In this issue of Signature Litigation’s Financial and Regulatory Disputes Update, the third of 2016, Partner Abdulali Jiwaji and Associate Johnny Shearman examine the Serious Fraud Office’s (SFO) new Section 2 interview guidance and its impact on legal representation. In our second article, Associate Jessica Thomas investigates the banking industry’s approach to de-risking and anti-money laundering regulations.

The Serious Fraud Office and Legal Representation During Section 2 Interviews

Partner Abdulali Jiwaji and Associate Johnny Shearman’s article has been published in the following publications:

FTSE Global Markets – 15th August 2016

Fraud Intelligence – 5th September 2016

It is often assumed that an individual being interviewed by an investigative body, whether under caution or voluntarily, has a fundamental right to legal representation and advice. However, the publication of new guidelines by the Serious Fraud Office (“SFO“) on the presence of lawyers and the conduct of interviews conducted pursuant to section 2 of the Criminal Justice Act 1987 (the “New Guidelines“) calls into question this assumption. This article will consider the New Guidelines which were issued following the case of Lord v the SFO[1].

Lord v the SFO – the facts

Whilst s.2 interviews have been a powerful tool deployed by the SFO since the late 1980s, their means as a way of retrieving information in relation to an investigation has remained largely untested. That was until 2014 when the SFO’s policy on s.2 interviews was challenged in the case of Lord v the SFO.

In 2014, GlaxoSmithKline was under investigation by the SFO in connection with alleged acts of bribery and corruption. As part of the investigation, the SFO issued notices to three senior employees of GSK requiring them to attend s.2 interviews. Upon receiving the notices, the three employees instructed the law firm Arnold & Porter LLP to attend the interviews to provide legal advice, as necessary. However, the SFO declined to permit A&P’s presence at the interviews. While the SFO agreed that the presence of lawyers at s.2 interviews was permitted in principle, the SFO objected to A&P as their presence might stand to prejudice the investigation given that they were also the lawyers for GSK. It was that decision by the SFO which the employees sought to challenge by way of judicial review.

The court ultimately held that the SFO had acted reasonably in refusing to permit the attendance of A&P, given that the firm acted on behalf of GSK. In his decision, Lord Justice Davis stated:

It would clearly be entirely self-defeating if an interview had to go ahead and actual prejudice had to be established before the SFO could react. In my view, the SFO was entitled to look at whether there was potentially a real risk of prejudice to the investigation before deciding as it did: and that is precisely the process it adopted“.

Davis LJ also confirmed that the European Convention of Human Rights had not been contravened given that the employees had not been arrested or detained. Further, he affirmed that no common law right was conferred for a lawyer to be present during questioning for those subject to a s.2 interview. Following the court’s decision, the SFO reviewed the guidance contained in its Operational Handbook.

The New Guidelines

The New Guidelines replace those contained in the SFO’s Operational Handbook. Unlike the former SFO guidance, the New Guidelines do not automatically permit the attendance of a lawyer. Instead a lawyer will only be permitted to attend a s.2 interview if the case controller believes they will assist the purpose of the interview and/or investigation, or that they will provide essential assistance to the interviewee. The original concept of refusing to permit the attendance of a lawyer on the basis of “prejudice” or “delay” remains, and in addition several other grounds are now included. These further grounds are highlighted below.

Pursuant to the New Guidelines, prior to attending a s.2 interview, a lawyer must provide written undertakings on behalf of their firm stating that the firm does not represent any corporate or individual who is a suspect in the investigation. Where a lawyer is “unable to demonstrate (by giving appropriate undertakings) that they are not retained by, or otherwise due a duty of disclosure to any other person (natural or legal) whom may come under suspicion during the course of the investigation, including the interviewee’s employer, they are likely to be allowed to attend the interview“. This amendment is drafted as if to assume that a lawyer is in a position to know all existing or potential suspects in any given investigation, which seems highly unlikely. For a lawyer to undertake that they are not retained by any persons who may come under suspicion during the course of the investigation is to assume that the lawyer has full knowledge of the investigation and the foresight to predict who may or may not come under suspicion.

Under the New Guidelines it is now stipulated that only one lawyer will be allowed in a s.2 interview, unless expressly agreed by the SFO. The New Guideline also requires further undertakings to be given by the lawyers confirming that they will respect certain parameters so as to not undermine the free flow of full and truthful information which the interviewee, by law, is required to give. There is clearly scope for tension here between this restriction and the duty of the lawyer to act in the best interest of its client, and to step in if concerned that an interviewee is being treated unfairly.

It is difficult to assess the impact of the SFO’s New Guidelines at this early stage and there is certainly scope for further issues to go before the courts. However, what is clear is that the SFO’s New Guidelines set it apart from other investigative bodies such as the Financial Conduct Authority. The New Guidelines have effectively removed the presumption that an interviewee has the unfettered right to legal representation. By removing the presumption, the dynamics in advance of a s.2 interview have shifted significantly in favour of the SFO. This means we may see the courts dealing with this subject matter again soon, and the courts will no doubt expect the SFO to approach any matters involving exercise of a discretion rationally and reasonably.

Is de-risking an over-reaction to over-regulation?

Associate Jessica Thomas’s article has been featured in the following publications:

Professional Adviser – 24th August 2016

Insurance Day – 24th August 2016

Money Laundering Bulletin – 14th September 2016

In the wake of the global financial crisis, “risk avoidance” appears to have replaced “risk management“[1], with banks embarking upon wholesale cullings of customers deemed to be “outside of risk appetite“. This practice is called “de-risking“, and whilst many regulatory authorities insist that it is not in line with international guidelines, the unfortunate reality is that it has become a recognised problem within the global financial services sector and termed a large-scale market failure[2].

The increased regulatory activity means increasing costs to banks either in the face of sanctions imposed by the regulators, or in the face of mandatory standards of risk and compliance. This has not gone unnoticed and the World Bank’s 2015 report on de-risking points to low profitability of a customer base as one of the key, if not the most important, driving factors behind de-risking practices. Banks are now frequently left in a situation where they lack both “market and regulatory incentive” to maintain a wide range of customer accounts, with the preferred approach being to off-board high-risk, low-profit customers.

The risk of falling short of existing Anti-Money Laundering (“AML”) legislation is another factor. In the UK, the application of the Money Laundering Regulations 2007 and, specifically, the concept of a Politically Exposed Person (“PEP”), has an extensive application across a wide range of customers (covering not only the PEP itself, but also any of its “close associates” and “immediate family members“). Moreover, once a PEP has been identified banks are then under an obligation to carry out enhanced customer due diligence and monitoring – rather than adhering to these ongoing obligations, the more financially viable and risk-adverse option for a bank is often to simply close the customer’s account.

The Financial Action Task Force has observed that de-risking has the potential to force entities and persons into less regulated or unregulated channels. Something which Gloria Grandolini (Senior Director of Finance and Markets Global Practice at the World Bank Group) agreed with when she stated that “[t]here is a real risk that turning away customers could actually reduce transparency in the system by forcing transactions through unregulated channels“. So what can be done to counter the adverse effects?

The FCA’s recently commissioned report (“De-risking & Impacts of Derisking”) recognised the need for banks to “retain flexibility in setting up appropriate systems and controls to ensure they comply with legislation as well as in making commercial decisions on whether to provide banking facilities that are consistent with their tolerance of risk“.

Many hope that the Financial Services Act 2016, which came into force on 6 July 2016, will go some way to achieving this. The act makes provision for the FCA to issue guidance on the meaning of a PEP for the purposes of the Money Laundering Regulations, going so far as to suggest that compensation might be owed to the customer concerned if the banks effectively “over-comply” with the regulations. This latter proposal appears to address the “one size fits all” approach by introducing an element of accountability for any de-risking decisions and encouraging a more active management of risk portfolios. To ensure this initiative has any real impact, however, it would need to truly penetrate; training should highlight more than just a need to focus on treating each client on a case-by-case basis, and work to avoid the systematic allocation of clients into convenient risk buckets to be emptied out of the firm if out of sync with its risk appetite.

Many hope that the arrival of the Basic Payment Accounts Regulations 2015 (“BPARs“) on 18 September 2016 will also provide a buffer to across-the-board de-risking practices. The BPARs will, subject to certain conditions, make it mandatory for banks to offer a basic payment account to any consumer who applies for one on or after 18 September 2016. Banks will also see a limitation of their discretionary termination rights: under the BPARs, basic payment accounts may only be closed in clearly defined situations (for example, if the account is being used for illegal purposes, or if the customer subsequently opens a second account elsewhere). The FCA sees the introduction of the BPARs as positive progress in the fight against de-risking; not only do they provide clear cut rights to customers, but they also lay down unambiguous rules of governance for banks in respect of certain customer accounts. That said, the restricted application of these Regulations cannot, unfortunately, be ignored: basic payment accounts are not overly appealing due to their limited functions, they are also notably under-advertised by most high street banks and as a result make up only a small number of accounts on most banks’ books. Despite the BPARs being a step in the right direction, therefore, their impact might not actually be felt on any extensive scale.

Outlook

It is unlikely that these new initiatives will totally eradicate the problem of de-risking. What is promising, however, is that UK regulators appear at least to have realised that the current regulatory environment is close to being unworkable. Banks need more clarity on what risks they actually face, and an improved dialogue between the financial services sector, the regulators and the consumers will prove essential in achieving this.