Tending the borders

Multinationals need to adopt high regulatory principles if they are not to fall prey to increased cross-border activity by, and cooperation between, authorities. By Geoff Nicholas

The globalisation of business has had a profound impact on the investigations landscape. It has led many countries to introduce new legislative measures to extend significantly the global reach of their jurisdictions.

This presents regulators and prosecutors with significant challenges: as the bounds of jurisdictions are extended, the scope and complexity of their supervisory and enforcement roles increase exponentially.

For multinational companies, increased cooperation and exchange of information between authorities mean they frequently have to deal with the same regulatory issues across many jurisdictions, with one ­problem in one place often escalating into multiple problems in different jurisdictions. They also face increasingly severe sanctions, with many countries introducing corporate criminal ­liability for a range of offences.

Combo deals

Over the last few years, US Securities and Exchange Commission (SEC) requests for cooperation from foreign regulators have increased significantly, as have requests to the SEC from foreign regulators. The FSA has reported similar trends. There has also been a marked rise in international coordination between competition authorities.

The UN Conference on Trade and Development observed recently that more than 110 countries now have viable competition law regimes and that, while a number lack regulatory frameworks to counter anti-­competitive behaviour, increased cooperation is assisting enforcement.

Competition authorities have taken the lead in the criminalisation of corporate conduct. Since 2007 the European Commission has collected e10bn (£8.64bn) in cartel fines and 2010 saw 70 companies fined a total of nearly e3bn in seven cartel decisions. ­Substantial fines were also imposed in the US in a number of these cases.

While some of the fines in Europe have exceeded those in the US, antitrust fines in the US remained high in 2010. Similar trends are apparent in emerging markets such as Brazil, where in 2010 the authorities issued their highest-ever fine of nearly $1.8bn (£1.16bn).

The financial crisis has unsurprisingly led to a proliferation of investigations in the financial services industry. The trend of large settlements continues apace in the US, with Goldman Sachs last year paying $550m to settle federal claims that it misled investors concerning subprime mortgage products.
Back in Europe, while Kweku Adoboli, the trader alleged to have lost UBS £1.5bn as a result of unauthorised trading, faces charges of fraud and false accounting in the UK criminal courts, a joint FSA/Swiss Financial Market Supervisory Authority (Finma) investigation led by KPMG is already underway focusing on the details of the unauthorised trading, the control failures through which it remained undetected and the ­overall strength of UBS’s controls to prevent ­unauthorised or fraudulent trading activity.

There has been a considerable focus on corruption risk recently, driven not only by the new UK Bribery Act, but also by an increased prosecutorial focus on corruption, particularly in the US. Fines resulting from the Foreign Corrupt Practices Act (FCPA) investigations reached record levels in 2010 and there is no sign of things slowing down, with more than 120 FCPA probes currently underway and SEC and Department of ­Justice (DoJ) manpower on the increase.

Enforcement action is focused heavily on conduct in new markets, with nearly 75 per cent of companies under investigation for corruption by the DoJ and SEC under the FCPA being investigated concerning ­operations in emerging markets. At the same time, authorities in those markets are increasingly leveraging off the findings of investigations originating in the US and Europe through ’follow-on’ actions.

The magnificent seven

Some remain unconvinced, however, with Transparency International finding recently that a majority of Organisation for ­Economic Cooperation and Development (OECD) ­governments are still failing to translate their OECD Anti-Bribery Convention ­commitments into action and that of the 38 governments party to the convention, only seven are actively enforcing it.

Legislative change is a step in the right direction and many countries have, like the UK, extended, or begun taking steps to extend, the scope and reach of their anti-corruption laws. However, until there is a real commitment to enforcement and ­genuine cooperation between authorities, meaningful progress will prove difficult.

Sanctions imposed against troublesome countries are increasingly adding to the woes of multinational companies. In late 2009 Credit Suisse agreed to pay $536m to avoid criminal charges that it had violated sanctions against Iran, while other multinationals have since paid out substantial sums for alleged breaches of sanctions.

The issue of data loss is also attracting attention. Not only can the scale of the ­problem be significant – May 2011 saw Sony warning of the theft of personal data of more than 100 million PlayStation Network ­subscribers – but regulatory repercussions can be enormous. The FSA fined Zurich Insurance £2.27m for data loss last year.

Authorities are already alive to the increasingly global character of investigations and cooperation is on the rise. However, the ­number and breadth of investigations that many multinationals now face, and the scale and severity of the potential sanctions, heighten the need for a measured and ­cooperative regulatory approach.

Geoff Nicholas is global investigations co-head at Freshfields Bruckhaus Deringer