre- and post-deployment to maintain reliability.
- It identifies Generative AI as a promising yet challenging technology requiring strict controls and testing, with an emphasis on safeguards like input and output filters to prevent issues like hallucinations and biases.
- It recommends banks to focus on internal efficiency use cases for Generative AI rather than customer-facing applications at this stage.
- It discusses the need for oversight of third-party AI solutions, with clear contractual terms, validation processes, and regular monitoring to meet internal standards.
- This information paper encourages ongoing monitoring through regular audits and revalidation to maintain AI performance thresholds and establish contingency plans, including “kill switches” for high-risk scenarios.
- This information paper suggests for version control systems to track updates and ensure accountability across the AI lifecycle.
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Cayman Islands Monetary Authority Appoints Jessica Ebanks as Head of Securities Supervision Division
The Cayman Islands Monetary Authority (CIMA) has appointed Ms Jessica Ebanks as Head of the Securities Supervision Division, effective 1 November 2024. Ms Ebanks has been a key figure in the Division’s growth since its inception, showcasing exceptional dedication and leadership throughout her tenure.
- Ms Ebanks joined CIMA in 2013 as an Analyst in the Investments & Securities Supervision Division and became the sole Chief Analyst in the Securities Supervision Division in 2017.
- She was promoted to Deputy Head in 2020, and continued to lead contributing to the Authority’s objectives.
- Ms Ebanks holds a Bachelor’s degree in Management and Organisational Studies, specialising in International and Comparative Studies (Globalisation), from the University of Western Ontario.
- She is a Certified Fraud Examiner and has completed certifications including the Canadian Securities Course, Canadian Practices Handbook, and programmes with IOSCO and PIFS-Harvard Law School.
- Her qualifications also include an ILM Level 5 in Leadership and Management, highlighting her commitment to professional development.
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Fraudulent Commodity Pools: U.S. CFTC’s Legal Action Culminates in Over US$2 Million Penalty Against Hawaiian Operator
On 5 December 2024, the United States Commodity Futures Trading Commission announced the resolution of its enforcement action against Marcus Todd Brisco, a Hawaii-based operator accused of running fraudulent commodity pools. A consent order issued by the U.S. District Court for the Southern District of Texas imposed over US$2 million in penalties, restitution, and permanent injunctive relief against Brisco.
- Marcus Todd Brisco operated fraudulent schemes through Yas Castellum LLC and Yas Castellum Financial LLC, soliciting funds under the pretext of trading leveraged forex and gold.
- Between October 2020 and January 2023, Brisco misappropriated over US$1.6 million, failing to direct funds towards promised trading activities.
- Brisco deceived investors by issuing falsified account statements and misrepresenting trading profits.
- The first commodity pool, operated through Yas Castellum LLC from October 2020 to May 2022, raised US$470,700 from 43 participants, with funds diverted to unrelated accounts.
- After an examination by the National Futures Association (NFA) in March 2022, revealed irregularities, Brisco repaid participants and claimed to exit financial services.
- He launched a second fraudulent pool under Yas Castellum Financial LLC in June 2022, raising over US$1.9 million from 66 participants.
- The U.S. District Court ordered Brisco to pay US$350,000 in civil penalties and US$1.65 million in restitution to compensate 66 defrauded participants.
- Brisco is permanently banned from trading, engaging in transactions involving commodity interests, or acting in any capacity requiring US CFTC registration.
- Restitution payments will be managed and monitored by the NFA to ensure equitable distribution to affected investors, with the court retaining jurisdiction to enforce compliance.
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US CFTC Issues Compliance Advisory on Use of Artificial Intelligence in Derivatives Markets
On 5 December 2024, the United States Commodity Futures Trading Commission issued an Compliance advisory on AI in Derivatives Markets addressing the integration of artificial intelligence (AI) in markets under its jurisdiction. Released by US CFTC division, the advisory guides registered entities and registrants on maintaining compliance with the United States Commodity Exchange Act while adopting AI technologies.
- The advisory recognises AI’s transformative potential in derivatives markets and its associated risks, offering recommendations for compliance without creating new binding rules.
- Compliance responsibility remains with the regulated entity, regardless of whether AI systems are internally developed or sourced from third-party providers.
- Entities must conduct thorough risk assessments, update policies, and establish robust controls to ensure AI systems meet existing regulatory standards.
- Designated contract markets, swap execution facilities, and swap data repositories using AI must uphold principles of fair and transparent trading, as outlined in Core Principle 9 of the Commodity Exchange Act.
- AI-driven tools for market surveillance or trade optimisation must detect abusive practices, such as wash trading and front-running, while preserving the price discovery process and requiring human oversight.
- Regulated entities must adopt system safeguards, including recognised standards for reliability, security, and disaster recovery. Material changes to AI systems must be reported to the US CFTC in advance.
- Derivatives clearing organisations must ensure AI integration complies with Core Principles I, C, and D of the United States Commodity Exchange Act, addressing risk management, participant eligibility, and settlement processes.
- Outsourcing AI services does not absolve organisations of compliance obligations. Entities must ensure third-party systems meet regulatory standards and communicate significant changes promptly to the US CFTC.
- AI applications for futures commission merchants, commodity pool operators, and swap dealers must ensure compliance with relevant provisions, particularly when managing customer funds or calculating margin requirements.
- Customer protection remains a priority, with strict adherence required for rules safeguarding segregated customer assets.
- The US CFTC will monitor AI developments and include discussions on AI during routine oversight activities, with potential future guidance or regulatory action anticipated.
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US CFTC Charges Pastor for $5.9 Million Crypto Ponzi Scheme
On 9 December 2024, the United States Commodity Futures Trading Commission filed a complaint against Francier Obando Pinillo, alleging he operated a fraudulent cryptocurrency Ponzi scheme. The scheme, which solicited over US $5.9 million from more than 1,500 individuals, primarily targeted financially vulnerable individuals, including members of his church congregation in Washington state.
- Pinillo operated through unregistered entities: Solanofi, Solano Capital Investments, and Solano Partners LTD, promising guaranteed monthly profits of up to 34.9% through cryptocurrency trading and staking activities.
- No cryptocurrency trading or staking took place; instead, Pinillo misappropriated customer funds for personal use and provided falsified account statements to deceive customers about the growth of their investments.
- Pinillo leveraged his position as a pastor to build trust, targeting congregants and other unsophisticated investors, falsely claiming to run a high-performing automated cryptocurrency trading platform.
- The scheme included a multilevel marketing (MLM) component, offering a 15% referral fee for recruiting new participants.
- An online dashboard fabricated account balances, misleading investors into believing they were achieving massive returns. For instance, one investor believed their US $36,000 had grown to over US $1 million in less than a year.
- Pinillo transferred over US$4 million to private wallets in Colombia and unrelated accounts, with no customer assets ever being traded or invested.
- When investors sought withdrawals, Pinillo provided false explanations, blaming technical issues and the bankruptcy of cryptocurrency exchange FTX, despite no funds being linked to FTX.
- The US CFTC charged Pinillo under Section 6(c)(1) of the United States Commodity Exchange Act and Regulation 180.1(a)(1)-(3) for manipulative and deceptive practices.
- The US CFTC seeks a permanent injunction against Pinillo, barring him from trading or soliciting in commodity markets, and requests civil penalties, full restitution to affected customers, disgorgement of ill-gotten gains, and a lifetime trading ban.
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US SEC Orders Morgan Stanley Smith Barney to Address Failures in Safeguarding Client Funds
On 9 December 2024, the United States Securities and Exchange Commission (US SEC) issued an order instituting administrative and cease-and-desist proceedings against Morgan Stanley Smith Barney LLC (MSSB). The order alleges serious lapses in MSSB’s internal controls that failed to prevent financial advisers from misappropriating millions of dollars from client accounts over several years.
- MSSB failed to implement effective safeguards to detect and prevent fraudulent activities by its financial advisers, including Michael Carter, Chingyuan “Gary” Chang, Douglas McKelvey, and Jesus Rodriguez.
- Between 2015 and 2022, these advisers collectively misappropriated millions of dollars through unauthorised Automated Clearing House (ACH) payments and wire transfers.
- Michael Carter misappropriated over $6 million, McKelvey diverted $1.15 million from elderly relatives’ accounts, Chang misappropriated $58,000, and Rodriguez misused $3.6 million.
- MSSB’s fraud detection systems, implemented in 2015, failed to monitor suspicious patterns, such as multiple transfers from client accounts to a single external account controlled by the financial advisers.
- MSSB did not screen ACH payment instructions to detect instances where the beneficiary’s name matched the adviser responsible for the account, allowing the fraud to persist undetected.
- MSSB’s failures only came to light after client complaints and subsequent US SEC investigations prompted retroactive reviews of transactions.
- The US SEC charged MSSB with violations of Section 206(4) and Rule 206(4)-7 of the United States Investment Advisers Act of 1940, Section 15(b)(4)(E) of the United States Securities Exchange Act of 1934, and the antifraud provisions under Section 10(b) and Rule 10b-5 of the United States Exchange Act.
- MSSB is required to pay a $15 million civil penalty and engage an independent compliance consultant to review and enhance its fraud detection systems and supervisory policies.
- Remedial measures include regular monitoring of ACH and wire transactions, enhanced staff training on fraud detection, and compensation for all affected clients through a Fair Fund established under Section 308(a) of the Sarbanes-Oxley Act.
- MSSB has been directed to cease and desist from further violations of the United States Investment Advisers Act and the United States Exchange Act and to ensure future compliance with federal regulations.
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ASIC Reinforces Custodial Standards: Insights into the Updated Regulatory Guide 133
On 10 December 2024, the Australian Securities and Investments Commission (ASIC) published an updated version of Regulatory Guide 133: Funds Management and Custodial Services: Holding Assets. This guide outlines updated obligations and standards for Australian Financial Services (AFS) licensees engaged in asset management and custodial services. It reflects developments in the financial industry, including the integration of crypto-assets, and focuses on client asset security, operational integrity, and regulatory compliance.
- The updated Regulatory Guide 133 applies to asset-holding AFS licensees, including responsible entities for managed investment schemes and licensed custodial service providers.
- Revisions include updated financial requirements and recommended practices for managing emerging asset classes like crypto-assets, emphasising information security controls and enhanced risk management.
- Custodians must ensure client assets are separated from their own holdings, maintain adequate organisational structures, and implement secure asset management systems.
- Obligations for third-party custodians require enforceable agreements detailing compliance standards, conflict management, and liability, with continuous monitoring and immediate rectification of deficiencies.
- Specific provisions for crypto-assets mandate segregation of digital holdings, transparency, auditable records, and independent audits. Agreements must outline liabilities and risks associated with these assets.
- Relief measures for omnibus accounts are provided, allowing consolidated client asset management under strict trust and segregation requirements to ensure client asset protection.
- Reporting and record-keeping obligations require comprehensive documentation of client assets, transaction histories, and valuations, with periodic compliance certifications and updates on custodial arrangements.
- Business continuity planning is mandated to ensure uninterrupted custodial services during operational disruptions, with confidentiality requirements for client information.
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US SEC Files Insider Trading Complaint Against Former Comtech CEO Amid Allegations of Misconduct and Law Violations
On 11 December 2024, the United States Securities and Exchange Commission (US SEC) filed a complaint against Ken Peterman, former CEO, chair of the Board, and president of Comtech Telecommunications Corp. The complaint, submitted in the United States District Court for the Eastern District of New York, alleges that Peterman engaged in insider trading by selling Comtech stock while in possession of material non-public information about the company’s poor financial performance for Q2 FY24, violating federal securities laws and breaching his fiduciary duties.
- Peterman allegedly sold Comtech shares before the public disclosure of Q2 FY24 financial losses, avoiding approximately $12,445 in losses.
- Comtech’s Q2 FY24 results, revealed after Peterman’s trades, included a 12% decline in net sales and a drop in adjusted EBITDA, leading to a 25.4% decline in stock price.
- At the time of trading, Comtech had two blackouts in effect: a routine quarterly blackout and a special blackout tied to confidential projects, both of which Peterman violated.
- Peterman attended a Board Audit Committee meeting on 4 March 2024, where he was informed of Comtech’s negative financial results, gaining insider knowledge.
- On 12 March 2024, Peterman was terminated for cause due to personal misconduct, including failing to disclose a relationship with a subordinate and directing the subordinate to complete mandatory training on his behalf.
- Hours after his termination, Peterman attempted to sell 8,241 shares from his Compensation Account, which netted $40,454.54 before the financial results were disclosed.
- Peterman also tried to liquidate an additional 49,400 shares from another account, further breaching blackout period policies.
- The US SEC alleges that Peterman violated Section 10(b) of the United States Securities Exchange Act of 1934 and Rule 10b-5, which prohibit trading on material non-public information and contravened Comtech’s Standards of Business Conduct.
- The US SEC is seeking penalties, including a permanent injunction against future violations, disgorgement of profits with prejudgment interest, civil monetary penalties under Section 21A of the United States Securities Exchange Act, and a lifetime ban on serving as an officer or director of any publicly traded company.
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US CFTC Orders Five Individuals to Pay Over $5 Million for Digital Asset Fraud Scheme
On 11 December 2024, the United States Commodity Futures Trading Commission (US CFTC) announced that the United States District Court for the Central District of California had issued orders against five individuals involved in a fraudulent digital asset scheme under the name Icomtech. The consent order and default judgment require the defendants namely Marco A. Ruiz Ochoa, David Carmona, Juan Arellano Parra, Moses Valdez, and David Brend to collectively pay over $5 million for defrauding over 190 investors out of more than $1 million through false promises of high returns in digital asset trading.
- The defendants operated a deceptive scheme between August 2018 and December 2019, falsely claiming funds would be used for trading digital assets such as Bitcoin.
- They promised daily returns of 0.9% to 2.8% and assured investors their investments would double within eight months.
- Funds were misappropriated for personal use and to perpetuate the scheme, leaving many investors—primarily from Spanish-speaking communities—financially devastated.
- The court found the defendants guilty of violating Section 6(c)(1) of the Commodity Exchange Act and CFTC Regulation 180.1(a), which prohibit deceptive practices in commodity transactions.
- The court imposed civil monetary penalties of $1 million against Carmona, Arellano, Valdez, and Brend and held them jointly liable with Ruiz Ochoa for $1,098,920 in restitution to defrauded investors.
- The orders permanently ban all defendants from registering with the US CFTC, trading in US CFTC-regulated markets, and engaging in any activity violating the Commodity Exchange Act.
- In related criminal proceedings, Carmona received a 10-year prison sentence, Ruiz Ochoa a five-year sentence, and Brend a 10-year sentence, while Arellano’s sentencing is pending. Moses Valdez’s case remains unresolved.
- Criminal forfeiture orders include $914,000 for Ruiz Ochoa and $329,450 for Carmona, with additional restitution orders pending.
- The court discussed the defendants’ exploitation of vulnerable Spanish-speaking communities and their calculated deceit through fabricated trading claims.
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