Global Investigations Review - The law and practice of international investigations

The Practitioner’s Guide to Global Investigations, Fourth Edition

Global Settlements: The In-house Perspective

03 January 2020

Barclays plc

27.1Introduction

Reaching a global settlement will involve engagement with multiple enforcement agencies across multiple jurisdictions and co-ordination of a significant number of external and internal stakeholders. Settlements are multifaceted and require consideration of many factors, including the commercial aspects, not just the penalty but also potentially redress or compensatory payments; the collateral consequences for the company; the impact on employees; continuing regulatory requirements; and potential follow-on litigation. The timing and sequencing of a global settlement with multiple agencies and regulators can also be key. One of the principle advantages for a corporate in reaching a global settlement is to achieve a resolution guaranteeing finality and certainty. If this cannot be achieved, or achieved with a high degree of certainty, a company has to consider whether the benefits of a more limited settlement outweigh a further period of uncertainty. This can be a complex and difficult decision, especially when some of the uncertainty may not be fully quantifiable. This chapter will look at these key considerations from the perspective of the different stakeholders in a global settlement.

27.2Senior management

When considering global settlements, key considerations for senior management will be (1) the size of the financial penalty and any other financial components to the settlement; (2) the extent to which the settlement will bring finality of resolution to the company; (3) potential collateral consequences to the company’s business; and (4) reputational damage.

In recent years the size of financial penalties levied against corporates has grown exponentially. Since the 2008 financial crisis, a 2017 study shows the 50 largest banks in the United States and Europe have paid over US$300 billion in penalties for regulatory breaches.[2] Negotiating the financial penalty of any global resolution will be a key consideration for senior management. For regulators and law enforcement agencies working within a fairly rigid penalty framework, the scope for negotiating the proposed penalty may be more limited. For others there may be greater scope to seek a more proportionate penalty by putting forward arguments about the calculation method or the applicability of different components, for example whether disgorgement is appropriate. Ultimately, senior management will need to understand and take into account the proportionality of the penalty and the impact it will have on the company’s overall financial health.

In the United Kingdom, focused resolution agreements (FRAs) allow financial services firms to challenge a penalty proposed by the Financial Conduct Authority (FCA).[3] In April 2019, the FCA fined Standard Chartered Bank just under £102.2 million for anti-money laundering breaches.[4] This case was one of the first to involve a FRA. Standard Chartered agreed the FCA’s findings of fact and liability, but argued that the proposed penalty was too high. Standard Chartered challenged the size of the penalty at a hearing before the FCA’s Regulatory Decisions Committee (RDC), arguing that the proposed penalty was not proportionate based on the seriousness of the relevant breaches and certain mitigating factors. The RDC found in the bank’s favour, reducing the penalty from £155 million to £102 million, which included maintaining a 30 per cent settlement discount – a term of the FRA.

In addition to financial penalties, there may be a further financial component of the resolution involving significant redress, compensatory payments or consumer relief. Indeed, a regulator may require this as part of any settlement.[5] The potential for financial impacts beyond the original penalties as a result of follow-on civil litigation must also be taken into account. Management will need to understand the total financial impact across all aspects of the settlement and any consequential financial impacts before deciding whether it is in the best interests of the company and its shareholders to proceed.

A key consideration for senior management will be the extent to which the settlement will bring finality of resolution for the company. The uncertainty created by a significant enforcement investigation, and what the outcome, business impact and reputational damage will be, can often mean that settling with only one agency or on one aspect of the action is unlikely to be attractive. One of the main advantages to reaching a global settlement is being able to draw a line under the matter so that management can refocus their attention on their business and customers. However, this is not always easy to achieve. Co-ordinating a global settlement across multiple jurisdictions and agencies can be challenging, requiring the agencies synchronising the completion of their investigations and the corporate negotiating settlements simultaneously with each agency. Settling with one agency could also risk triggering an investigation by another with further (and in some cases heightened) risk to the company and additional uncertainty. In these circumstances, the company may consider it is not in its interests to seek an earlier settlement because the potential exposure and uncertainty remaining is too significant.

The likely collateral consequences of any resolution, in particular the potential impact on the company’s business and customers will also be paramount. The risk of collateral consequences in recent years has become more acute as the number of corporate criminal actions has increased. These could include debarment from tendering for public procurement contracts, disqualification from – or restrictions on – specific business practices, and having to seek waivers from regulators to continue other business activities. These collateral consequences may dictate the terms on which a company is willing to enter a settlement. For example, deferred prosecution agreements (DPAs), rather than a guilty plea or conviction, could be beneficial to a company in avoiding certain collateral consequences. The DPA entered into by Rolls-Royce in 2017 allowed the company to avoid being debarred from tendering for public contracts.[6]

The potential (and often unquantifiable) reputational impact of a settlement should also not be underestimated. The company will want to plan a comprehensive strategy to minimise reputational damage. One aspect of this will be the proposed terms of the settlement, including the nature and extent of the factual and legal admissions required. Senior management will want to ensure that any admissions are supported by the evidentiary record and will want to understand if any of these admissions give rise to the risk of further regulatory or enforcement action or follow-on litigation. They will also want to take into account the reputational impact. These are key considerations for a company when negotiating the terms of any final statement of facts or agreement.

Other considerations will include any longer term impact on the company of any other settlement terms, for example the installing of a monitor or imposition of probationary terms. Monitors can be extremely costly, both in terms of financial costs and management time.

Taking all these commercial aspects into account, senior management will be looking for a settlement that achieves the highest degree of finality and the least impact on the business and its customers. The extent to which the company considers it has already addressed the root causes of the issues, and will be able to reassure its customers and employees that this is the case, will be critical.

27.3Shareholders

A global settlement has to be in the interests of, and justifiable to, a company’s shareholders. Many of the considerations cited above for senior management will also be key issues for the shareholders.

Aside from the level of the penalty and the impact it will have on the company’s financial position, the single biggest concern for shareholders is likely to be achieving a final resolution. Shareholders will want to see the company move on and management be able to focus their attention on the business without the distraction of an ongoing enforcement action. A partial settlement or one that may trigger other litigation or enforcement action is unlikely to be considered a good outcome.

Shareholders will also expect the company to take appropriate action against any employees involved in the misconduct and will want to see that the company has taken steps to remediate any underlying issues. They will want assurance that the misconduct will not occur again, and they will want to have confidence that the current senior management of the company have set the right culture to ensure this. They will want to know that the company can properly move forward and draw a line under the matter.

27.4Employees

An enforcement investigation and global resolution can have a significant and long-lasting impact on employees. In most enforcement matters involving a global organisation, the misconduct itself centres on a small part of the company, and a small number of employees. For those employees directly involved there will likely be a need to consider disciplinary proceedings and other issues such as the question of continuing to fund their legal representation and applicability of D&O insurance.

The majority of the company’s employees, however, will know very little about the underlying issues until the settlement is announced. They will be most concerned about whether there will be any impact on them, including their ability to service their customers, and whether it will result in any changes to the structure or management of the company. Employees will also want to have confidence in senior management’s handling of the matter, and the steps taken to remediate the underlying issues and prevent similar occurrences. It may also be important for employees to be able to communicate the measures taken to customers.

When a global settlement is announced, a company’s management should provide sufficient information to employees to allow them to understand the rationale for the settlement, what it means in terms of reaching a final resolution, if there is going to be any impact on the company’s business or customers, and, if so, how this impact will be mitigated. It is also important for employees to know what they can communicate to customers, who may have many questions of their own about the potential impact of the settlement.

Despite not being involved in the underlying misconduct, the resultant negative reputational impact can still have an effect on employees, in terms of morale and motivation. It is therefore important for senior management to reassure employees that the matter has concluded, the company has taken appropriate action to address and remediate the issues, and to recognise the ongoing support and efforts of the wider employee workforce.

27.5Customers

The single most important aspect of a global settlement for a company’s customers is likely to be whether it will have any impact on the company’s ability to continue servicing them. On announcement of a global settlement, customers will be looking for assurance, to the extent possible, that there will be no impact on the company’s ability to continue doing business in the same way. To the extent there are restrictions or constraints placed on the company’s business activities by the settlement, they will want to understand how the company will minimise the impact of these. Customers will also be looking for assurance that there will be continuity of service and the least disruption possible. This may involve structuring things differently or making changes to personnel. It will be important to identify all these issues and any contingencies planned well in advance of the settlement announcement.

Some customers may also want to know what changes the company has made to address the issues. This may be particularly important to customers or counter­parties who conduct business on behalf of investors or shareholders to whom they owe fiduciary duties. This may also be more significant for customers where they consider there is a risk of an impact on their own compliance and regulatory obligations, for example if the misconduct involves anti-money laundering or sanctions breaches.

In recent years, some companies have considered that the risks of doing business in certain areas or jurisdictions are too high and have withdrawn from them. This ‘de-risking’ has been most prevalent in the banking industry and in respect of concerns about anti-money laundering (AML) and countering financing of terrorism (CFT), for example banks’ withdrawal from business in areas such as the money transfer business sector. While this is unsurprising, there are broader socio-economic consequences, and concerns have been raised that this de-risking can in fact frustrate AML/CFT objectives by pushing higher risk transactions into more informal, unregulated channels that are harder to monitor.[7] More still needs to be done by governments, regulators and enforcement agencies to help banks mitigate the unintended consequences of de-risking.

27.6Regulators and enforcement agencies

The size of the monetary penalty is still considered one of the key aspects of a settlement by most regulators and enforcers. Credible deterrence is seen by many to require imposing a financial penalty so severe it affects the company’s cost of doing business, to deter others at the company or in the industry from committing the same misconduct. Where multiple agencies are involved, there may also be political pressure to match equivalent penalties in other jurisdictions, increasing the overall settlement figure.

Another important aspect for the agencies in reaching a global settlement is often how the company will give redress to those who have been harmed by the misconduct.[8] If a company can demonstrate that it has voluntarily given redress for or remedied the misconduct in a timely and effective manner it is likely to receive credit for this in any final settlement.

The terms of any published statement of facts or final notice will also be important to make the severity and scale of the misconduct clear to the industry and wider public. The importance of this to the enforcement agency or regulator is often matched with the importance to the company of minimising the negative effects, which can make the negotiation of the terms hard-fought and the subject of contention.

In recent years, regulators and enforcement agencies have also placed a strong emphasis on holding individuals to account for the misconduct, both in terms of enforcement and disciplinary action. In 2018, the Department of Justice announced changes to its policy reflected in the Yates Memorandum[9] requiring companies to provide relevant information about ‘all individuals substantially involved in or responsible for the misconduct’. It also reinforced its commitment to prosecuting the individuals responsible for the misconduct. In November 2018, Deputy Attorney General Rod J Rosenstein clarified that the Yates Memo’s position on pursuing individuals remained a ‘top priority’, although he also announced a revised policy that gives prosecutors more discretion in deciding whether to pursue individuals.[10]

The introduction of the Senior Managers Regime by the FCA in the United Kingdom is also aimed at driving greater accountability within financial services firms. In 2015, the FCA and the UK Prudential Regulatory Authority (PRA) issued a joint policy statement[11] on the deferral of remuneration and clawback of variable compensation, and the FCA issued guidance setting out its expectations on how firms should comply with requirements on ex-post risk adjustment, to adjust variable remuneration to take into account a specific crystallised risk or adverse performance outcome including relating to misconduct.[12] In its guidance the FCA makes it clear that it expects firms to consider applying adjustments not just to those directly involved in the misconduct, but also to those employees whose roles and responsibilities include areas where failures or poor performance contributed to or failed to prevent the risk or misconduct.

Regulators and enforcement agencies will also want to see that the company has identified and remediated any root causes of the misconduct, including any systems and controls and cultural issues at the company. Credit is often given to those companies who take these steps proactively and at an early stage.

Finally, the extent to which a company is seen to have co-operated in the investigation is often a key determiner of the basis and terms of the settlement. In recent years, there has been much debate about the steps a company needs to take to be considered to have ‘co-operated’. Some regulators and enforcement agencies have provided greater clarity and guidance in respect of what they consider constitutes co-operation.[13] However, there are differences in expectations across jurisdictions among agencies, making it important for companies to balance these expectations when co-ordinating a global investigation and settlement.

27.7Conclusion

The increase and complexity of global settlements and the resultant collateral consequences in recent years means that early detection of a potential issue, through a robust compliance programme, has become all the more important. Effective and timely co-ordination of all aspects of the investigation, engagement with the different regulators involved, and consideration of the potential consequences and how to mitigate these, will be key factors in shaping the company’s strategy for dealing with the matter. Identifying these issues and setting the strategy early on in the investigation is often key to ensuring that the sequencing and timing of a global settlement is ultimately achievable.


Footnotes

1 Claire McLeod is the head of investigations and enforcement for Europe and the Middle East at Barclays Bank PLC. The views expressed are the author’s own and do not represent the views of Barclays Bank PLC.

3 The FCA introduced Focussed Resolution Agreements in March 2017.

5 In 2017, the FCA used its powers under section 348 of the Financial Services and Markets Act to require Tesco plc and Tesco Stores Limited to pay compensation to investors for market abuse, https://www.fca.org.uk/news/press-releases/tesco-pay-redress-market-abuse.

6 Serious Fraud Office v. Rolls–Royce Plc (Case No. U20170036) [2017] Lloyd’s Rep FC 249, ‘Debarment and exclusion would clearly have significant, and potentially business critical, effects on the financial position of Rolls-Royce. This could lead to the worst case scenario of a very negative share price impact, and, potentially, more serious impacts on shareholder confidence future strategy, and therefore viability.’ per Leveson P at para. 55.

8 See, for example, the FCA Mission: Our Approach to Enforcement, March 2018 (https://www.fca.org.uk/publication/corporate/our-approach-enforcement.pdf), in which the FCA places emphasis on the importance of taking action to address harm caused by serious misconduct.

9 Memorandum from Sally Quillian Yates, Deputy Attorney General, US Department of Justice to all US Attorneys, Individual Accountability for Corporate Wrongdoing (9 September 2015) https://www.justice.gov/archives/dag/file/769036/download.

10 Deputy Attorney General Rod J Rosenstein remarks at the American Conference Institute’s 35th International Conference on the Foreign Corrupt Practices Act, Office of Public Affairs, US Department of Justice, 29 November 2018, https://www.justice.gov/opa/speech/deputy-attorney-general-rod-j-rosenstein-delivers-remarks-american-conference-institute-0.

11 Strengthening the alignment of risk and reward: new remuneration rules, June 2015, https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/policy-statement/2015/ps1215.

12 Financial Conduct Authority, General guidance on the application of ex-post risk adjustment to variable compensation, 1 July 2015, https://www.fca.org.uk/publication/finalised-guidance/guidance-on-ex-post-risk-adjustment-variable-remuneration.pdf.

13 See, for example the Department of Justice’s FCPA Corporate Enforcement Policy, https://www.justice.gov/criminal-fraud/file/838416/download and the SFO’s Corporate Cooperation Guidance, https://www.sfo.gov.uk/publications/guidance-policy-and-protocols/sfo-operational-handbook.

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