REGULATORY & CRIMINAL ENFORCEMENT FEBRUARY 2013

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1 REGULATORY & CRIMINAL ENFORCEMENT FEBRUARY 2013 The Netherlands News New legislation AFM fines Bribery International News Insider trading and market manipulation FCPA violations US and UK settlements Compliance Export control and sanctions The Netherlands News New legislation Revision of preliminary investigation phase Two acts dealing with the position of examining judges in criminal proceedings and revising rules concerning case files came into force on 1 January see also the RCE Newsletter of October Prevention of money laundering and financing of terrorism Amendments to the Dutch Act on money laundering and prevention of terrorist financing and to

2 its counterpart for the BES countries also took effect on 1 January The legislative changes implement recommendations made by the Financial Action Task Force ("FATF") with regard to: client due diligence notification of unusual transactions criminal and civil indemnification of institutions that made notifications exchange of information between supervisors See also the RCE Newsletter of July 2012 The European Commission adopted a proposal on 5 February 2013 to implement the FATF recommendations in two directives concerning money laundering and fund transfers. These are: a directive on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing a regulation on information accompanying transfers of funds to secure "due traceability" of these transfers The two proposals allow reinforcement of the sanctioning powers of the competent authorities and strengthen cooperation between the relevant agencies in the different member states. The proposals are currently pending with the European Parliament and the Council of Ministers. Implementation of European evidence warrant A bill implementing the Council Framework Decision on the European evidence warrant ("EEW") was published on 10 January It is not yet known when the bill will enter into force. The Framework Decision is aimed at fast and efficient cooperation between Member States in collecting and transferring (existing) evidence in criminal cases. Where necessary, evidence may be obtained and transferred by a search, an order to hand over documents, or a demand for information. This could also concern information already held by criminal investigation agencies. The EEW is issued by the judicial authorities of the requesting member state and carried out by the authorities of the member state on whose territory the objects, documents or data are located. The Framework Decision does not cover collection of future information. Fines and periodic penalty payments in case of violation of EU regulations A decree enabling the Netherlands Authority for the Financial Markets ("AFM") and the Dutch Central Bank ("DNB") to impose a fine or periodic penalty payment on parties violating a

3 European regulation was published on 8 November An annex to the decree lists the regulations and provisions for which a fine or penalty payment may be imposed. The majority of the decree's provisions took effect on 1 January Changes to accountancy law The First Chamber of the Dutch Parliament adopted a bill on the accountancy profession on 11 December Most provisions of the bill entered into effect on 1 January The bill merges the Netherlands Organisation of Accounting Consultants (NOvAA) and the Royal Netherlands Institute of Registered Accountants (NIVRA) into one organisation, the Netherlands Institute of Chartered Accountants (NBA). The bill as adopted will bring significant changes to the accountancy profession. These include: Compulsory rotation of accountancy firms. Accountancy firms may provide statutory audit services to public interest organisations for no more than eight consecutive years. After this, they will have to observe a two-year cooling off period before resuming statutory audit services. These new compulsory rotation rules will not come into force until 1 January A requirement for audit firms to separate audit and advisory services. This means that accountancy firms may no longer provide both audit and advisory services to public interest organisations. A requirement for public interest organisations to give prior notification to the AFM of their intention to appoint an accountancy firm to perform audits. Penalisation of terrorism financing A bill on the penalisation of terrorism financing was submitted to the Second Chamber of Parliament on 22 November In submitting this bill, the Netherlands is meeting FATF and other international obligations in the fight against the financing of terrorism. In a report issued in early 2011, the FATF expressed criticism of the way in which terrorism financing was penalised in the Netherlands, which was different from the approach adopted by most other FATF member states. To address this criticism, the new bill contains changes to the Dutch Criminal Code, and its equivalent in the BES countries, making financing of terrorism a separate criminal offence. AFM fines AFM issues fine for passing on inside information The AFM issued a EUR 2,500 fine to a securities trader on 10 December 2012 for passing on inside information regarding an imminent share issue by a listed company. The recipient of the

4 fine was employed as an equity sales trader by an investment company that was assisting the issuer. The trader shared his knowledge about the issue with a client, even though he knew that he was not allowed to do so under Dutch financial laws. The AFM ruled that the trader thus violated the statutory prohibition on disclosure. The base amount for a fine for this type of violation is EUR 2,000,000, but as the offender's financial capacity was limited, the amount was reduced to EUR 2,500. AFM fines AFAB for inadequate safeguarding quality of financial services provision AFAB Holding N.V. ("AFAB") was fined EUR 6,000 by the AFM on 5 August 2010 because employees of AFAB Geldservice B.V. ("AFAB Geldservice") had failed to provide adequate professional services in concluding consumer and mortgage credit agreements. According to the AFM, AFAB failed to demonstrate that enough managers holding relevant qualifications were available to ensure quality of service. AFAB also failed to show that AFAB's and AFAB Geldservice's operations were designed to safeguard the professional competence of their financial service provision to consumers. The District Court reduced the fine to EUR 5,400 on 1 November AFM fines Goudse Levensverzekeringen N.V. The AFM fined Goudse Levensverzekeringen N.V. ("Goudse") EUR 200,000 on 27 December The reasons for this fine were that, according to the AFM, Goudse had supplied documents to customers omitting important information such as the right to or option of value transfer. This information should be provided to a departing member of a pension scheme according to the AFM. As a result of the missing information, the AFM was of the opinion that relevant members may have been unable to make sound choices about their financial situation. Bribery OECD report on implementation of anti-bribery convention in the Netherlands The OECD concluded in a report at the end of 2012 that the Netherlands should increase its efforts to enforce foreign anti-bribery laws. According to the OECD, 14 out of 22 foreign bribery allegations in the Netherlands did not trigger an investigation. The report made a number of recommendations to improve this, including: Foreign bribery cases concerning Dutch individuals or companies should be proactively investigated, even if other jurisdictions may be involved. More resources and manpower should be provided to Dutch investigation and prosecution authorities to detect and investigate foreign bribery more effectively.

5 The financial sanctions for legal entities should be increased. A bill extending existing measures to combat financial and economic crime will be submitted to the Second Chamber of parliament in early Under the bill, fines issued to a company can be linked to the company's turnover, and the maximum prison term for foreign bribery is increased from four to six years. The bill also introduces a faster procedure for situations in which police and public prosecutors seek access to information covered by legal privilege. See also the RCE Newsletter July 2012 for more information about this bill. The Dutch public prosecution service has promised to take a more proactive approach when there are signs of foreign bribery and increase its international cooperation. Public prosecutors reach settlement with Ballast Nedam Ballast Nedam ("BN") reached a EUR 17.5 million settlement with the Dutch public prosecution service in an international bribery case. BN will pay a EUR 5 million fine and waive a tax refund of EUR 12.5 million. BN is alleged to have paid bribes to foreign intermediaries in the period Following an internal investigation, BN brought the issue to the attention of the authorities in January This triggered an investigation by the FIOD (Fiscal Intelligence and Investigation Service). The settlement also ends a criminal case concerning bribery of a Dutch government official. In connection with the settlement, BN has tightened its compliance policy and drawn up new compliance guidelines. International News Insider trading and market manipulation New rules against benchmark manipulation In connection with investigations into possible rate fixing by banks, the European Commission has amended its proposals for regulation on insider trading and market manipulation. Manipulation of benchmarks such as LIBOR and EURIBOR will be explicitly prohibited and subject to sanctions. The EU's justice ministers agreed to the Commission's amended proposals in December 2012 and the European Parliament is expected to discuss the proposals in May ESMA and EBA have drawn up the following draft guidelines for the setting of EURIBOR and for the supervision of banks involved in the setting process: Report on the administration and management of EURIBOR Principles for Benchmarks-Setting Processes in the EU EBA Recommendations on supervisory oversight of activities related to banks

6 participation in the EURIBOR panel IOSCO is holding a consultation until 11 February 2013 on rules for and supervision of financial benchmark setting. Former CEO and CFO of Porsche prosecuted for market manipulation The German justice department has charged the former CEO and CFO of Porsche with market manipulation. They are alleged to have publicly denied that in the period from March through October 2008 Porsche was interested in a takeover of Volkswagen, while preparations for this takeover had already started. This inaccurate information caused severe losses to traders speculating on a lower share price on the basis of the public statements, according to the authorities. Four banks found guilty of fraud in Italy A court in Milan, on 9 January 2013, found Deutsche Bank, JPMorgan Chase, UBS and Depfa Bank guilty of fraud. Employees of these banks sold derivatives to the city of Milan in 2005, reportedly lying about the risks of the transactions and causing the city to incur significant losses. The Public Prosecutor demanded prison sentences of up to 12 months for nine bankers. The Italian court handed down sentences of 15 days to eight months. In addition, each bank was fined EUR 1 million. Earlier this year, the four banks reached a civil settlement of EUR 1.7 billion with the city of Milan. Ex-SAC analyst given two years probationary sentence A former technology analyst at SAC Capital subsidiary Sigma Capital cooperated with an US government's investigation of insider trading. He was sentenced by a US federal court to a two-year probationary sentence for passing on non-public information regarding Cisco Systems. The analyst pleaded guilty last year to tipping a former Sigma Capital portfolio manager and the founder of Whitman Capital LLC hedge fund. In cooperating with the investigation he incriminated 20 other people in insider trading. Former CFO Xilinx Inc. charged with insider trading The Galleon case has proven to be a major case for the US authorities (as previously reported in our RCE Newsletters April 2012 and July 2012). The founder of Galleon Group, who is serving an 11-year prison sentence, has already paid USD 63.8 million in criminal penalties and was also ordered to pay a fine of USD 92.8 million to the Securities Exchange Commission ("SEC"), recently agreed to pay a disgorgement of about USD 1.5 million in a civil

7 lawsuit that was filed by the SEC. In addition, the former CFO of Xilinx Inc., a former associate of the Galleon Group, was charged by the SEC for allegedly providing inside information from internal company reports in December The former CFO has agreed to pay a USD 1.75 million fine to the SEC to settle the charges. FCPA violations Allianz agrees to pay settlement for violating the FCPA Allianz SE ("Allianz") has agreed to pay USD 12,396,423 to settle charges of violating the US Foreign Corrupt Practices Act ("FCPA"). The FCPA prohibits US persons and companies from bribing foreign officials to obtain business. The SEC brought charges against the German insurer for paying bribes to government officials in Indonesia. In total, the SEC discovered 295 insurance contracts on government projects that Allianz had obtained by paying over USD 650,000 in bribes to Indonesian officials. According to the SEC, the German insurer made more than USD 5,300,000 in profit from these government contracts. Allianz did not plead guilty, but agreed to settle the charges and refrain from further violations. Although Allianz is not a US-based company, the SEC claimed authority because Allianz stock was listed on the New York Stock Exchange during the period in which the payments to government officials were made. Compliance JP Morgan targeted by US regulators for lapses in risk management The US Federal Reserve and the Office of the Comptroller of the Currency have taken official enforcement actions against JP Morgan Chase. These actions target lapses in risk management at the US banking giant as well as money laundering controls. The Federal Reserve required the board of JP Morgan to submit a plan within 60 days that targets the improvement of risk management at the bank. The Office of the Comptroller required the board to appoint a compliance committee which will have the task of investigating how risk management can be improved. The enforcement actions are related to the USD 5.8 billion trading loss in derivatives that JP Morgan suffered last year. US and UK settlements 2012: record breaking year for US corporate settlements In 2012, the Department of Justice ("DoJ") reached corporate settlements for a total amount of USD 9 billion, which was more than USD 3 billion higher than the previous high set in Important contributions to this record-breaking amount were made by GlaxoSmithKline, which paid a fine of USD 3 billion for drug misbranding, the British bank HSBC ("HSBC"), which

8 paid a fine of USD 1.9 billion for money laundering compliance failures, and UBS, which agreed on a settlement of USD 1.5 billion for fraud. See below for more information. HSBC reaches settlement with US authorities over flaws in compliance HSBC reached a settlement with US authorities for a total sum of USD 1.9 billion. This amount consisted of a forfeit of USD 1.25 billion in proceeds that HSBC gained by its illegal activities, while USD 655 million was added to this sum as a fine. HSBC failed to maintain adequate measures against money laundering, according to the US authorities. The DoJ announced that Mexican drug cartels conducted operations through HSBC for a total amount of USD 881 million. HSBC was also charged with violating US sanctions against Iran, Libya, Sudan, Burma and Cuba. In July 2012, a US Senate subcommittee concluded that HSBC provided an easy gateway into the US financial system for all kinds of illicit money. UBS pays hefty fine for Libor manipulation UBS was the second international bank to be fined for activities that involved manipulating LIBOR, the inter-bank lending rate, according to international authorities. The Swiss bank reached an agreement with the US, the UK and Swiss regulators on a USD 1.4 billion fine. USD 1.2 billion will be allocated to the DoJ, while the British Financial Services Authority ("FSA") will receive USD 160 million and the Swiss Financial Market Supervisory Authority will receive USD 63 million. In June 2012, British bank Barclays was fined an amount of USD 450 million by US and UK regulators for its apparent participation in the manipulation of LIBOR. Other banks are still under investigation for similar conduct. Standard Chartered agrees to pay total of USD 667 million in settlement The British bank Standard Chartered agreed to pay USD 327 million in a settlement with the U.S. Federal Reserve Board, the U.S. Treasury, the DoJ and the District Attorney for New York County. In August 2012, the bank accepted a USD 340 million fine imposed by the recently created New York Department of Financial Services. Standard Chartered was accused of violating US sanctions against Iran and conducting money laundering activities for residents of Iran. According to the Department of Financial Services, the violations of Standard Chartered involved more than 60,000 transactions which occurred from 2001 to 2008 and involved a total of USD 250 billion transferred into Iran. RBS third large bank to reach settlement over Libor manipulation activities The Royal Bank of Scotland ("RBS") has reached a settlement with the FSA, the American Commodity Futures Trading Commission and the DoJ over LIBOR manipulation that took

9 place at the British banking giant. RBS will pay a total of USD 612 million in fines, of which the largest share will be appropriated by US authorities. Investigations have revealed that 21 RBS employees were involved in the manipulation of LIBOR by submitting incorrect lending rates. RBS, 81 per cent of which is owned by the British state, has announced that it will pay a large part of the fine (USD 470 million) by clawing back bonuses that have already been paid to employees that were involved in the illegal activities and cutting the bonus pool for the year The head of investment banking at RBS will step down as a result of the scandal. Difference in LIBOR fines between US and UK sparks row The large differences between the shares in LIBOR fines of UK and US regulators are under increasing scrutiny by UK politicians. They demand that the FSA receive a larger part of future fines levied on banks for LIBOR manipulation. Of the fines that Barclays and UBS were given, the UK authorities (only) received USD 253 million, while the US authorities pocketed more than USD 1.5 billion. UK politicians consider this split wholly inappropriate, especially when the banks concerned are British. The row seems to have had little effect if one looks at the settlement that the British RBS struck on 6 February 2013 with British and US authorities. Of the USD 612 million fine that RBS has agreed to pay in connection with LIBOR-rigging activities, (only) USD 137 million will be paid to British authorities while US authorities will receive USD 475 million. US banks agree to settle mortgage-linked disputes with regulator and home-owners Several large commercial US banks have settled legal disputes with homeowners over illegal foreclosure practices. The banks, which include Citigroup, Bank of America, JP Morgan and Wells Fargo, agreed to pay a total of USD 8 billion in compensation. At the same time Bank of America struck a deal with Fannie Mae regarding a conflict over mortgages that Countrywide Financial sold to Fannie Mae before the outbreak of the credit crisis. Countrywide Financial was subsequently acquired by Bank of America in Bank of America agreed to pay Fannie Mae USD 3.6 billion in compensation, while it would buy back a fraction of the disputed mortgages for USD 6.75 billion. Bank of America is said to regret the acquisition of Countrywide, as settlements and claims regarding this company have already cost the Bank of America USD 40 billion. Export control and sanctions China state-controlled nuclear company pleads guilty to illegal exports to Pakistan Nuclear Industry Huaxing Construction Co., Ltd., ("Huaxing"), a company with links to the Chinese government, has pleaded guilty in the US to export control violations. It is probably the first occasion where such a company has done so. Huaxing was ordered to pay a criminal

10 and administrative fine of more than USD 3 million. The fine comes after an investigation of illegal exports of high-performance epoxy coatings to the Chashma II Nuclear Power Plant in Pakistan. The plant is owned by the Pakistan Atomic Energy Commission ("PAEC"), an entity on the U.S. Department of Commerce s Entity List. The investigation was led by the U.S. Department of Commerce s Bureau of Industry and Security. Huaxing agreed to the maximum criminal fine of USD 2 million, USD 1 million of which will be stayed pending its completion of five years of corporate probation. Huaxing is required to implement an export compliance and training program to comply with US export laws. Huaxing will also pay an administrative fine of USD 1 million as part of an agreement with the U.S. Department of Commerce and be subject to multiple third-party audits over the next five years to ensure the efficacy of its compliance with US export laws. Former MD of PPG Paints Trading sentenced for conspiring to illegal export A former managing director of PPG Paints Trading Co., Ltd., was sentenced to a year in prison for conspiracy and violating the U.S. International Emergency Economic Powers Act. The former MD was also ordered to pay a USD 100,000 fine and to perform 500 hours of community service. In 2011 she also settled an administrative proceeding brought by the U.S. Department of Commerce regarding the same subject matter as her criminal case. She agreed to pay a civil penalty of USD 200,000 with another USD 50,000 payment suspended. She will be placed on the Denied Persons list for a period of five years with an additional five years suspended, and will be prohibited from directly or indirectly participating in any transaction involving a commodity, software or technology exported or to be exported from the US that is subject to Department of Commerce regulations. In both cases, the former MD is accused of conspiring to export, re-export, and trans-ship highperformance epoxy coatings to the Pakistani Cashma II Nuclear Power Plant. The PAEC, and also its subordinate nuclear reactors and power plants, are on the list of prohibited end-users under the Export Administration Regulations. A restricted end-user, to re-export or trans-ship any items subject to the U.S. Export Administration Regulations, would first need to obtain a licence from the U.S. Department of Commerce. Singapore nationals extradited from Singapore to US in connection with plot to illegal export Two Singapore nationals have been arrested by Singaporean authorities and extradited to the US to stand trial in connection with an alleged fraud conspiracy involving the unlawful export of 55 military antennas from the US to Singapore and Hong Kong. The defendants are accused of conspiracy to defraud the US by violating the U.S. Export Administration Regulations. If convicted, they could face a potential sentence of five years in prison. According to the indictment, both men allegedly conspired to defraud the US by causing a total of 55 cavity-backed spiral antennas and biconical antennas to be illegally exported from a

11 Massachusetts company to Singapore and Hong Kong without the required licence. These military antennas are controlled for export as US munitions and are used in airborne and shipboard environments. According to the indictment, the defendants have conspired to undervalue the antennas to circumvent US regulations on the filing of shipper s export declarations to the US government and used false names and front companies to obtain the antennas illegally from the US. Contact If you have any questions or require further information regarding this newsletter please contact: Patrick Ploeger T E patrick.ploeger@debrauw.com Marnix Somsen T E marnix.somsen@debrauw.com Roan Lamp T E roan.lamp@debrauw.com You might also like... Newsletter Financial Markets - February 2013 Newsletter The Netherlands: the country of cross-border injunctions in IP Legal Alert Directive combating late payment in commercial transactions implemented in the Netherlands PRIVACY STATEMENT