The Long Arm of the (International) Law: As Markets Become More and More International, So Do Criminal Activities. How Do Regulators Clamp Down on Cross-Border Fraud and Market Manipulation without Stifling Cross-Border Trade and Commerce?

By Zwick, Steve | Futures (Cedar Falls, IA), October 2006 | Go to article overview

The Long Arm of the (International) Law: As Markets Become More and More International, So Do Criminal Activities. How Do Regulators Clamp Down on Cross-Border Fraud and Market Manipulation without Stifling Cross-Border Trade and Commerce?


Zwick, Steve, Futures (Cedar Falls, IA)


David MacGregor and Karen Roth won't say exactly what it was about the track record posted on the www.teamforex.com Web site that tipped them off, other than that the numbers seemed a bit "optimistic."

Whatever the initial impulse, they contacted the futures commission merchant (FCM) on whose platform Team Forex traded, and soon found themselves embroiled in the type of fraud investigation that Roth and MacGregor, and other investigators at the Commodity Futures Trading Commission (CFTC), have grown familiar with.

To begin with, Team Forex was based in South Africa, and not in the United States. What's more, its owner, James DeWet, wasn't registered with the CFTC, and didn't have to be thanks to a controversial clause in the Commodity Futures Modernization Act (CFMA), which allows solicitors to act in a completely unregulated environment--albeit an environment still subject to common law.

And the CFMA does authorize the CFTC to prosecute violations of fraud and manipulation when the suspected fraudster, registered or not, has executed the futures trades for retail U.S. customers on a platform operated by a CFTC-regulated FCM.

In this case, that FCM was New York-based Forex Capital Markets (FXCM), but it could have been any FCM with a currency platform.

Such fine legal distinctions between who does and who does not have the right to bring a case to court on whose behalf and under what circumstances are critical, especially when dealing cross-border.

That's because regulators pursuing cross-border fraud cases need to know how to hit perpetrators where it hurts, and that usually means going after their assets. Because most non-U.S. fraudsters don't have assets in the United States, regulators have to get an order to freeze assets abroad, and then figure out which organizations in which countries have which standing in which court.

"There's also the issue of recognition of judgment," says CFTC attorney Phyllis Cela. "There's a whole body of law in every jurisdiction as to the type of order that can be recognized in foreign court.

Cooperation among regulators tightened after 9/11, when governments and regulators around the world began to clamp down on illicit money flows and money laundering.

In 2002, the International Organization of Securities Commissions (IOSCO) published its Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information, dubbed the Multilateral MoU for short, and the MMoU for shortest. See www.futuresmag.com for a list of signatories to the MMoU.

As the name implies, the MMoU provides for the exchange of essential information in investigating cross-border securities and derivatives law violations, including bank, brokerage and client identification records. The MoU also enables regulators to use that information to enforce compliance with securities and derivatives laws and regulations, including through civil and criminal prosecutions.

The MMoU works because IOSCO members only can become signatories once they prove their ability to cooperate with regulators around the world when it comes to delivering information on bank and brokerage accounts, as well as who owns what, and, paradoxically, to keep the information they get from falling into the wrong hands.

As a result, cross-border information-sharing has become routine, and all IOSCO members are required to become MMoU signatories by 2010, although it's not clear what will happen to members who fail to do so.

NEXT: THE BIG FREEZE

In June, IOSCO members overwhelmingly endorsed a resolution encouraging members to promote laws giving regulators in one country the right to ask courts to freeze assets in their jurisdiction on behalf of regulators in another jurisdiction.

Such ability is already widespread among criminal prosecutors worldwide. The CFTC, for example, is authorized to investigate and prosecute fraud cases delivered to it by non-U.

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