I support this enforcement action against the Bank of Nova Scotia (“BNS”), headquartered in Canada, as another victory for holding banks accountable for their pervasive use of unauthorized communication methods, like Whatsapp and private texts, to avoid regulatory oversight.  After previously bringing enforcement actions that levied over $700 million in penalties against 11 Wall Street banks,[1] the Commission continues to send a zero tolerance message to banks who seek to evade regulatory oversight.  The CFTC continues to bring accountability in these cases in partnership with the Securities and Exchange Commission (“SEC”).

1. Accountability for record keeping requirements serves important public interests.

The Commission’s “offline communication” cases are not merely “technical” violations, but instead go to the core of public interests in financial regulator visibility into those it regulates to protect markets and investors.  It also goes to the core public interest of market integrity.  U.S. markets are the safest and most liquid in the world because market participants have confidence in U.S. financial regulators’ ability to police the markets for illegal actors.  That may be why a Canadian bank was interested in U.S. markets.

The public interest is not served by U.S. or foreign banks keeping U.S. regulators in the dark.  Darkness undermines law enforcement.  As a federal official in law enforcement for the last two decades, I have routinely used communication records as evidence of a defendant’s intent to violate the law.  Efforts to hide the motivation for trades make it harder for the government to establish the intent required to prove fraud, market manipulation, and other illegal acts—a fact well known to banks.

In what has become an all too familiar fact pattern, the CFTC was investigating BNS when it became apparent that there were missing communications records.  The missing records triggered another investigation where we found that most employees regularly used unauthorized communication platforms, with the knowledge and participation of senior leadership.  This even included the use of encrypted messaging apps and private texts by those who should have stopped this illegal practice—senior officials responsible for compliance.

2. As a repeat offender in violating the Commodity Exchange Act—BNS’s use of unauthorized communications reflects its broader culture of evasion over compliance.

Use of unauthorized communication platforms is one more reflection of a serious problem with the “tone at the top” of BNS—a tone of legal evasion over compliance.[2]  The CFTC brought an enforcement action in 2018 against BNS for market manipulation known as spoofing.[3]  Then in 2020, the CFTC brought another enforcement action against BNS for market manipulation (spoofing)—this time in parallel with a Department of Justice (“DOJ”) criminal action.  DOJ found that BNS engaged in an eight-year commodities market manipulation scheme where BNS made thousands of orders of precious metals futures contracts that it knew it would cancel before the trades were executed.[4]  BNS compliance officers contributed to the illegal conduct.  The 2020 resolution points out that BNS also hid the extent of illegal conduct from the CFTC, preventing the CFTC’s 2018 resolution from bringing accountability for the full extent of illegal conduct.[5]

BNS’s illegal conduct in what is now its third CFTC enforcement action occurred while the bank was under independent monitorship as a condition of the 2020 case.  DOJ agreed to defer prosecution in the 2020 case because BNS agreed to be under watch of an independent monitor for three years, pay $60.4 million in penalty and disgorgement, change compliance practices, and cooperate with the criminal case against the trader.[6]  Coupled with today’s charges, BNS’s culture of evasion needs to change immediately if it is going to continue operating in U.S. markets with CFTC registration.[7]

3. Given BNS’s recidivism, resolution of the Commission’s enforcement third enforcement case against BNS must be strong to deter future violations.

BNS is now a three-peater before the CFTC.  Any resolution of this third case must be strong.  In September, I proposed a “Heightened Enforcement Accountability and Transparency” (HEAT) Test for the CFTC to require more defendants to admit wrongdoing in CFTC enforcement settlements where admissions are necessary to promote the public interest goals of law enforcement—justice, accountability, and deterrence—to the fullest extent.[8]  Too often, deterrence is only discussed in terms of the size of a penalty (and I support the $22.5 million in combined penalties with the SEC here).[9]  Having worked on many DOJ civil, state attorneys general, or other civil cases that contain defendant admissions, as opposed to “neither-admit-nor-deny” clauses, my experience is that deterrence can be achieved from a defendant having to admit its wrongdoing, combined with a penalty.  Particularly defendants with significant resources may view admissions to be more consequential than a penalty.

The HEAT Test I designed identifies those cases calling for greater public accountability and transparency—where the CFTC should send a message about the paramount importance and strength of our enforcement program—just like the case against BNS.[10]  The violations are egregious as the use of unauthorized communications platforms was widespread and pervasive, including by senior supervisors. BNS is a recidivist, with multiple attempts to evade regulatory scrutiny.  Continued use of unauthorized communication platforms by banks threatens market integrity.

As investigations continue to reveal the widespread use of unauthorized communication tools across not only Wall Street, but foreign banks, the importance of deterring this conduct becomes increasingly clear.  Based on the serious threat that unauthorized communications platforms pose to market integrity and BNS’s three-peat record of CFTC enforcement actions, I applaud the enforcement team for requiring an admission of wrongdoing as part of this settlement.