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Recent Global Regulatory Responses to Financial Crime

In the ten years since the 2008 financial crisis, the reaction of global regulatory bodies has been swift to shield consumers and investors from further harm. The most prolific enforcers have been US-based, comprising nearly 80% of the $26 billion worth of fines imposed for market abuse on both US and international entities in equal measure. Over the previous five years, 28 custodial sentences have been handed down in criminal courts worldwide.

In the UK, revelations concerning decades-long manipulation of the London Interbank Offered Rate (LIBOR) that emerged in 2012 resulted in a dramatic spike globally in market abuse sanctions. In 2015, one custodial sentence, reduced to 11 years on appeal, was handed down for rigging. Since 2012, over £2.2 billion in monetary sanctions have been issued by the UK’s Financial Conduct Authority (FCA).

Beyond the 2008 crisis and LIBOR scandal, increasingly globalised networks for money laundering, organised crime and terrorist financing have in turn necessitated an intensified regulatory response, most notably through the United States’ PATRIOT Act targeting “politically exposed persons”. As highlighted by the World Bank in 2015, many global financial institutions have responded by “de-risking”: complete withdrawal from perceived high-risk geographic regions, with dire consequences in those areas for a deluge of sectors, including banking and charities. Where such entities cut relationships entirely, as opposed to developing more robust compliance regimes, an invaluable resource for monitoring and detecting illicit activity is lost.

This note will explore definitions of “market abuse”, being by far the highest prevailing category of offence. It will then provide common approaches to risk management advanced by regulatory bodies.

Definition of Market Abuse

Virtually all countries will meet market misconduct with both civil and criminal sanction, including market bans, injunctions, and in some cases, custodial sentencing. In the UK, the FCA has all three sanctions at its disposal.

Market misconduct does not always arise intentionally, rather, it is in part attributable to lack of information sharing amongst financial institutions as to what constitutes risk. This is in turn fuelled by a lack of common cross-border terms as to what conduct requires regulation. For example, granted the US has housed the most zealous enforcers, financial entities worldwide have paid close attention to guidance issued by the US Securities and Exchange Commission.

The UK’s regime for market abuse sanction is governed by domestic legislation and the EU Market Abuse Regulation (MAR), in effect from 3 July 2016. There is a broad range of offences, however, the most commonly occurring are: (1) insider dealing (2) unlawful disclosure; and (3) market manipulation. The UK has retained its own criminal sanction schemes with regards the first and third.

Insider dealing

The Criminal Justice Act 1993 defines insider dealing as dealing in securities based on information that is not yet publically known, or “inside information”, that would otherwise affect the price of the securities if it were to be made public. The MAR applies a similar definition but more broadly to “financial instruments” rather than securities alone.

This definition is stricter than the position in the US, which requires a fiduciary relationship, or an equivalent, to exist between the dealing party and recipient for regulations to apply. 

Unlawful disclosure of inside information

Under Article 10 MAR, unlawful disclosure of inside information relates to where inside information is disclosed to a third party except where pursuant to the normal exercise of employment, profession or duties. An exception exists for “market soundings”, where a disclosure is made to gauge the interest of potential investors.

The MAR further mandates disclosure of inside information that “directly concerns” the issuer of securities, with delay only being justified if: (1) the issuer’s legitimate interests are likely to be prejudiced; (2) the delay would not mislead the public; and (3) the issuers can ensure confidentiality of the information. In the UK, an issuer must notify the FCA in writing as to how these three categories have been fulfilled.

More broadly, MAR mandates the maintenance of “insider lists” of all persons who have access to inside information.

Market manipulation

Part 7 of the Financial Services Act 2012 provides that making or creating false or misleading impressions with regards benchmarks is a prosecutable offence. The MAR adds to the UK’s criminal enforcement regime by criminalising attempts at market manipulation.

Ensuring Compliance and Avoiding Sanction

The prerogative has been firmly placed upon boards of management to maintain a sound working knowledge and impetus to develop programmes aimed at preventing financial crime within their entities. Regulators have commonly referred to improving “risk culture” in market-participating entities, which refers to practices fostering cultural awareness and accountability, including:

  • Incorporating compliance efforts into performance evaluation for staff.
  • Organisational reform linking accountability directly to senior management.
  • Emplacement of robust cybersecurity regimes.
  • Conducting ongoing compliance training tailored to specific employee roles.
  • Protection for whistleblowers.
  • Implementing due diligence and “Know Your Customer” measures pursuant to recommendations issued by the Financial Action Task Force (FATF).
  • Foster dependable information sharing communities with other entities.

In recent years, cybersecurity has risen to particular prominence, with attacks on both financial institutions and their client bases occurring. In light of the ever-increasing deluge of regulatory information that financial and non-financial entities are facing, many are turning to outsourcing their compliance regimes, owed to lack of in-house technical knowledge and the need to establish confidence when conducting business activity.

Conclusion

The two-prong effect of global financial crises and post 9/11 international crime and terrorism has added previously unseen pressure upon both financial and non-financial entities to ensure compliance to a web of national financial regulatory regimes they could be potentially subject to. Strategies such as de-risking are, ultimately, harmful to both emerging financial markets in less-developed countries, crime detection and counter-terrorism measures. Greater information sharing has been advanced by regulatory bodies as a means of reducing duplicative use of resources where multiple parties are moving to complete cross-border transactions. In a broader context, it is no longer sustainable for entities operating in cross-border markets to remain in the dark as to where their operations sit in the wider global context.

Contact our Financial Crime Defence Solicitors London

If you are subject to investigation or enquiry by the FCA, it is important to immediately contact a Financial Crime Defence Solicitor.

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