Regulators collaborate to target firms already probed in one jurisdiction
A dramatic rise in international cooperation between regulators is fuelling a spike in increasingly invasive, multi-jurisdictional regulator investigations into companies says international law firm Freshfields Bruckhaus Deringer.
Figures obtained from leading regulators the Financial Services Authority (FSA) and its US counterpart the Securities and Exchange Commission (SEC) show a marked increase in cooperation with their offshore counterparts, with the SEC increasing requests to foreign regulators for assistance on its investigations by 30% in the fiscal year 2009 (774, up from 594 in 2008) and obliging with 400 requests from foreign regulators in the past fiscal year.
As a result, the SEC successfully engaged foreign counterparts in over a dozen jurisdictions obtaining freezes of non-US assets to the value of $325.9 million - five times the total amount of assets frozen by the SEC in the previous four years ($65m).
The FSA, which levelled £34.8 million in fines through the fiscal year 2009, a 54% increase on the previous year's total, fielded a 25% increase in requests for assistance from foreign agencies during 2009 and noted that it had increased its own requests to foreign regulators for assistance with its investigations but had not detailed by how much.
Furthermore, FSA investigations into foreign companies and financial institutions have increased six-fold. This jump which saw 30 foreign companies the focus of an FSA investigation in 2009 (15% of 194 FSA corporate investigations) is in stark contrast to previous years where foreign companies as a proportion of all FSA corporate investigations were comparatively low, accounting for only 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 that due to the UK's status as a global financial centre, the rise in FSA investigations into foreign companies is not necessarily indicative of a particular single regulator focus, but 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," says Parker. As a result of regulator cooperation, he is seeing more instances of a regulatory enquiry or successful prosecution of a multinational company in one jurisdiction spawning agency investigations in other regions.
"It's 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 added. "However, in many instances this is not justified as, for example, identified instances of bribery, fraud, mis-selling and market abuse are commonly localised and not always indicative of a company's modus operandi."
A host of bi-lateral agreements between regulators, the International Organisation of Securities Commission information sharing agreement, which counts more than half the world's securities commissions as members, and joint regulatory supervisors such as the European Securities Commission, has ensured regulators have more information at their finger tips than ever before, and an official mandate to share.
The Iosco agreement is an understanding between 63 securities commissions from across the globe to share information on companies. Sixty three of 115 securities commissions are members.
"Regulatory cooperation 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. However, on the other side of the coin are the multi-national companies and financial services firms that are increasingly subjected to aggressive, 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."
Parker sees evidence of this approach in an ongoing judicial review into an FSA decision to investigate a UK hedge fund following a request for information from the SEC for documents from the hedge fund's accountants [Amro International SA & Creon Management SA v FSA].
"This case 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 around, has been challenged by the subject of the investigation who is not a party to the complaint issued by the SEC."
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, says Parker. He predicts cross-border investigations into companies will increase this year, particularly as companies look to emerging markets for growth.
"The macroeconomics of the world has changed. We're coming out of a global recession and emerging markets now present very real business opportunities for ambitious companies. For example, in relation to winning and maintaining lucrative contracts, the line between corrupt practices and permissible business in some jurisdictions can at times be blurred," Parker says. "Companies need to appreciate the strategic risk of prosecution and variances in local legislation or else face regulatory investigations further down the line."
The recession, coupled with a perceived lack of accountability in the financial services sector, has led to increased governmental scrutiny, and placed business practices squarely under a microscope. "Like it or not, regulators will use any reason they see fit to initiate investigations and will happily share the fruits of their labour with their international counterparts."
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