overseas banks legal and compliance forum€¦ · –3 banks had s166 reviews imposed ... •...
TRANSCRIPT
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Eversheds LLP’s Overseas Banks Legal and Compliance Forum
An introductory seminar
25 February 2015
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Agenda
• Introduction
• An in-house guide to dealing with English Court Orders including:
– freezing injunctions;
– Norwich Pharmacal/Bankers Trust orders; and
– registration of foreign judgments
• Update on recent regulatory developments
• Q&A
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Eversheds LLP’s Overseas Banks Legal and Compliance Forum
An in-house guide to dealing with English
Court Orders
David Flack, Partner, Eversheds LLP
25 February 2015
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Litigating before the English Court
• Over the past 5 years over 62 % of litigants in Commercial Court cases were based outside of England & Wales
• A large proportion are from the Middle East, Russia and CIS
• So, why do international parties like to litigate in the English Court?
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So, why do international parties like to litigate in the English Court?
• The co-existence of London’s reputation as an international business centre with its reputation as a global legal centre is no coincidence. Business requires expert legal advice and a predictable and stable legal system in which to operate. The English courts are a safe and neutral forum for the resolution of disputes, overseen by a strong and famously independent judiciary – The Honourable Mr Justice Carr, 19 September 2013
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Typical English Court Orders: Interim Remedies
• Freezing Injunctions
• European Account Preservation Orders
• Norwich Pharmacal Orders
• Bankers Trust Orders
• Registration Orders (in respect of foreign judgments)
• Third Party Debt Orders
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Freezing injunctions – key points
• A freezing order is an:
– interim remedy that restrains a party from disposing of or dealing with his assets
– its effect is to preserve the D’s assets until a final judgment can be obtained/enforced
• They are commonly sought where C has been the victim of a fraud
• A freezing order can be made in respect of assets situated domestically or worldwide
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Freezing injunctions - key points
• A freezing order will contain a penal notice. If breached, there is a threat of contempt proceedings – assets can be seized by the Court or a prison sentence
• This will extend to a bank (and its employees) which has been served with a freezing order and is within the jurisdiction of the English Court
• Liability will arise from conduct which assists or encourages D to breach the terms of the order
• But no liability of 3rd party banks in negligence to the applicant Commissioners of Customs & Excise v Barclays [2007] 1 AC 181
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Practical considerations – Which Assets are caught?
• A freezing order may relate to domestic and/or internationally held assets
• If English assets only, the Bank is only obliged to freeze those assets within the jurisdiction not those located offshore or based in other jurisdictions
• If a WFO and the Bank’s employees within the jurisdiction can exercise control over those assets may be caught
• Check whether the order includes a schedule of specific assets
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Practical considerations – Piercing the Corporate Veil
• where a company or trust is used to hold assets which are controlled by and held for the benefit of the D
• if assets beneficially belong to a 3rd party but D has rights, the value of which depends on the preservation of those assets
• If the transfer of an asset is regarded as a “sham”
• Where freezing orders are obtained against individuals always check related corporate entities and whether there is any reason to suspect that that co’s assets may be impacted
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Other Practical considerations
• As a non-party affected and served with a freezing order, a bank is entitled to certain documents under CPR 25 PD 9
• Check the relevant protections afforded to third parties are included in the Freezing Order (especially a WFO) – check against the commercial court standard template
• You are entitled to read the Defendant’s identifier details narrowly
• Freezing orders do not effect a bank’s right of set off – i.e. where D has two bank accounts, one in credit and the other in debit
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European Account Preservation Orders
• Came into force on 17 Jul 2014 and will applied by participating Member States from 18 Jan 2017
• UK and Denmark have not opted in therefore accounts located in the UK cannot be attached
• However, UK and Danish account holders as well as banks operating in participating Member States will be impacted
• EAPOs are alternative protective measures to national remedies
• It will allow C to secure or freeze monies in D’s bank accounts across Europe
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EAPOs – key points
• Banks will be under an obligation to “freeze” accounts subject to an EAPO “without delay”
• If C is unable to identify the bank(s) with which D holds accounts, he can request that such info is obtained by the court of issuance
• The Regulations do not expressly address a bank’s right of set off – it provides that the EAPO has the same rank as an “equivalent national order” of the Member State
• The Regulation appears complex and will undoubtedly increase the burden on banks. Banks will have to review Ts&Cs and processes
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Norwich Pharmacal and Bankers Trust
• An NPO is a form of disclosure order which enables C to:
– identify a wrongdoer
– obtain full information about a wrongdoing
• BTOs are only available against banks and require banks to provide information ordinarily protected by duties of confidentiality. They assist C in:
– tracing/preserving assets
– police a freezing order
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NPOs/BTOs - Practical tips
• Ensure that:
– the date range requested is appropriate and not too wide and the deadline for the Bank’s response is realistic
– Generally entitled to notice (even if informal)
– the Bank complies with any gagging order –beware of tipping off
– the Bank’s costs of complying with the Order are provided for (reasonable photocopying costs etc)
– Generally banks adopt a neutral stance in response to NPOs/BTOs
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Registration of foreign judgments
• Final judgments made by foreign courts can be generally be registered for enforcement in England and Wales
• The English courts are often used as a method to enforce foreign judgments where assets exist within the jurisdiction
• Often accompanied or followed by a Third Party Debt Order (TPDO) – remember a bank account in credit is simply a debt owed by the bank to its customer
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Practical guidance
• Watch out for letter of credit disputes (the bank becomes the defendant)
• Also watch out for English orders registering foreign court interim freezers (may well lack the standard protections – no case law on this)
• There are often short time periods within which to act when served with a registration order, therefore it is key to act quickly on receipt and seek legal advice (often the bank may know little about the circumstances of the foreign judgment/award)
• Ensure the legal team can be briefed about the issues and brought up to speed quickly
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Eversheds LLP’s Overseas Banks Legal and Compliance Forum
Update on regulatory developments
Greg Brandman, Partner, Eversheds LLP
25 February 2015
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Agenda
• FCA Thematic work
– AML and sanctions controls
• Guidance consultation
– Conflicts of interest
• HMT consultation on extending the new senior managers regime to the UK branches of overseas banks operating in the UK
Recent regulatory developments
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FCA Financial Crime Thematic Review
• How small banks manage money laundering and financial crime risk
• 21 banks reviewed – serious issues found at 6 banks
– 4 banks subjected to restrictions
– 3 banks had s166 reviews imposed
– 2 banks referred to enforcement
• FCA found significant and widespread weaknesses in most banks’ AML systems and controls
• One third of banks had inadequate resources in Risk, Compliance and Audit functions
• Overseas banks are struggling to reconcile group policies with UK requirements
• The FCA has published new AML guidance as a consequence
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Background
• FCA reviewed AML controls at 27 banks in 2010/11
– PEPs
– correspondent banks
– wire transfers
• Weaknesses around AML controls and high risk/PEP customer relationships
• 5 banks referred to enforcement
• FCA’s Financial Crime Guide published
• 2014 review was a follow-up focusing on PEPs, correspondent banking and sanctions controls
• 5 of the banks visited were part of the 2010/11 review
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What the FCA found
• Continuing weaknesses in most small banks’ AML systems and controls:
– inadequate AML risk assessments at business and customer level
– inadequate EDD and monitoring of high-risk, PEP and correspondent banking relationships
– awareness of AML and sanctions risks was weak
– group policies not always consistent with UK AML requirements
– lack of senior management engagement in assessing AML controls against FCA guidance
• UK CEO position was sometimes a short-term posting from the home country with little incentive to ensure AML controls met UK standards
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Assessing AML risk in your business
• Business-wide risk assessments
– key to identifying the high risk parts of your business and to prioritising resources accordingly
– key to developing appropriately risk-based AML controls
– key to your ability to respond appropriately to emerging risks
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Assessing AML risk in your business
• Customer money laundering risk assessments
– key to determining the appropriate level of CDDand ongoing monitoring for each relationship
– 2014 review found that the quality of customer risk assessments remained weak
– 75% of banks were failing to implement an adequate customer risk assessment process
– banks are expected to take a holistic view of the AML risk associated with each relationship
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Enhanced due diligence
• Quality of EDD remained the weakest area for most banks visited in the 2014 review
• 75% of banks failed to carry out adequate EDD on their high risk relationships
• Establishing source of wealth/funds was a particular problem – merely evidencing a bank transfer is not sufficient !
• MLRs provide that EDD must be carried out on non-EEA correspondent banks
• The risks of reliance
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Enhanced ongoing monitoring
• FCA found that ongoing monitoring was not always effective
• Transaction monitoring
– failure to establish expected activity when accounts opened
– no attempt to identify trends or unusual patterns
– threshold limits often the only form of transaction monitoring
– insufficient training for RMs on “red flags”
• Half of banks visited were not carrying out periodic reviews of their high risk relationships
– are you updating EDD post-review ?
– does the customer risk assessment remain appropriate ?
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Sanctions controls
• Banks generally had a good understanding of their obligations under the UK sanctions regime
• But effectiveness of sanctions controls varied significantly
• Sanctions screening was not being performed for certain types of transactions
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Training and awareness
• Training at nearly half the banks visited was found to be ineffective
• Staff in important AML roles were regularly unable to discuss AML risk or red flags
• The level of AML and sanctions knowledge among MLROs in 25% of banks visited was inadequate
• FCA has re-emphasised the importance of providing staff in key roles with tailored, practical AML and sanctions training – this is especially important for staff dealing with high risk customers
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Proposed new guidance on financial crime systems and controls
• Includes new/further guidance on:
– management information
– risk assessments: business-wide and customer
– EDD
– enhanced ongoing monitoring
– sanctions screening
– governance and culture
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Points to note for senior managers
• FCA expects senior management to be aware of the AML and sanctions risks to which the firm is exposed and to ensure these are managed effectively
• What does this mean in practice ?
– establish a strong AML culture and set a clear risk appetite
– ensure you get quality M.I. on AML issues
– ensure control weaknesses are identified and corrected
– ensure compliance and AML functions have adequate resources to help manage the risks
– set up a Financial Crime committee ?
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FCA Thematic Review: conflicts of interest relating to in-house investment products (IHPs)
• FCA review of conflicts arising from wealth managers’ and private banks’ use of in-house investment products in retail discretionary and advisory portfolios
• Follow-up on FCA’s 2013 suitability review
• 18 WM and private banking firms reviewed
– £146 billion retail customer assets under management
– 20% of this invested into products manufactured by a party connected to the firm
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Key Findings
• Firms generally recognised the potential risks arising from conflicts
– heightened senior management awareness
– no evidence of remuneration structures that could bias investment decisions towards IHPs
– consistent due diligence processes around selection and monitoring as between IHPs and other products
• BUT there were shortcomings
– unclear articulation of how IHPs fitted in business model/strategy and how aligned with customers interests
– failure to monitor level of IHPs in customer portfolios (implications for conflicts management)
– unclear communications with customers about nature of firm’s services and extent to which IHPs might feature
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Points to consider
• Identifying and managing conflicts
• Management Information
• Sales targets and remuneration
• Product selection, reviews and monitoring
• Communications with customers
• Transfers of business/outsourcing arrangements
– impact on customers should be considered
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Conclusions
• Firms using IHPs must be aware of the inherent risk of conflicts arising from their business models
– increasing AUM
– increasing profitability
• Firms which have access to IHPs will be expected to consider how their own arrangements meet the standards set out in the report
• Senior management responsibilities
– implement robust systems and controls to identify and manage conflicts arising due to firm’s business model
– promote a culture which supports the identification and management of conflicts of interest
• Arch Cru decision and FCA’s Feb 2015 Regulation round-up
– “Responsibility for identifying conflicts and how to manage them should be clearly allocated and the controls in place should be reviewed regularly.”
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HM Treasury consultation
• HMT is seeking views on whether to extend the UK’s new Senior Managers and Certification Regime to UK branches of foreign banks and investment firms
• Chancellor announced UK government’s intention to extend the regime to cover UK branches of foreign firms in June 2014
• FCA and PRA have welcomed the proposal
• Consultation closed on 30 January 2015
• HMT will make the order, subject to Parliamentary approval
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What is the new regime ?
• Parliamentary Commission on Banking Standards report (June 2013) – objective to strengthen individual accountability
• Financial Services (Banking Reform) Act 2013
• Only deposit-taking institutions or PRA-regulated investment firms (“relevant firms”) are affected
• New regime for Senior Managers
– 18 SMFs will replace SIF functions at relevant firms
– new conduct rules for SMFs
• New certification Regime for those who can cause “significant harm” to the firm or its customers
– Firms to be responsible for certifying fitness and propriety of staff to hold these roles
• 5 new conduct rules will apply to all employees of relevant firms who do not perform a mere ancillary role
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Key features of the new regime
• Presumption of responsibility for senior managers
• Mandatory statements of responsibility for senior managers
• Firms required to consider fitness and propriety of senior managers prior to applying for approval and at least annually thereafter
• Firms required to certify annually the fitness and propriety certification regime staff
• All employees of relevant firms who do not perform a mere ancillary role (e.g. security guard, catering and cleaning staff) to be subject to new conduct rules
• Firms required to notify the regulators of suspected conduct rules breaches by, and disciplinary action taken against, their employees
• Obligation to train relevant staff in respect of the new conduct rules
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What to expect (PRA)
• Regulators will apply new requirements to branches “appropriately and proportionately”
• Different rules for different types of branch
• A UK branch of a foreign bank will be treated the same as a UK subsidiary of a foreign bank, if they engage in the same activities
– but PRA prudential supervision of a branch will be lower than for a subsidiary
• PRA will not designate SMFs in UK branches of EEA relevant firms
• PRA regime for non-EEA firms is subject to consultation, but
– expected that PRA will designate significantly fewer SMFs in branches of these firms than for UK equivalents
– some branches may only need 1 person approved as SMF
– PRA unlikely to designate many significant harm functions in branches
• PRA’s proposals will be aligned to its wider approach to branch supervision – see SS10/14
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What to expect (FCA)
• Difference between branch/subsidiary less significant for conduct of business than for prudential regulation
• FCA’s conduct of business regulation of branches will be more closely aligned with its approach to UK firms/subsidiaries
• FCA will designate more SMFs and significant harm functions in branches than the PRA
– total number of designated SMFs is expected to be 5 or 6 per branch
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Implications for firms and their staff
• 1,000s more staff within the disciplinary jurisdiction of the FCA/PRA
• Enhanced monitoring and reporting obligations placed on relevant firms
• Considerable additional training obligations placed on firms
• The presumption of responsibility for senior managers
– reversal of the burden of proof where the firm has breached regulatory requirements in their area of responsibility
– not necessary to show direct responsibility for the breach
– senior managers will need to prove they acted reasonably
– intended to make it easier for regulators to take disciplinary action against senior managers
– considerable increase in personal regulatory risk
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Non-executive directors ?
• CP15/5 published 23 February 2015
• Revised approach to INEDs in relevant firms and Solvency II firms
• PRA and FCA will only make the following NEDs subject to approval and inclusion in the Senior Managers Regime:
– Chairman of the Board
– Chairs of Risk, Audit, Rem & Noms Committees
– Senior Independent Director (nb also compliance and whistleblowing)
• Unless a NED holds one of the specified non-executive functions, he will not be performing an SMF and so will not be subject to the presumption of responsibility
• CP15/5 also contains proposed guidance on the role and responsibilities of NEDs in relevant firms and Solvency II firms
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Questions?
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Today’s speakers
David Flack Partner0845 497 [email protected]
Gregory Brandman
Partner
0845 497 9797
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