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Multi-Million Scheme 'Built Upon' Rbc Bahamas Strategy

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Royal Bank of Canada (RBC) has described as irrelevant claims by US regulators that it “falsely represented” its Bahamian branch was responsible for devising a multi-million dollar ‘wash trading’ scheme, having asserted that this “built upon” a strategy previously devised in this nation.

A batch of documents filed by Royal Bank’s attorneys with the New York courts this month, in response to a lawsuit filed against it by the US Commodities and Futures Trading Commission (CFTC), give a further insight into the role played by its Bahamian branch in the alleged scheme.

In particular, the documents disclose that “either the Bahamas or Cayman Islands” branches initiated almost every transaction that the CFTC is complaining about, and detail the Canadian tax advantages Royal Bank’s Bahamian operations sought to obtain.

“The CFTC alleges that RBC falsely represented that the ‘idea’ for its trading strategies originated with ‘Bahamas staff’ and not CFG Member 1, a purported representative of senior management,” one document, which was attempting to strike out one count against the bank, said.

“Putting aside whether CFG Member 1, who led the Bahamas staff at the time of the October 2005 letter, was a member of senior management, the CFTC does not- and cannot - allege facts demonstrating materiality.”

Royal Bank added that it had already disclosed that the trading strategy had been approved by senior managers and “built upon” an earlier one devised by its Bahamas branch.

And it said there was nothing in US law/regulations that made a trading strategy permissible depending on who approved it.

In its initial lawsuit, filed in April 2012, and a subsequent amended complaint, the CFTC alleged that Royal Bank engaged in the non-competitive selling of exchange-traded stock futures contracts with its Bahamas and Cayman Island branches.

The bank was alleged to have conducted this activity as ‘block’ trades through the OneChicago futures exchange, using “wash and fictitious sales” that were not independent, arm’s length sales between two different counterparties.

This, the CFTC alleged, breached US law and were designed to enable Royal Bank to access tax benefits from holding certain public companies’ securities in Canadian and offshore accounts.

But Royal Bank has vehemently denied the allegations against it, and describing them as “absurd”. It described the CFTC lawsuit as “meritless and we will rigorously defend ourselves against such baseless allegations”.

In particular, the Canadian bank is questioning why the CFTC is bringing the lawsuit now when it relates to matters first raised in 2005 - some seven years ago.

Detailing the role played by Royal Bank of Canada’s Bahamas branch, a November 17, 2005, letter to the Chicago Mercantile Exchange’s director of financial surveillance, said: “The idea of engaging in OneChicago single stock future block transactions originated with the staff in our Bahamas office.

”The decision to engage in the block transactions was then made between the Royal Bank affiliates involved in the transactions (primarily RBC (Bahamas branch) and (a Luxembourg affiliate) after discussions between them.”

The strategy was discussed and approved by RBC’s senior capital markets staff, and the letter added: “The single stock futures strategy essentially built upon a trading strategy involving swaps that had previously been utilised by RBC (Bahamas) branch with other RBC entities.

“That strategy was developed by RBC (Bahamas branch) in conjunction with senior managers in the RBC Capital Markets platform.....”

The letter also explained how, by holding a cash position against the single stock futures trades, RBC’s Bahamas branch was able to reduce its Canadian corporate tax burden by a sum equivalent to the 15 per cent withholding tax levied upon US source dividend income by the IRS.

Noting that Royal Bank’s Bahamas operations generated over $100 million worth of revenues for that financial year, the November 17 letter said: “Under Canadian tax laws, RBC (Bahamas branch) is also able to reduce its Canadian taxes otherwise payable from the banking business carried on by it in the Bahamas by the amount of the US withholding taxes.”

In its lawsuit, though, the CFTC alleged that the strategy had been developed at Royal Bank’s corporate level, including by the head of global arbitrage and trading for its Caribbean branches.

”The idea of engaging in OneChicago single stock future block transactions did not ‘originate’ with the staff in [RBC’s] Bahamas office, but was instead conceived by CFG Member 1 and proposed to RBC management when CFG Member 1 was a managing director of RBC Capital Markets working in RBC’s London office,” the CFTC lawsuit alleged.

“The RBC branches and subsidiary that engaged in SSF trading did not ‘independently come up with the idea and strategies to trade’ SSFs. Instead, CFG Member 1 devised the idea to trade SSFs between RBC-affiliated counterparties and created the futures trading strategies for both counterparties to the trades.”

The CFTC alleged that Royal Bank of Canada attempted to give the trades “the appearance of being the result of independent decisions by its branches and subsidiaries to buy and sell futures contracts”, when instead they were controlled and devised by a small group of senior executives.

The US regulator claimed that between 2005 and May 2010, transactions between the Bahamas/Cayman Islands and the Luxembourg affiliate accounted for 51 per cent of the volume in a particular type of trade on OneChicago. In 2006 and 2007 respectively, these deals accounted for 87 per cent and 72 per cent of this particular trade type.

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