Investigations and decisions

U.K: SFO criticised over collapse of Dahdaleh trial

In December 2013’s issue of Financial Crime update we reported on the collapse of the trial of Victor Dahdaleh, accused by the Serious Fraud Office SFO of paying almost £40 million in bribes between 1998 and 2006 to Sheikh Isa Bin Ali al-Khalifa, a member of the Bahraini royal family, minister of oil and chairman of state-controlled Aluminium Bahrain (“Alba”). In proceedings brought by Mr Dahdaleh for the recovery of part of his legal costs of the aborted trial from Akin Gump Strauss Hauer & Feld, the US lawyers instructed by the SFO to assist in the investigation, the agency was accused of “mismanagement” of the failed case. At a hearing on 21 March 2014 Judge Nicolas Loraine-Smith found that although Akin Gump’s lawyers had behaved discourteously towards the court (they refused to attend the trial due to concerns over a conflict of interest), they had not committed serious misconduct. However, he went on to criticise the extent to which the SFO had relied on Akin Gump in its investigations into the alleged bribery, saying that “the fact of delegation to a law firm acting in a foreign jurisdiction, with interests in direct conflict with the defendant’s, was bound to result in very real complications.”

The SFO has denied that their investigation was “delegated”, adding that their actions were routine in such cases. However, it has acknowledged that its investigation has been the subject of criticism and will be studying the ruling to identify lessons to be learnt. 

U.K.: FCA fines insurance broker for ineffective ABC and controls

On 17 March 2014 the Financial Conduct Authority (“FCA”) imposed a fine of £315,000 on Besso Ltd, a medium-sized commercial insurance broker, for failing to implement effective anti-bribery and corruption systems and controls. The fine reflected a 30% discount for early settlement.

In its final notice the FCA observed that insurance and reinsurance brokers such as Besso typically make payments to or share commission with third parties in a number of scenarios. The third party may, for example, be another broker based in a territory where the original broker has no presence. Client introductions are another instance. In relation to payments of this kind made by Besso, the FCA concluded that there was a risk that the money might have been used by the third parties for “inappropriate purposes”, including the payment of bribes to persons connected with the insured.

The fine related to the steps taken by Besso between 2005 and 2011 to address this risk, which were held to have been inadequate. Particular failings included:

  • limited bribery and corruption policies in place
  • inadequate risk assessments of third parties
  • inadequate due diligence on third parties
  • insufficiently detailed / regular reviews of third party relationships
  • inadequate staff monitoring in relation to third parties.

The enforcement process appears to have been costly for Besso. It was required (under section 166 of the Financial Services and Markets Act 2000) to commission a skilled person’s report. It also of its own accord commissioned a law firm to provide a report covering the relevant systems and controls. Its recommendations were implemented. The FCA specifically took this last point into account in deciding upon the appropriate sanction.

It is important for authorised entities to pay close attention to relevant FCA guidance and to any enforcement action which it publicises. The specific failings identified by the FCA in this case match fairly closely those listed in the second part of its financial crime guide at pp30-36. The FCA was critical of Besso’s failure to take heed of this guidance, as well as fines imposed on other institutions for similar failings during the relevant period. 

U.K: Further set of Libor charges brought against former City bankers

Three former Barclays bankers under investigation by the SFO in connection with the Libor manipulation case have been formally charged with conspiring to make false or misleading US dollar Libor rates between 1 June 2005 and 31 August 2007, to benefit the bank.

Jonathan Mathew, Peter Johnson, and Stylianos Contogoulas appeared at Westminster Magistrates' Court on 27 February 2014. They were granted bail and are expected to appear in court again towards the end of July.

U.K./U.S.: Rolls-Royce faces new corruption allegations

Rolls-Royce (“R-R”) has disclosed that it is being investigated by the US Department of Justice in relation to alleged bribery which is already the subject of an investigation by SFO in the UK. The disclosure was made in R-R’s annual report, published on 5 March 2014.

New allegations have also surfaced that R-R used agents to secure contracts to supply power turbines to the Gas Authority of India between 2007 and 2011. India’s Central Bureau of Investigation is reported to have commenced an investigation into whether R-R has been involved in illegal practices with respect to Indian defence contracts.

In a response to the initial allegations, R-R has set up a 24-hour "ethics line" for employees to report concerns about bribery and has also said that any member of management found to have been involved in corruption will be ineligible for bonuses (although harsher action might be required, it may be thought).

The background to the SFO’s investigation into R-R was reported in the January 2014 edition of Financial Crime Update. 

U.S.: Treasury and MoJ give marijuana guidance to banks

On February 14, 2014, the U.S. Treasury and Justice Departments issued guidelines intended to give banks confidence that they may provide services to marijuana businesses in states that have legalized its medical or recreational use, despite the fact that marijuana remains illegal under federal law. Because federal law prohibits marijuana’s distribution and sale, financial transactions involving a marijuana-related businesses generally involve funds “derived from illegal activity,” triggering the Bank Secrecy Act duty to file a Suspicious Activity Report (“SAR”). But under the new Financial Crimes Enforcement Network (“FinCEN”) guidelines, a bank providing services to a marijuana-related business that it reasonably believes to comport with federal enforcement priorities and applicable state laws should instead file a “Marijuana Limited” SAR, which carries lower reporting burdens than most SARs.

In a three-page memo to federal prosecutors issued in conjunction with these new FinCEN guidelines, Deputy Attorney General James M. Cole noted that prosecution may not be “appropriate” when banks serve legal marijuana entities that do not violate any of the eight priorities listed in a Justice Department memo last August, including preventing marijuana revenue from furthering criminal enterprises. Twenty states and the District of Columbia have legalized medical marijuana, while two of those states, Colorado and Washington, also have legalized recreational use. 

The FinCen guidance is available here.

The February Cole Memo is available here

U.S.: S.D.N.Y. rules that foreign bank secrecy laws may not bar third party depositions

On February 13, 2014 Judge Shira Scheindlin of the U.S. District Court for the Southern District of New York ruled that the Bank of China, as the defendant in a suit brought by the family of a victim of a 2006 Tel Aviv bombing, is entitled to depose a witness from Israel’s Bank Hapoalim, despite the Israeli bank’s arguments that such testimony would violate Israel’s bank secrecy laws.

Judge Scheindlin weighed the merits of Bank of China’s subpoena request against Bank Hapoalim’s opposition to find that the defendant deserved to hear “crucial” information Hapoalim could provide regarding the Israeli government’s steps to block financing to the alleged Palestinian Islamic Jihad leader, Said al-Shurafa. While the plaintiff asserts that Israeli counterterrorism officials warned the Chinese government in 2005 that Shurafa was using his Bank of China accounts to facilitate terrorism, the plaintiff has been unable to produce evidence of what Israeli officials said at the 2005 meeting. However, defendant Bank of China argues that it was never alerted to Israeli suspicions about Shurafa, that it needs to know whether Hapoalim received such warnings and, if so, why it still originated sixteen wire transfers, totaling $266,100, to him between 2004 and 2007. In approving the subpoena request, Judge Scheindlin noted that, given how unlikely it was that the Israeli government would provide whether it notified Hapoalim, Hapoalim is the Bank of China’s only possible source of such evidence. 

U.S.: S.E.C. Obtains Fifth Admission of Guilt After Reversing Longstanding Settlement Policy

On February 21, 2014, the Securities and Exchange Commission (“SEC”) obtained its fifth admission of guilt since modifying in 2013 its longstanding policy of allowing settlement without “admitting or denying” wrongdoing. In its settlement order with Credit Suisse, the SEC stated that employees of Credit Suisse provided cross-border investment advice to American clients without registering with the Commission, in violation of Section 15(a) of the Securities Exchange Act of 1934 and Section 203(a) of the Investment Advisers Act of 1940. 

On June 18, 2013, SEC Chair Mary Jo White announced that the SEC would no longer maintain a blanket policy allowing respondents to settle SEC cases without admitting to wrongdoing and instead would require admissions of guilt in cases involving “widespread harm to investors,” “egregious intentional misconduct” and / or obstruction of the SEC’s investigation. Criticism of the prior policy mounted in the wake of the financial crisis; for example, Southern District of New York Judge Jed Rakoff issued a series of opinions criticizing the policy in cases involving the SEC’s requests for approval of settlements.  

The Settlement Order is available here.