1. Former Innospec CEO admits bribery to falsify product tests

The SFO has announced that Paul Jennings, former CEO of Innospec Ltd, has pleaded guilty to one charge of conspiracy to corrupt Iraqi public officials and other agents of the Iraqi Government. This charge relates to allegations that Mr Jennings paid inducements to officials to ensure that tests on a competitor product were concluded with an unfavourable assessment of that product. Mr Jennings' sentencing has been adjourned.

Innospec Ltd, a UK subsidiary of Innospec Inc, (a US NASDAQ listed company), had previously pleaded guilty to charges in relation to various corruption offences: between February 2002 and December 2006, Innospec Ltd, through various agents, engaged in systematic and large scale corruption of senior government officials of Indonesia to secure contracts for the supply of a fuel additive Tetraethyl Lead (“TEL”). The corrupt behaviour took the form of bribes, totalling approximately $8 million. The seriousness of the corruption was aggravated by the fact that Innospec Ltd’s behaviour was aimed at blocking legislative moves to ban TEL, due to environmental and public health concerns.

See our briefing of March 2010.  

  1. SFO announcement regarding LIBOR investigation

Following the SFO's announcement that it is investigating the operation by a number of banks of the London Interbank Offered Rate (LIBOR), the SFO's Director has issued a press release stating that he is satisfied that currently-existing criminal offences are capable of covering conduct in relation to the alleged manipulation of LIBOR and related interest rates.  

  1. High Court publishes Kaupthing judicial review judgment

The Divisional Court of the High Court has published its judgment in Tchenguiz v Serious Fraud Office [2012] EWHC 2254 (Admin). The Court declared that search warrants issued to the SFO were unlawful as they were obtained by misrepresentation and non-disclosure to the judge. The SFO has come under criticism on a number of occasions and has previously conceded that serious mistakes were made in this case. The SFO has announced that it hopes that its restructuring and recent senior appointment (see our earlier update) will prevent the repetition of such errors.

In a postscript to the judgement, Sir John Thomas, on behalf of the Court said:

"In our view, there is a more important lesson to be learnt which in fairness to the then Director of the SFO we must make clear.

The investigation and prosecution of serious fraud in the financial markets requires proper resources, both human and financial. It is quite clear that the SFO did not have such resources in the present case.

  1. A fundamental error was a failure to set out the commercial background to the events. The identification of suspected criminality and the drafting of an Information for presentation to a judge requires a team with a proper understanding of the financial markets in which the transactions have been effected.
  2. The drafting of a document such as the Information in a case relating to the financial markets is a formidable task that requires a draftsman with an understanding of the markets, the agreements in issue and accounting issues. The facts and issues must be set out in a clear and analytical manner; this requires very considerable skill. Its presentation to the judge then requires a lawyer with great skill and experience.
  3. Although many investigators are reliant in the first instance on the provision of information by those who have an interest in the transactions such as administrators or lawyers or accountants involved in disputes, it is essential that those charged with investigation and prosecution can scrutinise the information provided with the same level of skill. The SFO should have scrutinised what it was told by Grant Thornton through the use of expertise of at least equivalent experience. The SFO should not have been compelled to rely on Grant Thornton who owed duties to their own clients which rightly took precedence over the interests of the public.
  4. The execution of a warrant requires the presence of independent lawyers where there is the prospect of privileged documentation. This expense has to be resourced.
  5. The prosecution of such offences necessitates equality of arms being provided to those investigating and prosecuting. Equality of arms is used most commonly to apply to the unequal position of defendants to an investigation or a prosecution. However, the public interest in upholding the integrity of the financial markets is destroyed if those who investigate and prosecute do not have access to the same level of legal and accountancy skills and human and financial resources as those who are the subject of investigation and prosecution.
  6. The matters in issue occurred in the period between late 2007 to October 2008. Although there are some complex details as regards some of the individual transactions, the case is not a complex one. The investigation should have been concluded a very long time before now, but again this required adequate resources, both human and financial."  
  1. Men convicted in £10m fraud trial

The SFO has announced that two people have been convicted in relation to a fraud that targeted UK investors and expatriates in Majorca. Another man pleaded guilty prior to trial. The men operated a Ponzi scheme whereby investors' money was diverted to support their own lifestyle rather than to achieve promised growth on the US stock market. Sentencing will take place on 31 August 2012 with confiscation and compensation proceedings to follow. The scheme attracted £10 million worth of investment and it is calculated that around £5 million was siphoned off.  

  1. Pfizer reaches settlement with SEC

The United States' Securities and Exchange Commission (SEC) has announced that it has reached a settlement with Pfizer Inc and a related company, Wyeth LLC for violations of the Foreign Corrupt Practices Act (FCPA). The SEC alleged that the employees and agents of Pfizer's subsidiaries in Bulgaria, China, Croatia, the Czech Republic, Italy, Kazakhstan, Russia and Serbia had made improper payments to foreign officials to obtain improper advantages for their products. The two companies will pay a combined fine of more than $45 million to settle their respective charges. In a parallel action, the US Department of Justice has announced that Pfizer H.C.P. Corporation has agreed to pay a penalty of $15 million to resolve its investigation of FCPA violations.  

  1. Former Securency executive avoids jail in bribery-related case

David John Ellery, former chief financial officer of Securency, has pleaded guilty to false accounting for his role in inaccurately recording overseas payments to an agent engaged by Securency to obtain banknote contracts in Malaysia. Justice Hollingworth, passing sentence in the Victoria Supreme Court, said that Ellery had been fully aware of his misconduct as evidenced by his subsequent attempts to conceal what had occurred. Ellery was sentenced to six months' imprisonment, suspended for two years.  

  1. SEC adopts Dodd-Frank rule requiring disclosure of payments to governments by US resource extraction issuers

The SEC has recently adopted rules requiring all US-listed firms engaged in the energy sector to file a supplementary form with them disclosing information relating to certain payments made to either the US or a foreign government. The new rules, which implement section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, apply to companies that are engaged in the development of oil, natural gas or minerals and will require annual submissions to be made to the SEC starting in the 2014 financial year. The new rules apply to "resource extraction issuers" if:

  • the issuer is required to file an annual report with the SEC; and
  • the issuer engages in the commercial development of oil, natural gas or minerals.

The rules apply to both US and foreign issuers and to smaller reporting companies that fall within the definition of "resource extraction issuer". Payments made to governments by subsidiaries and other entities controlled by a qualifying issuer will also need to be disclosed. For the purposes of the rules, "government" is defined as including a department, agency or instrument of a foreign government, or a company owned by a foreign government as determined by the SEC.

Issuers will need to disclose all payments related to commercial development activities that are:

  • made to further the commercial development of oil, natural gas or minerals;
  • not "de minimis" – i.e. a single payment or series of payments that equals or exceeds $100,000 during the most recent fiscal year; and
  • within a specified category of payments – including taxes, royalties, fees (including license fees), production entitlements, bonuses, dividends and infrastructure payments.

Submissions to the SEC under the new rules should be completed on the designated form (SD form) and should be submitted no later than 150 days after the end of the issuer's financial year.

Some commentators have welcomed these new rules, stating that increased transparency will serve to reduce the risk of bribery and corruption in the energy sector. Concerns have, however, been raised that the rule will force companies to divulge secret commercial strategies and may therefore damage companies who are subject to the rule.

Terrorist financing/sanctions/money laundering

  1. UK and US regulators provide guidance on humanitarian assistance to Iran

In light of the recent earthquakes in north-west Iran, HM Treasury and the US Department of the Treasury's Office of Foreign Assets Control (OFAC) have published clarifying guidance on providing humanitarian assistance to Iran.

Pursuant to the various EU Regulations, HM Treasury has clarified that transfers of funds may be made to Iranian persons, entities and bodies without prior authorisation where the funds are for humanitarian purposes or activities. The Treasury must be notified in advance of any humanitarian transfers of over €10,000 but, even if the transfer is over €40,000, a licence will not be required. The position does, however, become more problematic where the transfer is from a UK credit or financial institution to an Iranian bank, as the Financial Restrictions (Iran) Order 2011 will be engaged. This prohibits UK credit and financial institutions from transacting with Iranian banks. However, there are certain general licences which are available.

General licence 1 allows the transfer of under €40,000 to an Iranian bank where those funds are for, or relate to, humanitarian activities or purposes (provided, first, that any transferor notifies the Treasury in advance if the sum is over €10,000, as required by Article 30 of the EU Regulation, and, second, that the Iranian recipient bank is not itself subject to an asset freeze). If the transfer is for €40,000 or more, a specific licence must be sought.

Similarly, general licence 2 allows UK financial and credit institutions to transact with (unlisted) Iranian banks to effect personal remittances (i.e. those unrelated to commercial or business activities) of under €40,000. If the transfer is for €40,000 or more, a specific licence must be sought.

In summary, therefore, humanitarian donations or personal remittances of €10,000 or less can be transferred by UK financial and credit institutions to unlisted Iranian banks without notifying or seeking further authorisation from the Treasury. Humanitarian donations of over €10,000 but less than €40,000 can only be made to an unlisted Iranian bank after notifying the Treasury. Humanitarian donations of €40,000 or more will require a licence under the 2011 Order if the transfer involves a transaction between a UK bank and an unlisted Iranian bank. Any transaction with a listed Iranian bank would require a licence.

OFAC has stated that donations of food and medicine designed to be used for humanitarian purposes are exempt from US sanctions so long as they are not being sent to the Iranian government or any individual or entity listed on the Treasury Department's List of Specifically Designated Nationals and Blocked Persons. However, licences will be required in respect of any medical devices that are either sold or donated to Iran. Generally speaking, OFAC reiterates that personal remittances are permitted to Iran but charitable donations of funds to Iran require a specific licence from OFAC. OFAC will prioritise licence applications from nongovernmental organisations wishing to engage in earthquake relief efforts.  

  1. International payments under US Iran sanctions regulations

HM Treasury has published a letter it has received from the US Department of the Treasury's Office of Foreign Assets Control (OFAC). OFAC clarifies the way in which OFAC's Iran sanctions previously applied to international payments. HM Treasury requested clarification, particularly in relation to the obligations of foreign banks operating in the United States before and after 2008 in respect of transactions involving Iranian counterparties.  

  1. New US Executive Order in relation to Iran and enforcement action against two non-US banks

On 31 July 2011 Barack Obama enacted a new Executive Order ‘Authorising Additional Sanctions with Respect to Iran’, which has immediate effect. The US Department of the Treasury also announced the imposition of sanctions under the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (“CISADA”), against two non-US financial institutions (one Iraqi, one Chinese) for knowingly facilitating significant transactions or providing significant financial services for US-designated Iranian banks. Please click here for our detailed briefing on this topic.  

  1. MONEYVAL evaluation report on the Holy See

The Council of Europe's Committee of experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL) has published its first evaluation report of the Holy See (including Vatican City State). The report evaluates the implementation of international and European standards to combat money laundering and terrorist financing as at November 2011 but takes into account developments up to 25 January 2012. The report concludes that the Holy See has come a long way in a very short period of time to providing the building blocks of a regime to counter money laundering and combat terrorist financing (AML/CFT regime), however, further important issues need to be addressed in order to demonstrate that the regime is fully effective and has been properly implemented. MONEYVAL will continue to monitor implementation of its recommendation. The Holy See is required to submit a progress report within one year.  

  1. Turkish Bank (UK) Ltd fined for money laundering failings

The FSA has published a Decision Notice fining Turkish Bank (UK) Ltd (TBUK) £294,000 for breaching the Money Laundering Regulations 2007. The breaches related to TBUK's corresponding banking arrangements and were considered to be widespread by the FSA. This is the first time that the FSA has taken action against a firm in relation to money laundering weaknesses in its correspondent banking arrangements. Under the Money Laundering Regulations 2007, providing correspondent banking services to banks based in non-EEA states is considered to create a high risk of money laundering that requires enhanced due diligence and ongoing monitoring of the relationship. The FSA found that TBUK had failed to establish and maintain appropriate and risk-sensitive anti-money laundering (AML) policies and procedures for its correspondent banking relationships, had failed to monitor its relationships with correspondent banks and had failed to maintain adequate records. TBUK's failings were particularly serious as the FSA had previously warned it of deficiencies in its AML controls over correspondent banking. TBUK's fine comes as a result of the FSA's July 2010 thematic review of how banks in the UK were managing money laundering risks.  

  1. Standard Chartered settles US claims over Iranian transactions

The New York State Department of Financial Services (DFS) has announced that it has reached a settlement with Standard Chartered Bank in relation to allegations that the bank had failed to disclose approximately 60,000 transactions with the Iranian government amounting to at least $250 billion in breach of the US sanctions regime. The bank has agreed to pay a civil penalty of $430 million to DFS and has agreed to install a monitor to evaluate money-laundering risk controls in the New York branch and implementation of appropriate corrective measures for a period of two years. The bank has also agreed to install permanent personnel in its New York branch to oversee and audit any offshore money-laundering due diligence undertaken by the Bank. A preliminary statement setting out DFS' case against the bank has also been published.  

  1. US Senate Committee publishes report on alleged money laundering failures by HSBC

The Permanent Subcommittee on Investigations of the US Senate's Committee on Homeland Security and Governmental Affairs has published a report concerning HSBC and its US affiliate (HBUS) for alleged anti-money laundering (AML) control failures.

To examine the current money laundering and terrorist financing threats associated with correspondent banking, the Subcommittee selected HSBC as a case study. The Report's focus was on how overseas banks' relationships with their US affiliates allow customers access to the US financial sector and US currency.

The Subcommittee's recommendations included:-  

  1. Screen High Risk Affiliates. HBUS should re-evaluate its correspondent relationships with HSBC affiliates, including by reviewing affiliate AML and compliance audit findings, identifying high risk affiliates, designating affiliate accounts requiring enhanced monitoring, and closing overly risky accounts. HBUS should conduct a special review of its account for HSBC Mexico.
  2. Respect OFAC Prohibitions. HSBC Group and HBUS should take concerted action to stop non-U.S. HSBC affiliates from circumventing the OFAC filter that screens transactions for terrorists, drug traffickers, rogue jurisdictions, and other wrongdoers, including by developing audit tests to detect OFAC sensitive transactions by HSBC affiliates. In the findings of fact section of the report it was alleged that, while HBUS had insisted that HSBC affiliates provide fully transparent transaction information, when it obtained evidence that some affiliates were acting to circumvent the OFAC filter, HBUS had failed to take decisive action to confront those affiliates and put an end to such conduct.
  3. Close Accounts for Banks with suspected Terrorist Financing Links. HBUS should terminate correspondent relationships with banks whose owners have links to, or present high risks of involvement with, terrorist financing.
  4. Revamp Travellers Cheque AML Controls. HBUS should restrict its acceptance of large blocks of sequentially numbered U.S. dollar travellers cheques from HSBC affiliates and foreign financial institutions; identify affiliates and foreign financial institutions engaged in suspicious travellers cheque activity; and not accept travellers cheques from affiliates and foreign banks that sell or cash U.S. dollar travellers cheques with little or no KYC information.
  5. Boost Information Sharing Among Affiliates. HSBC should require AML personnel to routinely share information among affiliates to strengthen AML coordination, reduce AML risks, and combat wrongdoing. (We note that the interaction between information sharing within the EU and data privacy rules is an issue that has been highlighted in the EU's current review of the Third Money Laundering Directive).
  6. Eliminate Bearer Share Accounts. HBUS should close its remaining 26 bearer share corporate accounts, eliminate this type of account, and instruct financial institutions using HBUS correspondent accounts not to execute transactions involving bearer share corporations. U.S. financial regulators should prohibit U.S. banks from opening or servicing bearer share accounts.
  7. Increase HBUS’ AML Resources. HBUS should ensure a full time professional serves as its AML director, and dedicate additional resources to hire qualified AML staff, implement an effective AML monitoring system for account and wire transfer activity, and ensure alerts, including OFAC alerts, are reviewed and Suspicious Activity Reports are filed on a timely basis.
  8. Treat AML Deficiencies as a Matter of Safety and Soundness. The Regulator, OCC, was criticised and it was recommended that OCC should align its practice with that of other federal bank regulators by treating AML deficiencies as a safety and soundness matter, rather than a consumer compliance matter, and condition management CAMELS ratings in part upon effective management of a bank’s AML program.
  9. Act on Multiple AML Problems. To ensure AML problems are corrected in a timely fashion, the OCC should establish a policy directing that the Supervision Division coordinate with the Enforcement and Legal Divisions to conduct an institution-wide examination of a bank’s AML program and consider use of formal or informal enforcement actions, whenever a certain number of Matters Requiring Attention or legal violations identifying recurring or mounting AML problems are identified through examinations.
  10. Strengthen AML Examinations. The OCC should strengthen its AML examinations by citing AML violations, rather than just Matters Requiring Attention, when a bank fails to meet any one of the statutory minimum requirements for an AML program; and by requiring AML examinations to focus on both specific business units and a bank’s AML program as a whole.

Banks and other financial institutions may wish to consider their programmes to ensure that they take into account, where appropriate, the Sub-Committee's Recommendations.

There is speculation that other financial institutions may be subject to investigation for sanctions and related violations by the US authorities.  

  1. OLAF launches investigation into tobacco company

It has been reported that the European Commission's European Anti-Fraud Office (OLAF) has launched an investigation into Japan Tobacco Inc for alleged breaches of sanctions in respect of Syria. It is alleged that a Swiss subsidiary of the firm sold millions of cartons of cigarettes to a firm which was at least partially owned by the Makhlouf family, who are related to the Syrian President, in May 2011.

Market abuse/Insider dealing/FSA enforcement

  1. Tracey McDermott appointment confirmed

The FSA has published an internal email confirming that Tracey McDermott has been appointed Director of its Enforcement and Financial Crime Division (EFCD). Ms McDermott has been Acting Director of EFCD since April 2011.  

  1. Six sentenced for insider dealing

The FSA has announced that six men have been sentenced for insider dealing offences committed between 2006 and 2008. The defendants obtained confidential and price-sensitive information from investment banks concerning proposed or forthcoming takeover bids and then used a large number of accounts to place spread bets on certain stocks knowing that their price would rise. The defendants were convicted of making a combined profit of £732,044.59 between 1 May 2007 and 31 May 2008. This case was the longest and most complex prosecution brought by the FSA to date. Ali Mustafa, Pardip Saini and Paresh Shah were sentenced to 3 years 6 months, Neten Shah was sentenced to 18 months, Bijal Shah and Truptesh Patel were sentenced to 2 years. Confiscation and costs orders will be dealt with at a later date.  

  1. FSA fines former insurance broker for misappropriating insurance premiums

The FSA has published a Final Notice against Stephen Goodwin, former partner of Goodwin Best in Lancashire. The FSA fined Mr Goodwin £471,846 and banned him from working in regulated financial services after it found that he had used clients' insurance premiums to fund his business. The fine consists of disgorgement of £303,846 and a punitive element of £168,000. Goodwin's actions resulted in one client finding out they were not insured when trying to make a claim and two other clients paying the same premium twice to ensure their policies remained in force.  

  1. US regulators summon seven banks in relation to LIBOR

Regulators in New York and Connecticut have widened the scope of their respective investigations into the alleged manipulation of the London Interbank Offered Rate (LIBOR). The New York and Connecticut Attorney Generals have requested information from JP Morgan Chase, Barclays, Royal Bank of Scotland, HSBC, UBS, Deutsche Bank and Citigroup.  

  1. Wheatley Review sets out UK's response to LIBOR scandal

Martin Wheatley, head of conduct regulation at the FSA, has given a speech providing details on his review of the alleged manipulation of the London Interbank Offered Rate (LIBOR). Mr Wheatley has been asked by the Government to look at how the system can be reformed to ensure its credibility and trust within it. The Wheatley Review will consider:

  • reforming the current framework for setting and governing LIBOR;
  • how to find and tackle abuse; and
  • other areas where prince-setting mechanisms are used in financial markets and whether policy changes will be needed.

The Wheatley Review has published a discussion paper for consultation which sets out the Review's early thinking on the issues raised. Stakeholders are invited to submit their responses by 7 September 2012.

There are also proposals at an EU level to specifically provide for the manipulation of LIBOR and other benchmarks within the market abuse regime. For further information, please see our blog on this topic.  

  1. Insider dealers ordered to pay £1.5 million in confiscation

The FSA has announced that it has been successful in obtaining Confiscation Orders against Christian and Angie Littlewood following their sentencing for insider dealing in 2010. Mr and Mrs Littlewood have each been ordered to pay £767,000 by way of confiscation and have also each been ordered to pay costs in the sum of £33,000 to the FSA. The orders mean that the total amount of money confiscated in this case, including from Helmy Omar Sa'aid, totals £2,174,000. The confiscation orders are especially interesting given that the total profit made by the Littlewoods and Sa'aid amounted to only £590,000.  

  1. HM Treasury and US Tax Authority release model agreement to implement FATCA in the UK and extend information sharing powers between the US and the UK

HM Treasury (in conjunction with the governments of France, Germany, Italy and Spain – together the ‘FATCA Partners’) have published the terms of a model agreement (the ‘Model Agreement’) which they propose to enter into with the US government (the ‘IRS’) and which is intended to address concerns about FATCA compliance for financial institutions established in the FATCA Partner jurisdictions.

The Model Agreement is intended to allow UK (and other FATCA Partner) financial institutions to comply with their FATCA obligations in situations where domestic law (such as data protection) prohibits the necessary exchange of information. This is achieved by requiring the financial institution to pass relevant information to their tax authorities who in turn will pass it on to the IRS.

A link to the Agreement can be found here and a link to the joint statement can be found here. For our more detailed briefing, click here.