Going global: the resolution of cross-border investigations Aug 04 2014 Raj Parker, Michelle Bramley and Chris Morris News headlines are dominated by settlements arising out of financial services regulatory investigations. Firms often face huge fines as well as pressure to remove senior management involved in any wrongdoing. However recent settlements involving U.S. regulators have added a whole new dimension. Firms are now having to make admissions of guilt, become subject to intrusive monitorships and are being prohibited from conducting certain types of business. Some firms have also only narrowly avoided the withdrawal of banking licences. Regulators are increasingly cooperating across borders. So does this mean that we will see U.S. resolution tactics being adopted by regulators in other jurisdictions? This article, the sixth and final in the series, looks at recent trends in the settlement of cross-border investigations and identifies some practical issues that firms need to consider when resolving such investigations. Freshfields Financial Services: Investigations & Enforcement The globalisation of regulatory investigations and enforcement Raj Parker Since the global financial crisis, financial services regulators around the world have adopted a more interventionist approach to their regulation of firms. Regulatory investigations and enforcement actions have proliferated and now increasingly involve criminal as well as anti-trust authorities. Regulators and prosecutors across jurisdictions are exchanging information and often coordinating in relation to investigations. Cross-border cooperation is now being promoted as an essential part of the regulatory tool-kit. Examples of cooperation In 2013/2014, the Financial Conduct Authority (FCA) received 1022 formal requests for assistance from overseas regulators, 52 of those requests alone were from other regulators requesting assistance in relation to FX investigations. In 2013, the U.S. Securities and Chris Morris Exchange Commission (SEC) made 717 requests of overseas regulators and received 508 requests (SEC 2013 Annual Performance Report), while the Hong Kong Securities and Futures Commission dealt with 107 overseas enforcement-related requests and made 113 requests of its own. The trend towards regulatory cooperation and coordination is set to continue. The International Organization of Securities Commissions (IOSCO) has reinforced its standard on cross-border cooperation. IOSCO regulates more than 95 percent of the world's securities markets and has adopted measures to encourage 28 non-signatory
members to sign the IOSCO Multilateral Memorandum of Understanding on cooperation and exchange of information, which facilitates cross-border investigation of market misconduct and enhances global enforcement by providing a vehicle through which securities regulators share investigative material. Within the European Union, the Market Abuse Regulation and MiFID 2 will enhance existing provisions for the exchange of information and cooperation and coordination (for example, arts 24 26 of the Market Abuse Regulation and arts 79 81 of MiFID 2, both of which were published in the Official Journal on 12 June 2014). Regulatory investigations and enforcement are going global and firms need to adapt their strategies for resolution of regulatory investigations to reflect this. Michelle Bramley Recent trends in global settlements Tougher settlements The cost of settlement has risen significantly in recent years. Regulators on both sides of the Atlantic are imposing record fines on firms involved in misconduct. In 2013, the total value of fines handed down by the FCA reached its highest ever level and the average size of corporate penalties imposed by the FCA rose markedly. In December 2012, the FSA imposed its highest ever individual fine when UBS was penalised 160 million for misconduct relating to the London Interbank Offered Rate (Libor). That sum has however been dwarfed by recent fines by U.S. regulators. In November 2013, JPMorgan's $13 billion civil settlement with U.S. authorities for misleading investors regarding the value of mortgage backed securities became the largest settlement ever reached between the U.S. government and a single corporation. It is unlikely that FCA fines (or those of other regulators) will reach the eye watering amounts imposed recently by the U.S. but we expect that the trend internationally will be for yet higher fines. Regulators are also likely to penalise firms heavily if they fail to cooperate with their investigations. For example, the FCA found that JPMorgan had failed to be open and co-operative with the FCA as the 'London Whale' crisis unfolded, in breach of Principle 11 of the FCA's Principles for Businesses, which resulted in a significant uplift to JPMorgan's fine. Global settlements are also likely to come with a high price tag. In June 2012, Barclays paid $453 million to UK and U.S. authorities in a civil settlement of allegations that it manipulated benchmark interest rates. In September 2013, JPMorgan reached a global settlement of the 'London Whale' investigation by paying a total of approximately $920 million to U.S. and UK regulators. Meanwhile, in October 2013, Rabobank announced a $1 billion global settlement of Libor related misconduct with regulators and prosecutors in the UK, U.S., the Netherlands and Japan. The table at Appendix 1 below includes recent examples of global settlements. In the past, the U.S. Department of Justice has frequently made use of Deferred Prosecution Agreement's (DPAs) where firms agree to pay a fine and have their prosecution deferred and subsequently dismissed as long as certain conditions relating to the settlement are fulfilled. For example, HSBC was able to enter into a DPA with U.S. regulators in 2012 in exchange for paying a penalty of $1.9 billion. That trend looks set to be mirrored by the UK
regulators and prosecutors in the light of the introduction of DPA's in the UK in February this year. However the latest trend now appears to be for U.S. regulators to move away from DPAs towards demanding that firms make guilty pleas and pay even more substantial fines. For example, in May 2014, Credit Suisse was forced to plead guilty to tax evasion as part of a settlement agreement, which was accompanied by a $2.6 billion fine. It remains to be seen whether UK authorities will also begin to insist on criminal admissions as part of a settlement. Firms should however prepare themselves for the increased risk of criminal prosecution from UK regulators and prosecutors as well as potentially from others overseas. Regulators are also becoming more aggressive in other aspects of their settlement negotiations. U.S. regulators for example, are imposing lengthy monitorships (where an external individual is appointed for a period of time (in some cases up to four years) to test the strength of a firm's compliance programmes) as part of settlement deals and even threatening the suspension or variation of a firm's banking licence. For example, in 2012 Standard Chartered Bank was threatened with the suspension of its banking licence by the New York State's Department of Financial Services for economic sanctions violations. Again, we anticipate that these trends may well be followed by regulators and prosecutors elsewhere. Pursuit of individuals Regulators and prosecutors are also increasingly looking to hold directors and senior management at firms personally accountable for corporate failings. The Credit Suisse investigation in the U.S. resulted in the indictment of eight Credit Suisse employees. In the UK and U.S., individuals allegedly involved in the manipulation of benchmark interest rates are being prosecuted and face jail sentences if convicted. This trend is likely to continue. For example, U.S. regulators have a growing appetite to target individuals and in the UK the soon to be implemented Senior Managers Regime will introduce criminal sanctions for senior management at banks that are guilty of 'reckless misconduct'. Follow on litigation In some cases, a regulatory settlement or enforcement action may result in follow on action by other regulators, or civil litigation by third parties. A common concern is whether documents disclosed to a regulator in which an entity admits to certain conduct may prejudice continuing or potential litigation. This is a particular concern in the U.S. and other jurisdictions where claimants use findings by regulators (or admissions) of regulatory breach in support of civil claims. U.S. plaintiffs increasingly file civil claims on the basis of an announcement by regulators that an investigation has been commenced, as demonstrated by the number of class action lawsuits that investors have already filed in the U.S. against international banks for losses allegedly incurred by manipulation of foreign exchange markets and precious metals markets. It appears that this trend has been exported to the UK and elsewhere in Europe. The recent case of Graiseley Properties Ltd v Barclays Bank [2012] EWHC 3093 is one such example. In Graisely, the claimants were allowed to amend their claim to plead Barclays' manipulation of Libor (contained in Barclays' global settlement) to support their claim of alleged mis-selling of an interest rate swap.
Practical issues to consider when resolving cross-border investigations A firm entering into settlement negotiations with one or more regulators or prosecutors in the context of a crossborder investigation should attempt as far as possible to reach a coordinated settlement involving all entities. This has the advantage of minimising negative publicity and potential impact on a firm's share price. This may not however always be possible and in some circumstances regulators and prosecutors may actually compete with each other to be the first to reach a resolution. Where possible, agreement should also be reached as to which regulators or prosecutors will take the lead on settlement. If a global settlement is not feasible, a firm will need to consider the impact that settlement with one or more regulators or prosecutors will have in relation to any ongoing investigations or regulatory proceedings with other regulators or prosecutors, or any potential litigation involving third parties. Some regulators (such as the UK FCA) have formalised settlement processes that provide for discounts where settlements are concluded at an early stage. A firm should carefully consider whether such processes require admissions to be made. Some regulators or prosecutors (such as in the UK or U.S.) may insist that a firm or person who has been disciplined agrees not to dispute the facts and matters contained in the enforcement notice or settlement order as a pre-condition of the settlement. Firms need to consider the impact of this on any outstanding regulatory or criminal investigations and actual or potential civil litigation. Where regulators do not encourage settlement as a matter of public policy (such as BaFin in Germany, Consob in Italy), there may be scope for attempting to negotiate an informal agreement where the firm accepts a sanction in return for regulatory action being discontinued.
Appendix 1- Examples of recent global settlements Date Firm Investigation Regulators involved June 2012 Barclays LIBOR / EURIBOR manipulation (See: FSA Press Release FSA/PN/070/2012) US: US Commodities Futures Trading Commission (CFTC), Department of Justice (DoJ) December 2012 UBS LIBOR / EURIBOR manipulation (see FSA Press Release FSA/PN/116/2012)). US: CFTC, DoJ, SEC Switzerland: Swiss Financial Market Supervisory Authority (FINMA) February 2013 RBS LIBOR manipulation (see FSA Press Release FSA/PN/011/2013) Japan: Japanese Financial Services Authority (JFSA) US: CFTC, DoJ, FBI Singapore: Monetary Authority of Singapore September 2013 ICAP LIBOR manipulation (see FCA Press Release FCA/PN/90/2013) US: CFTC, DoJ September 2013 JP Morgan London Whale investigation, (see FCA Press Release FCA/PN/88/2013) UK: FCA US: SEC, OCC, Federal Reserve October 2013 Rabobank Serious LIBOR-related misconduct (See: FCA Press Release FCA/PN/100/2013; DOJ Press Release (http://www.justice.gov/opa/pr/2 Japan: JFSA Netherlands: De Nederlandische Bank, Dutch Public Prosecutor s Office UK: FCA US: DOJ, CFTC
013/October/13-crm- 1147.html); and Dutch Public Prosecutor s Office Press Release (http://www.om.nl/algemene_on derdelen/uitgebreid_zoeken/@ 161679/rabobank-pays-dutch/) Raj Parker is a partner, Michelle Bramley is global head of practice development and Chris Morris is an associate in the Financial Institutions Disputes Group at Freshfields Bruckhaus Deringer LLP. All three authors are contributors to the Freshfields Bruckhaus Deringer LLP third edition of "Financial Services: Investigations & Enforcement". The views expressed are their own.