Firms face global scrutiny as regulators join forces


Firms are facing increasingly tough and intrusive investigations by regulators around the globe, led by the US, which is intent on clamping down on fraud and corruption. National regulators are seeing opportunities to launch their own investigations and are raising the stakes for companies to keep their house in good order, says Aaron Marcu, global investigations partner at international law firm Freshfields Bruckhaus Deringer. There is a growing trend toward multi-jurisdictional enforcement actions, he says.

This is encouraging firms to tighten up their procedures and make their own investigations to detect potential problems early, pre-empting time-consuming and potentially costly probes. Almost 60% of investigations since 2008 resulted from breaches of internal controls that companies identified themselves, says Marcu, citing recent Freshfields research.

“Increasingly, companies are concluding that devising and maintaining stringent internal controls designed to prevent corrupt behaviour, or at least to detect it before a regulator does, enables a company to correct the problem with less disruption to its business, and financial and reputational cost. This makes sense because the consequence of not taking care of your own house can be a serious criminal or regulatory investigation, large fines and disgorgement of profits, the loss of business, ongoing monitoring of the company’s business by a government agent, and even the prosecution of key executives,” Marcu says.

Figures from the UK’s Financial Services Authority (FSA) and the US Securities and Exchange Commission show a marked increase in co-operation with their international counterparts. The SEC increased requests to foreign regulators for assistance on its investigations by 30% in 2009 (774 requests, up from 594 in 2008) and it responded to 400 requests in the same year.

The SEC successfully engaged international counterparts in more than a dozen jurisdictions, obtaining freezes of non-US assets worth $325.9 million – five times the amount of assets frozen by the SEC in the previous four years, Freshfields says.

The FSA saw a 25% increase in requests for assistance from regulators worldwide in 2009. FSA investigations into foreign companies and financial institutions increased six-fold, with 30 foreign companies under FSA investigation in 2009, representing 15% of FSA corporate investigations, compared with 2.4% of all corporate investigations in 2008 and 4.9% in 2007.
Raj Parker, a dispute resolution partner in Freshfields’ global investigations practice, says the sharp rise in FSA investigations into foreign companies is symptomatic of an increasingly international approach to regulatory investigations.

“Regulators have worked out that a joined-up approach is an efficient and productive way of getting results,” he says. A regulatory enquiry or successful prosecution of a multinational company in one jurisdiction is spawning investigations by other regulators in other regions.

“It is as if the regulators are saying: ‘Well, you got them with something so surely there must be a way for us to get at them too – throw us your case work and we’ll see what we can find’,” Parker says. In many instances this is not justified, he says, as instances of bribery, fraud, mis-selling and market abuse are usually localised and not necessarily indicative of a company’s modus operandi.

At least 111 companies worldwide are being investigated for bribery by US authorities, setting a record number for such probes, according to Freshfields research. About one-third of the companies are from outside the US.

These investigations are led by the US Department of Justice (DOJ) and the SEC, and are carried out under the Foreign Corrupt Practices Act (FCPA), the US law designed to crack down on the bribery of foreign officials and improve transparency of corporate accounting.

Parker says a host of bilateral agreements between regulators has ensured regulators have more information at their fingertips than ever before, as well as an official mandate to share. “Regulatory co-operation has achieved results for the likes of the FSA, SEC and DOJ, therefore, it is only natural to expect them to continue with this collaborative approach.”

Multinational companies and financial services firms are increasingly subjected to “aggressive and invasive investigations that are at times based on erroneous reasons and tenuous jurisdictional links, or simply because a regulator elsewhere has initiated an enquiry into a company,” says Parker.
He0 sees evidence of this approach in an ongoing judicial review into an FSA decision to investigate a UK hedge fund following a request by the SEC for documents from the hedge fund’s accountants.

“This case – Amro International & Creon Management vs FSA –  is an example of the regulators using broad and unspecific motives to initiate a local investigation on the back of their counterpart’s request for assistance, which, this time, has been challenged by the subject of the investigation who is not a party to the complaint issued by the SEC,” Parker says.

 “The outcome of this case will help clarify whether the regulator, above and beyond acting as a conduit for information, has a responsibility to understand the nature of the case on which it is assisting and whether the request is substantiated by gathered evidence or merely speculative. This will help shed some light on exactly what regulators are required to demonstrate in order to initiate investigations when assisting other regulators. Until then regulators will continue to have a large grey area to work in,” he says.

Parker predicts cross-border investigations into companies will increase this year, particularly as companies look to emerging markets for growth. Emerging markets offer business opportunities for ambitious companies, but also challenges, he says. “In relation to winning and maintaining lucrative contracts, the line between corrupt practices and permissible business in some jurisdictions can at times be blurred. Companies need to appreciate the strategic risk of prosecution and variances in local legislation or else face regulatory investigations further down the line. Like it or not, regulators will use any reason they see fit to initiate investigations and will happily share the fruits of their labours with their international counterparts.”

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