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
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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
Recent regulatory developments
• 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
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 CDD
and 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 nonEEA 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
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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
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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)
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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
Partner
0845 497 0818
[email protected]
Gregory Brandman
Partner
0845 497 9797
[email protected]
Get in touch
[email protected]
www.eversheds.com/financialinstitutions
@EvershedsFI
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