stats
globeinteractive.com: Making the Business of Life Easier

   Finance globeinvestor   Careers globecareers.workopolis Subscribe to The Globe
The Globe and Mail /globeandmail.com
Home | Business | National | Int'l | Sports | Columnists | The Arts | Tech | Travel | TV | Wheels
space


Search

space
  This site         Tips

  
space
  The Web Google
space
   space



space

  Where to Find It


Breaking News
  Home Page

  Report on Business

  Sports

  Technology

space
Subscribe to The Globe

Shop at our Globe Store


Print Edition
  Front Page

  Report on Business

  National

  International

  Sports

  Arts & Entertainment

  Editorials

  Columnists

   Headline Index

 Other Sections
  Appointments

  Births & Deaths

  Books

  Classifieds

  Comment

  Education

  Environment

  Facts & Arguments

  Focus

  Health

  Obituaries

  Real Estate

  Review

  Science

  Style

  Technology

  Travel

  Wheels

 Leisure
  Cartoon

  Crosswords

  Food & Dining

  Golf

  Horoscopes

  Movies

  Online Personals

  TV Listings/News

 Specials & Series
  All Reports...

space

Services
   Where to Find It
 A quick guide to what's available on the site

 Newspaper
  Advertise

  Corrections

  Customer Service

  Help & Contact Us

  Reprints

  Subscriptions

 Web Site
  Advertise

  E-Mail Newsletters

  Free Headlines

  Globe Store New

  Help & Contact Us

  Make Us Home

  Mobile New

  Press Room

  Privacy Policy

  Terms & Conditions


GiveLife.ca

    

PRINT EDITION
Regulator flagged Scotiabank's record-keeping at Puerto Rican unit
space
space
By RITA TRICHUR
  
  

Email this article Print this article
Monday, July 8, 2019 – Page B1

Canada's banking regulator reprimanded Bank of Nova Scotia for inadequate record-keeping in its Puerto Rican operations, years before this country's thirdbiggest bank decided to sell its 109-yearold subsidiary at a loss.

The Office of the Superintendent of Financial Institutions (OSFI) visited Scotiabank de Puerto Rico, the oldest foreign bank in the U.S. territory, to audit its commercial credit files in 2014, according to two people familiar with the matter. The sources were granted anonymity because they were not authorized to speak to the media about the regulator's review. This June, Scotiabank announced a deal to sell both its Puerto Rican and U.S. Virgin Islands operations to Oriental Bank, as part of a broader risk-reduction strategy.

OSFI, which conducted its audit in three stages, determined that Scotiabank's documentation and background reviews of clients were unsatisfactory for its Puerto Rican commercial credit business, the sources said. The regulator found shortcomings in the subsidiary's internal controls because some of its files didn't match or were missing pertinent information, those people added. The bank's commercial-credit department provides business customers with loans and trade financing.

After its onsite examinations, OSFI sent a letter to Scotiabank's head office in Toronto outlining deficiencies in its Puerto Rican operations.

But OSFI's findings were disputed by the local banking watchdog in Puerto Rico, the Federal Deposit Insurance Corporation (FDIC), sparking a cross-jurisdictional conflict between Canadian and U.S. regulators, the sources said.

That regulatory clash was just one of a slew of challenges that Scotiabank faced while operating on the Caribbean island in recent years. Puerto Rico, which spiralled into a government debt crisis in 2015 and declared a form of bankruptcy in 2017, continues to struggle with fiscal reforms.

Compounding those problems, Puerto Rico is still rebuilding nearly two years after Hurricane Maria wiped out homes, businesses and basic infrastructure.

The island also remains rife with drug-trafficking and moneylaundering risks.

Scotiabank said on June 26 this year that it reached an agreement to sell its operations in Puerto Rico and the U.S. Virgin Islands to Oriental Bank, a subsidiary of OFG Bancorp. As a result, Scotiabank plans to record an after-tax loss of about $400million during its fiscal third quarter, an amount that could be reduced to $300-million to $360million after the deal closes.

Oriental Bank plans to expand the commercial-banking business in Puerto Rico after the acquisition, president, chief executive and vice-chairman Jose Rafael Fernandez told analysts on a June 27 conference call. A spokesman declined to comment on whether Oriental Bank was aware of OSFI's audit of Scotiabank's commercial operations in Puerto Rico.

"Scotiabank, as with all financial institutions, is subject to periodic reviews by its regulators, the contents of which are confidential in accordance with applicable regulations," spokesman Doug Johnson wrote in an emailed statement. "Scotiabank and its regulators maintain an open, transparent and ongoing relationship in all the jurisdictions in which we operate."

OSFI said it is prohibited from commenting on specific financial institutions, a view echoed by U.S. regulators. "The FDIC does not comment on open and operating banks," spokesman David Barr stated in an e-mail.

Although Canadian and U.S.

banking regulators share information with each other, turf wars do occur when banks seek growth outside their home markets. In this case, OSFI and the FDIC disagreed on how Scotiabank de Puerto Rico ought to maintain its commercial files, the sources said.

About half of the subsidiary's files were in Spanish, but OSFI failed to send properly trained staff who were proficient in that language, one of those people said.

"OSFI has the appropriate resources including the necessary language support to pursue its supervisory obligations," spokesman Gilbert Le Gras wrote in a statement.

"In addition, OSFI has productive working relationships with our regulatory peers around the globe, and before performing supervisory reviews in other jurisdictions OSFI informs host regulators and provides notice, timelines and scope for the review," Mr. Le Gras added. For its part, the FDIC declined to answer questions about its dispute with OSFI.

While the FDIC took the view that OSFI was being overly zealous during its review of Scotiabank de Puerto Rico, the Canadian regulator flagged a number of problems in its audit, the sources said.

For instance, OSFI found inconsistencies between banking files (documents prepared by staff in charge of client relationships) and the subsidiary's credit files (paperwork maintained by the credit department's staff). In some cases, the regulator found that banking staff had failed to share records with the credit department. As a result, the credit department had information gaps in its files.

OSFI takes such documentation discrepancies seriously because they can reveal problems with a bank's due diligence on credit decisions, its compliance with know-your-client rules and other potential weaknesses with internal controls designed to catch fraud, money laundering and mitigate other reputational risks.

As part of its assessment, OSFI scrutinized Scotiabank's own internal audit of its Puerto Rican operations, the sources said.

After completing its audit of Scotiabank de Puerto Rico, OSFI informed the bank that it would conduct a similar sweep of its commercial files in Mexico, the sources said. Scotiabank Mexico is the bank's largest foreign subsidiary.

In preparation for the regulator's visit, the bank spent about six months vetting its Mexican subsidiary's commercial files to ensure that they would be in pristine condition for OSFI, one of the people said. Both OSFI and Scotiabank declined comment on the Mexican audit.

Scotiabank's planned sale of its operations in Puerto Rico and the U.S. Virgin Islands is part of CEO Brian Porter's broader strategy to remove risk from the bank, while increasing its focus on core international markets of Mexico, Chile, Colombia and Peru.

"Bank of Nova Scotia's announced exit from Puerto Rico benefits the Canadian bank's risk profile and capital position," Fitch Ratings wrote in a research note.

The proposed transaction marks the third time in about seven months that Scotiabank has announced divestitures in the Caribbean. In November, 2018, the bank announced plans to sell its insurance subsidiaries in Jamaica and Trinidad and Tobago, and a separate deal to sell its banking operations in nine other countries. Scotiabank said it made the decision to sell those assets because of "increasing regulatory complexity" and the associated compliance costs. The following month, Scotiabank announced the sale of its pension and insurance operations in the Dominican Republic.

Other Canadian banks have also reduced their exposure to the Caribbean in recent years. In 2014, Royal Bank of Canada sold its Jamaican operations at a loss.

RBC would later shutter its wealth-management business in the Caribbean owing to moneylaundering risks.

Canadian Imperial Bank of Commerce, meanwhile, tried but failed to jettison part of its stake in FirstCaribbean bank. Last year, CIBC nixed plans for an initial public offering of that subsidiary in the United States.


Huh? How did I get here?
Return to Main Paul_Knox Page
Subscribe to
The Globe and Mail
 

Email this article Print this article

space  Advertisement
space

Need CPR for your RSP? Check your portfolio’s pulse and lower yours by improving the overall health of your investments. Click here.

Advertisement

7-Day Site Search
    

Breaking News



Today's Weather


Inside

Rick Salutin
Merrily marching
off to war
Roy MacGregor
Duct tape might hold
when panic strikes


Editorial
Where Manley is going with his first budget




space

Columnists



For a columnist's most recent stories, click on their name below.

 National


Roy MacGregor arrow
This Country
space
Jeffrey Simpson arrow
The Nation
space
Margaret Wente arrow
Counterpoint
space
Hugh Winsor  arrow
The Power Game
space
 Business


Rob Carrick arrow
Personal Finance
space
Drew Fagan arrow
The Big Picture
space
Mathew Ingram arrow
space
Brent Jang arrow
Business West
space
Brian Milner arrow
Taking Stock
space
Eric Reguly arrow
To The Point
space
Andrew Willis arrow
Streetwise
space
 Sports


Stephen Brunt arrow
The Game
space
Eric Duhatschek arrow
space
Allan Maki arrow
space
William Houston arrow
Truth & Rumours
space
Lorne Rubenstein arrow
Golf
space
 The Arts


John Doyle arrow
Television
space
John MacLachlan Gray arrow
Gray's Anatomy
space
David Macfarlane arrow
Cheap Seats
space
Johanna Schneller arrow
Moviegoer
space
 Comment


Murray Campbell arrow
Ontario Politics
space
Lysiane Gagnon arrow
Inside Quebec
space
Marcus Gee arrow
The World
space
William Johnson arrow
Pit Bill
space
Paul Knox arrow
Worldbeat
space
Heather Mallick arrow
As If
space
Leah McLaren arrow
Generation Why
space
Rex Murphy arrow
Japes of Wrath
space
Rick Salutin arrow
On The Other Hand
space
Paul Sullivan arrow
The West
space
William Thorsell arrow
space





Home | Business | National | Int'l | Sports | Columnists | The Arts | Tech | Travel | TV | Wheels
space

© 2003 Bell Globemedia Interactive Inc. All Rights Reserved.
Help & Contact Us | Back to the top of this page