Finance in the firing line

Transcription

1 July 2013 Finance in the firing line Crime and financial institutions The financial crisis has sharpened the focus of criminal prosecutors on financial institutions and their employees. Clifford Chance experts discuss the new tools and approaches being deployed, and examine how financial institutions can navigate this increasingly complex environment. Right across the world, but particularly in the US and Europe, the financial crisis has put the finance sector and the way it conducts business under the spotlight as never before, says Michael Bray, a partner in Clifford Chance s banking practice based in London. The result has been not only greater regulation, but a greater emphasis on ensuring it is enforced. In order to achieve this objective, the authorities are increasingly using the full force of criminal, as well as administrative and civil law to bring transgressors to book. This is creating a challenging environment for financial institutions, especially given the number of different agencies that are charged with supervising markets and enforcing regulations, and the new tools and approaches they are developing to do so. To gain insight into this new environment it makes sense to turn first to the US, which has a strong history of using both civil and criminal law to hold businesses and executives to account. An approach that has been further sharpened since the financial crisis. The US leading the way? What we are experiencing is really the eagerness by US agencies to deploy the full array of civil and criminal penalties, in response to what is perceived as a political and indeed a public outcry to hold financial institutions and their executives accountable for perceived wrongdoing, explains Ed O Callaghan, a partner in Clifford Chance s litigation and dispute resolution practice based in New York. He points out several key trends. The first is the sheer number of agencies involved and their willingness to collaborate, or in some cases compete. We are seeing the multiple divisions of the Department of Justice (DOJ), the SEC, the CFTC, US Treasury and Office of Foreign Assets Control (OFAC) as well as the various district attorneys offices collaborating or sometimes stepping over each other to deploy all of their tools, says Ed. The next point is that this approach extends across borders. Some of the recent cases are cross-border and involve financial institutions and executives outside the US. Examples include the LIBOR fixing scandal, money laundering offences, offshore tax cases and of course the FCPA and bribery and corruption cases. It is also clear that attitudes The financial crisis has put the finance sector and the way it conducts business under the spotlight as never before. Michael Bray, Partner, Clifford Chance (London)

2 2 Finance in the firing line Key advice for Financial Institutions The key component is to have a compliance function tailored for each business line. Edward O Callaghan, Partner, Clifford Chance (New York) Compliance functions need to be sufficiently empowered and respected within the organisation. Luke Tolaini, Partner, Clifford Chance (London) At the first red flag of a possible corporate offence, a thorough internal review should be conducted. Antonio Golino, Partner, Clifford Chance (Milan) Provide training for employees to help them identify risks before they become potential breaches. Frédérick Lacroix, Partner, Clifford Chance (Paris) It is a question of culture of viewing everything you do through the eyes of regulators. Michael Bray, Partner, Clifford Chance (London) towards criminal prosecution have hardened. US agencies are not settling, as they might have in the past, for large monetary penalties. If there is any hint in the course of their investigation that there may be criminal wrongdoing, then this will be investigated and potentially prosecuted, adds Ed. Another key development is that criminal prosecutors are on the front line with financial regulators. Previously, federal prosecuting offices would generally wait for a referral from the financial regulator. Now the DOJ prosecutors are working side by side with the SEC attorneys and they are making what amount to joint charging decisions, explains Ed. Ed is also seeing multiple actions against the offending entity or individuals, citing the LIBOR fixing cases as examples. There are non-prosecution agreements (NPAs) against the entities, deferred prosecution agreements (DPAs) against the entities, large monetary settlements, and criminal prosecutions or guilty pleas, as well as criminal charges against individuals. It is worth noting judges are becoming much more involved in scrutinising DPA and NPA agreements. The judges have been requiring the parties to come in and give them regular updates as to how the entity is progressing with meeting its obligations, and that s something that s wholly new, says Ed. Extra-territorial jurisdictions Ed believes US regulators and prosecutors are really pushing the envelope more than ever before in this area, and showing a greater willingness to get involved in cases that have only a tangential relationship with the US. A recent case involved a Hungarian telecom operator which allegedly paid bribes to officials in Macedonia. Although neither was a US entity, a US federal judge found that there were sufficient minimum contacts, through financial filings in New York, to allow the SEC to proceed with their case. In a DOJ or OFAC investigation that is cross-border, the investigators may want to conduct interviews (often with company employees) in the jurisdiction where the alleged wrongdoing would have taken place. It s worth noting that there is a criminal statute that makes it a felony to make a false statement to any US federal agent conducting an official investigation, and that statute has extraterritorial application. So, the message here is that employees and executives will not be able to avoid investigation wherever they are located and need to consider very carefully what they say. What we are experiencing is really the eagerness by US agencies to deploy the full array of civil and criminal penalties. Edward O Callaghan, Partner, Clifford Chance (New York)

3 Finance in the firing line 3 The UK catching up? Historically, the UK does not have the best record in the enforcement of criminal law in the commercial sphere. But the financial crisis has seen public concern about white collar crime being addressed by concerted action to criminalise commercial misconduct and give criminal prosecutors a greater role in policing the market. As a result we are in a new, post-financial-crisis phase. The SFO has a far greater willingness to get involved in hard finance than it did historically, and can be seen as trying to reposition itself as a prosecutor after a few years of being seen as a deal-doer, says Luke Tolaini, a partner in Clifford Chance s litigation and dispute resolution practice based in London. In contrast the FSA (now FCA) has had criminal powers since 2001, and has been using them effectively for many years. In fact, Luke believes the number of tools now available to the FCA makes it one of the most powerful prosecuting authorities in the world. Not only does the FCA have the criminal prosecution powers under FSMA, but it can use civil market abuse to back up its criminal prosecutions. This wide range of FCA powers has created hybrid cases such as insider dealing cases where one individual may be prosecuted but others are dealt with under the civil market abuse regime while assisting the criminal prosecution. They have also entered into quasi-plea agreements under the Serious Organised Crime Police Act, whereby they have been able to offer lower sentences in return for cooperation, says Luke. Corporates and individuals One difference between the US and UK has been the attribution of criminal conduct to corporates rather than individuals within them. Generally, it has not been a problem in the US, but in the UK it has been something of a barrier to prosecution, explains Luke, because you can only find a corporate liable in criminal law where an individual is the directing mind and will of the company. DPA s will shortly be available for designated prosecutors in the UK. Many see them as a key mechanism for prosecutors to overcome this issue, albeit the law on corporate attribution remains unchanged. But there are problems. Not least, are the judges going to accept the deals done between the corporate and the prosecutor? And will there be issues when an individual (say, the directing mind and will) and a corporate are the targets for prosecution? While the corporate may be willing to accept a DPA, the individual may have more to lose from accepting guilt and want to fight all the way, says Luke. Italy widens its net Strictly speaking, under the Italian constitution only an individual can be charged with a crime. Yet as Antonio Golino, a partner in Clifford Chance s litigation practice in Milan points out, since 2001 we have had a law 231 that provides for the administrative liability of corporate entities for crimes committed by their employees in the interest of the corporate Under certain circumstances (namely when the individual defendant is a member of the top management) it is the company that must prove that it had in place systems and controls that were adequate to prevent the commission of that specific type of crime. Antonio Golino, Partner, Clifford Chance (Milan)

4 4 Finance in the firing line entity. This tool is now being used more widely and, although not a criminal law, carries severe penalties such as fines, profit seizure and trading bans. The list of crimes that fall under this law has also been widened. So now we not only have cases of market abuse and fraud against the government, but also environmental crimes, as well as certain types of bribery and corruption. Next in line could be tax evasion, with lobbying going on to change the law and allow the seizure and confiscation of corporate assets where an employee has transgressed. One of the peculiarities of this law is its burden of proof. Under certain circumstances (namely when the individual defendant is a member of the top management) it is the company that must prove that it had in place systems and controls that were adequate to prevent the commission of that specific type of crime, adds Antonio. This could leave corporates with a lot of work to do to prove their innocence, particularly if the individual employee, or the exact means or intent behind his action, is not fully known. France toughens up Although France tends to have relatively less litigation in this area, there have been a small number of highly publicised cases and some interesting trends. The first concerns traditional cases where the prosecutors and judiciary can be seen to have become more aggressive. In 2006, the French Financial Market Authority (AMF), opened an insider trading investigation against several top executives and shareholders at EADS. At the same time, and because insider dealing in France is both a regulatory infringement and a criminal offence, a criminal investigation was also started. The point here is that although the AMF decided not to impose any sanctions, the prosecutor, perhaps influenced by the high level of public anger and press comment, continued to investigate and in February this year it notified the indictment. The takeaways from this appear to be that the prosecutor can be more aggressive than the regulator itself; and that, particularly if the case is in the public eye, there may be many and varied attempts, over a long period of time, to punish transgressors. Another example of a more aggressive approach was the relative harshness of the punishment meted out to Jerome Kerviel, a former rogue trader at Société Générale. He was not only, quite rightly, sentenced to jail, but also to indemnify the bank for the whole prejudice it has incurred, something like 5 billion, personally, says Frédérick Lacroix, a partner in Clifford Chance s banking and finance practice based in Paris. This was despite the fact that Société Générale had been fined by the banking regulator for the shortcomings in its internal control systems that had made Kerviel s fraud possible. In this particular case, the victim s faults has not been taken into account by the court when assessing the indemnity for the damages caused by Kerviel. The other area to note concerns the vicarious liability of corporates (in particular, financial institutions) for the actions of their employees. Over the last five years we have had two court decisions that have increased the Over the last five years we have had two court decisions that have increased the possibility of prosecuting a particular financial institution on the back of wrongdoings by single employees. Frédérick Lacroix, Partner, Clifford Chance (Paris)

5 Finance in the firing line 5 possibility of prosecuting a particular financial institution on the back of wrongdoings by single employees, even when those employees do not formally have the authority to represent the financial institution, because they are deemed to act on its behalf or its supervision, says Frédérick. This can be a significant risk management issue for financial institutions. Looking ahead, the French parliament is debating a new bill, on tax fraud and serious financial crimes, which could have serious and far-reaching consequences. As well as granting new powers to investigating police forces, it covers anyone or any institution that commits, supports or hides fraud. The corporates estates can be confiscated in full, and the bill will also see a new, nationwide prosecutor office for financial fraud or crime. The global picture joining the dots? We have heard from four jurisdictions, I suspect we would be hearing similar things from partners across the globe in terms of the creeping criminalisation we are seeing, comments Michael Bray. There is also evidence that highly publicised cases, such as the LIBOR investigation, appear to be awakening regulators in jurisdictions that weren t previously paying full attention to their regulatory authority. This is creating problems for some Financial institutions in Asia, a region supervised by more than a dozen different regulators. While financial institutions had been able to cover the regulatory requirements with a relatively small in-house team, they are now requiring greater resources. Another point raised when looking at the issue globally is how much co-operation or even competition there is between agencies in different jurisdictions. The view is mixed. Luke Tolaini believes that while there is co-operation and despite legal mechanisms for doing so, it is evidently not total, there are circumstances where information does not appear to have been shared and others, such as cross-border resolution mechanisms, where some countries do not have mechanisms for early settlement, restricting their ability to cooperate. New York-based Ed O Callaghan thinks that competition has actually forced collaboration, a view supported by recent successful extraditions to the US from the UK. He also notes the increasing need to get used to competing legal traditions and cultures. The global nature of finance personnel means that we are now facing the prospect of key people on the same trading desk being investigated in different jurisdictions. Addressing the issue getting your strategy in place Ed O Callaghan believes that the key component is to have a compliance function within each business line. Then at least, when dealing with any allegations, it is possible to say we did have a compliance function. It had regular audiences of the board. We tried to do it the right way but nothing is perfect. While that may be complicated to put in place, without it your complications are going to be that much more grave, says Ed. My recommendation would be that, at the first red flag of a possible corporate offence in Italy, a thorough internal review should be conducted, by either external consultants or an independent committee of the local board in order to avoid pressure, says Antonio Golino. That way the financial institution can detect the crime at an early stage, so that you are then in a position to decide whether the case is defendable or whether you should just let the individual go his own way and cut a deal on the corporate liability. He also advises that, as there will be more and more criminal prosecution, make sure that you have dawn raid protocols in place in the local offices, and that people are adequately trained. Because mistakes made at a very early stage can create real problems later on. Luke Tolaini identifies a fundamental issue for financial institutions: compliance functions need to be sufficiently empowered and respected within the organisation and have authority from the top to be able to manage risk and push back on the business. With so many potential breaches, criminal through to regulatory, for an organisation to manage, he believes it is vital to take time to identify the biggest risks, and focus attention primarily on those. Frédérick Lacroix stresses the need to: improve complaints control and provide training for employees to help them identify risks before they become potential breaches. The number of tools now available to the FCA makes it one of the most powerful prosecuting authorities in the world. Luke Tolaini, Partner, Clifford Chance (London)

6 6 Finance in the firing line Conclusion There are so many new and complex regulatory reforms, as well as new tools and approaches for enforcing them, that it may be impossible for any FI to avoid any potential breach or any investigation by a regulatory agency. The key is therefore to have the processes in place not only to prevent problems in the first place but to manage and mitigate them effectively when they occur. As well as gaining a better understanding of the new environment, and having the right compliance functions in place, Michael concluded that compliance needs to be seen in a wider context, as a question of culture, a question of behaviour and a question of viewing everything you do through the eyes of regulators. Read our other publications If you would like to receive copies of our other publications related to this topic, please tarrah.toth@ Was It Worth the Wait? The Department of Justice / Securities and Exchange Commission Guidance on the FCPA (November 2012) SFO muddies the waters on self-reporting, facilitation payments and hospitality (October 2012) Second Circuit Lowers the Bar for Aiding and Abetting Liability in SEC Securities Fraud Actions (August 2012) UK Government unveils plans for Deferred Prosecution Agreements (May 2012) Deferred Prosecution Agreements and U.S. Approaches to Resolving Criminal and Civil Enforcement Actions (April 2012) Shareholders carry financial risk for bribery in companies in which they invest (January 2012)

7 Finance in the firing line 7 Clifford Chance contacts To discuss any of the issues in this publication, please contact one of our market experts below: Michael Bray Partner, London T: E: michael.bray@ Antonio Golino Partner, Milan T: E: antonio.golino@ Frédérick Lacroix Partner, Paris T: E: frederick.lacroix@ Edward O Callaghan Partner, New York T: E: edward.ocallaghan@ Luke Tolaini Partner, London T: E: luke.tolaini@

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