Lawyers welcome cross-border regulatory co-operation but countries piggy-backing on investigations is a step too far
US and UK watchdogs are increasingly co-operating on transatlantic financial services investigations, with regulators in other jurisdictions piggy-backing on the probes to create a global web of demands on the sector’s in-house lawyers.
Regulation specialists told a recent round table organised by The Lawyer that investigations are becoming increasingly complex and multi-jurisdictional.
”We’re seeing a lot more co-operation among regulators,” said Roger Best, a regulatory enforcement proceedings partner at Clifford Chance.
Best claimed liaison was particularly strong “between the UK and US authorities in bribery investigations and more recently in relation to Libor issues and financial services, with regulators in Japan, Singapore, Switzerland, London and New York working together”.
In-housers at the round table broadly welcomed this.
“Co-operation is good,” said David Isenegger, general counsel at utility company Centrica. “More co-operation between regulators when they are trying to address the same issues is welcome.”
However, co-operation – while praised for attempting to provide consistency – has its drawbacks.
“They all want to impose sanctions for the same conduct,” said Best.
And differences in approach remain, especially between the US and Europe. US authorities expect all potentially relevant documents to be handed over in what one lawyer described as “industrial discovery exercises”, as well as having full access to all employees. In contrast, Europe’s culture makes wholesale disclosure to US regulators difficult.
Apart from processes, lawyers raised further concerns about cross-border regulatory co-operation. Patrick Norton, a partner in the London office of Washington DC firm Steptoe & Johnson warned that consistency was difficult to ensure – and there were plenty of jurisdictions jumping on the bandwagon of UK and US investigations to muddy the waters.
“It’s common now for a company to finish a US Foreign Corrupt Practices Act or UK Bribery Act investigation that has taken three years and generated huge fees, to turn around and see a long line of regulators from, say, China or India with their own legal and political concerns.”
Ashurst litigation partner Ed Sparrow gives the Libor scandal as an example. “What is interesting about Libor,” he said, “is that we’ve already had [regulator interest in] Europe, the US, the UK, Japan and Canada – and banks are now finding [regulators in] Singapore, Hong Kong, Thailand and India climbing on the bandwagon. Banks that thought they had broken the back of the issue are having to go through exercises in those countries.”
Sparrow also suggested cross-border co-operation is not as fulsome as some maintain.
“In terms of Libor,” he said, “there is communication but I’m not sure about co-operation. Look at the spat between the US and the UK over who prosecutes whom – I’m not sure that’s been helpful.”
Issues also swirl around document production. Greg Wildisen, managing director, international, at software house Epiq Systems, said clients are often forced to produce different sets of documents to different regulators.
“Co-operation is not happening at a granular level,” he said. “And that means lawyers have to deal with different production sets and meta-tags, and keep track of which documents are with who. That’s not easy across multiple jurisdictions.”
Norton voiced concern over trends in the US where regulators share documents with authorities in other countries without informing the companies. The reverse is also worrying.
“US authorities want documents that are held outside the country,” he said. “But laws in those jurisdictions prevent dissemination of the documents. It’s complicated.”
Lawyers also expressed concern over what one described as the “politicisation of regulation”. Sparrow said there was “a clear intention by politicians to influence what the regulators do”. He maintained the newly-minted ‘twin peaks’ structure in the UK is battling to maintain independence.
“To some extent they are beholden to the Treasury Select Committee,” said Sparrow. “When things are going well politicians want regulators to stand back. But when things have gone wrong, they want regulation to be tough. That explains proposals to have criminal sanctions for senior bankers.”
Regulatory investigations and cross-border commercial disputes have spawned an industry in document management. A generation ago, lawyers built their own systems for managing a paper-based operation. But modern litigation can involve millions of electronic files.
“Lawyers are not the best people to deal with all the issues that can come up,” maintained David Nayler, head of the environment and public services legal and claims practice at insurer Aon.
“For example, in an anti-spoliation exercise around a securities class action there are a lot of issues around the way you store information, down to which jurisdictions your servers are located in. There can be 15 regulators looking at the information, but you don’t want that many sets of data. You don’t want to re-do each task for each regulator.”
Nayler told attendees that some businesses are bringing their disclosure and discovery review processes back in-house from law firms. Indeed, many are moving to offshore options in cheaper common law jurisdictions such as New Zealand and South Africa.
That desire, said Norton, comes partly from what the less charitable might interpret as lawyers milking institutional clients.
“A lot of law firms over-staff their work,” argued Norton. “You see large numbers of lawyers working away at every conceivable issue – and it might not be necessary.”
Cross-border litigation has spawned a new breed of in-house professional, the meeting heard. Boards are increasingly parachuting in litigation project managers to sit beside general counsel and conduct the logistics of the dispute. Crucially, this new kid on the block can often be responsible for managing external costs, ie breathing down the necks of instructed law firms.
“They can deliver significant savings,” acknowledged Nayler.
“They may ask questions that strike the lawyers as a bit foolish but they are plain questions that improve the delivery of the service to the board,” added Sparrow.
The group also readily accepted that alternatives to traditional court-based litigation had firmly established themselves on the dispute resolution landscape. Mediation and arbitration centres have cropped up around the globe and compete for business.
But while there are advantages of speed and at least a veneer of confidentiality, alternative dispute resolution (ADR) is no silver bullet.
Matthew Rushton operates at the coalface of ADR as deputy managing director of JAMS International, a global provider of arbitration and mediation services. He told the meeting that “mediations can often be bloody, grubby climb-downs. There’s a handshake at the end but research shows that 90 per cent of the time the parties will never do business with each other again. However, mediation goes get the parties to a point of settlement reasonably efficiently.”
The timing of an ADR process is also crucial.
Explained Nayler: “Mediation shouldn’t be conducted three months in when people have not understood the issues, proofed the witnesses or read the papers.”
At least one general counsel present voiced strong support for law firms to “put some skin in the game”, in other words, to share some of the risk of litigation with corporate or banking clients.
“There’s been a mantra that litigation is unpredictable so law firms can’t share risk,” said Pavel Klimov, general counsel (Emea) at Unisys. “But with the legal services market opening up, pressure will mount for change. Yes, litigation is unpredictable but so are many other things in life. You can get life insurance pretty quickly so law firms should be able to develop better offerings.”
Round table line-up
Matthew Rushton – deputy managing director, JAMS International (chair)
David Isenegger – general counsel, Centrica
Patrick Norton – London partner, Steptoe & Johnson
Roger Best – partner, Clifford Chance
Edward Sparrow – partner, Ashurst
Neil Hodges – UK GC, Zurich Insurance
Antoinette Keane – legal director, Genzyme
Pavel Klimov – general counsel (Emea), Unisys
Richard Blann – head of group litigation, Lloyds Banking Group
David Nayler– head of E&PS legal and claims practice, Aon
Greg Wildisen – managing director, international, Epiq Systems
Sponsor’s comment: understand the risks
Global organisations face requests for information from both local and overseas courts and regulators. Supervision and enforcement teams within national regulators are collaborating and the overlap between regulatory investigations and litigation is growing. When responding to this potential wave of requests, practical and legal challenges exist. Businesses under investigation, or conducting an internal investigation, need to be able to access and examine information, assess culpability and respond to regulators or self-report quickly and accurately, often within weeks of the initial request.
The process of retrieval and assessment is complicated by the evolution of electronic data, stemming in large part from the ease and pace at which electronically stored information (ESI) is created, duplicated, disseminated, stored, hidden and retrieved around the world. Global organisations may have multiple information management systems based in numerous jurisdictions. Potentially relevant information (or copies thereof) may be stored on one or several of these systems and organisations need to implement strategies to minimise the risk of breaching local data protection regulations when transferring information across borders.
Understanding where and how data is stored, and acquiring the specialist skills required to manage a varied data population, is imperative. Recent high-profile cases demonstrate the need for companies to consider not just documents and emails, but also oral conversations which can often contain evidence that may prove or disprove wrongdoing. Audio evidence can be critical to legal proceedings, but speech analytics is a complex area and the harvesting of relevant conversations can be extremely time-consuming and difficult. The review of speech requires technology that is able to decipher and facilitate the search of local dialects, accents and languages, and the peculiarities of pronunciation and abbreviation. This is a challenging and developing area, but one which organisations will have no option but to embrace.
Managing information once investigations or litigation is resolved is also important. The tendency for regulators to work in concert with their foreign counterparts means that businesses are more likely to be subject to multiple prosecutions of the same wrongdoing. The extensive preparation undertaken when responding to an initial regulatory or internal investigation may uncover information which will also be useful for future litigation and investigation. Establishing an efficient system of archiving that enables the business to retain this information to aid response to potential future legal action is imperative.
Waiting for a dawn raid or service of a writ before putting in place a rigorous response process is a high-risk strategy. Proactivity, engagement with technology and vigilance in monitoring the organisation’s information is recommended to ensure an effective response.