Author: Jonathan J. Rusch

On July 2, the Fraud Advisory Panel, an independent anti-fraud charity in the United Kingdom, announced its issuance of a report that calls attention to the problem of domestic corruption.  The report, entitled “Hidden in plain sight: domestic corruption, fraud and the integrity deficit,” raises concerns that while foreign corruption attracts substantial media and public attention, “data on domestic corruption are not collected systematically, let alone analysed” and “[t]here is no dedicated infrastructure or single agency in the UK responsible for taking the lead in policing domestic corruption.”

The report acknowledges that the United Kingdom Government has an Anti-Corruption Strategy that will operate until 2022.  At the same time, it notes that the Strategy “contains a number of worrying signs that the government still doesn’t fully ‘get’ the reality of domestic corruption risks.“  Those signs include (1) failure to address the question of resources and the deleterious effects of the Government’s years-long commitment to “austerity” on law enforcement: (2) the inadequacy of empirical data on domestic corruption; (3) the lack of “lead responsibility for policing domestic corruption,” and of a dedicated infrastructure or resource base; and (4) the absence of a system for the public to report corruption (although the Home Office reportedly indicated that one is “is in the pipeline”); and (5) conflicts of interest and the “revolving door” are “the fundamental flaw at the heart of our national preference for so-called ‘self-regulation’.”

The report makes five key recommendations for action:

• In view of the ongoing £1 billion reform of the United Kingdom’s courts, the United Kingdom Government should concentrate on greater transparency and openness of its courts and proceedings (including vastly easier access to court information and documents).”
• There should be “a strong and structured approach to policing domestic corruption risks, starting with an easy-to-use central public reporting mechanism feeding a systematic approach to recording and analysing the data.”
• To improve the use of the Bribery Act 2010 in domestic and small-scale cases, agencies should “improve police training and reduce the bureaucracy surrounding bribery case authorisations.”
• The Government “should bring forward firm plans to create a new offence of ‘failure to prevent economic crime’,” so that corporate executives can be held “to the same criminal standards as the rest of us.”
• There should be a public consultation on a statutory framework for conflict-of-interest concerns.

Note: As a general matter, the Fraud Advisory Panel’s report is a useful reminder to government agencies and companies (and not just in the United Kingdom) that corruption risk extends well beyond foreign-official bribery.  In many countries, most individuals and companies face a far greater day-to-day risk of corruption from a local business owner or local official than from a senior official of a foreign government.  For that reason alone, financial-crime compliance teams should review their companies’ anti-bribery and corruption compliance programs, including their anti-corruption risk assessments, to see that they appropriately address domestic corruption risks.

Most of the report’s recommendations also identify key deficiencies in the United Kingdom’s anti-corruption program that are being remedied or can be remedied without extraordinary cost to the Government – provided that the Government is prepared to concede that continuing rigid adherence to austerity makes no sense for fundamental law enforcement functions.  On the other hand, the recommendation to extend the “failure to prevent” concept to economic crime lacks substantial justification, and in any event is of far less importance than the other recommendations for an effective response to domestic corruption.  Whether the Government, under a new Prime Minister, is prepared to modify its anti-corruption strategy to address any of these issues, remains to be seen.

Last month, the Hong Kong Securities and Futures Commission (SFC) issued its annual report for 2018-2019.  Enforcement-related highlights of the report include:

• Record Requests: Making 9,074 requests for trading and account records from intermediaries as a result of SFO surveillance “of untoward price and turnover movements”;
• Investigations and Prosecutions: Commencement of 238 investigations; execution of search warrants in 30 cases; and laying of 42 criminal charges against four individuals and one corporation, and securing convictions of four persons and one corporation;
• Civil Proceedings: Causing 101 individuals and corporations to be subject to ongoing civil proceedings; and
• Disciplinary Actions: Disciplining of seven firms and three individuals, and imposition of fines totaling HK$867.7 million “for failures as sponsors of initial public offerings” and $HK940 million in fines on licensees; reprimanding of three firms for deficient selling practices and imposition of fines totaling HK$24.6 million; and disciplining of three individuals and one corporation for mishandling client money (two of which were banned for life from reentering the industry).

Note: The SFC’s actions over the past year demonstrated its commitment to “a more proactive front-loaded approach to get ahead of threats, punish wrongdoers, and ensure markets and fair and clean,” in part by reportedly doubling the amount of fines it imposed since 2017-2018.  Consistent with its emphasis on Initial Public Offering (IPO) sponsor misconduct as “a top enforcement priority,” the SFC imposed substantial fines on a number of leading financial firms, including:

• Reprimanding and fining UBS AG and UBS Securities Hong Kong Limited a total of HK$375 million for failing to discharge their obligations as a joint sponsor, and partially suspending UBS Securities’ licence to advise on corporate finance for one year;
• Reprimanding and fining Standard Chartered Securities (Hong Kong) Limited HK$59.7 million for failing to discharge its obligations as a joint sponsor of one company’s listing application, stating that it “failed to conduct reasonable due diligence of core aspects of [that company’s] business”;
• Reprimanding and fining Morgan Stanley Asia Limited HK$224 million and Merrill Lynch Far East Limited HK$128 million “for failing to discharge their obligations as joint sponsors of [another company’s] listing,” stating that they “failed to follow the guidelines for due diligence interviews, allowed [the company] to control the due diligence process and failed to take appropriate steps to address red flags”; and
• Reprimanding and fining Citigroup Global Markets Asia Limited HK$57 million “for failing to conduct adequate and reasonable due diligence on still another company’s] customers and properly supervise its listing application.”

As a point of contrast, it should be noted that the SFC reported reprimanding and fining only one brokerage firm for failing to comply with anti-money laundering and counter-terrorist financing (AML/CTF) regulatory requirements.  In light of the increasing attention that regulators and law enforcement agencies in other regions have been giving to AML/CTF enforcement in the past 12—18 months, it would be surprising if the SFC did not expand its scrutiny of AML/CTF compliance in the coming year.

Because the report contains far more detail about the SFC’s enforcement activity, regulatory compliance teams at firms subject to SFC jurisdiction should read the report’s enforcement section in its entirety and include pertinent excerpts in internal briefings and training materials.

On July 9, the Paris Criminal Court acquitted Stéphane Richard, the Chairman and Chief Executive Officer of mobile telecommunications company Orange, French businessman Bernard Tapie, and four other defendants on charges of fraud and misuse of public funds by Tapie.  Although French prosecutors had sought a three-year prison term (half that time to be suspended) and a €100,000 fine for Richard and a five-year prison term for Tapie, Presiding Judge Christine Mee stated, in reading the verdict, that “[t]here was no proof that Richard took part in any fraud.”

The case traces back to 2008, when Richard was serving as chief of staff to then-French Minister of Finance Christine Lagarde.  At that time, Tapie asserted that he had been defrauded by Crédit Lyonnais, the former French state-owned bank, “when it encouraged him to sell his stake in sports equipment group Adidas for less than it was worth in 1993.”  The French government then agreed to arbitration in the case, resulting in a €403 million award to Tapie.

That award, however, became the subject of intense political controversy, as some alleged that the award was a “covert reward” to Tapie for his support of then-French President Nicolas Sarkozy’s election campaign.  Subsequently, another Paris court invalidated the arbitration award and ordered Tapie to repay the money.

In 2016, the Cour de Justice de la Republique, which specializes in ministerial misconduct, convicted Lagarde – by then head of the International Monetary Fund – of negligence, on the ground that she “should have done more” to overturn the arbitration award to Tapie.  Because that court did not impose a fine or prison term, Lagarde was able to remain as head of the IMF.

Despite the prior conviction of Lagarde, Presiding Judge Mee supported the decision by the Finance Ministry, stating that that Tapie’s claims weren’t “non-existent” and that “[c]hoosing to resolve the dispute via arbitration ‘wasn’t, in principle, contrary to the state’s interests’.”  The court also “found ‘nothing in the case that confirmed’ the allegation that the arbitration payout was tainted by ‘fraud’.”

Note: The verdict is a considerable relief not only to Richard and the other acquitted defendants, but to Orange employees, who valued Richard’s sustained leadership at the company.  It is also a rebuff to French prosecutors, who had pursued Richard and Tapie despite an apparent lack of proof that either man had corrupt motives or received a corrupt benefit from the arbitration award; and, indirectly, to the Paris court that invalidated that award.

On July 7, the Sunday Times of Malta reported that the Malta Financial Intelligence Analysis Unit (FIAU) had imposed a €3 million fine on Maltese bank Satabank for what the Sunday Times termed “widespread breaches of money laundering laws.”

This fine – reportedly a record for the FIAU — is the latest in a series of actions concerning Satabank that began in 2018.  At that time, the Malta Financial Services Authority (MFSA) imposed a €60,500 fine on Satabank for poor risk management structures, and a joint inspection and audit by the MFSA and the FIAU found reported “shortcomings” in Satabank’s anti-money laundering (AML), procedures.

That inspection, which found “extremely weak structures in place to prevent its clients from using it to launder potential proceeds of criminal activity,” led to the MFSA’s effectively freezing all 12,000 accounts at Satabank and appointed the consulting firm Ernst & Young to administer the bank’s assets.  Subsequently, the Times of Malta reported that tens of billions of euros in transactions had passed through Satabank during four years of operation “and investigators now believe as much as half of these may have been ‘high risk and highly suspicious’.”

Note: This action continues the disorder in the Maltese financial sector that began with the MFSA’s placing Nemea Bank under administration in 2016, followed by the European Central Bank’s withdrawal of Nemea’s license in 2017 and the MFSA’s appointment of a person to take charge of Pilatus Bank’s assets in 2018.

It may also be an indication that Maltese regulators are reacting to concerns within the European Union that Malta, due to its laxity in selling passports and tolerating corruption, “might pose a serious threat to global efforts to track money laundering, enforce economic sanctions, and maintain fair transnational standards.”  Even after the international outcry about the 2017 murder of Maltese investigative journalist Daphne Caruana Galizia, there appears to have been little overall change in the Maltese government’s attitude toward the country’s burgeoning “reputation for rampant corruption and dubious dealings.”

Financial firms with business operations in Malta should therefore continue to follow closely how vigorously the MFSA and the FIAU police Maltese banks’ management structures and AML measures, and whether the FIAU prevails in other Maltese banks’ appeals of FIAU fines for money-laundering failures.

On June 21, the United Kingdom Financial Conduct Authority (FCA) fined Bank of Scotland (BOS) £45.5 million “for failures to disclose information about its suspicions that fraud may have occurred at the Reading-based Impaired Assets (IAR) team of Halifax Bank of Scotland [(HBOS)]”  According to the FCA, BOS

identified suspicious conduct in the IAR team in early 2007. The Director of the Impaired Asset Team at the Reading branch, Lynden Scourfield, had been sanctioning limits and additional lending facilities beyond the scope of his authority undetected for at least three years. BOS knew by 3 May 2007 that the impact of these breaches would result in substantial losses to BOS.

Despite that knowledge, the FCA stated, “on numerous occasions” BOS

failed properly to understand and appreciate the significance of the information that it had identified despite clear warning signs that fraud might have occurred. There was insufficient challenge, scrutiny or inquiry across the organisation and from top to bottom. At no stage was all the information that had been identified properly considered. There is also no evidence anyone realised, or even thought about, the consequences of not informing the authorities, including how that might delay proper scrutiny of the misconduct and prejudice the interests of justice.

The FCA made clear that at the time, HBOS’s IAR was not subject to specific rules that the FCA’s predecessor agency, the Financial Services Authority (FSA), imposed on regulated entities, such as “conduct of business rules and complaints handling rules,”  because commercial lending “was and still is largely unregulated” in the in the United Kingdom.  He FCA, however, maintained that “BOS was required to be open and cooperative with the FSA, and the FSA would reasonably have expected to have been notified of BOS’s suspicions that a fraud may have been committed in May 2007.”

Not until July 2009 did BOS provide the FSA “with full disclosure in relation to its suspicions, including the report of the investigation it had conducted in 2007.”  Moreover,  BOS “did not report its suspicions to any other law enforcement agency”; rather, the FSA itself reported the matter to the National Crime Agency (then the Serious Organised Crime Agency) in June 2009.

The FCA was unsparing in its criticism of BOS’s failure to report these matters:

If BOS had communicated its suspicions to the FSA in May 2007, as it should have done, the criminal misconduct could have been identified much earlier. The delay also risked prejudice to the criminal investigation conducted by Thames Valley Police. Full disclosure would also have allowed the FSA, at an earlier opportunity, to assess BOS’s response to the issue and its approach to customers and complaints.

Ultimately, in 2010 the FSA appointed investigators to begin looking at BOS’s misconduct.  The FCA noted, however that that investigation  was “placed on hold” in 2013 “at the request of Thames Valley Police . . . until after the criminal prosecution of relevant individuals had been completed.”  The regulatory investigation was only restarted by the FCA in February 2017, when six individuals – including Scourfield, two of Scourfield’s business associates David and Alison Mills, and HBOS executive Mark Dobson – were sentenced to prison terms for their roles in the fraud.

In addition, the FCA announced that on June 20, it had banned Scourfield, Dobson, and David and Alison Mills “from working in financial services due to their role in the fraud at HBOS Reading.”  For each of the first three persons, the FCA found that he “is not a fit and proper person to perform any function in relation to any regulated activity,” as his conduct “has demonstrated a serious lack of honesty and integrity.” For Alison Mills, the FCA found that she is not a fit and proper person because she “has engaged in a financial crime offence.”

Note:  The FCA’s announcement does not make clear that its actions represent the final enforcement actions stemming from what The Guardian called an “extensive scheme” – in which Scourfield, Dobson, and David and Alison Mills all played key roles – “that drained the bank and small businesses of around £245m and left hundreds of people in severe financial difficulties.”

Financial crimes compliance teams in United Kingdom financial institutions should take note of the FCA’s actions in this case for two reasons.  First, they generally reflect the importance that regulators in multiple countries are attaching to financial firms’ timely reporting of suspicious transactions or conduct.  Second, these actions provide a precedent for the FCA to fine a financial firm or other regulated entity for failure to report certain suspicious activity, even if that entity is not clearly required to file a Suspicious Activity Report, if the FCA determines that the entity’s failure to report constituted  a failure to “to be open and cooperative” with regulators regarding that suspicious activity.