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Investigations and Enforcement Activity: Lessons from 2019 for the Year Ahead

06 December 2019

Ireland’s standing as a leading international economic hub has been bolstered significantly by the arrival of Wall Street’s heavyweights, who join their counterparts from Silicon Valley. Consequentially, international scrutiny of our corporate regulation has never been higher. 2019 saw the Government’s enforcement activity focused on the financial services sector. Next year will see the broadening of enforcement activity to all sectors, both public and private across the economy.

White Collar Crime Package – Phase 2

2020 will herald the next phase of the Government’s implementation of its white collar crime package. The enforcement activities of the current regulator have effectively been wound up and the new enforcement agency is to be “an Irish FBI for white-collar crime”: the Corporate Enforcement Authority (CEA). In line with the nature of the entities that it will regulate, the CEA will have vast investigatory powers that will extend beyond our borders. The CEA will draw on the knowledge and experience of international regulators, as the government announced that it will adopt international best practices, so close cross-jurisdictional regulatory collaboration is expected. The overhaul of Ireland’s anti-bribery and corruption (ABC) legislation last summer established an enhanced legislative framework for the CEA’s oversight and enforcement activity. Companies will soon be held to the highest international standards of corporate compliance.

Ensuring compliance

Companies must take their new obligations seriously. Those require that policies and procedures are implemented across all business activities to prevent any form of active or passive bribery by a company’s employees or agents. Once new policies are implemented, companies should ensure that proper compliance processes are in place to ensure adequate monitoring of any potential suspicious activity. It is only if a company shows that it took “all reasonable steps and exercised all due diligence” that it will be able to avail of a defence under the new ABC legislation.

Failure to do so will expose their shareholders and employees to irreparable reputational damage. We only need to look across the water to see the adverse effect of the simple act of announcing an investigation. In 2013, UK’s Serious Fraud Office (SFO) announced its investigation into ENRC. Overnight, ENRC’s share price tumbled and it fell out of FTSE100.  All of this, despite the fact that the SFO never filed criminal charges. The investigation was closed without any charges in June 2019. Worryingly, the company is seemingly without any recourse. It has yet to prevail in obtaining any compensation from the SFO. Just recently, the SFO announced an investigation into Glencore. Its shares immediately fell by9%, wiping £2.6bn off its market value. One cannot underestimate the extensive reputational and financial damage that will occur following a regulatory investigation and the same will be true on the CEA’s first announcement of an investigation and all those that follow.

CBI sets the standard

This past year saw unprecedented levels of investigations and enforcement activity across the financial services sector. We addressed the Bold and Uncompromising Approach that the CBI has recently adopted. In her address to the IBEC Fraud Prevention Forum, the Director General for Financial Conduct, Derville Rowland alluded to our assessment, which sets Ireland apart for its regulatory prowess. The CBI has made clear that it intends to continue on the enforcement trajectory set over the past year, which has established high expectations that will likely be met by the new CEA. It seems that Ireland’s regulators are set to be trailblazers on enforcement and companies operating under their watch must be extremely vigilant in response.

Companies must invest in their compliance programmes and ensure that they withstand the most intensive regulatory scrutiny. It is essential that companies maintain active oversight of that programme and particularly, engage experienced specialists to investigate instances of wrongdoing, ideally under the protection of privilege. Next year will see enforcement that focuses on individual liability and culpability.

Senior Executive Accountability Regime (SEAR)

In 2020, the introduction of the SEAR regime will empower the CBI to investigate individual wrongdoing, whereas previously firms were the central focus of its enforcement activity.

The next stage of CBI enforcement will likely delve into the activities of individuals, investigating allegations of potential wrongdoing and breaches of SEAR’s Conduct Rules. From my experience with SEAR in the UK and Australia, it is crucial that firms provide adequate resource not just for the initial implementation of SEAR, but more importantly to the investigation of events and potential instances of wrongdoing. Critical to the success of SEAR will be the manner in which firms engage with the CBI regarding those events. In the UK, regular and informal engagement with the FCA is the norm, which allows both the firm and regulator limit the market impact of allegations of Conduct Rule breaches.

Upon the receipt of a report of a Conduct Rule breach, the CBI will need to carefully balance the constitutional rights of individuals, the right to a good name and the right to earn a livelihood, against their enforcement mandate. An important lesson can be learned from the UK in this regard: the right to anonymity, both from a firm’s and individual’s perspective is paramount, until an investigation is concluded and the results published. 

Conclusion

Over the course of 2019, we saw the financial regulator take no prisoners in its approach to enforcement. The language used in reprimanding firms for bad behaviour was harsh. It was designed to make an impact, which it did.

This trend will continue in 2020. Next year, individuals will fall victim to the regulators’ investigatory powers. The impact of these changes cannot be underestimated. We have seen examples from the UK and the US, where some office holders have been unfairly subjected to unsubstantiated allegations of wrongdoing with their reputations adversely affected without any recourse. It is imperative that companies and their officers take the new approach to regulation seriously, as the fallout will otherwise be devastating.  

For more information on increased corporate enforcement activity may affect your organisation in 2020, contact a member of our Investigations & White Collar Crime team.

Discuss your related queries now with Muireann Dennehy.


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