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Eversheds LLP’s Overseas Banks Legal and Compliance Forum

An introductory seminar

25 February 2015

Agenda

• Introduction

• An in-house guide to dealing with English Court Orders including:

– freezing injunctions;

– Norwich Pharmacal/Bankers Trust orders; and

– registration of foreign judgments

• Update on recent regulatory developments

• Q&A

Eversheds LLP’s Overseas Banks Legal and Compliance Forum

An in-house guide to dealing with English

Court Orders

David Flack, Partner, Eversheds LLP

25 February 2015

Litigating before the English Court

• Over the past 5 years over 62 % of litigants in Commercial Court cases were based outside of England & Wales

• A large proportion are from the Middle East, Russia and CIS

• So, why do international parties like to litigate in the English Court?

So, why do international parties like to litigate in the English Court?

• The co-existence of London’s reputation as an international business centre with its reputation as a global legal centre is no coincidence. Business requires expert legal advice and a predictable and stable legal system in which to operate. The English courts are a safe and neutral forum for the resolution of disputes, overseen by a strong and famously independent judiciary – The Honourable Mr Justice Carr, 19 September 2013

Typical English Court Orders: Interim Remedies

• Freezing Injunctions

• European Account Preservation Orders

• Norwich Pharmacal Orders

• Bankers Trust Orders

• Registration Orders (in respect of foreign judgments)

• Third Party Debt Orders

Freezing injunctions – key points

• A freezing order is an:

– interim remedy that restrains a party from disposing of or dealing with his assets

– its effect is to preserve the D’s assets until a final judgment can be obtained/enforced

• They are commonly sought where C has been the victim of a fraud

• A freezing order can be made in respect of assets situated domestically or worldwide

Freezing injunctions - key points

• A freezing order will contain a penal notice. If breached, there is a threat of contempt proceedings – assets can be seized by the Court or a prison sentence

• This will extend to a bank (and its employees) which has been served with a freezing order and is within the jurisdiction of the English Court

• Liability will arise from conduct which assists or encourages D to breach the terms of the order

• But no liability of 3rd party banks in negligence to the applicant Commissioners of Customs & Excise v Barclays [2007] 1 AC 181

Practical considerations – Which Assets are caught?

• A freezing order may relate to domestic and/or internationally held assets

• If English assets only, the Bank is only obliged to freeze those assets within the jurisdiction not those located offshore or based in other jurisdictions

• If a WFO and the Bank’s employees within the jurisdiction can exercise control over those assets may be caught

• Check whether the order includes a schedule of specific assets

Practical considerations – Piercing the Corporate Veil

• where a company or trust is used to hold assets which are controlled by and held for the benefit of the D

• if assets beneficially belong to a 3rd party but D has rights, the value of which depends on the preservation of those assets

• If the transfer of an asset is regarded as a “sham”

• Where freezing orders are obtained against individuals always check related corporate entities and whether there is any reason to suspect that that co’s assets may be impacted

Other Practical considerations

• As a non-party affected and served with a freezing order, a bank is entitled to certain documents under CPR 25 PD 9

• Check the relevant protections afforded to third parties are included in the Freezing Order (especially a WFO) – check against the commercial court standard template

• You are entitled to read the Defendant’s identifier details narrowly

• Freezing orders do not effect a bank’s right of set off – i.e. where D has two bank accounts, one in credit and the other in debit

European Account Preservation Orders

• Came into force on 17 Jul 2014 and will applied by participating Member States from 18 Jan 2017

• UK and Denmark have not opted in therefore accounts located in the UK cannot be attached

• However, UK and Danish account holders as well as banks operating in participating Member States will be impacted

• EAPOs are alternative protective measures to national remedies

• It will allow C to secure or freeze monies in D’s bank accounts across Europe

EAPOs – key points

• Banks will be under an obligation to “freeze” accounts subject to an EAPO “without delay”

• If C is unable to identify the bank(s) with which D holds accounts, he can request that such info is obtained by the court of issuance

• The Regulations do not expressly address a bank’s right of set off – it provides that the EAPO has the same rank as an “equivalent national order” of the Member State

• The Regulation appears complex and will undoubtedly increase the burden on banks. Banks will have to review Ts&Cs and processes

Norwich Pharmacal and Bankers Trust

• An NPO is a form of disclosure order which enables C to:

– identify a wrongdoer

– obtain full information about a wrongdoing

• BTOs are only available against banks and require banks to provide information ordinarily protected by duties of confidentiality. They assist C in:

– tracing/preserving assets

– police a freezing order

NPOs/BTOs - Practical tips

• Ensure that:

– the date range requested is appropriate and not too wide and the deadline for the Bank’s response is realistic

– Generally entitled to notice (even if informal)

– the Bank complies with any gagging order –beware of tipping off

– the Bank’s costs of complying with the Order are provided for (reasonable photocopying costs etc)

– Generally banks adopt a neutral stance in response to NPOs/BTOs

Registration of foreign judgments

• Final judgments made by foreign courts can be generally be registered for enforcement in England and Wales

• The English courts are often used as a method to enforce foreign judgments where assets exist within the jurisdiction

• Often accompanied or followed by a Third Party Debt Order (TPDO) – remember a bank account in credit is simply a debt owed by the bank to its customer

Practical guidance

• Watch out for letter of credit disputes (the bank becomes the defendant)

• Also watch out for English orders registering foreign court interim freezers (may well lack the standard protections – no case law on this)

• There are often short time periods within which to act when served with a registration order, therefore it is key to act quickly on receipt and seek legal advice (often the bank may know little about the circumstances of the foreign judgment/award)

• Ensure the legal team can be briefed about the issues and brought up to speed quickly

Eversheds LLP’s Overseas Banks Legal and Compliance Forum

Update on regulatory developments

Greg Brandman, Partner, Eversheds LLP

25 February 2015

Agenda

• FCA Thematic work

– AML and sanctions controls

• Guidance consultation

– Conflicts of interest

• HMT consultation on extending the new senior managers regime to the UK branches of overseas banks operating in the UK

Recent regulatory developments

FCA Financial Crime Thematic Review

• How small banks manage money laundering and financial crime risk

• 21 banks reviewed – serious issues found at 6 banks

– 4 banks subjected to restrictions

– 3 banks had s166 reviews imposed

– 2 banks referred to enforcement

• FCA found significant and widespread weaknesses in most banks’ AML systems and controls

• One third of banks had inadequate resources in Risk, Compliance and Audit functions

• Overseas banks are struggling to reconcile group policies with UK requirements

• The FCA has published new AML guidance as a consequence

Background

• FCA reviewed AML controls at 27 banks in 2010/11

– PEPs

– correspondent banks

– wire transfers

• Weaknesses around AML controls and high risk/PEP customer relationships

• 5 banks referred to enforcement

• FCA’s Financial Crime Guide published

• 2014 review was a follow-up focusing on PEPs, correspondent banking and sanctions controls

• 5 of the banks visited were part of the 2010/11 review

What the FCA found

• Continuing weaknesses in most small banks’ AML systems and controls:

– inadequate AML risk assessments at business and customer level

– inadequate EDD and monitoring of high-risk, PEP and correspondent banking relationships

– awareness of AML and sanctions risks was weak

– group policies not always consistent with UK AML requirements

– lack of senior management engagement in assessing AML controls against FCA guidance

• UK CEO position was sometimes a short-term posting from the home country with little incentive to ensure AML controls met UK standards

Assessing AML risk in your business

• Business-wide risk assessments

– key to identifying the high risk parts of your business and to prioritising resources accordingly

– key to developing appropriately risk-based AML controls

– key to your ability to respond appropriately to emerging risks

Assessing AML risk in your business

• Customer money laundering risk assessments

– key to determining the appropriate level of CDDand ongoing monitoring for each relationship

– 2014 review found that the quality of customer risk assessments remained weak

– 75% of banks were failing to implement an adequate customer risk assessment process

– banks are expected to take a holistic view of the AML risk associated with each relationship

Enhanced due diligence

• Quality of EDD remained the weakest area for most banks visited in the 2014 review

• 75% of banks failed to carry out adequate EDD on their high risk relationships

• Establishing source of wealth/funds was a particular problem – merely evidencing a bank transfer is not sufficient !

• MLRs provide that EDD must be carried out on non-EEA correspondent banks

• The risks of reliance

Enhanced ongoing monitoring

• FCA found that ongoing monitoring was not always effective

• Transaction monitoring

– failure to establish expected activity when accounts opened

– no attempt to identify trends or unusual patterns

– threshold limits often the only form of transaction monitoring

– insufficient training for RMs on “red flags”

• Half of banks visited were not carrying out periodic reviews of their high risk relationships

– are you updating EDD post-review ?

– does the customer risk assessment remain appropriate ?

Sanctions controls

• Banks generally had a good understanding of their obligations under the UK sanctions regime

• But effectiveness of sanctions controls varied significantly

• Sanctions screening was not being performed for certain types of transactions

Training and awareness

• Training at nearly half the banks visited was found to be ineffective

• Staff in important AML roles were regularly unable to discuss AML risk or red flags

• The level of AML and sanctions knowledge among MLROs in 25% of banks visited was inadequate

• FCA has re-emphasised the importance of providing staff in key roles with tailored, practical AML and sanctions training – this is especially important for staff dealing with high risk customers

Proposed new guidance on financial crime systems and controls

• Includes new/further guidance on:

– management information

– risk assessments: business-wide and customer

– EDD

– enhanced ongoing monitoring

– sanctions screening

– governance and culture

Points to note for senior managers

• FCA expects senior management to be aware of the AML and sanctions risks to which the firm is exposed and to ensure these are managed effectively

• What does this mean in practice ?

– establish a strong AML culture and set a clear risk appetite

– ensure you get quality M.I. on AML issues

– ensure control weaknesses are identified and corrected

– ensure compliance and AML functions have adequate resources to help manage the risks

– set up a Financial Crime committee ?

FCA Thematic Review: conflicts of interest relating to in-house investment products (IHPs)

• FCA review of conflicts arising from wealth managers’ and private banks’ use of in-house investment products in retail discretionary and advisory portfolios

• Follow-up on FCA’s 2013 suitability review

• 18 WM and private banking firms reviewed

– £146 billion retail customer assets under management

– 20% of this invested into products manufactured by a party connected to the firm

Key Findings

• Firms generally recognised the potential risks arising from conflicts

– heightened senior management awareness

– no evidence of remuneration structures that could bias investment decisions towards IHPs

– consistent due diligence processes around selection and monitoring as between IHPs and other products

• BUT there were shortcomings

– unclear articulation of how IHPs fitted in business model/strategy and how aligned with customers interests

– failure to monitor level of IHPs in customer portfolios (implications for conflicts management)

– unclear communications with customers about nature of firm’s services and extent to which IHPs might feature

Points to consider

• Identifying and managing conflicts

• Management Information

• Sales targets and remuneration

• Product selection, reviews and monitoring

• Communications with customers

• Transfers of business/outsourcing arrangements

– impact on customers should be considered

Conclusions

• Firms using IHPs must be aware of the inherent risk of conflicts arising from their business models

– increasing AUM

– increasing profitability

• Firms which have access to IHPs will be expected to consider how their own arrangements meet the standards set out in the report

• Senior management responsibilities

– implement robust systems and controls to identify and manage conflicts arising due to firm’s business model

– promote a culture which supports the identification and management of conflicts of interest

• Arch Cru decision and FCA’s Feb 2015 Regulation round-up

– “Responsibility for identifying conflicts and how to manage them should be clearly allocated and the controls in place should be reviewed regularly.”

HM Treasury consultation

• HMT is seeking views on whether to extend the UK’s new Senior Managers and Certification Regime to UK branches of foreign banks and investment firms

• Chancellor announced UK government’s intention to extend the regime to cover UK branches of foreign firms in June 2014

• FCA and PRA have welcomed the proposal

• Consultation closed on 30 January 2015

• HMT will make the order, subject to Parliamentary approval

What is the new regime ?

• Parliamentary Commission on Banking Standards report (June 2013) – objective to strengthen individual accountability

• Financial Services (Banking Reform) Act 2013

• Only deposit-taking institutions or PRA-regulated investment firms (“relevant firms”) are affected

• New regime for Senior Managers

– 18 SMFs will replace SIF functions at relevant firms

– new conduct rules for SMFs

• New certification Regime for those who can cause “significant harm” to the firm or its customers

– Firms to be responsible for certifying fitness and propriety of staff to hold these roles

• 5 new conduct rules will apply to all employees of relevant firms who do not perform a mere ancillary role

Key features of the new regime

• Presumption of responsibility for senior managers

• Mandatory statements of responsibility for senior managers

• Firms required to consider fitness and propriety of senior managers prior to applying for approval and at least annually thereafter

• Firms required to certify annually the fitness and propriety certification regime staff

• All employees of relevant firms who do not perform a mere ancillary role (e.g. security guard, catering and cleaning staff) to be subject to new conduct rules

• Firms required to notify the regulators of suspected conduct rules breaches by, and disciplinary action taken against, their employees

• Obligation to train relevant staff in respect of the new conduct rules

What to expect (PRA)

• Regulators will apply new requirements to branches “appropriately and proportionately”

• Different rules for different types of branch

• A UK branch of a foreign bank will be treated the same as a UK subsidiary of a foreign bank, if they engage in the same activities

– but PRA prudential supervision of a branch will be lower than for a subsidiary

• PRA will not designate SMFs in UK branches of EEA relevant firms

• PRA regime for non-EEA firms is subject to consultation, but

– expected that PRA will designate significantly fewer SMFs in branches of these firms than for UK equivalents

– some branches may only need 1 person approved as SMF

– PRA unlikely to designate many significant harm functions in branches

• PRA’s proposals will be aligned to its wider approach to branch supervision – see SS10/14

What to expect (FCA)

• Difference between branch/subsidiary less significant for conduct of business than for prudential regulation

• FCA’s conduct of business regulation of branches will be more closely aligned with its approach to UK firms/subsidiaries

• FCA will designate more SMFs and significant harm functions in branches than the PRA

– total number of designated SMFs is expected to be 5 or 6 per branch

Implications for firms and their staff

• 1,000s more staff within the disciplinary jurisdiction of the FCA/PRA

• Enhanced monitoring and reporting obligations placed on relevant firms

• Considerable additional training obligations placed on firms

• The presumption of responsibility for senior managers

– reversal of the burden of proof where the firm has breached regulatory requirements in their area of responsibility

– not necessary to show direct responsibility for the breach

– senior managers will need to prove they acted reasonably

– intended to make it easier for regulators to take disciplinary action against senior managers

– considerable increase in personal regulatory risk

Non-executive directors ?

• CP15/5 published 23 February 2015

• Revised approach to INEDs in relevant firms and Solvency II firms

• PRA and FCA will only make the following NEDs subject to approval and inclusion in the Senior Managers Regime:

– Chairman of the Board

– Chairs of Risk, Audit, Rem & Noms Committees

– Senior Independent Director (nb also compliance and whistleblowing)

• Unless a NED holds one of the specified non-executive functions, he will not be performing an SMF and so will not be subject to the presumption of responsibility

• CP15/5 also contains proposed guidance on the role and responsibilities of NEDs in relevant firms and Solvency II firms

Questions?

Today’s speakers

David Flack Partner0845 497 0818davidflack@eversheds.com

Gregory Brandman

Partner

0845 497 9797

gregorybrandman@eversheds.com

oblcforum@eversheds.com

www.eversheds.com/financialinstitutions

@EvershedsFI

Get in touch

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