This post was written by Maria Wall.

On 22 November 2011, the Financial Services Authority (“FSA”) publicised that it had fined Dr. Sandradee Joseph £14,000 and banned her from performing any significant influence function in regulated financial services for breaching Principle 6 of the FSA’s Statements of Principle for Approved Persons. 

Authorities in both the US and the UK have recently successfully prosecuted offenders of the U.S. Foreign Corrupt Practices Act (FCPA) and Bribery Act respectively. 

In the United States, the District Court for the Southern District of Florida sentenced the former president of Terra Telecommunications Corp to 15 years in prison for money laundering and bribery offences relating to payments of approximately $890,000 in bribes to directors of Haiti Teleco. The Court further required the defendants to forfeit $3.09 million. The payments were concealed "commissions" or "consulting fees" to shell companies, in violation of the FCPA's books and records provisions. The sentence handed down is significantly higher than previous convictions (around 7 years) however in theory under the U.S. Sentencing Guidelines Manual, he could have been sentenced to 24 years or more.

Meanwhile, Munir Yakub Patel, an administrative Magistrates' Court clerk, pleaded guilty to the Section 2 offence under the UK Bribery Act 2010 for promising a defendant to influence motor offence proceedings in return for a bribe of £500. He faces a maximum sentence of up to 10 years, although it is likely that the sentence imposed will be significantly lower than the maximum. Patel was filmed by the Sun newspaper taking the bribe and had also been charged with misconduct in public office and perverting the course of justice. Patel was due to be sentenced on 11 November 2011. However, the matter was adjourned to Friday, 18 November 2011.

This case illustrates that while the FCPA relates to bribes paid to overseas officials, the Bribery Act, on the other hand, applies both domestically and internationally and catches not only the payment but also the receipt of bribes.

It is also somewhat ironic that, despite all the hype and scaremongering surrounding the UK's introduction of tough and wide-reaching anti-bribery legislation, the first prosecution concerned a small bribe to a minor official in relation to a petty motoring offence.  However, the UK's SFO is known to have its own prosecutions in the pipeline and these will inevitably relate to much bigger and more complex cases.

Please click here to read our previous blogs on the Bribery Act.

On 1 July 2011, the European Union Directive on Alternative Investment Fund Managers (AIFMD) was published (PDF) in the Official Journal of the European Union and is now law. It is no secret that, since the European Commission first mooted the concept of a generic platform for regulating non-retail investment management in Europe, there has been strong criticism from the hedge fund and private equity industries. Predominantly concerned with the effect that such a regime would have on the sector’s competitiveness, detractors also pointed out deficiencies with a ‘one-size fits all’ approach.

Despite such criticism, and the numerous drafts of AIFMD that have been produced over the last two years, the final version does not go far enough to address the problems associated with a single approach to regulation. Furthermore, the Commission has now admitted it.

In May 2011 the European Commission published the responses to a consultation paper (PDF) issued in February which asked the European Community to provide its views on the following:

• whether a new tax on the financial sector should be introduced;
• if so, what impact the tax would have; and
• how it should be designed and implemented?

In its paper, the Commission proposed two (potentially complementary) options:

1. A Global Financial Transactions Tax (the “FTT”) to be imposed on all financial services transactions (including on exchange and over-the-counter (OTC) transactions), based on transaction value; and

2. An EU Financial Activities Tax (the “FAT”) on the profits and remuneration of those in the financial sector, aimed primarily at preventing excessive risk taking and remuneration by firms.   

The FTT has also been described as the ‘Tobin Tax’, after economist James Tobin who initially coined the concept of a transaction tax in the 1970’s while, as you can imagine, the ‘FAT’ acronym has been gleefully adopted by the UK press, with no need for further explanation.

Why?

The reasons stated for the Commission’s proposals include:

• the level of financial support received by the financial sector during and after the economic crisis;
• the possible ‘under-taxation’ of the financial sector as a whole (largely as a result of the existence of certain exemptions, including the exemption from VAT of financial services);
• the need to reduce undesirable behaviour, such as excessive risk taking, using fiscal means (in conjunction with regulation); and
• the need for fiscal consolidation and harmonisation within the EU to deal with, for example, certain Member States imposing their own additional taxes on the financial sector (which, it is worried, will lead to distortions of competition and double or non-taxation).

 Response

The responses are now in, and it is clear the consultation has generated considerable interest - not surprising considering the potential impact on most financial industry firms and the strength of feeling of the general public on the issue.  Over 200 responses were received from market participants (including 10 fund/asset management firms), investors, consulting firms, national authorities, academics, NGOs and individuals, the views of whom were unsurprisingly polarised.

The SEC adopted final whistleblower rules (PDF) on May 25, 2011. The crux of the news here is that SEC decided not to require whistleblowers to report suspected law violations internally before reporting them to the SEC. Although the SEC staff knows, better than most, the wide variety of things that motivate employees to inform on their employers (and on one another), the desire to attract a good flow of “quality” reports to the SEC seems to have been a stronger driver than endorsing companies’ internal controls as a route of first resort. 

Whistleblowers get retaliation protection and substantial monetary rewards for information leading to successful enforcement and monetary sanctions in excess of U.S.$1,000,000. The SEC did change the monetary rewards scheme to remove disadvantages to internal reporting, but did not remove the possibility of rewards even for employees who may have participated in the reported conduct or who had been previously asked to cooperate with an internal investigation relating to such conduct.  Clearly, advisers still have much to be concerned about and have some planning to do. 

On Wednesday I attended the very well-organised Guernsey Funds Forum at the Grange St Paul's Hotel in London organised by Guernsey Finance. There were three very interesting panel discussions, excellently moderated by TV news anchor Alastair Stewart.  The first of these concentrated on the perhaps rather predictable topic of the Alternative Investment Fund Managers Directive (AIFMD). 

What I hadn't predicted, however, was the degree of optimism expressed by the panellists about the Directive's likely effect on the Guernsey funds industry. Indeed, despite many in the industry seeing the AIFMD as a badly-disguised act of EU protectionism, it was asserted by one panellist that the Directive would actually give Guernsey a competitive edge over many of its competitors, both onshore and offshore:  Onshore, because Guernsey feels confident that it will easily be able to clear the hurdles set out in the Directive for third countries, and offshore because Guernsey has the track record, experience and professionals to operate in the more regulated environment AIFMD would bring.

The FSA’s revised Remuneration Code (PDF) (the "Code") came into force on 1 January 2011. Those newly within its scope are expected to comply in full by 1 July 2011. Overall, the Code will have a lower impact on fund and asset managers than first feared, but will increase the ever-growing compliance burden as managers have to spend time and resources understanding the Code, why the worst of it doesn’t apply, and then applying the parts that do.

Following the computer game-esque guidance of CEBS (now the all-powerful ESMA) which said that some Principles of the CRD3 (PDF) (on which the Code is based) could be “neutralised” for the smaller firms, the FSA has split all firms caught by its first draft of the Code into four tiers (PDF). The general rule is: the lower your tier, the more provisions of the Code you can avoid – provided you adequately explain yourself to the FSA, of course. Most fund and asset managers, save for full scope BIPRU Firms, will fall into tier four.

Amongst other things, a tier four firm:

Will not have to:

• Appoint a remuneration committee (Principle 4)
• Defer bonuses to ‘Code Staff’ for 3 years (Principle 12)
• Pay 50% of variable remuneration in shares or equivalent (Principle 12)
• Assess performance related pay over a multi year framework (Principle 12) or
• Set ratios between fixed and variable pay (Principle 12)

But will have to:

• Explain why it is dis-applying any of the Principles above;
• Make a list of "Code Staff" (xls) and notify them of what that means;
• Draft a remuneration policy in accordance with the applicable Principles of the Code;
• Stop paying guaranteed bonuses to any staff, other than on an exceptional basis, in the context of hiring new Code Staff and in the first year of service only; (firms will hope those staff don’t leave after a year to get another first year bonus somewhere else!); and
• Make sure golden parachute payments reflect performance and do not reward failure.

Not too bad, you say? Indeed, the FSA’s attempt at implementing the Code proportionately has been described as a ‘regulatory ray of sunshine’ in these times of knee-jerk legislation. But what it essentially means is that it’s not as bad as it could have been for firms that arguably shouldn’t have been caught by this legislation in the first place.

The FSA is currently consulting on draft guidance on the interpretation of the Code, including a template Remuneration Policy Statement (doc) to be used by Tier 3 and 4 firms, a set of FAQ's (PDF) and the template list of Code Staff linked in above. Responses and comments can be sent to the FSA before 18 May 2011.  Asset managers should keep an eye on the FSA's response to any comments, as it may well be indicative of the way the remuneration provisions of the Alternative Investment Fund Managers Directive (AIFMD), which would apply to all firms within its scope, will be implemented. 

Now that we finally have a date lined up for the Bribery Act to come into force, and the Ministry of Justice (MoJ) has published its guidance on the Act, I thought I'd refresh my memory on what it's all about.

After making a quick mental note to cancel that lunch I've arranged with a sovereign wealth fund contact (just in case it might be thought that some fine wining & dining were intended to persuade her to send some work my way), I starting thinking about the approach the Government is taking to this legislation.  There are some reassuring messages in the MoJ's guidance to the Act.  In Justice Minister Ken Clarke's own words:

...combating the risks of bribery is largely about common sense, not burdensome procedures. 

But I just don't buy it.  The section 7 offence (failure of commercial organisations to prevent bribery) is the part of the Act that's most worrying businesses in - or connected to - the UK.  Section 7 contains only one stated defence: where the organisation proves it had adequate procedures in place to prevent bribery.  In this context, it is inevitable that firms will end up adopting potentially burdensome procedures, as having 'adequate' anti-bribery measures is their only sure-fire way to avoid liability.