BANKING & PROJECT FINANCE ENFORCEMENT

confidence in the integrity of the BBA setting process and the accuracy of the There’s a new figures it produces’, journalists at Bloomberg and the WSJ were highlighting the issue. Regulators, notably the US Commodities Futures Trading Commission (CFTC) were sheriff in town to start investigating shortly thereafter. That investigation was to have something of a The fundamentally changed global long lead time, however, because it was not until 2012 that the reach and scale of the regulatory enforcement. Today, institutions are investigation were to become widely increasingly being deputised to police themselves publicised. On June 27 2012, received the raditionally, when a new sheriff rides were perceived to have been insufficiently then largest-ever fine imposed by the FSA of into town, the place is in a mess. aggressive in pursuing enforcement options £59.5 million ($87.7 million), as part of a T Society has broken down, lawlessness in the lead up to and during the financial settlement with US and UK regulators for abounds and right-thinking people avoid the crisis. In December 2008, the Madoff $453 million. Barclays also lost its chief streets. The saloon bars are full of rowdy, scandal would raise questions about whether executive, . The Barclays fine intimidating gunslingers who go the Securities and Exchange Commission was soon eclipsed by the new largest-ever unchallenged – other than by fellow (SEC) had been overly light touch in its FSA fine meted out to UBS on December gunslingers. The town badly needs approach. In March 2009, , 19 2012, as part of a $1.5 billion settlement redemption (as does the sheriff, on then chief executive of the UK Financial with UK, US and Swiss regulators. Two occasion). The townspeople bestow a clear Services Authority (FSA), felt compelled to months later, on February 6 2013, RBS was mandate for change on their new law officer. announce the end of light touch regulation fined £87.5 million as part of a global He in turn enlists the support of deputies to by the regulator, with his memorable settlement of $612 million. In late 2013, clean the place up. Vigorous law declaration: “People should be very was fined $1.07 billion. In July enforcement takes centre stage. frightened of the FSA”. 2014, was fined $370 million. This approach seems to have been Most significantly for the future, Libor Just over a year later, on November 11 adopted by regulators in the wake of the marked a paradigm shift in the nature, 2014, the Financial Conduct Authority Libor [London Interbank Offered Rate] international scope and intrusiveness of (FCA) imposed fines totalling £1.1 billion scandal. In the post-Libor world, they have regulatory enforcement activity. Both in on five banks, for failing to control business effectively deputised firms to pursue their practice, and as a matter of law, institutions practices and maintain proper systems and enforcement objectives. A combination of are increasingly being deputised by the controls in the banks’ foreign exchange (FX) structural changes to law and regulation, sheriff to police themselves across the world, trading activities between 2008 and 2013. and the practicalities surrounding identify responsible individuals for future Quite apart from their eye-watering size, international regulatory investigations, have enforcement purposes, attest to controls, these fines and the subsequent legislative led to the internalisation of enforcement and disprove guilt (as opposed to defending follow-up changed the enforcement type activity within firms. innocence) when a problem arises. landscape altogether. The result is a once-in-a-generation The tipping point imperative on senior business, compliance Lessons for enforcers and the The Libor scandal represented a tipping and legal management to implement not enforced point in the evolution of modern regulatory only major systems and controls changes, A number of key lessons have emerged from enforcement. It exhibited Malcolm but fundamental cultural change, before the that dramatic period. Gladwell’s three characteristics: next big scandal. Institutions will have to be contagiousness; the fact that otherwise able to demonstrate that they can police the Libor as the first global investigation – limited causes or incidents can have big town vigorously, including finding and opportunities and challenges effects; and the fact that change happens not shooting the gunslingers, if they are not to Libor became the first truly global financial gradually but in one dramatic moment or be in the sheriff’s sights themselves. investigation, despite its initially limited period. scope. At its height, Libor or related Libor was the touchpaper that led to an Libor: origins and outcomes benchmarks were being investigated by at least explosion of public and political outrage at Libor was a child born of the . 12 regulators around the world. These the industry that had In April 2008, bank analysts issued a included financial and competition regulators previously found some expression in the research note concluding that ‘the current in the US (CFTC, SEC, Department of wake of the financial crisis, but had still liquidity crisis has damaged the interbank Justice (DoJ)), the UK (FCA and Serious remained somewhat latent. That explosion market, resulting in Libor sets that at times Office), Germany (BaFin), Switzerland led not only to new laws and regulations, deviate significantly from real interbank (Swiss Comco), the , but more fundamentally to a renewed lending rates’. It also stated, rather Korea Fair Trade Commission, Hong Kong empowerment of global regulators. prophetically, that if Libor lost credibility Monetary Authority, Monetary Authority of Further empowered, the regulators have ‘the long-term psychological and economic Singapore and Japan Financial Services generated significant momentum in re- impacts this could have on the financial Agency. The FX investigation was to follow balancing their relationships with firms. In markets are incalculable’. suit in a very similar fashion. certain cases, this involved a rehabilitation of By May 2008, despite the British Bankers This profusion of international overseers the regulators themselves, some of whom Association’s (BBA) expression of ‘every presented firms and regulators with a novel,

64 IFLR/April 2015 www.iflr.com ENFORCEMENT

complex, and not always harmonious firms. Far from it. The deputisation was A further issue when a firm is deputised in relationship dynamic. designed to supplement, not supplant, this way is the lack of clarity as to parallel On the face of it, answering questions or regulators’ efforts. This was explained by lines of communication between regulators, providing information to multiple regulators principle deputy assistant attorney general and the risks to which this gives rise. While might have given rise to logistical issues in Marshall Miller of the DoJ in a speech at the the UK, US, Swiss and other regulators will the past, but these were relatively easily GIR Programme in New York on September proudly announce their close cross-border navigable. A US regulator seeking 17 2014: cooperation at the time of settlements, it is information from a UK firm would “Some years ago there was a perception that rare in practice to obtain any real insight generally make a request for documents the Justice Department outsourced into levels of collaboration, including what through the international cooperation investigations of corporate criminal conduct to is or is not being shared during the course of section of the FCA. The UK regulator private law firms then sat back and waited for an investigation, prior to the settlement. would duly pass on the request in the form presentations and memos and hot docs to roll It can be dangerous to make any of a Notice of Requirement to the firm, in. At the Criminal Division, nothing could be assumptions in this context, for example exercising statutory powers of compulsion further from the truth”. that regulators are discussing matters at that disposed of Data Protection Act issues Miller was emphatic, as any fellow regulatory colleges or will generally pass on while requiring production. regulator would be, that while the DoJ material information in a timely and By contrast, following the spaghetti-like strongly encourages cooperation and firms comprehensive manner as between trail of global business lines and to carry out their own investigations, these themselves. Reasonable as it may be, if that responsibilities, employees moving from are just one of the many tools that are used assumption proves wrong, and the country to country with their work, and the to further investigations. They do not rely regulators perceive a failure of openness or other cross-border aspects of Libor gave rise on the internal investigation to make their cooperation by the firm in providing such to difficult – and occasionally delicate – case. information under principle 11 of the problems for regulators and firms alike. FCA’s Principles for Businesses in the UK, In the context of their international reach, A bobby on the beat or its equivalent elsewhere, the Libor highlighted the limitations on the Similarly, and echoing comments made by consequences can be severe. Goldman territorial jurisdiction of regulators. Given FCA Enforcement in December 2014, Sachs found this out when it was fined their own statutory and other restrictions, Andrew Ceresney, director of the SEC’s £17.5 million in September 2010 by the not to mention comity and sovereign Enforcement Division, made the point at a FSA for breach of principle 11, among authority issues with other regulators, they Corporate Governance conference on others, for its failure to keep the FSA could not simply march into another February 10 2015: “It is obviously an active informed of material developments in a country to follow the trail inevitably laid by regulatory atmosphere, we think it is non-Libor SEC investigation. international banks operating in important for investors to have an active cop Further, the manner in which these international markets. on the beat who is looking for misconduct”. deputised investigations are reported back to The extent to which regulators regulators can cause serious issues. In the may use or depend on a firm’s US, it is commonly accepted practice that own investigation will, in any this process will be undertaken orally in the The Libor scandal event, depend to a large extent interlocutory stages, rather than in writing. represented a tipping on the objectivity, rigour and This is because the opening question that thoroughness with which the any plaintiff’s counsel suing a firm will ask point in the evolution firm and its advisors are in their first discovery request is for copies of perceived to have conducted that all documents provided to or shared with the of modern regulatory investigation. regulator, including reports. The spectre of The relationship between massive private litigation in the enforcement regulators has not always background is such a significant feature in “ worked smoothly. Certain the US that regulators are broadly regulators in the US, Europe sympathetic to such concerns provided that These limitations would try the patience and Asia are notoriously jealous of their they obtain the information that they need of regulators. One solution for the sheriffs, own sovereignty and priority, with the for their purposes. in addition to using formal channels, was to result that firms can be placed in an This has historically not been the position deputise firms to secure documents and invidious position, trying to intermediate in the UK, because litigation does not tend evidence from other jurisdictions as well as between the competing and conflicting to follow regulatory enforcement in the their home, and produce these in the home demands of regulators. One regulator same way. Regulators have therefore tended regulator’s jurisdiction. might, for example, insist on seeing all to be less sensitive to the issue. That may At a stroke, regulators were effectively able materials being shown to other regulators change. At the outset of the FX inquiry, the to travel around the world through the eyes (although some regulators positively avoid FCA’s proposal that firms be required to and ears of the bank’s internal legal, risk and the potential death-by-information this follow its so-called interview protocol led to compliance functions, and external advisors. might involve). Another regulator would widespread and considerable disquiet across They could see things that would historically insist on strict confidentiality of its dealings the London market. Firms were concerned have been available only through a more with a firm – not only as regards other third about its impact on the protection of legal formal and lengthy mutual cooperation parties such as overseas regulators, but even professional privilege, as well as its structure, if at all. within a firm or its legal advisors. Resolving interaction with compulsion and other This is not to suggest that regulators such issues requires Bismarckian powers under the Financial Services and simply delegated their investigations to diplomacy. Markets Act 2000. www.iflr.com IFLR/April 2015 65 ENFORCEMENT

Legislative changes contravention in their area of responsibility, firms provide timely and comprehensive The transparency engendered by this unless they can show that they took statements about the alleged anti- tendency towards investigation by proxy reasonable steps to prevent or avoid the competitive arrangements, evidence of will be enhanced by imminent legislative contravention occurring or continuing. their own and other’s involvement, and changes to the UK regulatory environment. The manager will therefore be guilty until continued full cooperation. Speaking in December 2014, Tracey proven innocent. This has resulted in a new dynamic. McDermott, director of enforcement and These measures will provide an Institutions that would previously have financial crime at the FCA, observed: enforcement lightning rod into firms, and considered and investigated their own “There is now an even greater up to their top ranks. They will provide conduct, and then privately shared it with a determination at the FCA to make clear to regulators with greater insight into a firm’s financial regulator, will increasingly feel those at the top of firms that by accepting their internal workings and simpler audit trails compelled to engage in a foot race to the jobs, and the rewards that come with them, for regulators to follow. This, in turn, will competition regulator to obtain immunity they take on personal accountability … provide added incentive for internal or leniency. As the DoJ notes in its own Importantly, the new senior managers regime enforcement-style approaches to be taken leniency programme, this difference can for banks will require firms to certify their when dealing with potential or actual depend on a matter of hours as between own staff – they will be forced to take contraventions. If those with power and one immunity/leniency applicant or responsibility for fitness and propriety of those authority in the firm cannot deal with another revealing itself – and all possible they employ, rather than expecting the gunslingers or control failings, they will colluders – to the relevant competition regulator to do that for them”. find themselves the targets for the sheriff. authorities. The difference in outcome, as Although less likely in practice to was the case in Libor, can be measured in be of concern, since it retains the the hundreds of millions or even billions of Libor became the first conventional burden of proof and dollars. Barclays reportedly avoided a €690 other criminal law requirements, the million ($724 million) fine as the truly global financial new offence of reckless misconduct immunity applicant in [Euro investigation leading to the insolvency of a bank – Interbank Offered Rate]. UBS achieved a with a maximum seven years breathtaking €2.5 billion saving as the imprisonment – will also sharpen the immunity applicant in relation to yen The internalisation of the enforcement focus of internal discussions and behaviour. Libor. agenda is being accelerated by statutory In practice, the distinction between This major structural incentive for firms measures to be introduced under the internalised enforcement and what Hector effectively to prosecute themselves (which Financial“ Services (Banking Reform) Act Sants called the “intensive supervisory may be reinforced by the FCA’s new 2013, which followed the high profile model” in 2009, is shrinking even further. competition powers) means that from the inquiry and recommendations of the UK institution’s perspective, potential problems Parliamentary Commission on Banking Pouring petrol on the fire – the advent of will surface in a far more rapid and Standards. These measures are the subject competition-related enforcement in the uncontrolled fashion than was ever the case of pre-implementation consideration by financial sector before. It will also lead to increased UK regulators; near-final rules were One of the most notable features of the transparency and insight for regulators, published by the FSA for consultation Libor scandal has been the involvement of because they will have access not only to a purposes on March 16 2015. They will competition enforcement regulators in a way body of material in another institution that come into force by March 7 2016. They that has never been seen before in the they would not have previously had, but include the new Senior Managers Regime, financial sector. This feature has not simply that other institution will be singularly whereby senior management will have to fanned the flames of such investigations, but motivated to hand over everything it can to accept a so-called statement of has poured petrol on the fire, incentivising the regulator to comply with the conditions responsibilities. A requirement to prepare a even greater internal enforcement focus. for immunity or leniency. handover certificate for future reference This is because the rules and policies The combined effect of these features of when changing roles is also expected. governing competition inquiries incentivise the Libor investigation has been significant. These measures provide a backdrop to confessional self-reporting in the form of Regulators can not only see inside a firm the more radical change introduced under immunity or leniency applications, which laparoscopically, but they also can the statute, which is designed to demolish in essence provide that the first member of increasingly guide and direct firms what was described by the Parliamentary the can obtain immunity from remotely, requiring the firm to pursue Commission as the ‘accountability firewall’ prosecution or fines, or at least leniency, in inquiries and investigations elsewhere in within firms, where the chain of return for notifying the alleged cartel and the world. Regulators can also rely on the responsibility always appeared to the providing complete cooperation. fact that firms will have every incentive – Commission to stop before reaching the Subsequent alleged cartelists can also whether for competition or financial top of firms. (This is not a new concern on benefit from discounts. regulatory reasons – to flush out any the part of regulators. Senior management Under the provisions of the European wrongdoing with the utmost vigour, and accountability was at the top of the Commission’s current Leniency Notice with no expense spared, to avoid facing regulatory agenda as regulators confronted published in 2006, the DoJ antitrust even more serious sanctions themselves. their inability to deal with such issues division leniency programme dating back There is indeed a new sheriff in town. It’s following the Barings/Nick Leeson scandal to 1978, and equivalent measures in other you. 20 years ago, in 1995). jurisdictions, the competition authorities By Jonathan Kelly, partner at Cleary This change will see a senior person can commute sanctions. But in all cases, Gottlieb Steen & Hamilton in London being held guilty of misconduct for a this must be done strictly on the basis that Read online at iflr.com/newsherrif

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