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11 December 2017

The French Clemency: HSBC awarded settlement despite obstruction

Categories: Blog, Business crime & fraud, Financial Crime,

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Categories: Blog, Business crime & fraud, Financial Crime,

Categories: Blog, Business crime & fraud, Financial Crime,

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Categories: Blog, Business crime & fraud, Financial Crime,

Categories: Blog, Business crime & fraud, Financial Crime,

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Categories: Blog, Business crime & fraud, Financial Crime,

robert-hanratty

Categories: Blog, Business crime & fraud, Financial Crime,

Categories: Blog, Business crime & fraud, Financial Crime,

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Categories: Blog, Business crime & fraud, Financial Crime,

Categories: Blog, Business crime & fraud, Financial Crime,

Categories: Blog, Business crime & fraud, Financial Crime,

By Sangeeta Bedi

Categories: Blog, Business crime & fraud, Financial Crime,

Categories: Blog, Business crime & fraud, Financial Crime,

Categories: Blog, Business crime & fraud, Financial Crime,

Categories: Blog, Business crime & fraud, Financial Crime,

Categories: Blog, Business crime & fraud, Financial Crime,

Categories: Blog, Business crime & fraud, Financial Crime,

Categories: Blog, Business crime & fraud, Financial Crime,

Categories: Blog, Business crime & fraud, Financial Crime,

Categories: Blog, Business crime & fraud, Financial Crime,

Categories: Blog, Business crime & fraud, Financial Crime,

Categories: Blog, Business crime & fraud, Financial Crime,

Categories: Blog, Business crime & fraud, Financial Crime,

Categories: Blog, Business crime & fraud, Financial Crime,

Categories: Blog, Business crime & fraud, Financial Crime,

robert-hanratty

Categories: Blog, Business crime & fraud, Financial Crime,

Introduction

The French National Financial Prosecutor has, for the first time, used its powers to enter into a settlement agreement with a corporate organisation it is investigating. The Convention Judiciaire d’Intérêt Public (Public Interest Judicial Agreement) was agreed between HSBC Private Bank (“PBRS”) and the Prosecutor on 30 October 2017 and made public on 27 November 2017. The device was introduced in December 2016 by the “Sapin II” law, which aimed to streamline and modernise France’s ability to deal with corruption and financial crime. The Convention Judiciaire d’Intérêt Public is similar to the Deferred Prosecution Agreement used by the SFO in the UK. However, whereas in the UK the indictment is preferred but immediately suspended subject to compliance with the terms of the DPA, in France the Prosecutor may propose that companies settle before criminal proceedings are even initiated, thus extinguishing the prospect of a criminal indictment.

In further distinction to the approach in the UK, where the Court’s Preliminary Judgment is kept private until the terms of the DPA are finally approved by the Court, in France the terms of the Convention Judiciaire d’Intérêt Public are negotiated between the company and the Prosecutor, who upon reaching agreement submits the draft agreement to the Court of First Instance. At that point, a public hearing takes place at which the company and potential victim are heard. Following such a hearing the President of the Court may either refuse to ratify the agreement or make an order validating it.

The judge, however, can only consider validating the agreement if the company is under investigation, recognises the charges and agrees to the classification of the penalty as put forward by the Prosecutor. So, although there is no conviction or formal admission of guilt, in practice this corresponds very closely to such an admission, although one that does not subsequently disqualify the company from public procurement activities. Moreover, if the Convention Judiciaire d’Intérêt Public is not validated by the court, the information shared by the company during the proceedings cannot be used during any future criminal proceedings, thus making a subsequent criminal prosecution much more difficult.

Investigation

PBRS is a Swiss registered subsidiary of HSBC Holdings Plc (which held the equity in PBRS via HSBC BANK PLC registered in England and HSBC PRIVATE BANKING HOLDINGS SA SUISSE registered in Switzerland). Its principal activity is asset management for private and institutional clients to whom it provides credit facilities and bespoke services to develop their assets. In 2006 and 2007 it managed assets of over €100 billion, with profits of approximately €350m and €400m for each year respectively. PBRS also had its own Board of Directors and CEO, as well as its own legal, compliance and anti-money laundering functions independent of its parent holding company.

On 23 April 2013, an investigation initially opened by the Paris Public Prosecutor was taken on by the National Financial Prosecutor in order to assess potential misconduct including illicit financing and selling of French prospects, money laundering of funds generated by illicit financing or bank selling, and money laundering of proceeds gained from tax evasion. The investigation found that numerous French tax payers had not declared to the French tax authorities, assets held via PBRS’s Swiss operations. For several years, and certainly during the period 2006 – 2007, PBRS had knowingly aided and abetted French tax payers who wished to avoid paying taxes in part or in totality, by holding bank accounts that facilitated investments and concealment of assets from the French authorities.

PBRS also provided its French customers with standard banking services, common throughout the Swiss banking industry, but which were used by its French customers as a means of concealing their assets. That included opening anonymised bank accounts in order to shield the account holder’s identity, facilitating clients who wished to avoid receiving correspondence at their domestic address by holding their mail for them, and facilitating methods of depositing funds through both in-person deposits in Switzerland and via relationship managers operating in France. It was also revealed that PBRS pro-actively deterred several French tax paying clients from regularising their tax arrangements by offering to strengthen the concealment of their assets and reducing the risk of detection.

PBRS also sought to circumvent an agreement between the European Union and Switzerland on the implementation of the European Savings Directive (2003/48/EC), which applies to taxation from savings income and provides for its collection at source. In order to frustrate the Directive, PBRS advised French clients to transfer their assets to accounts held offshore by entities registered in the BVI or Panama, and offered services to set up such facilities.

Furthermore, PBRS adopted a pro-active strategy in respect of soliciting French clients. Several relationship managers travelled to France in order to find new clients, sell novel financial products and encourage those holding accounts at competing institutions to consolidate their assets with PBRS. The investigation found that PBRS managed accounts for approximately nine thousand French tax payers, valued to be at least €1.6 billion. While the Convention Judiciaire d’Intérêt Public recognised that a small proportion of those accounts may potentially have been properly declared to the French authorities, most of them were undeclared. PBRS acknowledged the facts as set out by the Convention Judiciaire d’Intérêt Public as well as their characterisation in law.

Compliance and Procedures

As the parent company, HSBC Holdings Plc had established general rules and principles as well as mandatory guidelines applicable to conduct across all of the group’s subsidiaries. Those policies prohibited the provision of any assistance in tax fraud and provided for anti-money laundering rules and cross-border activities. HSBC indicated that historically, and up until at least 2010, the compliance culture and standards of due-diligence at PBRS were less developed than they are today.

However, the break down in oversight seems to have resulted as much from the company’s diffuse organisational structure as it did from its underdeveloped compliance regime. HSBC maintained it was run on a federated basis, with many of the decisions taken at group level, and that each individual operating entity had ultimate responsibility for implementing the principles and ensuring the standards set down by the holding company. The bank, however, did concede that its Executive Committee was charged with following the strategic activities of all private banks in the HSBC group, coordinating operational strategy and overseeing the principles that each of the group’s private banks were meant to implement. That included applicable legal and compliance rules. In 2006 – 2007 the CEO of PBRS was a member of the Executive Committee and HSBC acknowledged that control failures had occurred in relation to its Swiss subsidiaries.

In order to address those failures, the group indicated that since 2011 it has initiated a complete overhaul of its structure, controls and procedures, including increasing control over its subsidiaries by strengthening reporting lines to HSBC Holdings. It also established tighter controls arounds its customers, withdrew operations from a number of markets, and put in place financial crime, regulatory compliance and tax transparency standards. Moreover, it increased the enforcement methods associated with those procedures.

With regard to PBRS specifically, the Convention Judiciaire d’Intérêt Public recognised that senior management had changed substantially – including new CEOs, a new Head of Regulatory Compliance and a new Head of Financial Crime Compliance. Services relating to the holding of client correspondence has ceased, banking services were stopped to numerous clients, and a review of every open account was carried out in order to identify potential non-compliance with tax obligations. The total number of accounts serviced was reduced by more than 70% compared to 2007 levels.

Financial Penalty

The financial penalty payable by PBRS has two components. First is the Public Interest Fine (Amende d’Intérêt Public); and second the sums payable by way of compensation to the French state.

The Public Interest Fine is established in proportion to the advantage gained to a company from having committed the offences, up to a maximum of 30% of a company’s annual turnover. This is calculated on the basis of average turnover across the three years prior to when there was a finding of default, in this case 2014 to 2016. For PBRS this average turnover amounted to €526,584,739, resulting in a maximum potential Public Interest Fine of €157,975,422. The Convention Judiciaire d’Intérêt Public found that PBRS’s profit, resulting from the management of the overall assets of French tax payers, was €86,400,000 for the years 2006 to 2009, which was thus the amount payable by way of disgorgement of profits derived from the offences.

The Convention Judiciaire d’Intérêt Public also stated, however, that in light of the particular seriousness of the misconduct ascribed to PBRS, as well as the fact that such conduct was committed over a prolonged period of time, it was appropriate to levy an additional penalty. This was due to the fact that PBRS neither disclosed its misconduct to the French criminal authorities, nor acknowledged its criminal liability while the investigation was ongoing. Furthermore, PBRS offered only minimal cooperation to the investigation, mitigated solely by the fact that until December 2016 (and the passing of Sapin II) the French legal system had not provided a formal mechanism for encouraging full cooperation. The Convention Judiciaire d’Intérêt Public thus added a penalty of €71,575,422, therefore increasing the amount payable by PBRS to the maximum allowable fine under the criminal code, stated above as €157,975,422.

The second financial penalty was payable by way of compensation to the French state for monies forgone due to money laundering and tax evasion. The state had registered as a victim in the investigation in May 2013. It valued its loss by reference to the relevant amount of assets under PBRS management and took account of assets already regularised with French tax authorities and to be regularised as a result of pending criminal and administrative proceedings. The loss to the French state, to be borne by PBRS, was valued at €142,024,578.

The total amount payable under the Convention Judiciaire d’Intérêt Public, including the Public Interest Fine and compensation to the state is therefore €300,000,000.

Analysis

Despite the high level of the fine payable by PBRS, the first use of the Convention Judiciaire d’Intérêt Public appears to set down a comparatively low threshold in order for an organisation to avail of entering into an agreement with the French Prosecutor.

The first point to note, as recognised in the Convention Judiciaire d’Intérêt Public itself, is that PBRS did not self-report to the authorities. The misconduct was uncovered following the seizure of electronic documents from the home of a former IT employee of the bank, turned whistleblower. This stands in juxtaposition to the approach in the UK wherein one of the most fundamental features of getting a DPA is the requirement that companies are frank about what has happened and self-report at an early stage. It is the case, however, that due to PBRS’s lack of openness, the fine levied on the bank was increased to the maximum amount allowable under French law. But the argument remains that lack of self-reporting should disqualify a corporate from being able to enter into an agreement altogether, and should instead face prosecution. Moreover, this is a curious aspect of the first Convention Judiciaire d’Intérêt Public because while it weighed in the balance the fact that PBRS did not disclose its own misconduct, formally under Sapin II self-reporting is neither rewarded nor encouraged, so the French Prosecutor appears to exercise some discretion as to the weight afforded to self-reporting.

Secondly, in the UK when a corporate has failed to self-report, only an “extraordinary” level of cooperation, as set down in SFO v Rolls-Royce, will suffice to offset the lack of self-report. The cooperation offered by Rolls-Royce included the SFO obtaining internal investigation documents and memoranda of interviews, general access to Rolls-Royce documentation, complete digital repositories and email containers for over 100 key employees unfiltered for privileged material, MLA requests across four jurisdictions and targeted requests for personnel files, employee notebooks, telephone records, marketing services files and accountancy records. Rolls-Royce also applied digital review methods to over 30 million documents in search of material responsive to SFO enquiries. In this case PBRS neither self-reported nor cooperated and may ultimately have avoided prosecution simply because of the lack of formal reporting mechanisms available in France at the relevant time. It remains to be seen how extensive a level of cooperation the French Prosecutor will require in order to enter into a Convention Judiciaire d’Intérêt Public in the future.

Thirdly, similar to the positon it the UK, in France a change in corporate personality will mitigate towards being allowed to enter into a Convention Judiciaire d’Intérêt Public. In the UK, the three DPAs published thus far have all been heavily dependent on the fact that since the alleged offences, significant changes had occurred at Board level and throughout the controlling corporate entity. While the Convention Judiciaire d’Intérêt Public adopts the same reasoning, it is notable that HSBC Holdings was able to suggest that it operated on federated basis and thus ultimately to avoid having to change the make-up of the Board of the parent company. This is despite the fact that throughout the relevant period the CEO of PBRS sat on the HSBC Executive Committee, which was charged with coordinating the group’s overall operational strategy and objectives.

This article was originally published in Thomson Reuters Practical Law, and a shorter version was published in The Banker’s Global Risk Regulator, both behind a paywall. 

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