Companies onboarding clients via subverting the CySec licences that they hold in order to onboard clients to offshore regions such as the Marshall Islands, and in some cases, FinanceFeeds has found that they do so via using personal entities as agencies (!) will no longer be able to do so, as European Union officials prepare to cut off the funds and make it impossible. We analyzed this during the course of 2017, and now the law is coming.
After an extremely eventful 2017, 2018 is upon us, and FinanceFeeds would like to take this opportunity in the very early hours of New Year’s Day to wish every professional in every sector of the electronic trading business who has contributed positively to the continued development of this industry a very happy and prosperous new year.
One of the many important factors that was at the forefront of commercial planning for the year ahead during 2017 was the imminent implementation of the MiFID II directive, which is a European Union-wide set of infrastructural rulings set out by ESMA on electronic financial services and how they are provided, that includes a comprehensive standard by which all FX brokerages must conduct their business, ranging from the use of technology and its relationship with other components, to the means by which trades are reported to competent authorities.
The clamor and discussion within the offices of national regulators, compliance departments of brokerages and the providers of execution and reporting technology was prominent indeed during the advent of the implementation of MiFID II, however in just two days time, MiFID II will no longer be a matter of planning, but a matter of reality.
On January 3, the European authorities will have set the MiFID II directive in motion, and whilst senior executives in important regions for FX that serve global client bases and have earned a longstanding reputation for quality, including firms in London, Sydney and New York have been concentrating very carefully on ensuring complete compliance, one aspect of their integrity that pre-empts the MiFID II ruling is that companies in bona fide jurisdictions do not onboard clients via unlicensed entities on offshore islands.
One of the most respected symbols of integrity among global partners of retail brokerages, including very large introducing brokers and high net worth clients, is the Financial Conduct Authority (FCA) regulatory approval.
It is clear that companies with FCA regulatory licenses are held in particularly high esteem globally not because of the FCA’s prowess as a regulatory authority, but because FCA regulated companies with completely British origins are widely renowned for their tenacity in terms of development of trading environments, encyclopedia-like industry knowledge, and even more importantly, for not misrepresenting anything at all to customers.
The European regulatory authorities were faced with a complete dichotomy to this when addressing the commercial structure and client onboarding procedure of some of the smaller firms in Cyprus.
Unlike the evergreen British companies which largely serve a loyal British client base via highly advanced proprietary platforms, some of the smaller, MetaTrader 4-based companies in Cyprus do not have any clients at all in Europe, are not staffed by Europeans, and are not owned by Europeans.
Their CySec regulatory stamp is purely a placebo which makes novice retail traders in often undeveloped regions such as South East Asia and parts of Africa and the Middle East, feel as though they have some degree of alignment with quality European regulatory arbitration, and, in some cases, a preposterous ability to purport to have an FCA license via the ‘passporting’ facility between financial services firms in European Union member states.
The reality is that, aside from some of the very large CySec firms that actually pioneered the growth of Cyprus as an FX industry hub for European regulatory licensing for foreign companies, a large number of firms in Cyprus have been onboarding a handful of clients via their CySec regulated entity just to pacify the auditors, and then onboarding thousands of clients via offshore entities in St Vincent, the Marshall Islands, the Seychelles and Belize, and offering extremely non-compliant trading terms as well as operating a ‘profit and loss’ model – literally living from the losses of clients rather than acting as a broker to live market liquidity – and manipulating prices as dealing desks are not under the remit of CySec or MiFID II’s stipulations despite being able to legitimately masquerade as a firm which is subject to well recognized regulation.
An end is about to come to this, however, as the European Commission, which is the central parliament of the European Union, has adopted a blacklist of 17 offshore tax havens.
American Samoa, Bahrain, Barbados, Grenada, Guam, South Korea, Macau, Marshall Islands, Mongolia, Namibia, Palau, Panama, Saint Lucia, Samoa, Trinidad and Tobago, Tunisia and United Arab Emirates are the countries listed.
Indeed, St Vincent and the Grenadines, as well as Belize or the British Virgin Islands are not on that list, however 47 jurisdictions are included in a public “gray” list of countries that are currently not compliant with EU standards.
Having researched the bureaucratic ramblings of European ministers, including French finance minister Bruno Le Maire on this matter, it is not about onboarding clients to non-compliant jurisdictions, but instead is about not allowing companies with European Union licensed and registered offices to have any related entity in these offshore regions and conduct business between the two, largely as a matter of tax locality.
This, however, means that by default, a ruling to ban companies which either have, or purport to have, prominent and major operations in European Union member states would not be allowed to operate ‘sister’ companies in any of those regions, thus although as a result of a different problem, would banish the practice of having an FX firm with its .com website set to onboard clients to a Marshall Islands entity, and its never-used .com.cy or .com.eu site to onboard clients in Cyprus, of which there are none.
Following multiple disclosures of offshore tax avoidance schemes by companies and wealthy individuals, EU states launched a process in February to list tax havens in a bid to discourage setting up shell structures abroad which are themselves in many cases legal but could hide illicit activities.
These illicit activities include duping clients into believing that their trading conditions are inline with European Union-stipulated terms and execution practices, and that they are protected by a major regulator.
Blacklisted countries are very likely also to lose access to EU funds, meaning that even those wishing to try to carry on under the radar will not be able to. Other possible countermeasures will be decided in coming weeks, minister Le Maire said.
FinanceFeeds has been privy to a document which demonstrates exactly how firms with regulation manage to onboard clients from regions all over the world to offshore entities which merchant services providers such as Visa or Mastercard would normally consider to be too much of a risk to allow the transaction to take place.
The depositing of client funds to unregulated OTC brands and brokers has become something of a red flag for many merchant services vendors, thus Visa and MasterCard will usually block the transfer of funds from unaffiliated countries (usually in South East Asia, Africa or the subcontinent – China does not count because Visa and MasterCard do not exist there).
Aside from that, many governments have banned the depositing of funds by retail customers to unregulated firms internationally, Belgium and the United States being two examples.
In order to circumvent the risk management systems implemented by merchant services providers and bans by governments on soliciting clients from certain countries, many unregulated firms have resorted to using payment services providers which offer specialist means of bamboozling the credit card firms and the authorities by moving funds to a third party account before depositing to the broker.
PacNet, one of the major providers, along with its subsidiary Counting House, was sanctioned by the US Department of Treasury for this last year and branded a criminal organization for money laundering.
Liberty Reserve, a favorite of the unregulated brokers for onboarding clients from all over the world no longer exists, its owner in serious trouble for money laundering, hence a hole exists for those who still insist on not conducting business via a transparent method.
Now, a further means has come to light. That being brokers themselves actually taking client deposits to personal accounts owned by “agents” and then taking the money to the brokerage.
Firms that engage in this are basically transferring funds from the client, to an ‘agent’ to ‘clean’ them to stop the merchant services company clawing it back or not allowing the deposit, then the ‘agent’ deposits it to the broker.
FinanceFeeds reported on this extensively in June 2017, and whilst it was completely ignored when we brought it to the attention of CySec, the European Commission, post MiFID II, will block it in its entirety along with any other offshore activity from retail firms with European Union licensing and registration.
FinanceFeeds asked CySec about this several times, and has been met with a countenance of confusion, and has approached some of the firms concerned, with silence abound.
Our opinion is that these firms will pack up and leave the European Union, and likely rescind their CySec license, before the European Union’s officials cut off their money transfer channel and insist that CySec cancels their license which would leave them in a position of having to go through regulatory censuring, and also with no access to offshore funds.
Whilst CySec has taken a short sighted approach thus far in attempting to keep them in Cyprus, FinanceFeeds has reviewed a document from the Cyprus government that demonstrates a government wish to remove this type of activity, along with other low-level, reputation-damaging business such as ICO and binary options firms (pretty much the same thing) from Cyprus in order to attract funds and family office business.
Once again, we support and applaud the established retail FX brokerages in licensed regions that have committed themselves to development and quality to the point that their loyal and domestic-market client base is testimony to their modus operandi, hence no action will be required when this law is invoked, and actually, it will be of great benefit to those doing things correctly as it will protect the reputation of the entire industry and good quality regulation as it sees off the scoundrels.
Here is our original commentary on this in mid 2017.