Pareto Meeting. Best practice for NHY bonds on identification and flagging of corruption issues" Richard Sjøqvist and Finn Bjørnstad.

Transcription

1 Pareto Meeting Best practice for NHY bonds on identification and flagging of corruption issues" Richard Sjøqvist and Finn Bjørnstad 6 February

2 Agenda / Talking points Topic: Due diligence and disclosure process in order for the Arranger to meet the legal standard of a "best practice due diligence"? Increasing reach of anti corruption framework Relevant "anti corruption" legal framework Moral, reputation, penal and liability exposure "Best practice" of corruption related DD? How to organise and process - case examples Should documentation be improved? 2

3 Increasing reach of anti corruption framework - trends Increased focus on corruption and this will continue By authorities, investors and international organisations Expansion of rules also to cover the financial institutions own activity More and more stringent compliance rules for financial institutions Legislation is focusing on practices (i) within the firm; (ii) of suppliers of the firm; and (iii) customers of the firm. Investment Banks' policies appear to focus on (i) and (ii). While (iii) is usually being analyzed in the concept of the Investment Banks' anti-money laundering policies, which appear to be more client-focused. 3

4 Relevant "anti corruption" legal framework Norwegian Penal code Section 276 a c (bribery abroad) Norwegian Penal code Section 317 (whitewash, covers also negligence) / FATF. UK Bribery Act 2011 / US Foreign Corrupt Practices ACT (extra-territorial reach) SEC s Resource Guide to the FCPA OECD/UN and EU Conventions Corporate Social Responsibility developing 4

5 Relevant "anti corruption" legal framework cont. Consequences of corrupt actions Criminal penalty personal and/or for the company Compensation claims Termination of contracts Blacklisting by clients/vendors Impact on reputation Relationship between anti corruption and whitewashing compliance systems The Arranger potential exposure both direct breach (deemed to contribute to criminal act/medvirkning) and liability in tort How to prevent to be exposed and to build defence against allegations? 5

6 Anti-Money Laundering AML rules requires and protects to some extent certain situations: Requires proper customer identification of beneficial owner Prohibition in dealing with FATF non compliant countries and politically exposed persons (including relations)! Requires risk assesment to be made by the Investment Bank to understand the exposure of clients Requires reporting on suspicious transactions Are rules / guidelines properly implemented 6

7 Anti-Money Laundering some basics Enhanced Customer Due Diligence: by their nature involve a high risk of transactions associated with proceeds of crime Politically exposed persons 7

8 8 FATF

9 Minimum requirement to a due diligence cont. Bare Minimum Selling Bonds vs Other Products Issuer vs Manager Selling «as is» vs «pursuant Marketing Material» Best interest of Client Issuer as client Investor as client Interest of Manager Balanced Marketing Material Structure Credit risk Description of rights and obligations History (facts) Issuers predictions to be balanced Other risk descriptions (AML?) Various obligations:(purchase Act, Marketing Act, MiFID Art 19, Securities Trading Act see 10-9, SEC Act etc) To act honestly, fairly and professionally in accordance with the best interests of its clients. All information (including Marketing Material) shall be fair, clear, comprehensible and not misleading. Include appropriate and understandable guidance on and warnings of the risks associated with investments in those instruments. Not put forward advantages with the investment without providing balanced information without the associated risk. Shall assess the suitability of the Bonds for the relevant Investor. Information to be capable of being analysed. Not withhold material information 9

10 Minimum requirement to a due diligence cont. Describe what due diligence has been conducted Document whom has reviewed the relevant material Obtain the Completeness and Indemnity Statement Make Sure the Application Form is properly drafted and make sure sellers make investors aware of the basis of their investment Remember you have two clients! 10

11 Anti-bribery due diligence Anti-bribery due diligence in transactions key tool in managing investment risk (alongside legal and commercial due diligence) Still neglected "Despite the many recent examples of the perils of ignoring the fraud and corruption dimension of these assessments a fifth of companies still do not consider it as part of M&A due diligence and a quarter never consider it in a post acquisition review" (E&Y global fraud survey 2011) Risk based and proportionate approach e.g. countries/sectors involved and nature of the investment (transparency international) 11

12 12 Example 3rd Party DD - Corruption

13 Corruption - IMF halts Congo loan programme Bloomberg and Reuters news agencies have reported that the International Monetary Fund has halted its loan programme with the Democratic Republic of Congo because of concerns over transparency in the country's mining sector. While Congo is clearly in desperate need of funds, Global Witness believes that concerns over possible corruption in the country's mining sector were so serious that the IMF was justified in stopping its lending. The overall three-year loan programme was for over $500 million, of which $200 million was not yet disbursed. Although the programme was due to expire on 10 December this year, Congo had been hoping for an extension. The immediate reason given by the IMF for halting its lending was the failure of the Congolese authorities to publish a June 2011 mining contract. In that month, the state-owned miner Gecamines ceded 25 per cent of mining company Comide to Straker International Corp, registered in the British Virgin Islands. Congo had promised the IMF and the World Bank that it would publish mining contracts between public and private companies and that it would publish details on the ownership of these companies. It had also pledged to sell mining assets by public tender. Congo followed up on these promises by passing a decree in May 2011 stating that all natural resource contracts would be published within 60 days of their coming into effect. While Global Witness welcomed these moves by the Congolese authorities, many key contracts have not been published and some of those that have been published have underscored the corruption risks we have highlighted. Global Witness has expressed concern over the way in which, since the end of 2009, state mining companies have sold off a slew of key copper and cobalt assets in the immensely mineral-rich Katanga province secretly, without any public tenders and at sales prices that were often steeply below commercially estimated values. The companies buying the assets were registered in offshore tax havens - particularly the British Virgin Islands - that keep company ownership and directors secret. In most, possibly all, cases the companies were linked to Dan Gertler, a businessman who is a friend of President Joseph Kabila. After acquiring the assets, the offshore companies often went on to make huge profits by selling them on to or by partnering up with international companies, in particular the mining giants Glencore and the Eurasian Natural Resources Corporation (ENRC). Both of these companies figure on the London Stock Exchange s FTSE 100. The reported decision of the IMF to halt funding should highlight the need for the Congolese state to ensure its natural resources are sold by public tender. Glencore and ENRC should take stock of the corruption fears surrounding their investments in Congo and ensure that all these deals are independently investigated, with all findings published. 13

14 How to organise the anti-bribery due diligence Who should do what? Arrangers own team Arrangers Counsel Issuer team Issuer Counsel Intermediaries Requirement to appoint independent investigator on which Pareto can rely upon prior to engaging in any mandate? Which situation? Country Beneficial owner Risk assessment 14

15 Examples Case studies Nigeria Mexico Indonesia Turkey Brazil 15

16 16 OSA Goliath Pte. Ltd.

17 17 Sea Trucks Group Limited

18 Corruption Risk Matrix What to look for History and reputation of Issuer, shareholders and management Corruption Risk (high/low) How to check - mitigation Transaction Structures Relevant Countries (Transparency International) Business segment(s) What kind of assets and contracts Counter party reputation and history Use of proceeds Agency, Commission and Service Agreements Any off market terms in any Project Documents 18

19 Corruption Risk Matrix What to look for / preliminary discovery What are the consequence of bribery indictement i.e. fine on client level, loss of contract, liability for manager? Value of assets vs bribery - consequence of the underlying contract being invalid as a result of the corruption Corruption Risk (high/low) How to check - mitigation Compliance manuals in place? Co-ordinated with Whitewash rules? Should Customer be denied? 19

20 How to improve documentation How to improve documentation OM Risk Factors TS covenants to be more specific Corporate Governance requirements Anti Corruption compliance systems Bond Loan Agreement adopt LMA corruption covenants FATCA rules Ongoing obligations Compliance Certificate Default if non-compliance 20