The B.C. Securities Commission has permanently banned a Liechtenstein-based bank from dealing stock in B.C. after it refused to reveal the identities of its clients.

Hypo Alpe-Adria-Bank (Liechtenstein) AG came under regulatory scrutiny last year after commission investigators discovered it was trading large amounts of U.S. over-the-counter stock through B.C. dealers.

From November 2006 to August 2007, Hypo operated accounts at 11 B.C. brokerage firms: Blackmont Capital, Canaccord Capital, First Canada Capital Partners, Gateway Securities, Golden Capital Securities, Global Maxfin Capital, Graydon Elliott Capital, Haywood Securities, Research Capital, Union Securities and Wolverton Securities.

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During this 10-month period, Hypo traded 463 million shares worth $165 million. More than 90 per cent of the volume and 82 per cent of the value were shares of companies quoted on the OTC Bulletin Board or the Pink Sheets in the United States.

As I have noted in previous columns, most were grotty issues that by any reasonable standard have no place in a decent public market.

When commission investigators discovered that some were being promoted by e-mail spam, they began inquiring into who was behind the accounts.

Sadly, the dealers didn't know, even though the general rule is that they must "know their clients."

When the investigators asked bank officials who the beneficial owners were, they refused to provide the information, citing Liechtenstein confidentiality laws.

Offended by the notion that confidentiality laws in a foreign jurisdiction could frustrate their ability to investigate trading within our provincial borders, commission enforcement staff took the matter to a hearing.

The hearing panel, headed by commission vice-chair Brent Aitken, agreed that "banking secrecy laws of foreign jurisdictions cannot serve as a shield against the legitimate exercise by the commission of its powers to enforce securities regulation in British Columbia."

It acknowledged that banning Hypo bank from the B.C. market would not help investigators identify the beneficial owners, but it would stop the bank from being used as a conduit for any further suspicious trading. So it permanently barred the bank from dealing stock in B.C.

The decision was warmly received by commission enforcement staff, but I think that, in itself, the decision is pretty useless.

Firstly, there are dozens of like-minded offshore corporations and institutions that are trading -- and will seek to trade -- stock in B.C. All the Hypo bank decision shows is that, if regulators intervene, you may be asked to leave.

Secondly -- as evidenced by the 11 brokerage firms that agreed to trade stock for Hypo bank -- there are lots of dealers who are willing to take on this business, as scuzzy as it is. This decision did not address their obligations.

That takes us to the "know-your-client" rule. In some cases, it doesn't make sense for a dealer to determine the beneficial owner of an account. If, for example, an institution is trading for a widely held mutual fund, the dealer shouldn't have to determine the identify of each unit-holder.