Tag: United Kingdom

AIFMD in the UK

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HM Treasury has published its response to its first consultation on the transposition of the Alternative Investment Fund Managers Directive (“AIFMD”) in the United Kingdom. The main thrust of the AIFMD will not hit Europe for a few years, but in the meantime there will be more uniform limitations on private placements in the European Union starting on July 22, 2013. Unfortunately, all of the EU countries are scrambling to get the new regulatory regimes in place. “Scrambling” may imply more activity than is really happening.

The United Kingdom has moved a step closer and published revised draft regulations under the AIFMD (.pdf). The good news is that the UK is proposing to provide a year of transition so that the requirements under the AIFMD for private placements won’t come into full effect until July 2014.

The draft regulations propose replacing the registration process for non-EU managers seeking to market their funds under the U.K. private placement regime with a simple notification procedure. You certify your compliance with the AIFMD. That way the fund manager does not have to wait for the approval of the Financial Conduct Authority before undertaking marketing.

That registration requirement is trouble under the AIFMD. Effectively, you need to go through the registration process and wait for approval before marketing in that EU country. There is no private placement passport. Of course, it may turn out that you end up with no investors in that country.

Now we need the other member countries of the EU to move forward so that European investors don’t get excluded from investment opportunities when the end of July comes around.

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Compliance Officer Banned in the United Kingdom

As a compliance officer, I often find that many lessons come from enforcement actions. Those actions imposed on compliance officers are especially instructive. The latest to catch my attention comes from the United Kingdom.

The Financial Services Authority levied a £14,000 fine and banned a compliance officer from performing any significant influence function in regulated financial services. The circumstances arose from an employee’s attempt to conceal losses after the collapse of Lehman Brothers in 2008.

Dr Sandradee Joseph was Compliance Officer at Dynamic Decisions Capital Management (DDCM), a hedge fund management company based in London. One of DDCM’s funds suffered catastrophic losses during the fall of 2008, losing 85% of its assets under management. A fund employee, rather than report the losses, decided to enter into a complicated bond transaction to create false profits. Essentially, the employee was buying bond units at a steep discount, but reporting a much greater value when calculating the fund’s NAV. The fund had lost $255 million, but the employee booked a $268 million gain on the bond transaction. A bond that the fund had only paid $5 million.

Three problems arose that the FSA thinks were instances of the compliance officer not doing her job.

The first was that the fund’s prime broker terminated its agreement with the fund because of the bond transaction. Any trade that causes the prime broker to leave should be a big red flag.

The second was an unhappy investor. The investor had put $48 million into the fund. The bond happened to violate some of its investment restrictions: maturity greater than 12 months, issued by an unlisted entity, no option to convert equity, and greater than 3% of the fund’s NAV. Violations of an investor’s investment guidelines should be a big red flag for a compliance officer.

The third problem was another unhappy investor. The bond transaction also violated this investor’s permitted investments limitation. A second big red flag that the compliance officer failed to remedy. This investor dug a bit deeper and felt that the bond may have been fraudulent.

The compliance officer tried a few defenses that sound weak to me. They sounded weak to the FSA as well.

  • The compliance officer’s role was a reporting function and it was up to individual employee to ensure compliance.
  • The compliance officer was not the fund’s lawyer and she could take a back seat on legal matters.
  • The compliance officer felt enough advisers were looking at the issue.
  • The compliance officer did not understand the bond and was relying on external lawyers to review it. (However, she never instructed a  law firm to to carry out due diligence on the bond.)
  • The compliance officer believed the bond was legitimate. (Even though she disclosed that she didn’t understand it.)

The FSA lays out the lesson learned: “In her role, if [the compliance officer] became aware of concerns that the firm was not complying with its regulatory obligations, she should have taken steps to ensure that these concerns were investigated, to verify if the concerns appeared to be legitimate, and if so to take appropriate action.”

As a compliance officer, I initially found the punishment to be on the harsh side especially since it seems to single out the compliance officer. Then I dug a little deeper and saw that criminal investigations were started by the SFO and the investors filed suit against DDCM.

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The London Olympics and the Bribery Act

The London Olympics in 2012 will be a test of strength, agility and endurance. That’s just be for the corporate sponsors trying to comply with the UK’s Bribery Act.

Unlike the US Foreign Corrupt Practices Act, the UK’s Bribery Act applies equally to payments made to foreign government officials as it does to payment made to domestic companies. Should a potential bribery case arise under the Bribery Act, the only defense of the organization is to show that it had “adequate procedures” in place to stop bribery. Guidance on what are “adequate procedures” will not be promulgated until at least early 2011.

It is estimated that £100m will be spent on hospitality during 2012 London Olympic games. It will be a compliance headache for companies with hospitality tents, events and other rewards for customers.

Here in Massachusetts, you can’t offer a public official tickets to a playoff game or World Series game. That’s true even if the official pays for the ticket. It’s considered special access and you are getting a benefit of access that is not available to the general public.

If you take that same position, maybe corporate sponsors should only be handing out tickets to Olympic events that are not sold-out. That sounds silly. But it may be one of the challenges faced with corporate sponsors at the London Olympics in 2012.

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Adequate Procedures to Prevent Bribery in the UK

On 14 September 2010, the United Kingdom’s Ministry of Justice  issued its Consultation Paper on what might be “adequate procedures” prevent bribery. Under section 9 of the Bribery Act, the only defense against criminal liability for a commercial organization which has “failed to prevent bribery” is that the organization had adequate procedures” to prevent bribery.

The consultation is a designed to seek public comment. Responses are due by November 8.

It lays out six principles for bribery prevention:

Risk Assessment – this is about knowing and keeping up to date with the bribery risks you face in your sector and market;
Top level commitment – this concerns establishing a culture across the organisation in which bribery is unacceptable. If your business is small or medium sized this may not require much sophistication but the theme is making the message clear, unambiguous and regularly made to all staff and business partners;

Due diligence – this is about knowing who you do business with; knowing why, when and to whom you are releasing funds and seeking reciprocal anti-bribery agreements ; and being in a position to feel confident that business relationships are transparent and ethical;

Clear, Practical and Accessible Policies and Procedures – this concerns applying them to everyone you employ and business partners under your effective control and covering all relevant risks such as political and charitable contributions, gifts and hospitality, promotional expenses, and responding to demands for facilitation demands or when an allegation of bribery comes to light.

Effective implementation – this is about going beyond ‘paper compliance’ to embedding anti-bribery in your organisation’s internal controls, recruitment and remuneration policies, operations, communications and training on practical business issues.

Monitoring and review – this relates to auditing and financial controls that are sensitive to bribery and are transparent, considering how regularly you need to review your policies and procedures, and whether external verification would help.

It also sets out a few scenarios and how the principles would be applied.

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UK Bribery Act Delayed

When I saw there was a press release from the UK’s Ministry of Justice, I was expecting an announcement of what it meant for a commercial organization to have “adequate procedures” to prevent bribery. That being the only affirmative defense under the Bribery Bill.

It turns out that implementation of the Bribery Act will be delayed until April 2011. They will start the regulatory process for guidance on procedures which commercial organizations can put in place to prevent bribery. That guidance is scheduled to be released in early 2011 in time for organizations to ramp up for the compliance deadline.

I view the UK Bribery Act as being more strict than the Foreign Corrupt Practices Act since it has no exclusion for “facilitation payments” and is not limited to government officials. The US DOJ and SEC have stepped up their enforcement of the FCPA which makes it a big concern for any company with international operations. We have yet to see how the UK government will enforce its Bribery Act.

In light of the delay, Transparency International is planning to publish its own guidance to “allow companies to get a ‘head start’ in tightening up their anti-corruption procedures.”

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Bribery in Britain

The British government is working on a new Bribery Bill “to reform the criminal law of bribery to provide for a new consolidated scheme of bribery offenses to cover bribery both in the United Kingdom (UK) and abroad.”

The Bribery Bill would replaces the offenses under the Public Bodies Corrupt Practices Act 1889, the Prevention of Corruption Act 1906 and the Prevention of Corruption Act 1916 with two crimes. The first makes it a crime to bribe another person. The second makes it a crime to accept a bribe.

The Bribery Bill also creates a discrete offense of bribery of a foreign public official and a new offense where a commercial organization fails to prevent bribery. This would create a British version of the US Foreign Corrupt Practices Act and and bring the United Kingdom compliant with its obligations under the OECD.

There is an affirmative defense for the failure of a commercial organization to prevent bribery: “adequate procedures.” The Bribery Bill requires the Secretary of State to publish guidance about procedures that a company can put in place to prevent bribery.

The Bribery Bill is widely expected to come into force later this year.

According to research from the Eversheds, many businesses are unaware of this new Bribery Bill, with 60% of businesses unaware that failing to prevent bribery will be a criminal offense.

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One in Two U.K. Companies Block Social Networking Web Sites

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Fulbright & Jaworski, the international law firm, just published their 6th Annual Litigation Trends Survey Report. It is an independent survey of senior corporate counsel from a wide range of industry sectors.

About half of the respondents (52% of U.K. and 46% of U.S.) claim to block employees from accessing social networking Web sites. Two in five of all corporates (42%) block the most popular personal social networking sites (such as Facebook, MySpace and Bebo) and 30% block business-related networking sites (LinkedIn and Plaxo). The YouTube web site is also blocked by more than a third of companies (37%).

Only 1/3 of the companies reported that they have no restrictions on access. Technology companies are the least likely to block social networking sites, with 56% of all tech companies saying they have no restrictions on such sites.

I found it interesting that 18% of U.K. companies have been asked to produce electronic information from such web sites as part of an electronic discovery request in legal proceedings.

Melanie Ryan, a Fulbright partner, commented, “For some businesses, networking sites can provide an efficient platform for keeping up-to-date with the latest developments and maintaining a profile in their industry. For those businesses that block access, such benefits are outweighed by the possible legal risks, including the inadvertent disclosure of confidential or proprietary information and the resulting claims or fines imposed by their regulators – not to mention, the security threat to their IT systems.”

But do they have a policy in place to let employees know what they should not be doing on these sites? Or are employees just doing those bad things at home or on their iPhone?

Blocking is not an effective policy.

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Self-Reporting Corruption in the UK

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As part of its renewed efforts to combat overseas corruption, the United Kingdom’s Serious Fraud Office published its new Approach of the Serious Fraud Office to Dealing with Overseas Corruption PDF Document .

Previously, the Serious Fraud Office saw its role as an after-the-event investigator and prosecutor, difficult for a company to engage except in the context of a formal investigation. The new policy statement shows a very different approach in which the Serious Fraud Office is offering to work with a company to avoid criminal prosecution.

What does this mean?

The Serious Fraud Office wants to encourage self-reporting. The benefit is that the Serious Fraud Office will more likely consider a civil, rather than criminal, outcome and the opportunity to manage publicity proactively. A negotiated settlement rather than a criminal prosecution means that the mandatory debarment provisions under Article 45 of the EU Public Sector Procurement Directive in 2004 will not apply.

What about the US Department of Justice?

If the case is within the jurisdiction of the DOJ and the Serious Fraud Office, they expect to be notified at the same time.

What do you need to do to avoid criminal prosecution?

Very soon after they receive the self-report and the acknowledgment of a problem, they want to establish the following:

  • Is the Board of the corporate genuinely committed to resolving the issue and moving to a better corporate culture?
  • Is the corporate prepared to work with the SFO on the scope and handling of any additional investigation the SFO considers to be necessary?
  • At the end of the investigation (and assuming acknowledgment of a problem) will the corporate be prepared to discuss resolution of the issue on the basis, for example, of restitution through civil recovery, a program of training and culture change, appropriate action where necessary against individuals and at least in some cases external monitoring in a proportionate manner?
  • Does the corporate understand that any resolution must satisfy the public interest and must be transparent? This will almost invariably involve a public statement although the terms of this will be discussed and agreed by the corporate and the SFO.
  • Will the corporate want the SFO, where possible, to work with regulators and criminal enforcement authorities, both in the UK and abroad, in order to reach a global settlement?

They are not offering an “unconditional guarantee” that there will not be a prosecution.

What about corporate officers?

There are no guarantees. There are a few questions that will influence their course of action:

  • how involved were the individuals in the corruption (whether actively or through failure of oversight)?
  • what action has the company taken?
  • did the individuals benefit financially and, if so, do they still enjoy the benefit?
  • if they are professionals should the SFO be working with the appropriate Disciplinary Bodies?
  • should the SFO be looking for Directors’ Disqualification Orders?
  • should the SFO think about a Serious Crime Prevention Order?

Conclusion

The Serious Fraud Office is trying to take the same approach that the Department of Justice is taking. Companies should self-investigate, self-report and negotiate to avoid the harshest sanctions.

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FCPA Opinion Procedure Release 08-02

FCPA Opinion Procedure Release 08-02 came at the request of Halliburton and its subsidiaries as they are looking to buy a UK well flow management company. They did not have enough time to complete the appropriate FCPA diligence on the target. Halliburton was concerned about inheriting FCPA liability as a result of its acquisition of the target company. There is a tight timeframe and a competing bid that prevents Halliburton from taking the steps that would ordinarily occur.