The risk of prosecution and erosion of corporate value
Corporate crime is a hot topic on the agenda of regulators worldwide. We are seeing increased enforcement for corruption offences, money laundering and a variety of other financial crimes. This article explains the consequential risk to corporates of criminal prosecution and erosion of corporate value.
As regulators across the globe strive to keep pace with multinational entities they regulate, they are turning to their regulatory counterparts overseas for assistance. Both Singapore and the UK have a strong culture of international cooperation, with each other and with other overseas regulators. The Monetary Authority of Singapore (“MAS") has a memorandum of understanding with several of its counterparts, including the UK’s Financial Conduct Authority. This is a formal document to exchange information and/or provide investigative assistance, such as taking testimony of persons at the request of the other authority. Singapore’s Corrupt Practices Investigation Bureau (“CPIB") cooperates similarly, but on a more informal basis with regional anti-graft agencies, including the UK’s Serious Fraud Office (“SFO"). The culture of cooperation of both Singapore and UK is further empowered by their mutual legal assistance laws and extradition regimes.
Strong international cooperation increases the chances of enforcement action being taken, both domestically and overseas. The LIBOR scandal is a stark example of an investigation conducted by overseas regulators which prompted an investigation by the MAS. Following Barclays’ settlement with US and UK regulators for the manipulation of LIBOR, the MAS began a similar probe into the manipulation of SIBOR. On 14 June 2013, the MAS censured twenty banks, requiring them to set aside a combined $9.7 billion in extra reserves for one year while they carried out internal changes. 133 traders were identified as trying to manipulate SIBOR, of whom many were disciplined. In another case, the US Department of Justice investigated kick-backs paid to a Bangladeshi official involved in the Siemens scandal and found that this money was being held by a Singapore vehicle. US anti-money laundering legislation covers assets held outside of the US, as long as unlawful activity such as bribery is involved. Singapore authorities repatriated the proceeds of crime and prosecuted the director of the offending Singapore entity for failing to report the substantial fund transfers to either the CPIB or the police.
As a result of long arm jurisdiction of overseas laws, a Singapore entity may also be at risk of action by an overseas regulator. For example, the UK has various laws relating to corporate crime which have long arm jurisdiction and therefore require only a remote UK connection - money laundering legislation, the sanction regime and the Bribery Act are such laws. The range of wrong-doing by corporates classified as crime in the UK is also growing. on 1 April 2013, in the wake of the LIBOR scandal, a new criminal offence of taking misleading actions in connection with financial benchmarks was introduced. There is also ongoing consideration to extend the Bribery Act to include a new offence for corporates who fail to prevent financial crime committed by its employees. This new offence will be a strict liability offence and will therefore address the current difficulty of proving that the "directing mind" of the corporate (e.g. the board of directors) was responsible for the corrupt acts of its junior employees. UK regulators are also being given increasing powers to prosecute. In February 2014, deferred prosecution agreements were introduced, allowing the SFO to settle criminal liability of a corporate entity in return for the corporate agreeing to certain conditions, including fines, which are likely to be harsh: under the new Sentencing Guidelines, corporate may be fined up to 400% of the value of their gain from the criminal act.
Crime costs – look at, for example, Barclays, whose share price fell 10% upon admission of manipulating LIBOR. Corporates and financial institutions must remember that erosion of corporate value can happen without a formal criminal investigation. Parties to commercial contracts will now commonly ask counterparties to confirm compliance with all relevant domestic and international laws; those who are not compliant will lose out on business.
In late 2013, the US Navy cancelled more than $200 million in contracts with Glenn Defence Marine Asia, a Singapore-based defence firm, for alleged bribery. Taylor Wessing has also advised on M&A deals which have been threatened with collapse because due diligence has exposed weaknesses in the target company’s policies and procedures relating to anti-corruption and other financial crime.
In short, regulators are getting more powerful and increasingly co-operative across frontiers. Corporates cannot afford to ignore this and need to embrace the culture of good corporate governance with appropriate and sophisticated procedures.