Caribbean offices focus of RBC charges
A U.S. regulator’s charges against Royal Bank of Canada, of an alleged massive wash trading scheme designed to win Canadian tax credits, focus on a small group within the bank’s Caribbean offices and whether they were directed by one senior executive.
The executive, who is not named in the suit, is identified only as “CFG Member 1” but is also described as head of global arbitrage and trading for RBC’S Caribbean branches and cohead of something called the Central Funding Group, which offers “secured balance sheet funding solutions” to clients.
That description appears to correspond with Richard Travoso, who, according to his biography on RBC’S website, is also responsible for the proprietary trading division at Royal’s capital markets operation.
Mr. Tavoso joined RBC in 1995, having graduated from Princeton University in 1987.
The U.S. Commodity Futures Trading Commission on Monday accused Canada’s biggest bank by assets of carrying out hundreds of millions of dollars of wash trades in a bid to claim dividend tax credits from the Canada Revenue Agency.
RBC has denied the allegations, calling them “absurd.”
According to the bank, U.S. regulators were kept apprised of what RBC was doing and approved the strategy.
“This lawsuit is meritless and we will rigorously defend ourselves against such baseless allegations,” it said in a statement.
A spokesman for the CRA declined to comment on the matter, saying confidentiality laws prevent it from talking about individual cases.
“We note Canadian tax law contains numerous provisions aimed at curbing abuses of foreign tax credits,” said Philippe Brideau. “The government of Canada has and will continue to enforce those laws and combat any abuses.”
Canada’s banking regulator, the Office of the Superintendent of Financial Institutions, said it is “following the situation.”
The CFTC claims that the wash trading scheme took place over several years from at least 2007 to 2010 during which RBC affiliates in the Cayman Islands, Toronto, Luxembourg and London traded futures contracts between themselves, so that prices were essentially set by the bank rather than the market.
Further, RBC “willfully concealed, and made false statements” about its trades.
According to the CFTC, the trades were “designed and controlled by a small group of senior RBC personnel acting on RBC’S behalf.”
The allegations represents one of the biggest wash trading cases the regulator has ever prosecuted. Observers point out that they come at a time when the CFTC is under enormous political pressure for its perceived failure to properly carry out its job during the run up to the financial crisis and more recently with the MF Global scandal.
Observers said the CFTC rarely goes after big banks, typically preferring smaller game such as brokerages and hedge funds.
“This is a bit unusual,” said Dan Waldman, a lawyer at Arnold & Porter in Washington, D.C. “Usually someone does a [questionable] trade and it’s
uncovered by the regulator and that’s that. But obviously this [alleged scheme] has been going for some time. People inquired about it, assumptions were made about what kind of trades were made, it was a whole dialogue with regulators that took place over a period of time.”
RBC has not denied it carried out trades that might benefit from favourable tax treatment. Sources close to the bank said that while positive tax treatment was one benefit, it was not the main driver.
“I don’t think RBC will take this lying down,” said Alan Mak, a principal at the Toronto-based forensic accounting firm Rosen & Associates.
As a player with global ambitions, it has little choice but to fight the allegations to protect its reputation.